Testimony Before the United States Senate
Committee on Environment and Public Works
October 30, 1997
The Texas Environmental Self-Audit Program
and the State-Federal Relationship

I. Introduction

My name is Barry R. McBee and I am the Chairman of the Texas Natural Resource Conservation Commission ("TNRCC"). The TNRCC is a multi-media environmental agency covering all air, water, and waste-related activities. One of the TNRCC's guiding principles is "To promote and foster voluntary compliance with environmental laws." To further this goal, we pursue an effective and efficient compliance and enforcement program that maximizes voluntary compliance, ensures that potential polluters are informed of their environmental responsibilities and compels compliance through legal action when necessary. The TNRCC believes that strong traditional enforcement of environmental laws is necessary to guarantee that public health and the environment are protected. To improve the condition of our environment while our populace and economy thrive, we must have compliance with governmental requirements enacted by state and federal legislatures.

This opportunity to provide testimony to the United States Senate Committee on Environment and Public Works regarding privilege and immunity provisions of environmental self-audit legislation and the differences between federal and state approaches to these issues comes at a critical time for the future course of the state-federal relationship. EPA Administrator Carol Browner has said that she views the relationship between the federal and state environmental agencies much like a marriage. Based on my experience, EPA sees us in the light of a paternalistic parent-child relationship, a relationship that is not healthy and that we must both work to change.

In the 1970s state environmental agencies maY have been immature, inexperienced and, dare I say it, "problem" children. But we are in the 199Os now, 30 years into the era of active governmental environmental protection. The states have matured and proven that they can and are willing to meet the shared goal of the federal and state governments to protect the environment and public health.

It is time for Washington and the EPA to "cut the cord" and give states the independence and flexibility they need to meet each state's needs. States want, and deserve, as you heard a witness from the Department of Justice state in her testimony before your committee in June of this year, to be "partners" with the federal government,- independent and responsible partners, with a greater role in the decisions that affect our states, our people, our environments and our livelihoods.

On May 23, 1995, Texas enacted the Environmental, Health, and Safety Audit Privilege Act (the "Audit Act"). This legislation provides limited immunity and privilege for the results of environmental self-audits. A law that promotes a spirit of cooperation between the regulator and those we regulate in achieving what we all want -- clean air, clean water and safe land -- is beneficial to all citizens of Texas. Providing entities an incentive to do their own self-analyses, to prevent pollution before it happens, and to promptly correct any problems they discover is a sound and reasonable approach. However, not everyone agrees with the fundamental basis of this law -- even though 23 states to date have adopted laws encouraging this type of partnership. The practical reality is that the field of environmental regulation has evolved significantly over the past twenty years, moving consistently away, and rightfully and properly so, from the "gotcha" mentality toward the type of cooperation embodied in environmental self-audit laws. Rather than embracing these innovative state approaches and providing federal support, however, EPA has been a persistent antagonist. Delegation to Texas of federal environmental programs has been threatened, and ultimately Texas was forced to compromise by amending its audit law to address some of EPA's concerns in order to get delegation back on track.

The Audit Act provides a limited privilege for certain information that is generated through a voluntary environmental audit and that is properly included in the audit report. It also provides immunity from administrative and civil penalties. Before its recent amendments, the Audit Act provided a limited immunity from penalties for a small subset of criminal violations, while specifically not extending the immunity to intentional and reckless conduct. It is important to-highlight that the Audit Act never provided immunity from enforcement of environmental laws, but merely from the end product of that enforcement -- the imposition of penalties. Problems or threats would be corrected through injunctive relief and similar tools. Among the conditions for penalty immunity is the requirement that the auditing entity must cooperate in the agency's investigation of the disclosed violations, and must initiate and complete corrective actions within a reasonable amount of time. Thus the Audit Act provides streamlined enforcement approach that fully addresses violations that might never otherwise come to light. Normal agency enforcement efforts proceed at full force, unaffected by these additional disclosures.

There are essentially two underlying facts that make it eminently sensible for us to promote self-policing by regulated entities. First, the complexity of modern environmental regulation makes it extremely difficult for a regulated entity to be in compliance and to know whether it is fully in compliance. Second, the limitation on state enforcement resources found throughout the country, coupled-with the immensity of the regulated community, makes it quite possible that, left to a traditional enforcement schedule, violations will go undetected and thus uncorrected. BY providing a limited privilege and immunity for voluntary environmental audits, Texas is able to encourage self-evaluation and compliance while maintaining its diligent traditional enforcement efforts. Thus, the voluntary disclosures by entities that conduct audits and promptly correct violations to receive immunity from penalties enhances the results of our enforcement activities.

II. The State-Federal Relationship under Strain

State environmental agencies, not the EPA, conduct the vast majority of inspections to check for compliance with both federal and state environmental laws and are primarily responsible for enforcement in most instances. Nine out of 10 enforcement actions in this country are brought by state environmental agencies.

States have an adequate and talented pool of environmentally educated and trained engineers, technicians, lawyers and public policy experts. In fact, according to former EPA Administrator William Ruckelshaus, state environmental protection programs have grown to employ 54,000 men and women, versus 18,000 for the EPA. Where in the past states may have had to rely on EPA for human resources that were in short supply, states now have good, sophisticated and knowledgeable personnel.

As the Texas Legislature was analyzing its pending self-audit bill in 1995, the Clinton Administration declared that "the adversarial approach that has often characterized our environmental system precludes opportunities for creative solutions that a more collaborative system might encourage." President Clinton and Vice President Gore, Reinventing Environmental Regulation, Inside EPA Weekly Report: Special Report, March 16, 1995. The Texas Legislature approved the Audit Act in May of 1995, believing that it had, in line with and supportive of the President's declaration, provided the regulated community with a tool to achieve and monitor compliance in cooperation with the TNRCC, so that they might be enabled to start thinking beyond compliance in just such a "collaborative system".

The EPA did not provide Texas with guidance regarding the potential impact of the Audit Act on the delegation-of federal environmental programs until well after the jaw was passed by the Texas Legislature Oregon had passed the first-environmental self-audit law in July of 1993. However, EPA did not issue its guidance, "Statement of Principles: Effect of State Audit Immunity/Privilege Laws On Enforcement Authority for Federal Programs," until February of 1997. Memorandum from Steven A. Herman, Asst. Administrator, EPA, et al. to EPA Regional Administrators (Feb. 18, 1997).

The first indication of the potential for federal objection to the Audit Act came after the EPA raised issues related to the Idaho environmental self-audit statute in the context of Idaho's application for approval of Clean Air Act Title V delegation. A simple memorandum from EPA Headquarters to the EPA Region X Regional Counsel in April of 1996 announced the beginning of the debate. Memorandum from Steven A. Herman and Mary Nichols, Asst. Administrators, EPA to Jackson Fox, EPA Regional Counsel, Region X (April 5, 1996)( "Effect of Audit Immunity/Privilege Laws on States' Ability to Enforce Title V Requirements"). This occurred almost one lull year after the Texas law was enacted. Shortly after the April 1996 memorandum, EPA raise similar issues in the context of Texas' application for approval of its Title V program.

The debate escalated shortly thereafter as the Environmental Defense Fund of Texas (EDF) petitioned EPA to withdraw delegation to the State of Texas of the Underground Injection Control program, based in part on the opposition to environmental self-audit laws that EPA had expressed in the April 1996 Title V memorandum. The EDF petition is still pending.

The Texas Senate Natural Resources Committee held hearings in September of 1996 on the implementation of the Act. It found that the majority of concerns about the Audit Act focused on the potential for withholding of delegation, not about lack of protection for our citizens. Texas Senate Natural Resources Committee, Interim Report to the 75th Legislature, Effectiveness of the Environmental Audit Legislation (Sept. 1996).

As Texas struggled for clear guidance from EPA regarding which specific provisions of the Audit Act EPA considered in conflict with regulations controlling delegation, some states, such as Utah, received specific recommendations from EPA on statutory changes that would pass EPA muster.

In November of 1996, fifteen state environmental commissioners officially requested a meeting with EPA Administrator Carol Browner to seek a way to cooperatively address this issue. The request went unanswered until Administrator Browner finally agreed to a meeting in early March of this year, shortly before the National Governors' Association was to meet in Washington. At that time, a coalition of more than ten states met with Administrator Browner and her staff and presented what was thought to be a reasonable compromise that the EPA would grant a two year evaluation period of state environmental self-audit laws to states whose attorney general had certified that the state had the necessary regulatory authority to carry out any new or existing program. Administrator Browner rejected the proposal outright, telling states "there would be no moratorium" and the only way to resolve differences would be for each state individually to enter into a "negotiation" with EPA officials in which they would be told what changes would be necessary for their state's law to be deemed acceptable by EPA for purposes of retaining or achieving delegated programs.

Shortly after that meeting, EPA Assistant Administrator for Enforcement and Compliance Assistance, Steve Herman and former EPA Region VI Regional Administrator Jane Saginaw, in a meeting with Governor George W. Bush, assured Texas that there were only a few changes needed to the Audit Act, that the negotiations would be quick, and that if successful, the Audit Act would no longer be a barrier to delegation. In that meeting the Governor made it abundantly clear, having been involved in similar negotiations with another federal agency over welfare reform and state flexibility, an initiative that was derailed by the Clinton Administration, that he had grown tired of the state negotiating against itself. He made it clear that if we took steps in Texas to address this issue to EPA's satisfaction, he expected no more issues to be raised, for petitions challenging our existing program delegation to be dismissed, and for programs that we desire to have delegated to us to be delegated.

Texas came to the table with proposed revisions addressing the specific concerns EPA had voiced, such as removing the privilege from criminal proceedings, and which we agreed would improve our law. On the eve of the legislative filing deadline for the Texas Legislature in March of 1997, high level negotiations between EPA and Texas officials resulted in a compromise being reached, and specific legislative changes were drafted. These changes were passed into law and became effective on September 1, 1997. Tex. Rev. Civ. Stat. Ann. art. 4447cc (Vernon's) (as amended by House Bill 3459, 75th Legislature).

Although these high level negotiations ultimately proved fruitful, a closer look at the delegation debate shows how the EPA has stretched the common and clear meaning of the words of its regulations to impose its philosophies and policies on the states. EPA's opposition to the Audit Act focused on the requirement in Federal delegation regulations that State civil penalties must be "appropriate" to the violation. See, e.g., 40 C.F.R.  145.13 EPA took the position that the State must consider certain criteria, the same criteria contained in EPA's Audit Policy, before arriving at "appropriate" penalties. For example, EPA maintains that a state must recoup the economic benefit of non- compliance as specified in EPA's environmental audit policy. This is a new interpretation of the federal regulations and one that conflicts with EPA's expressed interpretation at the time it promulgated those regulations. EPA is in essence applying its own recently developed audit policy as a new minimum requirement for "appropriate" penalties under 40 C.F.R.  145.13(c).

This approach has been described as blackmailing the states into adopting EPA's federal policy on environmental auditing. Timothy A. Wilkins and Cynthia A.M. Stroman, Washington Legal Foundation, Working Paper Series No. 69, Delegation Blackmail: EPA's Misguided War on State Audit Privilege Laws (August 1996). At the very least, this approach is an improper form of informal rulemaking not intended by Congress.

EPA has also actively pursued its opposition to the Audit Act outside the delegation context. In December of 1996 and January. of 1997, five Texas companies that had taken advantage of the Audit Act and voluntarily disclosed violations to the TNRCC were confronted with threatening EPA letters of inquiry regarding those same violations. These companies today remain under EPA investigation, although they have cooperated with TNRCC in addressing the disclosed violations. This interference by EPA in the Texas self-audit program was intentional and without warning to the State. Companies that had relied in good faith on the provisions of state law are experiencing first hand the problems associated with a conflicting philosophy at the state and federal level.

III. The Texas Audit Act

A. The Texas Audit Privilege

The Texas audit privilege attaches automatically to a report generated pursuant to a voluntary environmental audit. The scope of the privilege is broad and extends to all materials created in the course of an environmental self-evaluation and properly included in the audit report. However, there are three major caveats to this protection from discovery: (l) the privilege does not extend to any information required to be collected, developed, maintained, or reported under state or federal law; (2) the privilege does not extend to any observation of the actual physical events of violations; and (3) the privilege may be overcome in an administrative, civil or criminal context where a tribunal determines that the privilege has been asserted for a fraudulent purpose or that appropriate efforts to achieve compliance were not promptly initiated and pursued with reasonable diligence after discovery of the violation. Therefore, the Texas privilege is appropriately qualified and limited. A regulatory agency or a third party has potential access to the broad range of information that would normally be available without this legislation.

Whereas the privilege.under the original Audit Act extended to criminal proceedings, the amended Audit Act provides for a privilege only in civil and administrative contexts. The original Audit Act included the safeguard that where there was evidence of criminal conduct, an audit report could be reviewed in camera.

EPA's fundamental objection to the audit privilege is difficult to reconcile with the privilege's potential to stretch federal and state resources and to enlist the regulated community in a cooperative enforcement effort, a "creative solution" in a more "collaborative system", to again use President Clinton's words. It is interesting to note that the concept of a self-audit privilege is not foreign to the federal government. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 amended the Equals Credit Opportunity Act and the Fair Housing Act to provide a limited privilege for information generated in a self-test conducted to determine compliance. This legislation recognizes the wisdom of enlisting the regulated community in the effort to achieve greater compliance. Where compliance is a matter that affects the public health and environment, the need to optimize cooperation is even greater.

B. The Texas Self-Disclosure Immunity

"Immunity" under the Texas Audit Act provides for relief from any punitive sanction, but not from all enforcement action -- essentially it is a limited penalty mitigation. As a precondition to immunity, the disc lob sing entity must cooperate in the agency's investigation of the violation and must demonstrate correction of the violations within a reasonable time. When injunctive corrective provisions are deemed appropriate by the agency, a self-disclosed violation may be pursued through an enforcement order or civil proceeding.

As a further condition to immunity, a disclosing entity must provide to the agency a written disclosure as well as pre-audit notification, both of which are publicly available. Thus the immunity provision of Texas law competes in some measure with the privilege gained, and the public's right to information is protected. Furthermore, voluntarily disclosed violations must be recorded in an entity's compliance history maintained by the agency.

Despite EPA's opposition to the Texas Audit Act, the scope of the immunity provision has always been appropriately limited, particularly in the criminal context. Only a narrow range of criminal violations were eligible for immunity under the original law. Violations that resulted from reckless, intentional, or knowing conduct were never eligible for immunity. As a result of the compromise with the EPA, criminal violations are no longer eligible for immunity, without regard to their significance.

The Audit Act contains several additional limitations on the availability of immunity from penalties. For example, violations that result in substantial harm to persons, property, or the environment have always been ineligible for penalty immunity. As a result of the compromise with the EPA, immunity has been further restricted such that violations that result in risk of injury and violations that result in a significant economic benefit that results in an economic advantage are no longer eligible.

C. Texas' Experience

Texas now has almost two and one half years of very positive experience implementing the Audit Act. TNRCC enforcement (data demonstrate that despite the existence of audit privilege legislation, TNRCC has maintain-its rigorous enforcement standards. The audit privilege has shifted part of the burden to the regulated community to fund their own compliance rather than keeping it on the state to fund more inspections. As the following figures demonstrate, the TNRCC has maintained a strong inspection/enforcement presence to police-the regulated community and to provide a disincentive to fraudulent misuse of the audit legislation.

Although the number of disclosures is not large relative to the number of traditional enforcement actions, it is a positive number, reflecting improved environmental conditions, improved compliance status, and heightened managerial environmental responsibility. And this number has been achieved despite the unnecessary cloud of uncertainty created by EPA's position regarding self-audit legislation.

As of this date, the TNRCC has received approximately 650 notifications of intent to conduct a voluntary environmental audit. Participants include: municipalities; universities; navigational districts; the United States Air Force; newspapers; filling stations; food and food products companies; barge and ship cleaning operations; the United States Department of Energy; paper and paper products manufacturers; automobile manufacturers; computer and computer parts manufacturers; electric utility services; cement manufacturers; metal manufacturers; waste disposal companies; petroleum refineries; petrochemical plants; and chemical manufacturers. These entities range from small businesses to billion dollar corporations.

A majority of the notices indicate that the audits will be multi-media covering all environmental regulations and permits. Therefore, through use of the environmental audit tool, multi-media evaluations, which are encouraged by EPA and the TNRCC; but which we have limited resources to conduct through inspections, are significantly enhanced.

Approximately 100 of these audits have resulted in voluntary disclosures of discovered violations. A total of 430 individual violations have been disclosed, and these either have been or are in the process of being diligently corrected. The majority of violations are air violations, ranging from record-keeping problems to exceedences that necessitate permit amendments or reevaluation of grandfathered exemptions. Several companies have reported inadequacies with air emissions inventories and toxic release inventories. Others have reported inadequacies with spill prevention and countermeasure containment plans, contingency plans, and personnel training programs.- -In one case a company reacted quickly to the discovery of falsified operating log entries by firing the responsible employee and retraining the other employees involved in data entry.

Simply put, many of these violations would not have been detected in a routine compliance inspection. Voluntary stack tests and other expensive sampling protocols which go above and beyond the regulatory requirements are the foundation for many of these disclosures. Erroneous log or other data entry problems are difficult to detect through any means other than a self-audit. In addition, a number of the audits investigated historical compliance for periods extending more than a decade. Although not hindered by a statute of limitations, the TNRCC and other Texas agencies would not normally review records of this vintage when conducting inspections.

All of these disclosures have occurred without disruption of the normal enforcement process. We have conducted our inspections as scheduled; brought enforcement actions where appropriate using required reports and our own information; and diligently scrutinized the regulated community as our statutes and delegation authority require. Yet, without regard for our real-life results and Texas' general enforcement record, EPA threatened withholding of delegation of federal regulatory authority, claiming that the Texas Audit Act results in inadequate enforcement authority.

IV. Conclusion: The Need for Federal Legislation

The lack of federal cooperation in the implementation of state self-audit laws has created needless tension and uncertainty that hampers state efforts to experiment with innovative enforcement tools and deters regulated entities from utilizing them. Federal legislation expressly allowing states authority to pursue such innovations would be a welcome development.

EPA's policy on environmental auditing states, "As always states are encouraged to experiment with different approaches that do not jeopardize the fundamental national interest in assuring that violations of federal law do not threaten the public health or the environment, or make it profitable not to comply." 60 Fed. Reg. 66706, 66710 (Dec. 22, 1995). The Audit Act has always satisfied these conditions.

It appears that federal legislation is necessary to restore the states' ability to pursue innovative enforcement that differs from EPA's preferred policies. United States Senate Bill 866 explicitly preserves the rights of the states to enact audit privilege and immunity laws and does not preempt state law in state actions brought under federal laws for which the state has been delegated primary enforcement authority. Furthermore, S. 866 contains several admonitions to federal agencies to preserve the intent of state audit laws. Next week, EPA's Office of the Inspector General will be visiting the TNRCC to begin an investigation of our implementation of the Texas Audit Act. We hope the visit is used as an opportunity to understand the benefits Texas has derived from the use of this enforcement tool, to finally recognize its merits, and to prepare for implementation of the federal environmental audit privilege and immunity legislation that we hope will be enacted during this Congressional session.