Environmental regulation in the 1990s: new approaches to old problems.

Today, as the Clinton administration is settling into Washington and many are trying to predict President Clinton's environmental agenda, one issue is certain to be on that agenda - the conflict between industry and the environment. Instead of allowing the conflict to continue, President Clinton will need to harmonize the two so as to not jeopardize his much-touted economic recovery plan. As President Clinton recently noted at the "timber" summit in Portland, Oregon, the government's efforts to resolve the conflict between the timber industry and environmentalists on the issue of logging in the Northwest must be "scientifically sound, economically credible and legally responsible."

President Clinton's approach to the "timber" situation reflected in his statement that the Administration "must never forget the human and economic dimensions of the problem," is an indication that he recognizes this conflict. As a result, President Clinton has called for a new era in environmental protection that moves away from the present burdensome "command and control regulatory system" to a more pragmatic result-oriented approach which would produce the same environmental bang for fewer bucks.

Such a cost-benefit approach is premised on streamlining the regulatory scheme utilizing market incentives, development of new technology and conversion of industry to the notion that environmental programs will yield social as well as economic dividends in the long run.

In view of President Clinton's pledge to reconcile environmental protection with economic growth, it appears safe to predict that there will not be a flood of new regulations as some had feared. While it is anticipated that President Clinton will support the reauthorization of the Superfund program, RCRA, the Clean Water Act, and the Endangered Species Act, as well as press for wetland, wildlife and wilderness protection, it is doubtful such legislation will pass Congress if the associated costs are not offset by the creation of new jobs and the improvement of infrastructure.

CALIFORNIA'S AGENDA

Like Washington, California is also starting to adopt a more pragmatic approach with respect to environmental control. For years, California environmental regulations have run rampant. Today, due to the recession, the pendulum may be swinging toward a more balanced, practical, and flexible approach to environmental controls.

In a climate where environmental regulations have become so complex and interrelated that, at the very least, confusion and needless duplication often result, and in the worst cases, companies are forced out of business (thereby costing Californians jobs), it appears that there may be some relief in sight. Recent reports generated by the Council on California Competitiveness have prompted lawmakers and regulators to consider a more streamline and pragmatic approach to tackling environmental problems. If this trend continues, businesses are likely to see legislators and regulators paying more attention to the effects of environmental regulation on business and taking steps to lessen the burdens imposed on California's businesses by years of uncoordinated over-control.

AGENCIES WITH AUTHORITY OVER ENVIRONMENTAL ISSUES IN SOUTHERN
CALIFORNIA
27         Local
32         State
13         Federal
72         TOTAL

The following are some of the reform measures which have been enacted or are under consideration that will have the most positive impact on Southern California's businesses.

RISK CORRELATED PERMITTING SYSTEM

Among the most complex and cumbersome requirements that businesses face in California are those imposed by the Department of Toxic Substances Control ("DTSC"). Often, a business will spend a significant amount of money to comply with California's hazardous waste treatment laws only to find out that it still faces more regulatory hurdles before it can receive a permit. In response to repeated complaints from businesses, California legislators passed a new law, the Wrights-Lempert-Polanco Hazardous Waste Treatment Permit Reform Act ("the Act"), which became effective the first of this year.

The Act restructures California's system of regulating hazardous waste treatment facilities by creating a 5-tiered system that adjusts permitting requirements imposed on businesses depending on the degree of environmental risk presented by that business' waste-treatment process. The lower the risk, the less the regulatory burden. The primary beneficiaries will be small to medium size businesses that are presently subject to the same onerous permit-by-rule requirements as large industrial companies without any differentiation of risk. This new system is a radical shift from the prior enforcement position that viewed all hazardous waste management practices as posing significant environmental risks. If this risk correlated tiered permitting system is successful, it may serve as a model for reforming the existing RCRA permitting scheme in the future.

CALIFORNIA'S NEW 5-TIER PERMITTING SYSTEM

1. Conditional exemption for facilities treating on-site waste-types that pose the least environmental risk. No Phase I or financial assurance requirement needed.

2. Conditional authorization for facilities treating specific waste types on site that pose some minimal risk. No Phase I or financial assurance requirement needed.

3. Permit by rule for facilities conducting on-site treatment of certain waste streams, using certain technologies.

4. Standardized permits for facilities that treat or store non-RCRA waste.

5. Full permits for facilities treating RCRA waste and used oil.

AQMD'S NEW MARKET-BASED APPROACH

In a radical change from past policy, the South Coast Air Quality Management District ("the AQMD") has taken a market based approach to achieve mandated emission reductions. Taking a page from the practice of corporate tax credit brokering, the AQMD has developed the novel RECLAIM emissions trading program.

Under RECLAIM, a company that cannot reduce its emissions without spending large amounts of money on technology may nonetheless meet the program's requirements by purchasing emission reduction credits (at a cost far below that of the required technology) from another source. This flexible approach will allow businesses comply with the program in the most cost effective manner.

Meanwhile, as a result of a feeling that, notwithstanding the RECLAIM program, air districts are favoring the environment over business. Legislators throughout the state have introduced at least 58 bills that take aim at the state and regional agencies that regulate California's air quality. Of these, 18 take aim at the AQMD and would sharply curtail its powers. The legislation included bills that would:

* Require the AQMD to hire an ombudsman to serve as an advocate for business,

* Require the state legislature to ratify important decisions made by the AQMD,

* Temper the requirements that businesses reduce the number of car trips to and from work,

* Create an independent board that would review businesses' appeal of fines and other decisions of the AQMD, and

* Cap the agency's budget.

While it remains to be seen whether any of these bills will become law, they clearly reflect a mindset that the AQMD is driving businesses away from Southern California with overly stringent regulations and that it is time to keep businesses in mind when trying to solve California's pollution problem.

CEQA REFORM

Even before the economic downturn that we are now experiencing, real estate, one of the major backbone industries of California, was struggling because of ever escalating entitlement process costs. Many developers attribute a significant portion of the cost to compliance with the California Environmental Quality Act ("CEQA"). CEQA was originally intended to require public agencies to evaluate the environmental impacts of public projects that were under development on traffic, air, waste, endangered species, toxics and wetlands. It was later expanded to include all development projects that require discretionary approval by a governmental agency. What had started out as a measure that sought to protect the environment has developed into a potent weapon by anti-growth forces to stall development through costly litigation.

Due to the fear of litigation, most planners and developers have engaged in Environmental Impact Report ("E.I.R.") overkill. Instead of concentrating on relevant environmental information, most EIR's are prepared as litigation defense tools.

This concern with litigation defense has contributed to the mushrooming of unnecessary documentation and a tremendous growth in the environmental consulting business. Unfortunately, all of these costs are passed on to taxpayers and purchasers.

Recognizing this problem, the California legislature will be considering various recommendations to streamline the CEQA process during the current session. Assemblyman Sam Farr has already introduced three bills addressing the issue: AB 230, 231 and 232. Governor Wilson has also proposed overhauling the present CEQA. His recommendations were detailed in his January 25, 1993 report: "Strategic Growth: Taking Charge of the Future." The report stated that the reform is required so as "to reduce uncertainty, improve assessment of cumulative environmental impacts, and reduce duplicative project-by-project review for random development."

Some of the significant changes proposed so far are as follows:

* Development of a tiered basis EIR system where after master environmental impact reports for community general plans have been completed, future project candidates consistent with the general plan would need only to supplement the master EIR by a project-specific EIR;

* The definition of project would be limited to exclude projects that do not impact the environment, and development of a mitigation bank for contribution to habitat conservation and wetlands set aside.

* Limits would be imposed on the standards of review under CEQA.

* Development of a state-wide CEQA database that would overlap relevant information pertaining to areas of endangered species and wildlife habitat, agricultural land, timberland, forest land and range land with the state rail plan, the coastal zone conservation plan, the statewide housing plan, the state transportation improvement plan and state buildings and facilities.

EPA'S 1993 SUPERFUND PRIORITIES

There is no dispute that the Superfund program is in need of major changes. Carol Browner, the new EPA Administrator, has stated that the program has "gross problems" and that improving the management of the Superfund will be one of her first goals. The primary shortfalls of the Superfund program are inequities in the liability scheme, inconsistency in the application of law and regulations by the regional offices, and imposition of remedies which fail to take into consideration risk, cost benefit and technical feasibility.

With respect to these criticisms, EPA has begun to exhibit some sensitivity. On February 1, 1993, EPA released a memorandum detailing eight major national Superfund priorities for 1993. These priorities are: construction completions, accelerated cleanup, enforcement fairness, effective contract management, communicating success base closures and innovative technologies.

By recognizing enforcement fairness as a priority, it appears that EPA is shifting from a punitive-oriented philosophy to one based on fairness. EPA's regional offices are now encouraged to seek opportunities for de minimus settlement whenever possible. Under this new directive, small volume contributors will have a better chance of escaping the costly Superfund litigation and steering committee black hole by resolving their liability with EPA districts at an earlier stage and under a more favorable financial term.

CALIFORNIA'S ENVIRONMENT TECHNOLOGY INDUSTRY - ECONOMIC SAVIOR OR PIPEDREAM?

In recognition of the need to both develop technology to improve waste management and the need for jobs in recession-ridden California, state and industry officials have developed a program which they hope will stimulate the development, production, and marketing of goods and services based on environmental technologies. The California Environmental Technology Partnership, between California's Environmental Protection Agency and the Trade and Commerce Agency, is part of a statewide effort to strengthen California's economy without lowering its environmental standards.

The goals of the program are to:

* Develop a plan identifying public health threats and other environmental problems that offer opportunities for technological solutions;

* Outline and prioritize the ways California's government can help the private sector develop and use needed products and services;

* Identify regulatory changes that could be made at all levels to remove barriers to development for industry;

* Use available data bases to develop an information clearing house setting forth California's environmental technologies and services to promote technology transfer;

* Work with federal agencies to discover innovative clean up technologies to be used at federal facilities in California;

* Organize environmental technology conference to bring vendors and customers together;

* Create an expert assistance program to promote export to markets, including Asia, Mexico, and Eastern Europe; and

* Undertake joint research and development projects with the United States Department of Energy.

The creation of this industry should benefit both California's environment and economy by improving ways to reduce pollution while providing jobs for many Californians. State and industry officials hope that the industry will fill the job void created by the downsizing of the defense and aircraft industries. Indeed, the successful application of existing high technology brainpower from those industries to this new industry may be the beginning of the establishment of the 405 as the nucleus of the development of environmental technology.

WITH ALL GOOD NEWS COMES SOME BAD NEWS

Despite the positive strides made in streamlining the process, regulation seems to be increasing in scope. Recently, regulators in California took the following actions that are likely to impose additional burdens on businesses:

PROPOSITION 65 REVISITED

Exemption Abolished

As a result of the settlement of a long pending case brought by environmentalists, the exemption from Proposition 65's requirements created for foods, drugs, cosmetics, and medical devices labeled in accordance with the Federal Food, Drug & Cosmetic Act will be abolished.

Under the settlement agreement, the Office of Environmental Health Hazardous Assessment ("OEHHA"), will regulate 30 new chemicals. OEHHA also will formalize a process to prioritize future development of "no significant risk" levels in collaboration with the industry.

By agreeing to this settlement, OEHHA seems to be turning its back on industry. While, as always, businesses may participate in the process of adopting action levels for the new chemicals, it is clear that the addition of 30 new regulated chemicals will increase compliance costs for businesses.

New Warning Language Regulations

OEHHA is also in the process of proposing regulations which will change what constitutes a "clear and reasonable warning" under Proposition 65. A recent draft of the regulations contains the following changes:

* A requirement that all warnings list the particular chemicals regulated by Proposition 65 to which the individual is exposed;

* A change in the definition of "knowingly" from requiring actual knowledge of the fact of exposure or discharge to "actual knowledge and conditions making it more likely than not that the discharge, release, or exposure in question is occurring or will occur;"

* A requirement that the warnings clearly indicate that a person will be "exposed" to a chemical rather than merely indicating that the product contains a Proposition 65 listed chemical.

* An objective standard for determining the adequacy of the warning and a subjective standard for determining whether the recipient understands the warning;

* Strong new language for the required warnings for raw produce;

* A requirement for compliance with existing state or federal emission monitoring and reporting requirements; and

* A requirement for consumer products warnings in advance of the purchase of the product.

Additionally, now the Proposition 65 requirements must contain "minimum requirements." This is a big change from the previous regulations, which provided a safe harbor for businesses that met its requirements.

If these new requirements become law, businesses will, at great expense, possibly have to:

* Rewrite all existing warning signs, and

* Test all products that contain chemicals subject to the statute.

These recent developments, together with a substantial increase in the budget for OEHHA at a time when other agencies' budgets are being cut, indicate that California's regulators will continue to use Proposition 65 in its enforcement efforts in the future. Obviously, this will result in increased costs for businesses.

DOUBLE WHAMMY -- PROPOSITION 65 AND OSHA

Clinton's commitment to improving OSHA enforcement and regulations will require California businesses to be more vigilant with regard to workers' safety. Failure to appreciate work place environmental hazards not only will subject the employer to Prop 65 liability, but also OSHA citation, as well as potential prosecution under the California Corporate Responsibility Act. Of course, the employer may also be financially impacted in terms of increased workers' compensation claims. The new management creed is now: "Be a manager, go to jail and pay the piper."

UST CLEANUP STANDARD

An ongoing dispute over the appropriate cleanup standards for petroleum contaminated soil may greatly increase cleanup costs for California's businesses, especially those that own property containing or formerly containing underground storage tanks or property contaminated by other types of petroleum waste. The cost of cleanup of this type of contamination depends on the standards imposed by the agency overseeing the cleanup. Unfortunately for California's businesses, the cleanup standards for petroleum contaminated soil and groundwater vary widely not only from area to area but also from agency to agency within the state. Added to the uncertainty over which standard will apply is the frustration of knowing that the range of standards imposed is very wide and which level is applied results more from the whim of the regulator than from the degree of contamination.

Wastes that are not hazardous under federal law could be considered hazardous under California law. However, California's law does not specify the level at which this waste is classified as hazardous. As a result, the big question for companies with this type of contamination is: what level of this waste is hazardous and therefore requires a permit for disposal?

The answer depends on who you ask. Both DTSC and the State Water Resources Control Board ("Water Board") handle such waste. DTSC is the state agency designated to implement the federal standards. However, the Water Board is involved because it determines what types of waste can be disposed of in land-based water management units. As a result, the Water Board is involved in most cleanups because the contaminated soil is disposed of at those water management units.

Unfortunately, each agency gives a different answer and sometimes different people at the same agency give a different answer. Where will this debate end? The Water Board is in the process of developing flexible guidance for the regions to use in setting cleanup standards. Until this guidance is official, businesses are at the mercy of whatever agency happens to oversee its cleanup. As explained above, the costs of such an approach can be significant.

MORE EMISSION CONTROL

Despite efforts by auto industry representatives to obtain more time to develop appropriate technology, the State Air Resources Board ("ARB") recently approved amendments to its certification requirements and procedures for low emission passenger cars, light duty trucks, and medium duty vehicles. These amendments, which update regulations adopted in 1990 to incorporate the availability of new low emission fuels which have been introduced since then, will affect low emission vehicles sold in California beginning in 1994.

The most significant changes contained in the rule are as follows:

* Setting emission standards for combustion engine type auxiliary power units on hybrid electric vehicles;

* Recalculation for reactivity adjustment using the new low emission fuels;

* Calculating emissions from compressed natural gas vehicles; and

* Emissions output during cold start testing.

Who will absorb the costs of complying with these regulations? Even though we are in a climate where, because of an ongoing recession, consumers are not buying as many goods, it is likely that carmakers will follow their past practice of passing these costs onto their customers.

Many businesses will also face new restrictions on their emissions, as ARB has also issued new rules that require companies to apply best available control technology to capture and reduce particles of certain metals emitted into the atmosphere. As a result, businesses working with non-ferrous metals will be required to control emissions for arsenic, cadmium and nickel.

What does all this mean for California's business sector? Overall, it appears that both at the federal and state levels, lawmakers and regulators are beginning to address the problem of over-regulation. This is good news for businesses embroiled in the seemingly neverending regulatory process. However, even though the regulatory process has become more streamlined, there has been no relief in the breadth of enforcement. Thus, it appears that, while businesses may find regulators willing to approach issues with more flexibility than before, they will also find regulations with a wider scope. Indeed, with the expected increased focus on enforcement, especially on worker safety issues and under the Proposition 65 statute, businesses should take note that the time, energy, and money saved through the regulatory streamlining process may go toward efforts to meet new and different regulatory demands.

Anthony C. Ching is the managing environmental partner in Orrick, Herrington & Sutcliffe's Los Angeles office.

Ella L. Brown is an associate at the firm who specializes in environmental compliance and litigation.

RECLAIM EMISSIONS REDUCTION OPTIONS

* Reducing emissions,

* Improving air pollution control technology, or

* Buying emission reduction credits from other sources.