Examine Policies and Procedures for Assessing Administrative Penalties at the Texas Air Control Board

The Texas Air Control Board (TACB) should examine its policies and procedures for assessing administrative penalties. TACB s enabling legislation should direct the agency to consider the economic benefit of non-compliance in establishing penalty amounts.


Background
Texas Air Control Board s (TACB) enabling legislation authorizes the agency to assess a penalty for any violation of the Texas Clean Air Act, any agency rule, adopted order or permit condition. These penalties may not exceed $10,000 per day. In assessing penalties, TACB is required by law to consider the seriousness of the violation, any history of previous violations, the amount necessary to deter future violations, efforts taken by the violator to correct the violation and any other matter that justice may require.

When a violation warrants an administrative penalty, a committee of TACB staff meets to determine whether a financial penalty is warranted and, if so, what amount should be assessed. The agency s legal division then works with the violator to negotiate the penalty and other conditions for compliance. By agency policy, the legal division may adjust the penalty downward by as much as 10 percent as part of these negotiations. An agreed board order is drawn up to reflect the negotiated terms.

According to state law, if a violator disagrees with a penalty amount levied by the board, the violator may seek a judicial review of the agency s proposed actions. TACB reports that this has never happened because the agency does not impose a penalty without the violator s agreement. However, if a regulated company refuses to pay a penalty or comply with the terms of an agreed board orde r, the case is referred to the Attorney General s Office for legal action.

To provide an effective deterrent, TACB s penalties must be set sufficiently high and consistently imposed when significant violations occur. However, violators may be able to del ay or avoid certain costs by non-compliance. For example, by failing to install emission control equipment, a company can realize a sizeable economic benefit. Companies that realize such benefits also win a competitive advantage over those that have paid the costs of compliance with air pollution laws and rules.

TACB staff indicate that a considerable amount of discretion and technical expertise is needed to assess the severity of certain air-quality violations and their appropriate remedies. In its ana lysis, the Texas Performance Review (TPR) did not attempt to analyze specific case records to determine whether violations warranted, but did not receive penalty assessments. However, TPR has learned that the number of actual agreed board orders including penalties (167 in fiscal 1990 and 194 in fiscal 1991) is limited compared to the number of violations identified by inspectors (1,405 in fiscal 1990 and 1,609 in fiscal 1991), although it should be noted that a single board order can address a number of violations. 1 In one situation identified by TPR, a single company entered into three agreed board orders with the agency to resolve 78 violations.

While it is clearly more efficient for an agency to address a number of violations in one order, the practice makes it harder to analyze the agency s use of administrative penalties. Agency data on the board orders issued in fiscal 1990 and 1991 indicated that 361 board orders represented some 1,949 violations. To adequately assess the appropriateness of this practice, it would be necessary to determine, for each board order, the date that the company was notified of each violation, the duration and gravity of the violation and the penalty assessed.

One measure of the agency s use of penalties is the extent to which any penalty is assessed for a significant violation. TPR examined agency data listing significant violations identified in fiscal 1990 and 1991. The data indicated that of 194 violations, 59 were resolved informally without setting any compliance conditions in an agreed board order; 117 board orders were issued and ten cases were referred to the Attorney General s Office for legal action. Of the 117 board orders, 69 are pending and, according to the agency, will involve penalties. TACB indicates that violations that were resolved informally were all clerical in nature. However, clerical violations can be serious if they mask emissions problems, production rates or operating hours, or if the violation is recurring. In interviews, some TACB staff indicated that the primary focus of agency enforcement efforts should be on ensuring compliance with the law, rather than imposing penalties.

A 1989 EPA report to TACB indicates that Environmental Protection Agency (EPA) believes fines collected by the agency are not always sufficient. EPA specifically called attention to limited penalties assessed for reporting or record-keeping violations. E PA encouraged TACB to review EPA s penalty policy and to adjust its own policies; TACB s written response to EPA stated that adjustments to existing policies were not appropriate or necessary.

In public testimony to the agency in February 1992, EPA also expressed concern over the low penalty amounts obtained from violators in many states, including Texas. EPA has set a national goal to have all federal, state and local enforcement actions for C lean Air Act violations assess a penalty sufficient to achieve effective deterrence for violators and the regulated community as a whole. EPA has established the Clean Air Act Stationary Source Civil Penalty Policy as a guide for its own enforcement of the act and is encouraging its adoption by state agencies. 2 This policy emphasizes that any penalty should, at a minimum, remove any significant economic benefit resulting from non-compliance. In addition, it should include an amount beyond recovery of the economic benefit to reflect the seriousness of the viola tion. The first part of the penalty is called the economic benefit component while the second part is referred to as the gravity component.

In cases in which the state has not assessed penalties at a level high enough to deter violators and recover the economic benefit of non-compliance, EPA has indicated it will consider an overfiling action, in which it will impose its own penalties.

TPR has learned that a number of other state air pollution control agencies consider the economic benefit of non-compliance in assessing penalties. Such states include Illinois, Florida, New York, Minnesota and Virginia. Mo st states surveyed use a computer program developed by the EPA to determine the economic benefit. EPA trains people in how to use this program. Not all cases warrant the use of an extensive computer program, and the economic benefit of non-compliance can not always be easily calculated. In many cases, however, the agency can determine the controls that should have been used by a company, the cost of installing those controls and the maintenance costs the company would have incurred had the controls been installed at the time they were required.

In addition to the EPA s strong encouragement of more stringent penalties, a 1990 report conducted by the General Accounting Office (GAO) concluded that penalties imposed on significant violators were often not sufficient to remove the economic benefit of non-compliance. GAO reported that EPA data for fiscal 1988 and 1989 show that more than half of the significant violators identified by state and local programs 54 percent paid no cash penalties. 3

TACB s rules and guidelines could limit the number of identified violations that are ever considered for possible administrative penalties. Only violations that materially affect human health and safety or meet the agency s definition of significant should be considered for possible penalties. Regional offices can work with violators for 30 days to bring the company into compliance and must refer cases for possible penalties only if compliance is not achieved in that time period.

Recommendations
A. Texas Air Control Board s (TACB) enabling statute should be amended to provide that all significant violations identified as a result of an inspection or complaint are referred to headquarters for possible enforcement action at the same time that a notice of violation is issued.

This requirement would help to ensure that significant violations are considered and resolved in a timely manner, and that penalties are imposed when appropriate. Significant violations would include violations currently defined as significant in agency guidelines, including violations of a board or court order, violations that are intentional or demonstrate a flagrant disregard for agency regulations, violations that threaten human health or safety and any violations the agency has agreed with EPA to seek penalties for by a Memorandum of Understanding.

Two suggested changes from current guidelines involve repeat violations. Any violation for the same cause that is repeated a second time within a five-year period should be referred for cons ideration for a penalty. In addition, when more than ten violations of any type are identified within a five-year period, regardless of their severity, the violations should be considered for a penalty.

B. TACB s statute should be amended to require the agency to consider economic benefits to a violator resulting from non-compliance in assessing a penalty.

The statute should direct TACB to set penalties at a level sufficient to act as a deterrent. The statute would instruct the agency to adopt by rule the methods to be used to calculate the economic benefit of non-compliance and the conditions under which the benefit should be calculated. The agency would have authority in statute to mitigate the economic benefit calculation in cases where recovery of the penalty would result in plant closings, bankruptcy or other extreme financial burden, and where the costs of calculating the benefit would exceed the benefit that could likely be derived from the action. TACB also should be instructed to explore alte rnative payment plans, such as installment payments with interest, as an option for enabling a company to pay the penalty.

In one instance, Texas Attorney General has already calculated penalties that reflect the economic benefit of non-compliance, using the EPA computer model. In this case, a settlement was reached for an actual penalty amount well below the amount derived from the model. However, the settlement occurred only after the company was advised of the figure produced by the computer model.

To implement these provisions, the agency should consider adopting the EPA civil penalty policy to the fullest extent feasible. TACB has recently initiated meetings with EPA staff to discuss this implementation.


Implications
TACB already has the authority to consider economic benefit in assessing penalties, but placing an intent statement in state law would emphasize the importance of assessing penalties at a level sufficient to deter violations. By imposing an appropriate level of penalties on violators, the state will collect the penalties, instead of the federal government.


Fiscal Impact
The fiscal impact of these recommendations cannot be estimated. Penalties would be used to support agencies regulatory efforts.



Endnotes
1 It is important to note that the violation situations identified in 1990 and 1991 may have been resolved with a penalty assessment in a subsequent fiscal year. Similarly, penalties assessed in 1990 and 1991 could relate to violations that occurred prior t o fiscal year 1990. To date, TACB has not performed the analysis necessary to draw more accurate conclusions about the number of penalties associated with violations.
2 Environmental Protection Agency, Clean Air Act Stationary Source Civil Penalty Policy (Washington, D.C., February 16, 1984).
3 United States General Accounting Office, Air Pollution: Improvements Needed in Detecting and Preventing Violations (Washington, D.C., September 1990), p. 33.