Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Phase I environmental assessments have become the norm in virtually any commercial or industrial property transaction.  Almost any financial institution will require a Phase I report prior to agreeing to finance a transaction.  

In this regard, Phase I's have become a commodity- A box that needs to checked off before a deal can go through.  But buyer beware, beyond securing your financing you may not truly know the condition of your property.  Or even worse, you may not secure the legal protections from environmental liability you intended by procuring your Phase I.

A recent U.S. EPA study evaluated the quality of 35 Phase I reports that were performed on brownfields in connection with federal grant funding.  The Phase I reports were evaluated against basic requirements necessary to secure protections under the "All Appropriate Inquiries Rules (AAI)" (a shield from CERCLA liability for innocent purchasers).

"All Appropriate Inquiries"

Under federal law, in order to establish a shield from liability under CERCLA, a purchaser must, prior to the date of acquisition, perform "all appropriate inquiries" into ownership and uses of the property.  In 2005, U.S. EPA finalized its rule establishing mandatory standards for conducting AAI to secure liability protection.

IG Evaluates 35 Phase I's

In the study, the Inspector General evaluated the 35 Phase I reports to see if they met the required elements of the AAI rule.  Not one of the reports met the U.S. EPA required elements (or alternative ASTM standard).  Worse yet, the missing components were simply formalistic elements necessary for a Phase I to meet U.S. EPA standards.  They did not evaluate the professional judgments in the reports which would be more prone to varying opinion.  Aspects evaluated included:

1. Environmental Professional Qualification Statement- U.S. EPA AAI rule requires a boiler plate statement to be included in the report that the consultant meets the standards to be considered an environmental professional. 
2. Signature-  The environmental professional who responsible for the assessment must sign the report. 
3. Data Gaps-  The professional must identify any data gaps that may have impacted their ability to identify whether conditions at the property indicate a release or potential release occurred at the site.
4. Opinion Statement-  The report must include a conclusion section that summarizes all "recognized environmental conditions" at the property.  Any areas where there were conditions identified on the property which indicate a release or potential release occurred.

In the opinion of the Inspector General, not a single one of the 35 reports evaluated adhered to all of the requirements set forth above. 

The report is another example of the risks associated with hiring an environmental consultant to perform a Phase I.  From my discussions banks don't often evaluate the quality of the consultant or even whether the report meets the ASTM or EPA rule requirements. 

What are the risks to the future property owners in the transaction?  The Inspector General summarized the risks as follows:

Improper AAI investigations introduce risk that the environmental conditions of a property have not been properly or adequately assessed. Consequently, decisions about appropriate uses of redeveloped or reused brownfields properties may be based on improper assessments. Ultimately, threats to human health and the environment could go unrecognized.

Beyond the risks of the unknown conditions, you also could be jeopardizing the legal protections available under the AAI rule.  The rule is very specific in mandating an ASTM or EPA regulatory compliant Phase I assessment before the legal liability protections kick in.  Years later, when an issue arises, you may find you have no shield from liability due to an inadequate Phase I.

Recommendations:

• If you want a true evaluation of the conditions of the property hire a quality environmental consultant.  Avoid consultants who are simply churning Phase I's to move deals forward.  Low ball pricing can often be a red flag regarding the quality of the report.
• Review the Phase I for compliance with standards to secure liability protections.

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As reported in the Columbus Dispatch, Ohio EPA has experienced a drop in revenue attributable to reduced fees collected associated with its various programs due to the recession.  Governor Kasich has not proposed any fee increases to restore the loss in funding. 

Fee increases are seen as additional direct taxes on business which runs counter to the Governor theme of restoring a pro-business environment to Ohio.  Here is the discussion of the budget impacts reported in the Columbus Dispatch:

Since 2005, the Ohio Environmental Protection Agency has relied on fees it collects from businesses to fight pollution and clean the state's air, land and water.

It's an arrangement that worked pretty well until the recession hit. EPA officials hoped to collect $130 million this fiscal year, but estimate they'll fall short by $21.4million.

That led to the proposed 11.8 percent overall spending cut in Gov. John Kasich's proposed two-year budget plan, which begins July 1.

The article reports that the loss in revenue will not lead to layoffs, but Ohio EPA will eliminate 14 vacant positions. From some Ohio EPA staff I have talked to the Agency will also experience a slow attrition because it will not filling vacant positions with departures or retirements. 

The Collective Bargaining Bill (S.B. 5) is also having an impact on the Agency beyond the changes to the law.  It has accelerated retirements of long time Agency employees who fear that S.B. 5 is the first step toward additional changes to the State's retirement system (PERS).  Long-time employee (30 years of experience or more) are leaving in hopes of locking retirement benefits under the current structure.

The loss of institutional knowledge will have a greater impact than the elimination of vacant positions or a de facto hiring freeze.  Staff with thirty years of experience have managed numerous challenging sites, permits and issues.  They also understand the history behind various environmental programs.

While young staff can bring a much needed fresh perspective to management.  Experienced staff are often the most capable problem solvers. 

The  cuts and loss of experienced staff also coming at a time when U.S. EPA continues to place more and more work on State EPAs.  The loss of staff couples with additional demands means Ohio EPA will need to do even more with less...to borrow a phrase from former Governor Voinovich.

(Chart from Dispatch Article)

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Bay Village has been debating establishing a riparian setback for the last few years.  The proposal which began with a 75 foot setback has now been scaled down to 25 feet.  Yet the ordinance is still controversial and City Council decided to delay its vote enacting the provision.

The debate before Council was covered in the West Shore Sun:

Council took the items off the March 21 meeting agenda after hearing concerns voiced by Lake Road resident and attorney, Homer Taft... 

Taft told council he felt the proposed legislation was onerous, would impose unfair hardships on some residents, and could be found unconstitutional.

Residents near creeks wanting to make changes on their property could face thousands of dollars in additional engineering expenses, he said. In addition, some residents could find themselves facing restrictions on developing significant portions of their property.

“I believe this ordinance is unfair to property owners and rather draconian,” Taft said.

He also questioned whether the city is really obligated to pass the legislation.

“I know you are being told the EPA requires this,” Taft said. “I challenge anyone to provide written evidence that’s true.”

Riparian setback ordinances are appearing all over Northeast Ohio due to a strong push by the Northeast Ohio Areawide Coordinating Agency, local officials with Ohio EPA and the Cuyahoga Soil & Water Conservation District.  I am willing to bet that more areas are covered by riparian setback requirements in Northeast Ohio than anywhere else in Ohio.

From the article is appears there is still confusion as to whether Ohio EPA is mandating local municipalities adopt the ordinances to comply with NPDES permit requirements to control stormwater.  As discussed in a previous post, setbacks are but one option municipalities can utilize to meet their stormwater control requirements.

From an environmental standpoint do setback have value?  There is no debate setbacks have value by providing flood retention, filtering of pollutants and habitat to improve water quality.  While there are benefits, they also restrict owners ability to fully utilize their property. 

Many municipalities passed setback ordinances without really understanding what they were placing on their books.  City Councils then faced outraged citizens who complained about "no build zones" on their properties.  Some Boards of Zoning Appeals were faced with controversial variance requests to appease local citizens.  Given the controversy its a good idea that Bay Village is having a robust debate. 

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The U.S. Supreme Court issued two landmark decisions, Rapanos and SWANCC, which interpret the extent of federal jurisdiction under the Clean Water Act.  Since these decisions were issued the Army Corps of Engineers as well as Courts have had difficulty applying the tests for determining federal jurisdiction in a consistent and coherent manner.

The Army Corps of Engineers, in its 2008 Rapanos Guidance, set forth its methods for applying the Supreme Court tests for determining federal jurisdiction.   The prior written guidance left open key issues such as:

• Which of the two tests (Kennedy or Scalia) should be utilized- see discussion below
• Since the statutory language at issue, "waters of the United States,"  appears in other sections of the Clean Water Act how do the Supreme Court tests apply to regulatory requirements not directly addressed by the Supreme Court Decision.

The new 2010 Draft Rapanos Guidance (click link for a copy) attempts to address these issues as well as others. 

Perhaps most importantly, the draft guidance announces that its application will greatly expand the number of waters falling within federal jurisdiction- "the Agencies expect that the numbers of waters found to be subject to CWA jurisdiction will increase significantly compared to practices under the 2003 SWANCC guidance and the 2008 Rapanos guidance.”   The Agencies criticize the 2008 Rapanos guidance as interpreting Justice Kennedy's test too narrowly. 

Recap of Supreme Court Tests

The Rapanos decision contains two tests for determining federal jurisdiction.  The plurality test and the significant nexus test created by Justice Kennedy.  A key debate since the Supreme Court decision in the lower courts has been whether one or both tests should be used to determine jurisdiction.  Here is recap of the two tests that emerged from Rapanos:

1. Significant Nexus Test- (Justice Kennedy) Federal Clean Water Act Jurisdiction extends to all waterways that have a "significant nexus" to a navigable water. A "significant nexus" occurs "if the wetlands, either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity of other covered waters more readily understood as `navigable
2. Plurality Test- (Just Scalia) The test developed by the plurality has a more narrow focus than the Kennedy test.  Under the test, federal jurisdiction extends to only "relatively permanent, standing or continuously flowing bodies of water"

New 2010 Draft Rapanos Guidance

EPA and the Army Corp's 2010 Rapanos guidance basically states the agencies will apply Justice Kennedy test exclusively, the more expansive of the two tests.  Also, as discussed above, the guidance contains a clear message that the Justice Kennedy test will be applied by the agencies in a more expansive manner than under the 2008 guidance. 

The new guidance also applies to more programs under the Clean Water Act (CWA)  The 2008 Rapanos guidance focused only on the CWA 404 regulations governing placement of fill in wetlands and streams.  The 2010 Draft Guidance is far more expansive, stating it is meant to apply to “whether a water body is subject to any of the programs authorized under the CWA."  Such CWA programs include sections 402 (NPDES), 311 (oil spill), 303 (water quality standards and TMDLs) and 401 (state water quality certification) programs.

Status of Written Guidance

The draft 2010 Guidance was sent to the Office of Management and Budget (OMB) for review. OMB has until March 20, 2011 to conclude its review (90 days from the date it was submitted).  EPA and the Army Corps have also said they will provide a limited opportunity for comment once the draft clears OMB review.

It goes without saying that there is concern with the new guidance.  Industry has already stated it believes it is overly expansive and also incorporates language into Justice Kennedy's test that the Justice never intended. 

Based on the federal agencies attempt to greatly expand federal jurisdiction through release of the guidance, it will almost certainly be challenged. 

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The U.S. Chamber commissioned a study of the economic impact of project that have been delayed or canceled as a result of federal and state permitting processes. As described by the U.S. Chamber on its website:

This study estimates the potential loss in economic value of 351 proposed solar, wind, wave, bio-fuel, coal, gas, nuclear and energy transmission projects that have been delayed or canceled due to significant impediments, such as regulatory barriers, including inefficient review processes and the attendant lawsuits and threats of legal action.

The Chamber does acknowledge you can't blame the fact these project did not move forward exclusively on permitting:

As noted above, we do not believe that all of the subject projects will be approved or constructed even in the absence of any legal and regulatory barriers. Also, as with all economic forecasts, we recognize that there is an element of uncertainty. This could be true here because, to our knowledge, this is the first empirical study to quantify the macroeconomic and employment impact of the regulatory barriers imposed on the development and operation of so many energy projects.

The Study is a first real attempt to aggregate data on the impacts regulations on development. Below is a snaptshot of projects at issue in Ohio.

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You don't often get State court decisions on environmental law, especially on air permitting issues.  Recently, the 10th Appellate Court in Columbus issued a decision that has at least a few major implications for businesses in Ohio.  State of Ohio ex rel Ohio Atty. Gen. v. The Shelly Holding Co, et. al.,

There is a good summary of the facts behind the case and a discussion of the legal conclusions the Court reached on the blog American College of Environmental Lawyers by longtime environmental attorney Mike Hardy.  I won't repeat the history of the case here.  Rather, let me highlight the major implications from the ruling for businesses that operate air sources within Ohio.

Ohio EPA's Permit Backlog

Up until 2008, air sources were first issued a permit to install (PTI) to construct and start-up.  Then the source had to obtain a permit to operate (PTO) for continued operation.  With nearly 70,000 regulated air sources Ohio EPA had thousands of backlogged PTO applications.

To address the issue going forward, the law was changed in June 2008 and new sources could obtain a combined PTIO permit.  This reduced the need for two permits from 2 to 1 and extended the effectiveness from five years (PTO) to ten years (PTIO). (Click here for Ohio EPA chart on difference between the programs).

This was a good fix going forward, but what about businesses who were stuck with the system that existed prior to 2008?  The Court's ruling on potential to emit (see below) shows the danger of the Agency's failure to act on a timely basis.  Shelly submitted timely applications, but was placed at a major disadvantage because the Agency failed to act on those applications on a timely basis.

Key Lesson #1:  Even if a business fulfills its obligations on a timely basis it still can be placed at a regulatory disadvantage based on the Agency's failure to act.

What is a Source's Potential to Emit

A source of air pollution (boiler, paint line, etc.) must obtain a federal permit if it exceeds certain thresholds (100/250 tons per year).  There is a huge incentive for businesses to avoid obtaining a federal permit because they impose more onerous requirements. 

In determining whether a sources exceeds federal permitting thresholds, EPA looks at its design capacity, not its actual day-to-day emissions.  Design capcity is referred to as "potential-to-emit." (PTE).

Unless enforceable restrictions exist on design capacity, PTE is calculated using worst case assumptions- source operation 7 days a week, 365 days per year and 8,760 hours per year.  Enforceable restrictions include:

1. air pollution control equipment;
2. restrictions on hours of operation; and/or
3. restrictions on the type or amount of material combusted, stored or processed.

The 10th Appellate Court rejected Ohio EPA's claim that the restrictions must be federally enforceable (federal rule or permit).  The Court held state permits were deemed sufficient for purposes of enforceability.

However, it rejected Shelly's claim that voluntary restrictions were sufficient, even if those restrictions are in permit applications pending Ohio EPA review.  Until the permit is actually issued, the Court held they don't have sufficient legal effectiveness to avoid the worst case PTE calculation of 365 days a year.

Key Lesson  #2:  You can't rely on permit applications as enforceable restrictions to avoid federal permits. 

Ohio EPA's Failure to Follow the Law

Shelly was hurt by the failure of Ohio EPA act on its PTO applications.  Ohio law imposes an obligation on the Agency to issue permits within 180 days. 

The Court noted Ohio EPA failure to act on a timely basis and held that in considering penalties Ohio EPA failure to act "should not be held against the owner or operator."    An interesting sentence in the ruling-  "After the 180-day deadline passed, the burden falls on Ohio EPA to meet its obligation under law; and owner cannot be penalized for the Ohio EPA's failure."

I can envision that sentence being quoted in future briefs by lawyers whose clients may face penalties partially as a result of Ohio EPA failure to perform its mandated functions on time.

Key Lesson #3:  Don't forget Ohio EPA has legal obligations.  Their failure to meet those obligations could be a basis for a legal defense.

Stack Testing to Determine Compliance

Stack tests are samples of air emissions what a source is operating.  The accuracy of stack tests to determine whether a source is in compliance with its emission standards in a permit has been long debated. 

Businesses have argued that stack tests don't represent normal conditions and are only "a snap shot in time."  Regulators argue that stack tests are a valid way of determining compliance.  Until a source passes a stack test (emissions are within limits), the assumption is the source is operating out of compliance with permit standards and subject to penalties.  Any associated penalties should be based on the time from the failed stack test until the source passes a subsequent stack test.

Key Lesson #4:  To avoid large civil penalties, business should act very quickly to make adjustments following a failed stack test.

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