Legislature(1995 - 1996)
01/31/1996 03:40 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE January 31, 1996 3:40 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Rick Halford Senator Robin Taylor Senator Georgianna Lincoln MEMBERS ABSENT Senator Lyman Hoffman COMMITTEE CALENDAR SENATE BILL NO. 199 "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations; and amending Alaska Rules of Appellate Procedure 202, 402, 602, 603, 610, and 611." PREVIOUS SENATE COMMITTEE ACTION SB 199 - No previous action to record. WITNESS REGISTER Annette Kreitzer, Legislative Aide Senator Loren Leman State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Commented on SB 199. John Riley, Director Litigation Support Texas Natural Resource Conservation Commission POSITION STATEMENT: Commented on SB 199. Jerry Davenport, Legal Counsel MAPCO Petroleum 1150 H & H Lane North Pole, AK 99705-7879 POSITION STATEMENT: Commented on SB 199. Steve Torok, Senior Representative U.S. EPA Juneau, AK 99801 POSITION STATEMENT: Commented on SB 199. Ron Sutcliffe, Assistant Attorney General Department of Law 310 K Street, Ste. 308 Anchorage, AK 99501-2064 POSITION STATEMENT: Commented on SB 199. ACTION NARRATIVE TAPE 96-9, SIDE A Number 001 SRES 1/31/96 SB 199 ENVIRONMENTAL & HEALTH/SAFETY AUDITS CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:40 p.m. and announced SB 199 to be up for consideration. He said that SB 199 was inspired by his attendance at an Energy Council meeting where he found that 14 other states have already done this and a number of others are contemplating it. Although the EPA originally resisted this idea, it is changing its philosophy from the approach that government alone is responsible for forcing people to act certain ways to encouraging people to act in ways to meet our environmental laws. He said many programs want self-reporting, but they don't offer sufficient protection for companies who voluntarily report a violation and then correct it. SB 199 goes a long way to address that. The key thought behind this bill is that government should view business as a partner with a mutual interest of protecting our environment. In many cases, because of the complexities of our environmental and health/safety laws, a lot of businesses may unwittingly be violating. Correcting that behavior through a self- audit approach before it causes a problem gets us closer to accomplishing our objectives. Number 80 ANNETTE KREITZER, Legislative Aide to Senator Leman, said she thought it was important to point out that "privileged materials" as defined in this bill does not apply to documents, communications, reports, or information required by a regulatory agency to be collected under a federal or state environmental health and safety law. The privilege would not apply to information obtained by observation, sampling, or monitoring by a regulatory agency or information obtained from a source not involved in the preparation of an environmental health and safety audit report. The voluntary disclosure and immunity clause on page six grants limited immunity from administrative, civil, or criminal penalty for a violation that's disclosed, if the violation is corrected within a reasonable time. The violation cannot have resulted in injury to anyone at the site or in substantial off-site harm to persons, property or the environment. The immunity does not apply, if the violation was knowingly committed, if people were hurt, or if the violation was committed recklessly by any agent of the owner or operator. To receive immunity a facility that conducts a self- audit has to give notice to the regulatory agency that it's going to. The notice has to include the facility or the portion of the facility to be audited, the time the audit has to be done, and a general scope of the audit. A company cannot be in continuous state of self-audit. The audits must be complete no later than six months from the start of the audit, unless the regulatory agency agrees to an extension. Immunity does not apply if a person repeatedly or continuously commits serious violations and does not attempt to bring the operation into compliance. MS. KREITZER then briefly reviewed for the committee the individual sections. Number 175 SENATOR TAYLOR asked for a practical example of how this would apply. MS. KREITZER replied that in other states, for example, if you miss a reporting requirement, and you voluntarily disclose that, you are not assessed a penalty. SENATOR LEMAN noted that the whole concept of self-auditing started around 1977, but it has become even more important since the Union Carbide accident in Bohpal, India in 1984 where that company recognized that they were better off to go in and identify the things that needed to be changed and made those changes. Number 209 JOHN RILEY, Director of Litigation, Texas Natural Resource Conservation Commission, said they passed similar legislation effective May 23, 1995. He said this legislation is almost identical to theirs in spirit and in most of the provisions. Approximately 143 entities have availed themselves of the section in law which anticipated applying for immunity should violations be discovered. They haven't necessarily sought the immunity, but they have taken the first step of giving notice of intent. The types of entities are very different ranging from the University of Texas, municipalities, and industries. They have received 12 disclosures for immunity and a number of them would not have been discovered through routine record-keeping. None of the disclosures have been for any major contamination. The law is being looked upon as a supplement to their traditional enforcement mechanism, MR. RILEY said. Workshops he has taught emphasize that the audit and their traditional enforcement are independent of each other. If a violation is found simultaneously, immunity does not apply. He emphasized that the immunity is not from enforcement which mandates certain remedial action or technical requirements. Number 323 SENATOR LEMAN asked if they could require short-term as well as long-term remedial action. MR. RILEY said that was right. SENATOR TAYLOR asked him for an example of how a violation would have been treated before the law and how it is treated now. MR. RILEY explained there are some instances, like record-keeping, where entities are much better at investigating themselves than the agency is. Number 375 SENATOR LINCOLN asked if he had seen a reduction in environmental inspections they would normally go out on or was there a reprioritization of their resources that they now have with self auditing. MR. RILEY said he hadn't seen any, yet, but it is anticipated that at some point their inspections will not have to focus on same entities with the same frequency that they do now. This would happen if they are satisfied that they are getting a sufficient return on their self-policing mechanism. Number 396 SENATOR LINCOLN asked if disclosures are made public. MR. RILEY clarified that they do not advertise disclosures, but it is proper interpretation of their act that those disclosure letters are public information. SENATOR LINCOLN asked how their legislation affects the oil industry on self-auditing. MR. RILEY said, generally speaking, he hoped there would be benefit from industry's compliance status. They don't have to fear that documents they generate in the process would be used against them. Number 442 SENATOR HALFORD asked if he found an entity they were involved in an enforcement action on had used the self-audit provisions in any way as a shield. MR. RILEY said the only shield their law offers is a shield from a monetary penalty. SENATOR HALFORD asked what was his reaction when they are dealing with an entity they are about to start an investigation of, because of information or complaints, and they get a notice of self-audit at the same time. MR. RILEY said they wouldn't stop a scheduled inspection for a response to a complaint just because they received a notice of intent to audit. They would continue the inspection and see if they meet at the end with the same information. They exercise their discretion if they determine a good effort is made. SENATOR LEMAN said that the "privilege" applies to the audit itself, not to the underlying facts. SENATOR TAYLOR said he was troubled by the possibility that the opposite of the bill were true now and that an entity which is self-reporting is subjecting themselves to the full penal aspects of whatever the violation might have been, even though they are the ones who reported it. MR. RILEY said it is not clear whether self- reporting would be given consideration for having made the disclosure. SENATOR HALFORD said he was concerned with both directions. In "instructions" listed under "guidance" it says, "regional inspectors are cautioned not to schedule inspection based solely upon the receipt of such a notice." (Senator Halford was referring to a TNRCC guidance document available from Senate Resources Staff.) Number 520 JERRY DAVENPORT, legal counsel for MAPCO Petroleum, said he has had the opportunity to work in Oklahoma with the state agency developing a penalty policy which has elements similar to the immunity provisions in SB 199. Prior to this he worked as the head of the environmental law section of Nature Ways Co. in Texas and was very involved in doing audits. MR. DAVENPORT explained that typically a company performs an audit, because the law and regulations in the environmental area are extremely complex. Getting the information to the employee to try to comply with the regulations on a facility level basis is a very difficult process. They have other day-to-day concerns than reading the 13,000 pages of federal regulations. Audits are a key tool in determining a facility is complying with all the regulations and helping it to improve its management of the environmental area, as well as correcting any specific violation. Before a company adopts the position where it will actively go forward and audit its facilities and try to get in compliance, rather than waiting for a regulator to come by and inspect a facility, a number of questions come up. One is if they disclose the audits, will they be penalized for it, and will the audits be used against them by people who oppose their activities. He said in most cases if an inspection finds compliance problems, most agencies will work with companies and recognize that voluntary efforts are key to maintaining a high level of compliance within a particular state. Of course, this isn't always the case. Penalty policies in some states discourage the types of activities that should be encouraged to maintain a high level of compliance. In all honesty, when they are asked by some companies if they will be penalized for inadvertent violation, they have to say that it could happen, that it could be severe; but, it is far better for a company to seek out its own problems and solve them rather than to wait for the state to find them. SB 199, MR. DAVENPORT thought, crafted a very careful balance between the carrot for encouraging voluntary audits and self- evaluation and penalties for violations. TAPE 96-9, SIDE B Number 590 MR. DAVENPORT clarified that the areas identified under audit are the only areas covered. He informed the committee that Oklahoma adopted a similar policy. In Oklahoma's policy, the term "company" was used in order to mean those typically covered. A large Air Force base was the first to take advantage of the penalty policy. He said that the policy encouraged an early review from the regulating community. In conclusion, Mr. Davenport stated that the audit is a key tool in order for companies and regulated entities to comply with the complicated laws and regulations they face. CHAIRMAN LEMAN informed Mr. Davenport and Mr. Riley that testimony would be taken from the Department of Law who have expressed concern regarding the application of the audit privilege. He asked them to stay on line in order to answer possible questions. Both Mr. Davenport and Mr. Riley agreed. Number 565 [THE TESTIMONY OF JANICE ADAIR IS TRANSCRIBED VERBATIM.] For the record, my name is JANICE ADAIR and I'm here representing DEC today. We certainly agree that an objective, systematic and periodic review of a facilities operation is a very good idea. It's one of the best things the company can do to help comply with state and federal environmental laws. DEC's normal operating procedure is to not take any enforcement action where things are reported to us by a company where they have found a violation. We have never taken enforcement action. I think it's also important to recognize that DEC does not have administrative penalties and we have very limited civil penalties; and Marie Sansone from the Department of Law will talk about that more. I did bring a copy of a project that we're trying to do here with car shops, auto shops which will provide them with technical assistance on doing an audit because that is one of the problems that small companies have; is just even how to do one. There are no standards. And then also provide them with some immunity if violations are found provided they are quickly corrected. Number 545 We do have concerns with this piece of legislation, however. The privilege that's created creates a secret. It withholds information from the public and from the regulatory agency. And it has the real potential to increase public suspicion about the activities and motivations of the company. We believe that this would actually decrease cooperation. We have found that approaches that are more open and inclusive are much more effective at building good working relationships between the industry and public, between the industry and the agency, and between the agency and the public. So that everyone understands what it is that is going on. As we read the bill, the audit report which is a very comprehensive definition and includes the corrective action plan that a company would create to correct any violations that they had discovered would be privileged and would not be subject to any kind of disclosure. But the audit report, the documents that make up that audit report, do not have to be labelled in any way. And yet if an employee, a State employee, inadvertently discloses that audit report they are subject to criminal sanctions, a Class B misdemeanor. The department could ask a court to privately review the audit and lift the privilege on any portion of it. But we'd first be able to prove fraud or that the audit would show non- compliance. And we don't know how we would prove that if we had not ever seen the documents that make up the audit report. If there's reasonable cause to believe a criminal offense has occurred, the court can allow a State AG to review the audit. But any information that AG receives from his or her review - apparently, even if it leads to a lifting of the privilege - can't be used to prosecute the alleged criminal. If they do, if the agency were to make the decision to go ahead with a criminal prosecution, we believe that we'd have to bring in a new attorney probably, new inspectors from the department. Because we have to prove that any information we use didn't come from the review of that audit. So, practically speaking, we don't think that the audit privilege would ever be lifted. Information is, as was pointed out, that's required by law to be provided to the department isn't subject to the dis -- to the privilege. But we're not certain if that includes items that are in the permits; where we have a permit stipulation that might make a regulation more specific to a given facility. Nor do we believe it would include any contracts or leases or compliance orders by consent which is a very common agreement that DEC reaches with a lot of the regulated community. The owner or operator can voluntarily disclose to us any of the violations that their audit identifies and receive immunity from criminal, civil, or administrative enforcement actions providing they give us notice. But as we read this, the disclosure is public information but the actions that they take to correct the violation are not. They are covered, they're within the definition of the audit report and would be privileged. So, you would have documentation out there that a violation had been discovered through the disclosure letter, but whatever action the company chose to take to correct it would be - would remain under the audit privilege. We see that as a potential problem. There are also stipulations about when the disclosure is not voluntary. If it's by enforcement or decree, the immunity doesn't apply if the violation was done intentionally. Here, there is also some standard on injury or harm, but they're different standards. Some it is substantial injury, some is just injury, there's other references to substantial harm and then other references to just harm. So, we're not really certain what has to be proven at what point and time for the immunity. The court can find the immunity doesn't apply if violations are serious, repeated, or continuous, and that the person hasn't taken any actions to correct the violations such that they've created a pattern. And that a pattern is defined as serious violations that are separate and distinct at the same facility. So you have this concept of these continuous violations that then somehow become separate and distinct at the same facility. And we do have, there are operators in this state that will move from facility to facility and create the same violations in different facilities. So you would have, those fly- by-night operators that could potentially receive immunity under this bill. As I said in the beginning, we do support environmental audits. We think that they're very good and it's one of the reasons that we're doing this, this pit stop program. And if it is as successful as other states have been with it, we plan to expand it to others. But we do have some concerns about the way this bill is drafted. CHAIRMAN LEMAN summarized Ms. Adair's testimony to mean that she agreed with the legislation conceptually, but some of the language needs to be tightened in order to agree on the concept of the bill. JANICE ADAIR: We think that our current policy is working very well. So, I think as far as that goes conceptually we are in agreement. CHAIRMAN LEMAN asked Ms. Adair if she would be willing to work with the committee in order to ensure that the language of the bill is consistent with DEC policy and what the committee wants to accomplish. JANICE ADAIR: If we can do that, we certainly will--yes. Number 489 SENATOR TAYLOR pointed out that one aspect of SB 199 to which Ms. Adair objected was that a DEC employee could be prosecuted if they leaked the information to someone. Are they prosecuted under the current policy? JANICE ADAIR: Through the Chair, Senator Taylor, no. We have the presumption that our files are public information. Someone can come in and look in our files. If we have confidential information in our files, what we endeavor to do is mark those and keep them in a different location. Since this document isn't required to be labelled and it is a voluminous definition, it can include a lot of different things and there is no requirement that it be labelled in any way. So, someone could give it to us - a secretary being very efficient, not knowing what it is puts it in the facility file and a few days later someone comes in to look at that facility file and there is the information. And it has then been disclosed, it is inadvertent. But none-the-less, it has been disclosed. SENATOR TAYLOR said that the industry should be penalized for its inadvertent mistakes, but the agency, DEC, and its employees should not. JANICE ADAIR: Mr. Chairman, Senator Taylor, confidential documents should be labelled confidential. SENATOR TAYLOR indicated that DEC should be able to take care of that. If an audit were received, isn't there a certain protocol. JANICE ADAIR: If we knew that's what it was. We may not know what it is. SENATOR TAYLOR pondered how an employee of DEC could be dealt with if the employee did not like a decision made by DEC and the employee makes calls to various federal agencies. How do we get to that employee if the process specified in SB 199 is objectional? JANICE ADAIR: Mr. Chairman, Senator Taylor, I don't know that you will ever be able to take care of disgruntled employees in any employment situation. But, confidential documents that a company expects to be kept confidential should be submitted in that fashion. The definition of audit in this bill is so broad that we could receive information that was not realized to be part of an audit report. It would just simply go on the file and be available for public review. There was no intent, it's a very different situation than someone who purposely takes it and purposely discloses it; who intentionally does that. It is an inadvertent mistake that causes the document to be disclosed. SENATOR TAYLOR asked Ms. Adair if she would object to the penal aspect of the bill if the bill specified that confidential documents be labelled as such. JANICE ADAIR: Mr. Chairman, Senator Taylor, if that was the only thing that was changed in the bill, we would still have concerns with the legislation. SENATOR TAYLOR asked if Ms. Adair would still have concern with that one provision. JANICE ADAIR: We would still have concerns with that provision. SENATOR TAYLOR did not understand why Ms. Adair would have problems with penalizing an employee who intentional leaked information from properly labelled documents. JANICE ADAIR: That particular section doesn't require that the employee intentionally release it. It just simply says, if it's released. CHAIRMAN LEMAN noted that there is a section that specifies that if the document is not clearly labelled then it would be an affirmative defense. Chairman Leman agreed with Senator Taylor and Senator Halford. He was interested in hearing from the people in Texas about this issue. Chairman Leman indicated that placing the burden on those submitting the audit to label it would be agreeable with him. JOHN RILEY said that they decline to receive information that is part of an environmental audit. MR. RILEY explained that their legislation requires that before accepting a document, the department would enter into a confidentiality agreement. The confidentiality agreement obligates the submitter to label the documents. In practice, the submitter must label their documents, but this is not provided for in the legislation. Number 402 CHAIRMAN LEMAN agreed with that method. SENATOR TAYLOR expressed concern that this legislation would bind the agencies within the State while having no impact on any federal agency to whom the same document could be leaked. He pointed out that he and his office staff receive information of a proprietary nature involving various oil matters in Alaska. He emphasized that he and his employees fall under that sanction; if anyone discloses any of that information, they could be sent to jail. Why should the standard be different for DEC? CHAIRMAN LEMAN noted that there is a Congressional bill which would change federal law to do this. SENATOR HALFORD suggested that if the purpose is immunity, then the documents could be sent to DEC sealed and remain so. There is no reason to ever open those documents at DEC. Documents are at DEC in order that the entity can prove that it is working on it. The only time proof would be needed would be in the case of a violation. He stated that perhaps, the best manner in which to deal with this would be by DEC receiving the sealed documents so that the entity can prove they sent the documents if need be. Number 369 [THE TESTIMONY OF MARIE SANSONE IS TRANSCRIBED VERBATIM.] My name is MARIE SANSONE, and I've reviewed this bill from primarily the standpoint of its application in civil and administrative proceedings. My remarks today are of two categories: some are just background information and the other category would be to raise what we view are very serious problems and concerns with the bill. As you noted in your remarks, the audit privilege concept is based on an evidentiary privilege that was first recognized in the early '70s in a case Redice vs. Doctors Hospital. In that case, a patient had died. After the death of the patient, there was a medical peer review group. The patient's family sought the communications by the medical peer review group to prove medical malpractice. In 1970, the D.C. Circuit Court of Appeals recognized a concept that there should be a privilege for self-critical analysis or self-evaluative analysis where the purpose of that analysis is to prevent future malpractice or future bad conduct. That concept spread and nearly all the state legislatures adopted such a statute and we have one in this State. So we do have a type of limited audit privilege, if you will, in AS 18.23.030. And it may be worth looking at that statute for language or concepts related. It's 18.23.030. After that case, several courts went on to extend the concept of this privilege to other areas of law. Some courts completely rejected the concept even in the area of medical peer review. Other courts modified it. In general, there has never really been among the courts any consensus on what are the proper elements to assert a privilege or to overcome a privilege. The courts have, for the most part, rejected the privilege in environmental cases. There is one recent exception and that is the Reichhold case out of the Federal District Court in Florida. And I've brought copies of that decision with me, because it does set out conditions and criteria that the court considered important in the environmental fields. And that case happened to be a private case among private parties for contribution over a contaminated site. Alaska State law, except for the medical peer review, does not have an audit privilege. We do have the attorney-client privilege, the work- product privilege, and the evidentiary rule that against--that evidence of subsequent, remedial measures are inadmissible. And these evidentiary rules are used to protect audits, at least in part. They are available as a mechanism. There's also a mechanism in the rules of civil procedure for parties to obtain protective orders against disclosure. So, I wanted to leave the committee with the impression that we are not without mechanisms to protect information. The federal law that would apply to Alaska - there is federal law on the privilege and I've brought that case with me too. In 1992, the Ninth Circuit Dowling vs. American Hawaii Cruises held that there would be no privilege of self-critical analysis for internal corporate reviews of matters related to safety concerns. The Ninth Circuit didn't say that would never happen, but the conditions they establish in their decision do set up a hurdle that would have to be overcome. Interestingly, the Reichhold case which recognized the privilege relies on Dowling. So, the Reichhold court thought it could be done and I think those cases are very worthwhile to look at just in terms of requirements and exceptions that they set out. If the bill were to pass in its present form, the federal law of evidence would apply to any federal cases; but the State legislation would apply to State cases. That could create some odd situations as we just mentioned a few minutes ago in the hearing. The audit privilege legislation for environmental cases, like what Texas has - the concept for that started to develop in the early '90s in Oregon and Colorado. Similar bills have been introduced in other states, fourteen have passed and a number are pending, some have failed, some have been vetoed, and there are also federal bills. I've provided the committee staff with a notebook that contains testimony and background on many of these bills both by industry and by enforcement agencies for and against the bills. And that would give anyone who wants to take a look at it an idea of the scope of the discussion. Number 294 Virtually no one has ever disagreed with the concept that voluntary audits should be encouraged. That under appropriate circumstances, there should be either penalty reductions, good conduct credits, whatever, perhaps no enforcement as a break for a company that's acting in good faith and actually reviewing its behavior and making its corrections. But once you get past that initial agreement over the concepts and policies, there is or has been a lot of debate. And these bills have had vigorous and almost unanimous opposition from the federal and state enforcement agencies. The United States' Attorney General for the Department of Justice has opposed the privilege or an evidentiary privilege established in legislation. The EPA in its new audit policy, while it creates a policy that is designed to encourage audits and offer breaks and incentives for audits opposes state legislation creating the evidentiary privilege. The National District Attorney's Association has vigorously opposed this type of legislation and many state attorneys general have also opposed this type of legislation. Their concerns have been that the bill is actually not necessary to encourage compliance. That unless they're carefully drafted they'll create safe harbors for polluters, promote fraud, that they'll divest state enforcement officials of their discretion, invest that discretion in judges who will not be familiar with the case or the evidence. That the secrecy the bill could create if it's drafted very broadly would create mistrust of the enforcement agencies, regulatory agencies, and the very corporation it's intended to benefit. The corporations are conducting audits to avoid accidents and liability and that the fear of a disclosure requirement would not inhibit those audits. In the jurisdictions where this type of legislation has been debated, some industries have vigorously supported the bills. Other industries have supported the concept of incentives, but not necessarily through a statutory privilege or immunity. In any event, there's been a huge volume of testimony and that can probably tell you I've given it at least five inches worth. And I don't intend to cover all of that. In states where its been debated, it has produced a very adversarial bill. These bills contain within their framework, this adversarial relationship is built right into the bill. And I think if you carefully go through a lot of the exceptions and provisions in the Texas bill, you will see that. One provision will be very broad, the next provision will kind of chisel away, another provision will be broad, the next will chisel away. So, that adversarial nature is built right into the bill. Number 239 With that background, I want to emphasize a few points. We're very concerned with the breadth of the bill. The definition of environmental or health and safety law is very broad. It is not just DEC and OSHA; there are environmental bills, environmental laws vested in many state agencies and they are scattered throughout the entire Alaska statutes. DNR has environmental enforcement, regulatory authority. The Alaska Oil & Gas Conservation Commission regulates oil and gas drilling to prevent land and water contamination. And they have, they are participants in the EPA's underground injection control program. The joint pipeline office regulates the Trans-Alaska Pipeline for environmental compliance and safety. Department of Fish and Game has what could be construed as environmental laws. The Department of Public Safety regulates hazardous materials. And I probably omitted many agencies and many environmental laws. So that would be one of our concerns: that it would be improper and incorrect to view this bill as just dealing with DEC enforcement. If that were the intent, it would need to be more narrowly restricted. Or perhaps, that is not the intent, but I think it's important to understand that. Similarly, there are many laws that could be considered occupational and health and safety laws not just OSHA. But worker's compensation would be classified as an occupational and health and safety law. The Department of Health and Social Services regulates and licenses health facilities and operations, not just for patient care type regulations. But in many cases, for occupational, compliance with occupational laws. Professional and occupational licenses are another area that could be construed as a health and safety law. So, again if the intent is that this would just cover OSHA enforcement, the bill as its drafted does not do that. Number 213 We're also concerned with the definition of environmental or health or safety audits. These audits can be conducted by an owner or operator, an employee, an independent contractor. We don't have a concern so much as to who conducts an audit; but the critical issue in granting immunity or granting a privilege, giving someone a break would be who had the authority to initiate that audit, who had the authority to commit the funds and undertake the corrective action. As the bill is drafted, anyone in a large corporation in any division could initiate an audit. Maybe they would have authority to undertake the correction, maybe they wouldn't. But that is very simply too broad when we're going to give sweeping privileges and immunities. As a practical matter, when the attorney general's office includes an audit requirement in a settlement agreement one of the criteria that we would look at is: does the person or the entity have the wherewithal to actually conduct and complete the audit and undertake the corrections. That would be very important to us to whether or not they should be entitled to any kind of break on whether or not we're going to bring a case, or whether or not we would offset any civil assessment. Related to that, but not the same concern, is there are no standards for audits. There's no licensing for audits and there's a variety of audits. So that combined with the question of who can undertake one creates potential for abuse we feel. Number 184 Perhaps the most troubling aspect is the definition of audit report in the bill. And the bill is drafted so broadly that any document or communication of any nature whatsoever that is generated before, during and after the audit, if it can somehow relate to the audit and the resulting corrective actions is classified as the audit report. In the law of evidence there is nothing, not even the attorney-client privilege that would even approach a privilege of that scope. We don't believe there's justification for creating a privilege for the raw data that might be collected in the audit: the photos, the maps, and so forth. I find it very hard to see that there can be a justification for that. We believe there's no justification for the privilege to apply to the implementation plan or the corrective tracking system. There'd be no point to gather the information and chart a course of corrective action and then keep that information confidential, or at least it doesn't seem like there'd be any point to keeping it confidential. Because if you were undertaking the corrective action that frequently is to provide employee training, obtain appropriate permits. It just doesn't seem to make sense. The case law that I've provided you, the Dowling and the Reichhold case, recognize that there's no justification for keeping a privilege -- keeping a report confidential for post-audit conduct. So, if a party conducts an audit, the audit finds deficiencies and recommends corrective actions and then lo and behold those aren't undertaken, there's an accident, there's injury; that report should not be confidential as to that post-accident, that post-audit conduct. And that is a principle that is recognized in the federal courts that have recognized an audit privilege. Finally, along with the audit report definition most courts carve out exceptions for evidence where there's exceptional necessity or extraordinary hardship. And those circumstances might be that a witness died or a witness is impossible to locate who was interviewed as part of the audit, that the evidence is destroyed or missing, it is impossible to otherwise obtain the evidence. That kind of exception should be built into those provisions. We're very concerned with the marking requirement. The report is supposed to be marked, but there are no consequences to not marking them. There are all kinds of materials that could be part of the audit report that would look no different from any other document that might be submitted to DEC or to a regulatory agency. Under the bill, anyone can mark a document. Anyone can mark a document at any time even years after an audit is completed. For the immunity provisions to kick in, there has to be advance notice to the regulatory agency of the audit but not for the privilege. So, apart from the immunity, there's no real starting point to when you can start thinking about the audit and start marking your materials confidential. I guess the point, the conclusion to that is that if the legislature concludes there's policy reasons that would support creating an evidentiary and disclosure privilege, those policy reasons we do not believe would support going this far. We just think its too broad, that it will invite fraud and abuse. And that we'll be keeping information secret that's actually vital to protecting public health and safety. Now with respect to the privilege, and I believe this might be a conflict between the way the bill is drafted and the way its being implemented in Texas, but if you look at the very first paragraph of the bill - that privilege applies to any type of litigation, it can, whether it's civil, criminal or administrative. It could be asserted by public or private parties, it could be asserted when the State is bringing a case. It wouldn't necessarily have to be an enforcement case. It could be asserted if the State has been sued and we're trying to obtain discovery of an audit report in our defense. And it could be asserted between private parties and there's quite a lot of case law where private parties argue about this in terms of contribution over contaminated sites or insurance. So, it is an issue that comes up in private litigation. The way the bill is drafted, again I don't know if this the intent or not, but it applies to any type of dispute: negligence, intentional torts, contract problems, property problems. The State has leases. We have property management contracts. DOT is concerned that it would come up in condemnation cases. The University and Mental Health Lands Trust manage property and this could be asserted in any dispute involving those issues. Now, again that may not be the intent, but that is the effect of the language. Construction law is another area where there could be serious consequences. The State either contracts or gives grants to municipalities for large public works projects. Often there have to be audits in connection with these projects. As far as DEC goes, DEC brings injunctions on occasion to stop continuing violations and civil assessment and cost recovery statutes; it could come up in any of these contexts. It would apply to any type of remedy, not just penalties. It could be damages. It obviously applies to criminal proceedings. In administrative proceedings, that those could be conceivably enforcement. There are other administrative proceedings such as revocations of licenses where professionals or facilities have fallen far below in the accepted standard of conduct. We sometimes litigate over lease terminations in administrative context because the lessees are not maintaining the property. Contract debarment is another type of administrative proceeding. In other words, and I probably haven't mentioned all the types of proceeding, but the State participates in many proceedings. And the privilege applies to all of those. So the potential for the impact of this bill is enormous. To create a new privilege that could be invoked in so many different types of proceedings, would take very careful study and review. The privileges that are in the law that have been in effect, those privileges evolved over a very long periods of time and were refined through the courts and they're very narrow. Civil, for a broad privilege of this nature, it is very contrary to our civil discovery of practice and policy, the laws of civil discovery. We have very broad discovery to promote resolution of disputes and promote a level playing field. Parties in civil litigation are required to disclose any matters that are relevant to the subject matter of the dispute. And that's to encourage settlement and proper resolution of the dispute. When a privilege is asserted under the civil rules, or if a party desires a protective order, there are mechanisms in effect now to achieve that. The third point I want to make - we feel that the provisions in many respects are cumbersome, confusing, and would create substantive problems. We feel there are a number of drafting problems that have evolved here just from picking up the bill and trying to impose it on Alaska law. For example, the bill provides the person asserting the privilege has a burden of proving it applies. Well, with the definitions this broad, a party could simply assert and prove just about anything. That is the scope of the definitions. The burden then shifts to the person seeking discovery or to the State to show that the documents fall in a category that's not protected, or that there's fraud, or that there's been non-compliance. TAPE 96-10, SIDE A Number 001 But as this bill is drafted, it would be logically impossible to do that. The second problem we see there, again, is the post-report conduct should not be subject to the privilege. That principle is picked up in our medical peer review law and our Reichhold case. We're concerned with the category of nonprivileged material. As drafted, it refers to materials collected under the law. It doesn't mention permits or other authorizations. They frequently contain detailed requirements. It doesn't reference, although possibly there's later provisions that would cover it, judicial and administrative orders. But, significantly, this section does not provide for public contracts, public grants, to require audits or require this information. While it's true, you can still agree under this bill to exchange that information, I think that the provisions are such that we would lose quite a bit of bargaining leverage to do that. With respect to immunity, Ron Sutcliffe will discuss that. I do want to point out a few things. The bill provides immunity for administrative penalties. DEC does not have any administrative penalty authority. Therefore, the bill would not have any effect on DEC in this regard. Other agencies do have administrative penalty authority and it would affect them. DEC does not have civil penalty authority, except for air quality and hazardous waste. In all other areas of DEC environmental regulation there is no civil penalty authority. The civil assessments are required to be compensatory for damages and costs and remedial. Another concern that arises here is that if you look throughout the Alaska statutes, there's penalty provisions throughout them. Some are detailed. Some are simple. They are all very different. The bill as drafted applies to all of those. So, its exact impact would not be known without very careful study. As a fifth point, we are very concerned with the provisions that impact State employees. In recognizing that there are concerns with unauthorized disclosure information, there are still many provisions in here that cast State employees and State agencies in a very negative light and would actually have a very chilling affect on their ability to do their job. In a similar reverse image, many of the exceptions for the corporations cast corporations in a very adverse light and are designed to ferret-out corporations that are bad actors or midnight dumpers. These types of provisions in the bill set up very adversarial tensions that do not foster good audits. Where we have required audits in environmental enforcements and where they have worked, there's been a great deal of cooperation between the agency and the entity. The agencies have been involved in designing the audit, have monitored the conduct of the audit, have reviewed the conclusions. I do have several examples of that. A couple of years ago, we had a very successful compliance sort-of by consent with Kake Tribal Corporation. They had approximately 10-years of violation. Previous enforcement efforts had failed. There had been two criminal convictions, one probation revocation, and numerous notices of violation, but did not produce any results. They had multiple violations in every area, solid waste, hazardous waste, water quality, drinking water, sewage, all around a great deal of problems. The first step of the civil enforcement action was to require and agree with Kake on conducting, we called it an assessment, but it was actually an audit. They did a very thorough job. They reported to us violations we were not aware of, that were very serious. As part of the settlement, they received a very significant reduction in their civil assessment for this. They also undertook projects that went way beyond any legal requirements. Another example of where audits are very successful in the State is the joint pipeline office. The joint pipeline office works to audit the pipeline and they have received a national award for the audit structure they use. They have indicated in a communication they have detected 5,000 violations through audits. That's a significant number of violations of health and safety laws. Their response was to correct that and no penalties have been assessed. These are the models we would want to use in crafting audit policy. Audits that do not create and foster adversarial relationships and that actually do produce compliance and positive relationships between the agencies and the regulating community. I'll be happy to answer any questions. Number 127 SENATOR HALFORD said it seemed that they could deal with this whole issue if we just codified the federal privilege in State law and applied it. MS. SANSONE said that would certainly overcome a lot of our objections and it would not set up a state/federal conflict in the evidence law. SENATOR LINCOLN asked if there was anything in the bill she did like and had she attempted to work it out with the sponsor of the bill. MS. SANSONE replied that they had discussed approaches that would preserve the intent that would work. They haven't been able to explore those in depth, yet. They like the concept of audits from the civil standpoint. They have no objections to giving people offsets or reductions, or working with them to give them breaks for audits. We think that's appropriate. I think the immunity section, if you try to apply the immunities, there's many exceptions and you could argue for a long time whether you were in an exception or not. The important thing is that we encourage people to audit. That we get them into compliance and that if there is good conduct, they probably are entitled to some kind of break. Whether that's immunity, whether that's penalty reduction. The incentives through the immunity provision are aimed at a very narrow group of people for violations that don't result in injury. Corporations or individuals that have violations that result in injury and damages maybe could benefit even more from conducting audits and I think we could agree we should encourage that. SENATOR HALFORD asked if we codified the federal privilege and its four points, would she have any objections to that applying directly to environmental audits. MS. SANSONE replied that she thought that would be appropriate. She thought including the policy statement that is now in the bill would be good, also. SENATOR HALFORD asked if in the federal privilege that immunity applied even though injury or death may occur. MS. SANSONE replied that under the federal law that privilege attaches to the prior conduct, the evaluation of the prior conduct. If there's future bad or negligent conduct, it does not apply. SENATOR HALFORD asked if it attaches to prior conduct that includes injury or death. MS. SANSONE said that is correct. Number 217 STEVE TOROK, Senior Representative, U.S. EPA, said they had not completed a thorough review of SB 199, but he wanted to make some general comments on the concept. Alaska and EPA share the goal of achieving cooperation of regulated entities to obtain compliance with environmental laws. The critical question is how to achieve that goal without shielding environmentally irresponsible behavior or increasing environmental litigation. The vast majority of regulated entities do comply with environmental law. The focus of their enforcement is, and has been, on the violators, not the compliers. EPA's policy applies when a regulated entity undertakes a voluntary environmental audit or self-evaluation. It provides three incentives to conduct them and disclose violations that may be discovered during those audits. First, EPA will completely eliminate punitive penalties for companies or public entities that voluntarily identify, disclose, and correct violations. EPA will also reduce punitive based penalties by up-to 75 percent for regulated entities that meet most, but not all, of the conditions. This ability to partially reduce penalties is preferable to an all or nothing approach. Second, the EPA will not recommend to the Department of Justice (DOJ) that criminal charges be brought against a company acting in good faith to identify, disclose, and correct violations, so long as no serious actual harm has occurred. Under the federal system, the DOJ has the ultimate authority on criminal prosecutions. However, EPA recommendations carry significant weight. Third, EPA will not request voluntary environmental audit reports to trigger or initiate enforcement actions. This was in practice since 1986 and its change will alleviate the fears that an audit report will invite investigations that would not otherwise occur. EPA may request audit report information, if violations have been identified by other means. In summary, EPA, has struck a balance between the encouragement of good behavior and the loss of some regulatory discretion. The policy allows EPA to exercise its enforcement discretion in those cases where environmental violations must be addressed by the severity of criminal sanctions. EPA will also be able to assess penalties where the violator has realized an economic benefit as a result of that violation, since the agency believes that even a company that inadvertently violates environmental law, should not gain a business advantage over companies that do comply with environmental laws. Several independent studies support EPA's final policy of voluntary cooperation. An Arthur Anderson survey of corporate general counsels in 1992 revealed that nearly 60 percent of the corporations surveyed have had compliance audits performed between 1989 - 1991. Another almost four percent before 1989 had already conducted environmental audits. While only 37 percent of the corporations surveyed had never undertaken a formal compliance audit. This shows that a majority of the corporations have already found it to be to their advantage to conduct compliance audits. Of those corporations conducting audits, only 16 percent of the general counsels reported that they altered their procedures for conducting audits, because of concerns that the violations they find might be used against them. The overwhelming majority expressed no such concern. Voluntary cooperation by regulated entities is also exemplified in a study of the Investor Responsibility Research Center (IRRC). In its 1994 corporate profiles directory, the IRRC surveyed more than 249 companies covering 75 of the 86 standard industrial groups. The study found a large amount of voluntary compliance through various programs. Preliminary results from EPA's internal survey on the use of information from voluntary self-disclosures and voluntarily performed environmental audits supports the EPA's policy goals. EPA regional offices reported that of the over 4,600 enforcement actions taken during fiscal years 1993 - 1994, only 62 reported actions, nearly one percent, were initiated on the basis of voluntary self-disclosed information. Of that one percent, 75 percent had penalties that were either reduced or eliminated completely. To their knowledge, the federal government has never initiated a criminal enforcement case based upon a voluntarily submitted environmental audit. Alaska enjoys a reputation of a State that exercises enforcement discretion and actually puts its effort towards solving the problem, not putting its effort toward collecting punitive damages. In other audit privilege states, the existence of an environmental audit privilege has not lead to any increase in voluntary compliance. The EPA generally opposed the creation and adoption of new statutory and environmental evidentiary privileges. The issue associated with the privileges and subsequent litigation create serious resource drains on government and private litigators. Such statutes can encourage litigation. The U.S. Supreme Court has stated in a number of opinions that privileges are impediments to the search for the truth. They should not be created lightly, nor construed broadly. EPA feels that incentives should be structured in policy rather than establishing a statutory evidentiary privilege or immunity, the later of which could be used to shield evidence of violations from law enforcement officials, deny the public its right to know useful information affecting its health and environment, MR. TOROK stated. Number 350 If the legislature feels that a statutory provision is necessary to encourage environmental auditing and voluntary compliance, they are prepared to work with them on its development. Number 373 SENATOR HALFORD asked for clarification on the percentage of companies concerned with enforcement of violations that were discovered through environmental audit. MR. TOROK restated that 60 percent of corporations surveyed had already had a compliance audit performed. Only 16 percent of those had altered their procedures for conducting the audits, because of concerns that the violations they find can be used against them. SENATOR HALFORD said he thought 16 percent was a significant number. Number 414 SENATOR HALFORD also stated he thought that SB 199 was specific in avoiding his concern regarding evidence needed in enforcement being tainted by evidence covered under a privilege. He said he thought it was the intent of the sponsor that that wasn't the case. MR. TOROK said one of the areas they would be concerned about are the immunities and how they would affect delegated federal programs that the state has already assumed, or is working toward presumption. For example, the Clean Air requirements are for the State to have similar, if not equal, capabilities of collecting penalties. Whether the State decides to collect penalties is up to its discretion. In order for them to grant approval of the program, the State has to have the capability to collect the penalties. SENATOR HALFORD asked if they were to codify the federal privilege with regard to self critical analysis, that would not be a problem. MR. TOROK said that would address the privilege, but he didn't know if that would address the immunity issue. SENATOR HALFORD agreed, but he thought they were so closely related, that one flows from the other. Number 430 RON SUTCLIFFE, Assistant Attorney General, said the immunity provision is the issue that concerns the Criminal Division most. They are afraid it may effectively undermine their ability to prosecute serious environmental crime. They believe the "bad actors" would use it to avoid criminal liability. There were some ambiguities with the way the immunities were written in the bill. In criminal law, MR. SUTCLIFFE said, if there are ambiguities, they are going to be strictly construed against the State. Starting with section 475, the environmental disclosure is voluntary if it's made promptly and there is no definition of what promptly means. Also when you make a disclosure and have to send it by certified mail, it's not clear whether the sending of it triggers the notification or the receipt of it does. Under subsection 5 the person who makes the disclosure has to initiate an appropriate effort, which should be defined. The "due diligence" definition should be tied to some other "due diligence" definition in criminal law. In subsection 7, they are concerned with the substantial off-site harm and what that means. On page 7, in subsection (d) (1) - (3) they had problems with the negligence, because it's not clear who would determine negligence. Under subsection (f) there is no definition for substantial injury which could pose some problems. Also, in subsection f there is presumption language, that the State would have to prove beyond a reasonable doubt, in order to rebut the presumption, and that would be an intolerable burden. There are other standards that are possible, like clear and convincing evidence, that would be easier to use. Number 481 SENATOR HALFORD asked what standard of evidence they use to prosecute. MR. SUTCLIFFE answered proof beyond a reasonable doubt in a criminal case. Under subsection (h) there is a way for the State to get around the immunity provisions, if there have been repeated or continuously committed violations. However, there is no definition of a serious violation. His Division was concerned that there had to be three distinct and separate events in a three year period at the same facility or operation and that might result in them moving around. It would be more appropriate for it to apply to any of the facilities a corporation might own. Number 524 MR. SUTCLIFFE said one of the problems with the privileges was the that a corporation could appoint everyone at a facility as part of the audit team, so, if these people were subpoenaed later, they could testify about things that did not happen as a result of the audit. He thought that would lead to a lot of hearings on motions to quash subpoenas. He said it was clear from the legislation that they could use independently discovered material to prosecute, but they were afraid that would end up in a series of proceedings where they have to prove to the court that they actually discovered it from an independent source. SENATOR LEMAN said if the audit report were sealed, their job would be easy. MR. SUTCLIFFE answered the way it written now, if they got it from a search warrant, if it were sealed, he wouldn't be able to get it from DEC. Under a search warrant, it's sealed anyway. SENATOR LEMAN clarified that if it were sealed in the first place they wouldn't have to prove to the court that the source of information was other than the audit report. MR. SUTCLIFFE agreed. SENATOR HALFORD asked in prosecution, do they have to deal with the existing privilege against self-critical analysis. MR. SUTCLIFFE answered that he had never run-up-against it and he had had only one self-critical audit in two years which he declined. SENATOR HALFORD commented that that meant there was some protection, then. MR. SUTCLIFFE said the violation had been discovered by DEC before the disclosure, but it had been remedied, so they exercised discretion. He said when he prosecutes, he does it in front of a jury of 12 people, and he couldn't imagine a jury convicting, if the violation had been remedied. SENATOR HALFORD asked if the administration has commented on language on page 9, section 09.25.480 Circumvention by Regulation Prohibited. MR. SUTCLIFFE said he didn't know the answer. SENATOR TAYLOR said he thought this concept was well worth looking into and he commented on an incident that happened in Wrangell when EPA did not exercise their discretion. TAPE 96-10, SIDE B Number 580 SENATOR TAYLOR said he got the penalty reduced to $2500, but everybody felt like they were being treated like some sort of criminal. They were subjected to arrogance and insult. That is what prompts legislation such as this. He said that attitude was very frustrating to have to deal with and he applauded all the assistance that has been offered on working out good legislation. Number 552 CHAIRMAN LEMAN said they were running out of time, thanked everyone for their help and adjourned the meeting at 6:03 p.m.