Insights into Common Due Diligence Compliance Shortcomings: Part Three

Continuing with our four-part mini-series on Common Due Diligence Compliance Shortcomings (see Part One and Part Two), this article will focus on some common non-compliance issues (NCIs) we find related to stormwater permitting and compliance.

Today we will explore another common compliance short coming that we often find when conducting a Limited Environmental, Health & Safety (EHS) Compliance Review (LECR). LECRs are most commonly conducted along with the Phase I Environmental Site Assessment (ESA), when the Phase I ESA is being conducted to support a transaction involving an operating business, particularly those that engage in light industrial or manufacturing operations with possible compliance reporting obligations or permitting requirements. The main goal of a LECR is to identify and plan for material EHS concerns that have a high risk of penalty or that could require significant effort to address, so that these can be captured in purchase and sale agreements. We also find issues that are low risk and relatively easy to correct, and are highlighting those in this mini-series to put these issues into context for investors.

Here we cover how stormwater regulations can be a potential issue for even a seemingly benign business.

Stormwater Regulations

The Clean Water Act (CWA) was enacted in 1972 by the United States Environmental Protection Agency (USEPA) to protect and create a quality standard for surface waters in the United States. Section 402 of the CWA regulates the National Pollutant Discharge Elimination System (NPDES) permitting program that regulates some stormwater discharges from three potential industry sources:

• Municipal Separate Stormwater Sewer Systems (MS4s)
• Construction Activities
• Industrial Activities

Most often we see clients investing in facilities that fit into the third category, which has a wide range of applicability, based on a facility’s Standard Industrial Classification (SIC) or its North American Industrial Classification System (NAICS) code.

Material exposure through outdoor storage and handling of raw and finished products, by-products and waste, and exterior activities such as power-washing equipment or application of salts are often exposed to runoff from rainfall, snow, or snowmelt. These materials and activities are a common source of potential pollutants including materials such as chloride (salts), metals (lead, chromium, nickel, etc.), fuel, oil, and grease, which may be transported to nearby rivers, lakes, or coastal waters – directly or indirectly via a storm sewer system. To ensure surface and groundwater quality is not degraded, a stormwater permit should be obtained for such operations, with other management requirements such as planning, inspections, and annual reporting.

Currently, 47 states are authorized to implement the NPDES program and have been delegated permitting authority by the USEPA. While USEPA’s regulations provide a backbone for stormwater permitting requirements, each state can add its own conditions on top of the USEPA’s requirements, as long as they are at least as strict as the federal rules. Further complicating things is that after a federal rule change happens, each state must individually adopt the new rules and update their own rules accordingly. As such, it is important to consider individual state requirements when determining the need for coverage under a stormwater permit.

Types of Stormwater Coverage

• General Permit – General permits are used to cover multiple facilities with similar characteristics. Typically, if a State has published a General Permit for Stormwater Discharges from an Industrial Activity, individual facilities that have operations similar to those described in the General Permit would then submit a Notice of Intent (NOI) to comply with the requirements of the General Permit. The State authority then reviews the NOI and grants a facility coverage under the General Permit, often issuing an individual facility or permit number. Coverage under a NOI typically lasts five years. One a facility is granted coverage under the General Permit, the facility must then meet all requirements of the permit, including written plans, inspections, and sampling.
• Individual Permit – Individual permits are issued in situations where water quality standards are not being met in the area of the facility, or the facility needs individual limits on its stormwater discharges (or effluent). We do not often see these types of permits for small- to mid-sized businesses, as they can be costly to obtain and take time to be approved by the State authority.
• No Exposure Certification – An industrial facility that would otherwise require coverage under a stormwater permit but which has its industrial materials and activities protected from exposure to rain, snow, snowmelt, and/or runoff may be eligible for an exemption from industrial stormwater permitting requirements. The No Exposure Certification (NEC) was developed by the USEPA under the Storm Water Phase II Rule promulgated in the late 1990s and over the next several years, individual states adopted the provision. To meet this exemption, facility must submit a state-designated form requesting approval of the exemption, and the facility must certify that they meet the “no exposure” conditions.

Common Non-Compliance Issues (NCIs)

In BBJ Group’s experience, the most common NCIs we see related to stormwater permitting include:

• Not being aware the facility’s SIC or NAICS code falls under stormwater permitting requirements and therefore not having considered whether a permit is required;
• Not having filed a NEC or a NOI in accordance with state stormwater requirements as they apply to the facility;
• Not renewing stormwater permitting coverage or not re-affirming the conditions of no exposure in accordance with state requirements;
• Having submitted a NEC or NOI but not meeting state requirements for continued coverages; and,
• Having outdoor storage of materials that are in contact with stormwater in contradiction of NEC terms or failing to document and implement best management practices (BMPs) required by the General Permit.

These instances are common because many facility operators are either not aware that they need a stormwater permit – indeed a commonly asked question when we are working is “I need a permit for the rain?” – particularly at facilities with relatively benign operations or low use of hazardous chemicals. Equally, facility operators may not be fully aware of which outdoor activities or storage practices may be considered as exposure to stormwater. This is often the case when the facility’s EHS manager wears many hats or EHS was tacked onto their job description, or where there is no designated EHS manager.

The good news is that these instances of non-compliance are relatively straight-forward to fix. By working with an environmental professional, facility operator’s can evaluate whether their operations trigger permitting requirements and whether they are eligible for a NEC – and if not, gather information to submit the NOI, prepare required written BMP plans, and ensure implementation of such plans in a way that can be integrated into existing processes.

The Bottom Line

Stormwater permitting is an oft-overlooked EHS compliance issue, but is one that can be managed effectively through proper planning and staying up to date on state-specific regulations. By ensuring a facility is in compliance with stormwater regulations, it can help set the stage for compliance in other areas as stormwater compliance requires implementation of BMPs and accountability for exterior storage and activities. Identifying these issues before you purchase a business – for example by completing an LECR during your diligence period – can help ensure these matters are included as part of a transition plan and on the books for resolution shortly after closing.