On June 8, 2007 the Ministry of the Environment ("MOE") published the final versions of the much anticipated and controversial regulations relating to the use of Environmental Penalties ("EPs") in Ontario. Regulated industry sectors will face the first phase of EP enforcement beginning August 1, 2007. Regulations have been published under both the Environmental Protection Act ("EPA") and the Ontario Water Resources Act ("OWRA") (collectively "EP Regulations")

Background to the Implementation of EPs

Bill 133, the Environmental Enforcement Statute Law Amendment Act, 2005, was passed by the Ontario Legislature on June 13, 2005. Bill 133 made extensive changes to Ontario’s EPA and the OWRA as well as other areas of Ontario’s environmental laws. Some of the changes made by Bill 133 became effective immediately while others, such as the EP provisions, were suspended until the supporting regulations were developed and approved.

While Bill 133 made a number of changes, the most controversial amendment concerns an MOE Director’s ability to levy a financial penalty in the form of an EP for certain violations of EPA, OWRA and related regulations. To impose an EP, the Director need only prove the contravention on a "balance of probabilities." There is no due diligence defence available for EPs – these penalties can be imposed even if the corporation took all reasonable steps to prevent the contravention. For certain specified spills or unlawful releases, a corporation has the onus of proving that the unlawful release did not occur and was not a contravention. Finally, if an EP is imposed on a corporation for a particular contravention, the corporation can still be prosecuted for that offence.

On October 6, 2006, the MOE released draft regulations concerning the implementation of EPs. We reported on the draft regulations in a McCarthy Tétrault Legal Update dated October 10, 2006. Please refer to the publication for further detail on the EP regime. A significant amount of controversy resulted from the draft regulations, and during the 98 day comment period the MOE received 55 written submissions from industry stakeholders. Additionally, the MOE conducted four regional consultation sessions throughout the province where comments were provided.

Some changes have been made to the EP Regulations as a result of concerns expressed over the draft regulations. However, the overall EP regime retains the same structure and effect. In our earlier publications and seminars we referred to the MOE’s EP regime as a corporate environmental tax regime – this characterization remains valid.

Changes Made To The EP Regulations

1. Industries subject to EPs

The MOE has made changes to the relevant definitions that prescribe what "Regulated Persons" will be subject to EPs. The EP Regulations now clarify that the EP regime applies to corporations captured by the Municipal Industrial Strategy for Abatement ("MISA") regulations and similar industries.

Corporations captured by the EP Regulations can become exempt if they cease discharging or permanently cease MISA operations and activities.

2. Timing for when EP enforcement can begin

The MOE will be able to issue EPs for Phase I major violations (i.e. spills and discharge exceedances) beginning August 1, 2007. All other violations subject to EPs will be open to EP enforcement efforts beginning December 1, 2008.

3. Limits on the fine amount for an EP

The MOE decided to impose caps on EPs for certain multi-day violations. For instance, the "minor violations" that will form part of the Phase II (December 1, 2008) EPs have been capped at the lesser of 180 days or $60,000. Failure to report violations have been capped at $100,000.

The "serious violations" in Phase I (August 1, 2007) have no limit.

4. Toxic substances and toxicity as a factor to increase the amount of EPs

According to the draft regulations, a "toxic substance" could be either one of the 79 substances listed in Schedule 1 of the Canadian Environmental Protection Act or one of the current 195 substances that have met both the ecological criteria used by Environment Canada and the human health criteria used by Health Canada in the federal Domestic Substances List. The presence of one of these toxic substances is used by the MOE as a factor to increase the amount of an EP.

In response to concerns over the list of toxic substances, the EP Regulations now refer to a closed list of 113 substances that have been placed on the list on the basis that they are non-gaseous, persistent, bioaccumulative and inherently toxic to humans. The toxic substances list will be maintained in a document entitled "Environmental Penalties – Code of Toxic Substances."

Furthermore, the EP Regulations now impose a standard 35% multiplier as a method of increasing the EP amount for violations involving one of the listed toxic substances.

5. Reduction for Environmental Management Systems (EMS)

One of the ways of reducing the gravity component of an EP is having an EMS in place. The draft version of the EP regulations provided that a 5% reduction in the gravity component would be granted if, at the time of a contravention, the regulated person had an EMS in place that met the requirements of a schedule to the regulations. The schedule set out very detailed requirements for the EMS—stakeholder comments outlined concerns that the schedule constituted a new EMS standard. As such, the MOE has amended the requirement for an EMS to require that the regulated person have in place an EMS that meets the requirements of the ISO 14001 standard, the requirements of the Canadian Chemical Producers’ Association standard, or an equivalent EMS (determined to be compliant by a person with the qualifications set out in the regulation). The EMS must also be externally audited. The percentage of the reduction to the gravity component for having an EMS in place— 5%—has not changed.

6. Reduction for Settlement Agreements

The draft regulations provided that the gravity component of an EP could be reduced by as much as 75% if a corporation entered into a settlement agreement with the Director. The agreement would require the corporation to take beyond compliance measures—measures beyond those required by law—to prevent, eliminate, or reduce the discharge of a contaminant.

The final regulations specify that for major violations, the corporation can still reduce the gravity component of an EP up to 75% by taking beyond compliance measures, so long as the corporation agrees to spend $3 on such measures for each $1 in reduction of the gravity component. For minor violations, it is possible for a corporation to obtain a 100% reduction in the gravity component by spending $3 (for each $1 reduction) on beyond compliance measures for the first 75% of the EP amount and $5 (for each $1 reduction) on such measures for the remaining 25% of the EP amount. The MOE will release a guideline which addresses how the settlement agreement process works.

7. Spill Prevention and Contingency Plans

At the same time that the MOE released the draft EP regulations, it also released a regulation under the EPA concerning the preparation and implementation of spill prevention and contingency plans. Such plans were required by the same group of corporations which were subject to the EP regulations—i.e. the MISA sector companies. The draft regulations required such plans to be in place by February 1, 2008; this deadline has been revised to September 1, 2008.

Seeking Reconsideration and/or appealing an EP

A corporation that has been issued a Notice of Intention ("NOI") of an EP by the MOE may then request a reconsideration by the Director. In doing so, the corporation will need to provide information and make submissions to the MOE in an attempt to persuade the Director to reduce the amount of the EP, including challenging the calculation of any monetary benefit component. This must be done within 15 days of the service of the NOI (unless the Director agrees to a longer period). Certain specified prevention and mitigation steps taken by the corporation can impact the Director’s discretion to apply "modifiers" to the initial EP amount.

The amount of reduction can be significant, depending on the type of prevention or mitigation effort undertaken. Preventative measures that are relevant include: risk analysis; maintenance; containment structures; monitoring systems; process controls; and training. Post-violation mitigation efforts that are relevant include: implementing a spill response plan; speedy response measures; and pollution containment and recovery. These percentage reductions do not apply to any monetary benefit amount assessed.

Once the submission process is complete, or if no action is taken by a corporation to an NOI, the Director will issue a EP order. The EP order will specify the final amount owing and set out the time to pay. EP orders can be appealed to the Environmental Review Tribunal by giving notice within 15 days of the issuance of the EP order. Initiating an appeal will stay the effect of the EP order pending the appeal.

How to be prepared for EP enforcement

It can be expected that the MOE will not hesitate to issue EPs for the relevant violations beginning August 1, 2007. In light of the potential for serious financial penalties to be imposed through the EP regime, it will be critical for corporations that are subject to EPs to be fully aware of the steps involved to seek a review and/or appeal of an EP order issued by the MOE. Additionally, it will be important that corporations that receive an EP are prepared to draft detailed and persuasive submissions for the reconsideration application to the Director. In order to be prepared to provide the relevant information, it will be important for corporations to maintain up to date documentation regarding environmental mitigation and preventative measures.