11 November 2011 13:12 [Source: ICB]
US chemical distributors are facing punitive regulation and uncertainty, says NACD president and CEO Chris Jahn, as the US political impasse heightens its regulatory agencies' activity
US chemical distributors and blenders are facing an increasingly punitive federal regulatory policy and broad operational uncertainty in both existing rules and pending legislation, according to top NACD officials.
Chris Jahn, president and CEO of the National Association of Chemical Distributors, says a significant focus for NACD this year and next is a more aggressive and even punishing enforcement field.
With the US Congress seemingly deadlocked over multiple crucial issues, such as deficit and debt reduction, healthcare and reform of major federal entitlement programs, a lot of legislation of concern or interest to chemical distributors and blenders has been sidelined. "As a consequence," says Jahn, "regulatory agencies have stepped into that legislative vacuum, and they have a much more aggressive attitude."
"Many regulatory agencies are in a revenue-raising mode, and they have stepped up enforcement to generate more revenue for their agencies," he adds.
Jahn says that federal regulators have adopted a "find and fine" approach, using very broad interpretations of existing rules to "find" on-site regulatory violations and assessing top-tier fines.
As a symptom of this trend, he cites a shift in enforcement by the Occupational Safety and Health Administration (OSHA).
He notes that OSHA has for years run a compliance system called the Voluntary Protection Program (VPP), in which agency inspectors would identify potential regulatory shortcomings at a distributor's site and give the company an opportunity to make improvements before initiating any enforcement actions.
"But OSHA has transferred budget funds from VPP to enforcement, which is a good indication of their new approach to working with industry," Jahn says.
He adds that the Environmental Protection Agency (EPA) has also stepped up the level and intensity of its enforcement work, using the "general duty" clause of the Clean Air Act (CAA) to find on-site violations even when specific rules do not apply.
"Under the general duty clause, if an EPA inspector feels a particular situation is unsafe, or that chemicals are being improperly stored, he can issue a fine even if there is not a specific CAA regulation that covers the situation," he says.
"Regulators are using broad enforcement mechanisms in what we feel is a punitive way. Of course regulatory agencies have a legitimate enforcement role, but our NACD members need to know what the rules are, so that they can play by them. We feel that our members don't have regulatory certainty," he argues.
Part of the reason for that regulatory uncertainty is the lack of clear guidance by Congress. Jahn says that within NACD's advocacy efforts, the trade association is focused on three key issues: chemical site-security legislation, modernization of the Toxic Substances Control Act (TSCA), and freight rail-service reform.
Chemical distributors and the broad US chemicals sector are anxious to see a multi-year extension of the five-year-old federal site security mandate, the Chemical Facility Anti-Terrorism Standards (CFATS).
Under CFATS, the Department of Homeland Security (DHS) sets antiterrorism security criteria for chemical production, distribution or storage sites that are deemed to be at high risk for a possible attack by terrorists seeking widespread off-site casualties. While DHS sets the standards, facility owners and operators are free to select which security measures they want to meet the department's criteria.
First enacted for a three-year period, CFATS has been extended twice for one-year periods while members of Congress wrangled over whether or not to toughen the law. The standards are set to be extended for yet another one-year run, but distributors and other chemical industry players would rather see a multi-year extension and a resulting period of regulatory certainty.
CFATS renewal bills pending in the House and Senate would boot the program forward as is for three to seven years, but it remains to be seen if either chamber can give final approval before year end.
"We've got to get one or another of these multi-year extension bills across the finish line," Jahn says, "which is why CFATS is on our priority focus list. The key for us is regulatory certainty. Our members have made significant investments in complying with CFATS, and we need to know what the rules are going to be for a while going forward. After spending on that level, we can't have the rules being changed in the middle of the game."
Jahn says that despite the apparent chaos in Congress, he is optimistic that a CFATS extension bill will get moved. "With Congress deadlocked on a lot of the big issues, that may create an opportunity for legislation like this [CFATS] to get passed."
For TSCA, the 35-year-old US federal system for control of chemicals in commerce, Jahn is less sanguine about near-term congressional action. Here too, while the legislative process in modernizing TSCA could be fraught with danger for the US chemicals sector (some want it redrawn as a US version of the EU's REACH program), Jahn would prefer the certainty of an updated and uniform federal law that pre-empts state legislation.
"What we have now with congressional inaction on TSCA is the regulatory agencies stepping in, using their enforcement powers to secure through enforcement what they haven't been able to get in legislation," he says, referring to what many regard as unilateral actions by EPA and a growing trend of product or substance bans by state governments.
There is a draft TSCA reform bill under discussion on Capitol Hill and among various stakeholders, including the chemicals sector and environmentalists, but final action on a bill before next year's national elections seems unlikely.
Senator Frank Lautenberg (Democrat-New Jersey) has circulated a revised version of his TSCA-update bill, the Safe Chemicals Act, and his staff has held several meetings with chemical sector officials, but the bill generally is seen by industry as still far too onerous.
When legislators finally do get around to rewriting TSCA, Jahn is concerned that Congress understand the unique role of distributors.
"By and large, our members are not chemical innovators, they're not creating new chemicals," he notes. "Some of our members don't even break the original manufacturer's package." So Jahn is anxious for Congress to avoid pulling distributors in to a reformed TSCA when they do not have a role in chemicals manufacturing.
"On the other hand, 70% of our members blend products," he says. "But even there, they're not, most of the time, creating something new, just combining products or diluting a product - but that's different than manufacturing." As such, he said, distributors should be treated separately from manufacturers in a new TSCA.
"TSCA reform is very complex," Jahn says, "because it engages a huge swath of industry and producers and NGOs," referring to non-government organizations such as environmental groups.
As a consequence of that complexity, the chaos in Congress and the already developing US election cycle, Jahn says he sees no chance of a TSCA reform bill clearing both houses of Congress this year. "And there is a distinct possibility that it could get carried over to 2013 because of the election," he adds.
Another longstanding legislative issue for NACD is freight rail service, Jahn says, offering a simple analysis of the rail situation for distributors: "Basically, rail service stinks and it costs too much."
As with chemical manufacturers, the industry's distributors take issue with what they consider disproportionately high freight rates charged by rail carriers, and an unfair and costly rates appeal process.
CAPTIVE RAIL SHIPPERS
Most of all, distributors object to being captive rail shippers, a circumstance in which a facility is served by only one of the seven major US railroads. The chemicals industry charges that the captive shipper situation allows rail carriers to impose take-it-or-leave-it rates.
"Two-thirds of our industry members are captive shippers," Jahn says. He notes that in his recent travels to member companies across the country, he spoke with 100 firms, "and only one had expressed satisfaction with rail service".
There is legislation pending in Congress that would go some distance to resolving chemical makers' and distributors' longstanding rail service complaints - but like so much else on Capitol Hill it remains in limbo.
The Railroad Antitrust Enforcement Act (S-49) was approved at Senate committee level in March 2011, but it has yet to come up for a full floor vote and does not appear likely for prompt action by the Senate or House.
The bill would eliminate some of the antitrust exemptions granted the then-struggling US railroads in 1980 and allow shippers to challenge rail carriers' rates and service arrangements in federal courts, instead of through a cumbersome, lengthy and costly appeals process before the federal Surface Transportation Board (STB).
Jahn says that the disproportionately high freight rates and captive-shipper isolation that most distributors face amount to a hidden cost that consumers do not see. "Unfortunately," he adds, "we're not likely to see forward movement on those bills any time soon."
In the absence of legislative remedies, NACD must work to ensure that its members are kept up to speed on regulatory and enforcement initiatives that have begun to proliferate, explains Andrew Skipp, NACD board chairman. "We need to ensure that our member companies know what's happening on the regulatory and legislative fronts and give them the tools to deal with it," Skipp says.
Skipp, president and chief executive of Hubbard-Hall, a 162-year-old chemicals distributor and blender based in Waterbury, Connecticut, champions the NACD policy of creating value for its members.
"One of the things we as an organization must always do is to have relevance to our members," Skipp says. "As we look at what our members are being challenged with, we want to ensure that they are doing things in a responsible way," he says, which is why NACD's "Responsible Distribution" program is on a par with advocacy as a primary focus for the group.
As with Jahn, Skipp notes increasing scrutiny of distributors by an alphabet soup of regulator agencies, including EPA, OSHA and DHS but also the Department of Transportation (DOT). "I can't remember a time when things have been so extreme in both enforcement and the fines being levied right now," Skipp says.
And, like Jahn, he cites the new regulatory philosophy of "find and fine". The impact of ramped-up enforcement can be profound for NACD member firms, Skipp notes.
"Most of our members are owner-managed businesses," he adds, "and that means that for most of them, it's not just 'a job', it's their livelihood - and for many of them it is the most significant investment they have personally.
"So it's not just business, it's a matter of name and reputation, and we take these things seriously. We all have a vested interest in making sure that we do things right for our customers, our employees and our communities, so in these regulatory matters there is a higher level of sensitivity.
"We look at our businesses in a more critical way to ensure that we are doing things right, and our job at NACD is to help our members and business leaders to be aware of the various challenges ahead, even if they might not see them on a day-to-day basis."
Skipp says that NACD member firms understand that regulatory agencies have the statutory right and authority to issue fines, "but it is important that our members are aware and sensitive to the fact that it is a different game right now."
"We're not complaining or whining about the increased scrutiny," Skipp says. "And I have every confidence that EPA is looking to keep us safe - but it is a matter of degrees on rules interpretation and how fines are being meted out."
He says that NACD and its government relations staff seek to advocate for the members but also to reach out to regulators. "We want to be proactive with regulators," he says. "What is the goal here? Is it to make industry and people safe, or is it just to get fines revenue and justification for EPA, OSHA, DOT and DHS? I see the merits of all these programs, and we are better off because of their work, but it is a matter of degree."
"We want to work cooperatively and more effectively with regulators," he adds, "and we want to be working together, rather than an adversarial relationship."
Toward that end, Skipp notes that NACD soon expects to hire another government relations professional, who will assist Jennifer Gibson, NACD's experienced vice president for government affairs.
"We can only work on those things that we can control, so we have to reach out and be proactive, and communicate to regulators what can help or hinder our businesses to operate," Skipp says. "We need dialogue, not argument," he concludes.
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