EPA Delays Smog Testing Sanctions : Pollution: Federal and state officials report progress in solving dispute over auto emissions screening. Millions in highway funds are at stake.

For the second time in three months, the Clinton Administration on Wednesday put off its threat to cut California’s federal highway funding if the state does not bring its Smog Check program into compliance with federal clean-air standards.

This time, however, federal and state officials are expressing optimism that negotiations may lead to a mutually acceptable solution to the quandary over how to improve the state’s flawed system of detecting motor vehicle emissions.

“Based on recent progress in talks between U.S. EPA officials and California legislative leaders, U.S. EPA has decided to call a temporary halt to the process of imposing discretionary sanctions against the state of California for failure to enact improvements,” said Mary Nichols, the Environmental Protection Agency’s assistant administrator for air and radiation.

For the past year, the EPA has been pressuring the state to scrap its system of allowing auto inspection stations to test and also repair smog-control systems, saying that combining the two functions at one site leads to fraud, abuse and poor enforcement.

However, after meeting with EPA Administrator Carol Browner in Washington, state Assemblyman Richard Katz (D-Sylmar) said Wednesday there is new cause for optimism.

“The administrator indicated to me personally a flexibility and a willingness to work with us that I have not seen before,” said Katz, who heads the Assembly’s Transportation Committee.

Katz said there are now “proposals on the table at EPA” that would give the state the ability to crack down on those vehicles responsible for most of the pollution without junking the current system of emissions testing. Eliminating the system could gut the $280-million testing business and put thousands of independent testing stations out of business in the middle of a recession.

Although EPA officials said they wanted to allow more time to pursue new approaches, they emphasized that they are not putting the threat of sanctions on permanent hold.

“I want to stress the word ‘temporary,’ ” said Denise Graveline, an EPA spokeswoman. “We’re not talking about a matter of months. More like weeks, and we could be talking about days if progress can’t be assured.

“It certainly is the intent of this agency to move ahead with sanctions if we don’t see substantive progress coming out of these discussions,” she said.

California and the EPA have been at odds for months over how to improve the emissions testing program, which calls for most vehicles in the state’s smoggy urban areas to be checked every two years to determine if their anti-smog equipment is functioning properly.

The EPA has been threatening to impose sanctions that could cost California $700 million a year in highway funds if the state does not change its inspection system.

Earlier this year, state legislators appeared to be on the verge of approving Smog Check modifications opposed by the EPA, but they backed off and the EPA suspended sanction procedures in hopes of reaching a compromise.

Recently, the Wilson Administration gave the EPA a proposal that would retain the current system of inspection-and-repair stations, crack down on shady smog-station operators, beef up a computerized testing system and toughen licensing requirements for testers.

But EPA officials were critical of the governor’s proposals, saying they were “more committed to preserving the status quo than protecting the health of Californians.” And just a week ago, EPA officials said they had begun drafting documents that would allow the agency to impose sanctions on California as early as March.