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Regulatory Alert - RA 03-02 - EPA’s FINAL WATER QUALITY TRADING POLICY

Member Pipeline - Regulatory - Alert (RA 03-02)

To: Members & Affiliates, Water Quality Committee, Legal Affairs Committee
From: National Office
Date: January 17, 2003
Subject: EPA’s Final Water Quality Trading Policy
Reference: RA 03-02

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On January 13, the U.S. Environmental Protection Agency’s (EPA’s) Office of Water released its final Water Quality Trading Policy (“final trading policy”), and announced the funding of eleven pilot projects exhibiting different trading techniques. The trading policy (see 68 Fed. Reg. 1608), available at http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/pdf/03-620.pdf, will take precedence where it is inconsistent with the 1996 policy developed under the Clinton administration. The purpose of the trading policy is to encourage states to adopt voluntary effluent trading programs that facilitate the implementation of total maximum daily loads (TMDLs), reduce the costs of compliance with Clean Water Act (CWA) regulations, establish incentives for voluntary reductions and promote watershed-based initiatives. The trading policy outlines several basic federal policy principles, lists general elements of a successful state trading program, and delineates trading program provisions that EPA believes are necessary to be consistent with the CWA. While participation in the program is entirely voluntary, the Agency plans to actively encourage states to adopt trading programs. EPA is also planning on holding a two to three-day trading workshop in the several months, and has asked for AMSA’s assistance in planning the event.

During the development of the trading policy, AMSA met with senior Office of Water officials to communicate the issues and concerns of the wastewater community and to offer specific recommendations on how to revise the document. AMSA sent a letter to EPA on January 22, 2002 in advance of the proposed policy outlining key issues to be addressed in any trading program (see http://www.amsa-cleanwater.org/private/legreg/outreach/012202batchelor_letter.pdf), and also submitted comments on July 15, 2002 providing recommendations to improve the proposed document (http://www.amsa-cleanwater.org/private/legreg/outreach/07-02comments.pdf). Throughout the process, AMSA expressed support for the trading concept as long as the program was kept voluntary and it addressed existing inequities between point and nonpoint sources. Upon the release of the final policy on January 13, AMSA issued a press release applauding EPA for its commitment to developing voluntary and flexible alternatives to implementing Clean Water Act requirements (http://www.amsa-cleanwater.org/advocacy/releases/011303.cfm). In addition, AMSA’s Vice President Buddy Morgan, General Manager of the Montgomery Water Works & Sanitary Sewer Board, whose agency is one of the pilot project awardees, spoke at EPA’s press event alongside Governor Whitman in favor of the final policy.

This Regulatory Alert provides an assessment of how the final trading policy was changed (or not changed) to reflect AMSA’s concerns.

Analysis of Key Provisions and Issues
It should be noted that the trading program is intended to be exclusively state-led. The final trading policy essentially sets the framework for states to develop trading programs and provides an interpretation of the regulatory constraints in operating the program. EPA states in the final policy that its oversight role will be limited (Section III.I). Therefore, many of the implementation details will be left to the states to explore as their programs become operational.

The following is a summary of AMSA’s issues and concerns raised in the July 15, 2002 comment letter, and a brief assessment of how EPA altered the final document to reflect the points AMSA raised.

Establishing equitable allocations between point and nonpoint sources – Based on AMSA’s belief that total maximum daily loads (TMDLs), where complete, are the appropriate mechanism to establish the baseline for trading among point and nonpoint sources in impaired streams, the Association recommended that EPA emphasize the critical role of TMDL allocations for point/nonpoint source trades. Similar to the draft policy, the final trading policy addresses trading where TMDLs have been approved and where a TMDL has not yet been developed. Where a TMDL has been developed, EPA appropriately indicates that the baseline for generating trading credits is established by the point source wasteload allocation or the nonpoint source load allocation. For trading in watersheds without an approved TMDL or where a TMDL is not required, the baseline would depend on the applicable point and nonpoint source requirements in effect. Without a TMDL, AMSA questions the effectiveness of point/nonpoint source trades since the trading parties will be handicapped by the absence of well-defined pollutant removal responsibilities.

Voluntary participation in trading programs – AMSA supported the voluntary nature of EPA’s proposed trading policy. EPA’s final policy retains a completely voluntary approach to participating in a trading program.

Shifting liability with trades – AMSA recommended that NPDES permits reflect a lowered pollutant removal requirement for the trading source following a completed trade. The Association acknowledged that the proposed policy’s reference to states use of “variable permit limits” or “alternate permit limits” potentially facilitates the appropriate permit adjustment, but we requested more details on how this would work in practice. The final trading policy retains the suggestion of variable and alternate limits (Section III.F.2), but provides no further details or examples of how they would be used in a typical permit.

AMSA expressed significant concern with the proposed policy’s suggestion that “specific trades may be identified in NPDES permits, including nonpoint source requirements where appropriate.” The Association pointed out that this provision appeared to suggest that the POTW would be held responsible for the actions taken or not taken by its trading partners, and could be used as a backstop for unsuccessful nonpoint source control actions that were agreed upon through a trade. The final policy does not address AMSA’s concerns, and includes a potentially troublesome provision indicating that “in the event of default by another source generating credits, an NPDES permittee using those credits is responsible for complying with the effluent limitations that would apply if the trade had not occurred.” (Section III.G.5)

Trading of additional pollutants – AMSA observed that the proposed policy gave preferential status to trading of nutrients and sediments, while other parameters were relegated to “second tier” status. The final policy, much like the proposed document, indicates that trading of pollutants other than nutrients and sediments may improve water quality, but that such trades “may pose a higher level of risk and should receive a higher level of scrutiny to ensure they are consistent with water quality standards.” (Section III.C) The final policy also indicates that EPA will support cross-pollutant trading for oxygen-related pollutants, but that the Agency at this time does not support trading of persistent bioaccumulative toxics (PBTs) – which include mercury.

Measurement of nonpoint source loadings – AMSA supported the proposed policy’s inclusion of specific tools for determining approximate nonpoint source loadings, and suggested that the final document endorse the use of other tools on a case-by-case basis. AMSA believes that the final policy provides sufficient flexibility in its discussion of available protocols and reference to continuing work with the U.S. Department of Agriculture to improve upon existing methods. (Section III.G.4.)

Net load reductions for pre-TMDL trading – For pre-TMDL trades, AMSA recommended that the proposed policy’s support for the use of a “net reduction” standard be changed to “no net increase”. The final policy retains the “net reduction” language. (Section III.E.2) This may limit the interest in pre-TMDL trades.

Ratios for pre-TMDL trading – AMSA recommended that the proposed policy be revised to remove the statement that the pre-TMDL ratio for point/point and point/nonpoint trading be higher than 1:1. EPA removed this language, but still suggests that greater than 1:1 trading ratios between point and nonpoint sources can compensate for nonpoint source uncertainty.

Trading and antidegradation – AMSA raised concerns with the proposed policy’s implicit suggestion that a “no net increase” approach is required under the antidegradation policy, and noted that de minimis increases in loadings are allowable under the Clean Water Act and the antidegradation policy. The final policy has not made any substantive changes to this section. (Section III.F.7) The applicable provision states that EPA believes antidegradation review will not be required when trades achieve a “no net increase” of the pollutant traded.

Trading and antibacksliding – AMSA supported EPA’s interpretation in the proposed policy of the backsliding provisions. AMSA noted that the proposal correctly indicated that the Agency will “not consider backsliding triggered where a source makes surplus reductions and later decides to discontinue generating credits as long as the actual discharge level does not exceed the discharge level previously authorized by permit.” The final policy contains modified, and potentially more restrictive, language on this point indicating that the backsliding provisions will be satisfied if a source later discontinues generating credits, providing that the “total pollutant load to the receiving water is not increased.”

Enforcement of trading – AMSA expressed concern over the proposed policy’s suggestion to states to establish “enhanced enforcement provisions” for failure to generate credits which are traded. EPA has removed this language. The final policy asks states to establish “clear enforceable mechanisms consistent with NPDES regulations that ensure legal accountability for the generation of credits that are traded.” (Section III.G.5)

Trading Currencies – AMSA urged flexibility in defining trading units or currencies in order to account for multiple or ancillary environmental benefits that would likely result from the trade. While the final policy embraces flexibility in quantifying trading units, it does not specifically address the ability to account for such ancillary benefits.

Trading between sources owned/operated by same entity – AMSA recommended that the policy explicitly allow loads to be traded between sources owned or operated by the same entity. The final policy endorses both pretreatment trading (between industrial dischargers to a POTW) and intra-facility trading (between POTW and stormwater permittees). (Section III.E.5, 6)

Interstate trading – AMSA recommended that EPA add a discussion of how trading is to occur in watersheds that cross state boundaries. The final policy does not address interstate trading.

Margin of safety – AMSA objected to the proposed policy’s reference to using the TMDL margin of safety to address trading uncertainties. This language was omitted in the final policy.

Trading Pilot Projects
When EPA released the final trading policy, it also announced funding for eleven pilot projects to examine how different trading concepts and techniques work on the ground. The EPA-funded projects are:

Trading to Reduce Nitrogen Loads in the Chesapeake Bay Watershed - Conestoga River, PA. A project to reduce nitrogen loads in a Chesapeake Bay tributary and strive for additional environmental benefits such as creation of habitat. Contact: Allison Weideman, EPA Chesapeake Bay Program, 410-267-5733.

Create an Electronic Marketplace for Nutrient Trading in Chesapeake Bay. Develop an internet-based board of trade for nitrogen trading in the Chesapeake Bay watershed, with the potential to be adapted for other watersheds. Contact: Allison Weideman, EPA Chesapeake Bay Program, 410-267-5733.

Outreach on Trading to the Agricultural Community. Through a partnership with the National Association of Conservation Districts, provide information to extension agents and agricultural producers on the concept, mechanics and potential benefits of water quality trading. Contact: Joel Salter, EPA Office of Water, 202-564-0642.

Trading to Reduce Selenium Loads to the Lower Colorado River. Develop a trading framework aimed at reducing high selenium levels in tributaries to the Lower Colorado River requiring a TMDL. Contact: Bruce Zander, EPA Region VIII, 303-312-6846.

First-Year Assessment of Nitrogen Trading in Connecticut. Evaluate the first year’s implementation of a trading program among 79 wastewater treatment plants to meet a nitrogen TMDL in Long Island Sound. The project will assess nitrogen reductions achieved, the utility of a watershed permit used for the 79 facilities, and the potential for expanding the program to include nonpoint sources. Contact: Mark Tedesco, EPA Long Island Sound Office, 203-977-1541.

Trading to Reduce Impacts from Urban and Agricultural Runoff near Montgomery, Alabama. Project to explore trading’s potential to reduce sediment pollution and create additional environmental benefits in the Coosa and/or Tallapaloosa Rivers.

Pilot Feasibility Assessment of Trading to Reduce Mercury Loads to the Sacramento River. The Sacramento Regional Wastewater Treatment Plant has an NPDES permit that requires the plant to develop a proposal for reducing mercury discharges to the watershed from sources that are either not regulated or cannot be readily controlled. This pilot project supports the Sacramento Regional Country Sanitation District’s efforts to assess the feasibility of achieving net reductions in mercury loadings through such offset actions. Contact: Matthew Mitchell, EPA Region IX, 415-972-3508.

Increasing In-Stream Flow in the Upper Charles River Watershed, MA. This project seeks innovative ways to address problems of water quality and reduced in-stream flow in the Charles River by exploring the option of wastewater treatment plants taking actions upstream to increase groundwater recharge and decrease stormwater runoff in-lieu-of increasing treatment capacity downstream. Contact: Bill Walshrogalski, EPA Region I, 617-918-1035.

Evaluate Feasibility of Reducing Acid Mine Drainage in the Cheat River, WV. This stakeholder-driven project will assess the potential for trading to achieve greater reductions in acid mine drainage pollution than would be achieved under current NPDES permits through actions to abate drainage from abandoned mines. Contact: Bob Runowski, EPA Region III, 215-814-5385.

Nitrogen Trading in the Neuse River Basin, NC. Establishment of operational guidelines for a trading program to reduce nitrogen loads from a group of wastewater treatment plants to meet a TMDL. Contact: Dee Stewart, EPA Region IV, 404-562-9334.

Pilot Trading Framework for State of Wisconsin. Development of a trading framework that the state may use to guide development of future nutrient trading programs in Wisconsin. Contact: Frank Anscombe, EPA Region V, 312-353-0201.

If you have any questions regarding the final trading policy, please contact Alexandra Dunn at 202/533-1803 or adunn@amsa-cleanwater.org.