AMSA Regulatory Alert (RA 02-10)

To: Members & Affiliates, Wet Weather Committee, Legal Affairs Committee
From: National Office
Date: May 17, 2002
Subject: EPA’s PROPOSED WATER QUALITY TRADING POLICY
Reference: RA 02-10

Action Please By:
June 12, 2002

On May 15, 2002, the U.S. Environmental Protection Agency’s (EPA’s) Office of Water released for public comment its draft Water Quality Trading Policy (“proposed policy”). The proposed policy, available at http://www.epa.gov/owow/watershed/trading/proptradepolicy.pdf, will supersede the 1996 policy developed under the Clinton administration. The purpose of the proposed 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 proposed policy outlines several basic federal policy principles, lists general elements of a successful state trading program, and delineates provisions which are necessary to be consistent with the CWA.

AMSA Members Encouraged to Provide Comments on Proposed Policy
This Regulatory Alert provides a brief summary of key issues in the proposed policy and invites AMSA members to review and submit comments in response to several specific questions (see below). For a general overview of trading issues, please refer to the most recent Legal Perspectives (April/May 2002, Issue # 4). The deadline for filing comments is July 1. The National Office will work with the Water Quality and Legal Affairs Committees to craft AMSA’s comments based on the issues and concerns that you raise in your review.

In order to help us prepare AMSA’s comments, we ask that you provide us with feedback on the proposed policy by Wednesday, June 12 to Greg Schaner at gschaner@amsa-cleanwater.org. We encourage you to address the following questions when reviewing and commenting on this document:

• Has your agency participated in an effluent trading program? Has your agency considered participating in an effluent trading program? If so, please provide us with a general description of the trading program and observations as to why it has been or has not been successful. If applicable, please explain why you ultimately chose not to participate in a trading program.
   
• Would you consider trading based on the criteria outlined in this proposed policy? Why or why not?
   
• What additional criteria would you like to see added to this proposed policy, or what revisions would you make to the proposed criteria, to encourage trading and to protect the interests of publicly owned treatment works (POTWs)?

AMSA Feedback Instrumental in Proposed Trading Policy
AMSA has been actively involved in reviewing earlier drafts of the trading policy. The Agency has been responsive to AMSA’s preliminary concerns, recognizing that for trading to work the key permitholders will need to accept the policy. The National Office met with David Batchelor, the Office of Water’s top official assigned to the Agency’s trading project, to discuss preliminary POTW concerns with a national trading policy. AMSA submitted on January 22, 2002 a letter outlining those concerns for the Office of Water’s consideration (http://www.amsa-cleanwater.org/private/legreg/outreach/012202batchelor_letter.pdf). Many of these concerns related to ensuring that there is a level playing field for trades between point sources and nonpoint sources, and that trading is not used to supplant a fair and equitable allocation to all pollutant sources of pollutant reduction responsibilities under a total maximum daily load (TMDL). After reviewing a February 2002, revised draft of the proposed policy and confirming that many of AMSA’s preliminary concerns were addressed, the National Office wrote EPA’s Administrator Christine Todd Whitman on April 30 (http://www.amsa-cleanwater.org/private/legreg/outreach/043002EPAletter.pdf) recommending that the Agency move forward with the proposed policy.

Key Aspects of the Proposed Trading Policy
The proposed policy is divided into two major sections. Section II.4.A addresses the general elements that EPA believes are needed for any successful state trading program. Section II.4.B outlines several provisions that should be included in a trading program to be consistent with the Clean Water Act (CWA). The key issues in these sections are outlined below.

Fundamentally, EPA will require that any trading program must be consistent with the CWA. See Section II.B.1. EPA clarifies that trading can be used for a number of pollutants, and should not be effectively limited to nutrients and sediments as it has been in the past. However, coverage of other pollutants will require a net water quality or environmental improvement. See Section II.B.2. AMSA supports trading for other types of pollutants where it makes sense for the watershed.

General Elements of Successful Trading Programs (Section II.4.A)
Section II.4.A of the proposed policy lists several elements that should be included in any successful state trading program. Among the most noteworthy elements is a provision (Section II.4.A.6) indicating that “studies should be performed to quantify actual nonpoint source load reductions, validate nonpoint source pollutant removal efficiencies and determine whether the anticipated water quality objectives have been achieved.” AMSA emphasized the critical importance of nonpoint source accountability it its January 22 letter. Another trading element (Section II.4.A.3) recommends the use of Natural Resource Conservation Service (NRCS) methods and procedures for determining nonpoint source contributions of sediment and nutrients. This provision is important because of the historic uncertainty in consistently calculating nonpoint source loadings to waterbodies. Providing consistent guidelines to use in estimating nonpoint source loads will add credibility to the process.

Provisions to be Consistent with the CWA (Section II.4.B)
Section II.4.B addresses the substantive issues of how trading should ensure compliance with the CWA, and especially national pollutant discharge elimination system (NPDES) permits. Among the key provisions of interest to POTWs are the following:

• How to Incorporate Trading into NPDES permits (Section II.4.B.3) – EPA will support several approaches to incorporate trades into NPDES permits. These include using variable permit limits that may be adjusted up or down based on the quantity of credits used or generated; and/or using alternate permit limits to restrict the amount of a point source’s pollution reduction obligation that can be achieved via credits if trading occurs. AMSA emphasized in its January 22 letter that liabilities under the permit should be adjusted downward if credits are traded to another source. The potential for using variable or alternate permit limits may provide the appropriate mechanism for accomplishing this objective. The proposed policy does include the possibility that the NPDES permit would include nonpoint source requirements. AMSA believes that any dual liability scheme, where the NPDES permit includes accountability for the failure of nonpoint sources to make promised pollutant reductions, will drive point sources away from trading.
   
• Anti-Backsliding (Section II.4.B.7) – EPA clarifies that backsliding provisions will not be triggered if a POTW, or other point 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 a permit prior to generating credits.” A prior draft of the trading policy included language which triggered backsliding requirements where the point source discontinued generating credits. AMSA believes the current proposed provision significantly improves upon the earlier version.
   
• Antidegradation (Section II.4.B.10) – The proposed policy indicates that trades that achieve a “no net increase” in the discharge of a pollutant parameter in a given waterbody that fully supports designated uses satisfy the antidegradation requirements of the CWA. In the trading context, where the “no net increase” threshold is a prerequisite to a trade, AMSA believes this clarification is a reasonable application of the antidegradation provisions.
   
• Pre-TMDL Trading Ratios (Section II.4.B.11) – The proposed policy clarifies that any trades made prior to a TMDL should observe a greater than 1:1 reduction ratio to result in the required “no net increase” unless it can be “demonstrated that 1:1 ratios are consistent” with water quality standards. AMSA believes that trading should occur on a 1:1 basis regardless of whether the trade occurs prior to or after a TMDL.
   
• Post-TMDL Trading (Section II.4.B.12) – EPA clarifies that in post-TMDL trades, allocation of the overall pollutant loading cap among and between point and nonpoint sources establishes the respective baselines for trading to occur. This provision is critically important given AMSA’s long-standing position that trading should not be used to replace a fair and equitable allocation of pollutant reduction responsibilities among sources of impairment in a watershed. AMSA believes that it may be premature to trade with a nonpoint source prior to the state allocating their pollutant reduction responsibilities.

Thank you in advance for reviewing the proposed policy and providing AMSA with your agency’s feedback. If you have any questions, please contact Greg Schaner at 202/296-9836 or gschaner@amsa-cleanwater.org.