Corps And EPA Issue Important New Mitigation Rule

On April 10, 2008, the Army Corps of Engineers ("Corps") and the Environmental Protection Agency ("EPA") issued a final rule governing mitigation requirements for unavoidable impacts to wetlands and other waters of the United States under the section 404 program of the Clean Water Act.  70 Fed. Reg. 19594. This rule is a major change to the Section 404 program.  It was published with nearly 80 pages of preamble in the Federal Register, and the rules itself is more than 30 pages.  It will take some time for the Corps staff and the regulated community to learn the new rule.  The rule is sufficiently complex that it will be many years before the effect of the changes will be fully understood.



Application

The rule will take effect on June 12, 2008, but it will not apply to applications pending on that date or to applications filed after that date if applying the new rule would be a substantial hardship.

Effect Likely To Vary

In fiscal year 2005, the Corps authorized 20,754 acres of wetland impacts, and required 56,693 acres of compensatory mitigation through wetland restoration, establishment, enhancement, and preservation to offset those unavoidable impacts. From fiscal years 2001 to 2005, the mean annual wetland impacts authorized were 23,000 acres, and the mean annual wetlands compensatory mitigation required was 50,000 acres.  Because the Corps Section 404 program is nationwide and of such a large scale, the effect of the rule will vary considerably both regionally and even within a state depending of the particular circumstance of each area.

Goal of the Rule

The rule is intended to increase the accountability and rigor of the program and to elevate the role of mitigation banks in the mitigation process.  The rule applies the view that is that in many instances providing on-site mitigation adjacent to development in urban areas will provide fewer long term benefits than consolidating mitigation in areas that are more likely to remain undeveloped and rural.  At the same time, it increases the rigor of the planning and processing requirements for on site mitigation and requires that generally mitigation occur within the same watershed as authorized impacts.

The rule is intended to level the playing field between permittee-responsible mitigation, mitigation banks and in-lieu fee mitigation at least in terms of making sure that each of these options provides effective mitigation.  It establishes ecologically-driven performance standards that use the best available science.  The Corps and EPA expect the program will promote better compliance.  Under the rule, the Corps intends to increase compliance visits to ensure more complete compliance with mitigation requirements.  Entities carrying out the mitigation will be required to file more detailed monitoring reports.  This will be a challenge for many consultants who will need to develop the skills and knowledge to produce plans that meet these standards.

Compliance with Section 404(b)(1) Guidelines Maintained

The rule states that it preserves the mitigation sequence requirement under the Section 404(b)(1) guidelines to first avoid, then minimize, then compensate for unavoidable impacts and lost aquatic functions.  It also states that it does not expand the district engineers' existing level of discretion in determining that an applicant has taken all appropriate and practicable steps to first avoid and then minimize impacts to the aquatic ecosystem.  It does not change when mitigation is required, but it does change where and how will be performed. While the rule affirms the continued applicability of the sequencing provisions of the section 404(b)(1) guidelines, it does tilt the playing field away from requiring applicants to provide on-site, in-kind mitigation. The Corps specifically rejected requests to specify that on-site, in-kind mitigation  should be preferred because the failure rates for those kinds of projects was high.  Over time, this tilt will also affect the application of the guidelines and may result in less onsite avoidance.

Mitigation Hierarchy Established

The rule establishes a preference hierarchy for mitigation options as follows:

1. Mitigation bank credits

2. In-lieu fee program credits

3. Permittee-responsible mitigation under a watershed approach

4. On-site and/or in-kind permittee-responsible mitigation

5. Off-site and/or out-of-kind permittee-responsible mitigation

It is not clear how the hierarchy will be administered.  The rule seeks to maintain flexibility, but it also appears to give the districts the ability to select the “environmentally preferable option.”  It seems possible that the Corps could reject an on-site mitigation proposal, for example, on the grounds that purchasing credits is "environmentally preferable."  In terms of the amount of mitigation, the Corps and EPA rejected a request to set a minimum ratio of 1.5 to 1 in favor of retaining a general requirement for no net loss and a requirement to document the need for ratios in excess of 1 to 1.

Potential Benefits And Costs

The Corps and EPA anticipate that that benefits of the rule will be greater predictability, greater transparency, improved mitigation planning and site selection, improved performance of compensatory mitigation projects, and a possible reduction in permitting time especially for projects that can use mitigation banks or in-lieu fees.  It also increases the flexibility of mitigation options, provides for increased public participation and strongly encourages a watershed approach to mitigation so that mitigation will be located in areas that will provide long term benefits.  On the other hand, the cost and complexity of obtaining approval of a mitigation plan and authorization to commence work will greatly increase for projects that cannot use mitigation banks.  The importance of functional assessment is enhanced.  This is a potentially troubling element of the rule as most Corps districts do not have established methodologies for preparing watershed functional assessments and the cost of preparing a functional assessment can be considerable.

Watershed Approach Adopted

The use of a watershed approach in identifying locations for mitigation is a major new element of the rule.  Previously, mitigation developed under the Section 404 program was rarely subject to watershed-based analysis.  In adopting the final rule, the Corps and EPA responded to comments from the regulated community expressing concern that watershed planning would be a source of additional expense and delay to those seeking permits.  The rule clarifies that watershed planning/analysis is to be done by the Corps.  It is not a burden placed on applicants.  For those areas for which a watershed plan is incomplete or unavailable, mitigation and permitting can proceed either through banks or in- lieu fees or under project by project activity.

Where a watershed plan is developed using available information, however, the Corps and EPA expect that will provide strategic site selection to improve or maintain watershed functions.  A watershed plan can consider the type of mitigation, its landscape position, and other factors to provide desired functions.  The application of the watershed approach bears careful monitoring especially because the rule does not clearly define at what scale watershed planning should take place.

Recognition of Mitigation Elements

An important new aspect of the rules is that it recognizes that mitigation may be accomplished at multiple sites.  For example, an applicant could provide part of the mitigation on-site where mitigation measures will be needed to maintain water quality or store water for flood and provide stream protection and provide mitigation for other habitat functions could be accomplished off-site.  In fact, mitigation for wildlife habitat is listed as an example of an off-site mitigation element.  The rule also formally recognizes that mitigation can include elements such as preservation of wetlands, inclusion of riparian areas, and buffers where those activities contribute to providing needed functions.

New Standards for Approval of Mitigation Banks

The rule establishes requirements for each of the categories of mitigation.  For mitigation banks, the rule requires the banker to develop a prospectus that provides information on the bank—where it is located, why the site is appropriate, why the mitigation will succeed, what the service area will be, and how credits will be allocated.  Establishment of the bank is subject to a public notice and comment process, and review by an interagency team (IRT) under a process that includes opportunities and deadlines for other agencies to comment on the proposed bank.  The rule also provides a process to resolve disputes, if needed, by IRT members.  This dispute resolution process is similar to the existing process for elevating permit decisions under the Section 404(q) memorandum of understanding.  An approved bank must have an approved instrument, approved mitigation plans with credit release schedules, ledgers for all credit transactions and Corps approval to release credits.  Mitigation banks are subject to suspension or termination if the planned mitigation does not meet the required performance standards.  One advantage to permittees of the mitigation bank option or the in-lieu option is that responsibility to provide compensatory mitigation is transferred to the sponsor when the permittee secures credits.

New Timelines for Mitigation Bank Approval

The rule provides for formal timeframes that govern the process for  approving mitigation banks.  They are likely intended to reduce the time needed for approval as compared to the prior procedures under which the time for approval of mitigation banks could take many years.  However, the rule allows exceptions to these timeframes made if a bank proposal requires Section 7 consultation or a full NEPA review.  As a practical matter, the timeframes cannot be enforced since the rule provides no penalty if the process extends beyond the identified timeframes.  The specified time period is 225 days for Federal review without dispute resolution.  This time excludes time for the actions the sponsor is required to complete.  The entire process would take approximately 285 days, if the sponsor provides draft instrument within 30 days, and final instrument within 30 days.  The time would be extended to 320 days for Federal review if the dispute resolution process is used (380 days total, assuming 30-day submittals for draft and final instruments).

In-Lieu Fees Are Retained

One of the key issues to be resolved by the rule was the treatment of in- lieu mitigation where fees could be paid to an entity to be used for mitigation.  In-lieu mitigation (“ILF”) has been a somewhat loosely administered mitigation option.  Many of the in-lieu plans did not have the mitigation lined up in advance and there was some suggestion that the in-lieu programs might be abolished.  Instead, the Corps and the EPA added new requirements for in-lieu fee programs making them more like mitigation banks.

Under the rule, only non-profits or governments will be allowed to maintain in-lieu programs. The ILF must have a compensation planning framework required to identify, plan, and implement ILF projects; support the watershed approach; and justify advance credits.  Advance credits are a limited number of credits that can be sold before ILF projects are established and meet performance standards.  ILF funds collected for compensation may only be used for compensation projects minus a small percentage for overhead.  Credit costs must include all costs to implement projects, including financial assurances and long-term management.  Individual ledgers will track credit production by each in-lieu fee project.  As with mitigation banks, they will transfer liability to ILF up front with enforcement against the ILF.

Grandfathering of Banks and In-Lieu Funds

In an important concession to existing banks and in-lieu fee arrangements, previously approved mitigation banks and those approved within 90 days of publication of final rule are grandfathered.  They can continue to operate under their existing terms, unless there are substantive changes (e.g., adding or expanding sites).  In-lieu fee program instruments, previously approved instruments, and those approved within 90 days of publication of final rule, can continue to operate under their existing terms for two years after the effective date, unless the district engineer approves an extension of up to three additional years.

Requirements for Permittee Mitigation Increased

The rule continues to allow permittee-responsible mitigation, but substantially upgrades the requirements for these and creates formal regulatory standards for the first time.  Most of the requirements in the rule were previously found in informal guidance issued by each Corps district.  One of the biggest upgrades is a requirement to formalize to have the mitigation lands be placed under a conservation instrument or otherwise set aside in perpetuity and to ensure that financial assurances are in place to manage the mitigation site in perpetuity.  While these requirements were often imposed (at least in California), they were by no means universal.

Under the permittee-responsible mitigation, site selection may be based on a watershed approach, or, if a watershed plan is not in place, it may be based on either on-site/in-kind mitigation, off-site/in-kind mitigation, or off-site/out-of-kind mitigation.  In all instances, the permittee must provide a draft mitigation plan that identifies the mitigation objective, site selection information, the site protection instrument to be used (e.g., conservation easement), baseline information (for both the impact site and mitigation project site), an explanation of how the project will mitigate for lost functions and values, a work plan (specifications and work descriptions), a maintenance plan (ensuring continued viability), ecologically based performance standards, monitoring requirements, a long-term management plan (post-monitoring management), provisions for adaptive management plan (addressing unforeseen changes), and financial assurances (to ensure high level of confidence of successful completion).  The level of information must be commensurate with the scope and scale of the impacts.  Perhaps most importantly, the rule provides that the Corps must approve the mitigation plan before impacts may occur.  This places a premium on early identification of mitigation sites and emphasizes the benefits of mitigating at a pre-approved bank.

Nomenclature Clarified

The rule also seeks to bring new clarity to the nomenclature used to describe mitigation activities. Compensatory mitigation can be carried out through four methods: the restoration of a previously-existing wetland or other aquatic site, the enhancement of an existing aquatic site’s functions, the establishment (i.e., creation) of a new aquatic site, or the preservation of an existing aquatic site.  The rule also addresses comments on the concepts of “functions,” “services,” and “values” that were in the proposed rule.  The rule noted that the terms “functions,” “services,” and “values” have been used in various documents to describe the attributes of aquatic resources that are being replaced through compensatory mitigation. The proposed rule included definitions for all three terms.  By contrast, the final rule eliminates the term “values” from the final rule because the term “services” is currently being used in the ecological literature to relate to the human benefits that are provided by an ecosystem. The concept of "ecosystem services" provides a more objective measure than “values” of the importance of the functions performed by the ecosystem to human populations.

Mitigation Defended

The rule presents defenses to arguments raised by commenters that the technology and science does not exist for conducting mitigation for certain kinds of resources such as streams.  The Corps and EPA recognized that the science of stream restoration is still evolving and that more research is needed; however, the lack of a fully-developed set of tested hypotheses and techniques does not mean that stream mitigation (particularly via restoration, enhancement and preservation) cannot be successfully performed or that it should not be required where avoidance of impacts is not practicable.  On the other hand, the rule does note that some types of resources are harder to replace than others, and it provides guidance on how to handle those situations.

New Requirements for Individual Permits

The Corps has also made a change to the individual application process.  A new regulation requires an applicant to specify the efforts it has made to avoid impacts and to explain how the project will mitigate for its impacts.  This information must also be included in any public notice the Corps issues for an individual permit.  By contrast, under the prior rule, the public notice could be silent on those issues.  A section 404(b)(1) alternatives analysis or a full mitigation plan is not required either for the application or the public notice.

Conclusion

For permit applications that are far along in the process, the old rule will continue to apply.  For future applications, if a mitigation bank is readily available, the transition should be simple.  For all other projects, the complexity and cost of obtaining mitigation is likely to increase, perhaps exponentially.  The rule will place a premium on planning for mitigation especially for project proponents.  At a program level, the quality and public benefits of mitigation is likely to improve.

For further information contact Robert Uram, Ella Foley Gannon, Keith Garner, Aaron Foxworthy or Brenna Moorhead.  Robert J. Uram is a partner in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.  Ella Foley-Gannon is a Partner in Land Use and Natural Resource Practice Group in the firm's San Francisco Office.  Keith Garner, AICP, is an associate in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.  Aaron Foxworthy is an associate in the Real Estate, Land Use and Environmental Practice Group in the firm's San Francisco office.  Brenna Moorhead, AICP, is an associate in the Real Estate, Land Use and Environmental Practice Group in Sheppard Mullin's San Francisco office.

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