November 1, 2015

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Clean Power Plan's Needs May Increase Wetland Banking

Author:

Julie A. Rosen
303.813.6725
jrosen@rcalaw.com

Long pipelines, new renewable energy facilities, utility infrastructure, and other types of large-scale projects typically involve various environmental and community impacts, such as impacts on wetlands. Under the Clean Water Act, as a general rule, when wetlands1 are impacted, compensatory mitigation is required.

Wetland banking is the overall preferred type of compensatory mitigation to offset impacts from activities such as energy resources development. Wetland banking involves the restoration, establishment, enhancement, and/or preservation of wetlands for the purpose of mitigation under the Clean Water Act. Other forms of mitigation include “in-lieu fee” and permittee-responsible mitigation.”

Looking ahead, regulatory impacts to wetlands may become even more frequent given the coinciding operation of two recent US Environmental Protection Agency (EPA) rules: (1) the Clean Power Plan, which, if not successfully challenged and struck down, will likely result in the need for additional infrastructure and new renewable energy projects2, and (2) the Clean Water Rule redefining “waters of the US,” which may arguably result in increased wetlands and other water resources falling within the scope of waters protected under the Clean Water Act for which mitigation is required.3 Consequently, there may be increased need for compensatory wetland mitigation.

This column focuses on wetland banking as mitigation under the Clean Water Act and possible growth that the wetland banking market may experience in the coming years.

US ARMY CORPS OF ENGINEERS AND EPA ARE GOVERNING AGENCIES

Wetlands are known to serve important ecological and hydrological functions, such as for plant and bird species, and for oft-overlooked benefits, such as flood control, groundwater recharge, and shore stabilization. For decades, the federal government has attempted to implement a “No Net Loss” policy for wetlands.4 Under this concept, any wetlands destroyed must be replaced in one way or another. Although the No Net Loss policy was first announced by President George H. W. Bush in January 1989, the concept of wetland compensatory mitigation predates the No Net Loss policy.

Wetland banking is tied to the Clean Water Act’s Section 4045, which prohibits the discharge of dredge and fill material into wetlands that are considered “waters of the US,” unless authorized by permits issued by the US Army Corps of Engineers,  known as “404 permits” or “dredge and fill permits.”6 As a general rule, all projects must be designed and implemented to avoid impacts to wetlands. But in practice, even when all reasonable and practicable steps are taken to avoid encounters with wetlands, impacts may be unavoidable, especially in the traditionally wetter areas in the US east and south, as  compared to the arid US west.

Where impacts are unavoidable, compensatory mitigation will likely be required and conditions for mitigation may be set forth in the permittee’s 404 permit. However, note that permitting and wetland mitigation requirements should be evaluated on a case-by-case basis. If considered sufficiently minor based on their type or expected impacts, some projects may not be required to provide wetland mitigation.

The Corps is the lead agency responsible for 404 permitting and wetland mitigation.7 The EPA has some responsibility as well, particularly concerning environmental aspects, and the EPA has ultimate oversight through its seldom-used veto authority. Pursuant to the Clean Water Act Section 404, the EPA has adopted mitigation guidelines that the Corps and permittees must follow. These guidelines are known as the “404(b)(1) Guidelines.”8

The 404(b)(1) Guidelines were initially finalized by the EPA in 1980. As revised over time, the 404(b) (1) Guidelines serve as the primary rules governing wetlands mitigation. The EPA most recently revised the 404(b)(1) Guidelines in 2008 to clarify the banking process and to emphasize banking as the preferred approach to implement the No Net Loss policy. A wetland bank is the preferred option of the Corps and EPA because banks are performance-based and can provide a watershed-based approach to establishing, restoring, preserving, or enhancing wetlands. Also, in line with the No Net Loss  policy, banks provide functioning, ecologically valuable mitigation before the permitted impacts to other wetlands occur, thus reducing temporary loss of wetlands.

WETLAND BANKING ENABLES MITIGATION OBLIGATIONS TO GO TO THIRD PARTY

A wetland bank sells “credits” to permittees (404 permit holders) who will use the credits to offset impacts to wetlands caused by the permittee’s project, as allowed by a 404 permit.9

Credits may be used only within the “bank service area,” a designated area where the permitted activity may be performed using credits from the particular bank. Once credits are transferred to the permittee, the permittee’s obligation to provide mitigation is then transferred to the bank and the bank sponsor. The bank sponsor is generally the owner of the bank and the entity responsible for maintaining and managing the bank in perpetuity. A sponsor can be a private entity, nonprofit
organization, or public entity.

Typically, a third party is the bank sponsor. In theory, an entity could be both the permittee and the bank sponsor, but that circumstance is rare. In fact, using credits from an approved bank is an attractive option for permittees because the responsibility for mitigation success is assumed by the bank sponsor. Once the permittee purchases approved credits from a bank, the permittee can focus on its project and primary business. By comparison, under the permittee-responsible mitigation option, the permittee is responsible for the design, construction, monitoring, and long-term management of the wetlands.

The number and allowed use of credits from a bank is approved by the Corps, in coordination with the sponsor, based on the functional performance and quality of the bank. Where possible, the number of credits is identified in the banking instrument, described in the next section. When a permittee is obtaining its 404 permit and ready-to-use credits, the permittee works with the Corps to determine the credit-debit ratio. The credit-debit ratio varies case by case, but the most commonly accepted ratio by the Corps is 2:1 or greater, depending on the functional value of the wetlands credited as compared to the value of the wetlands to be impacted/debited. The actual cost of credits paid by the permittee to the bank sponsor is set by the sponsor, taking into consideration market conditions.

MUST SET UP A BANKING INSTRUMENT

The specific terms of the instrument governing a bank are crucial to ensure that wetland banking is a workable option for permittees and, correspondingly, that the banking market remains viable for sponsors and permittees alike.

A bank is generally governed by a banking instrument developed by the sponsor in coordination with and approved by the Corps. The banking instrument functions as a binding contract that sets forth terms and conditions governing bank operations.10 While the core substance of a banking instrument is largely based on the 404(b)(1) Guidelines requirements, the details of a banking instrument can be negotiated by the sponsor and the Corps.

The process for establishing a bank and developing a banking instrument is laid out in the 404(b) (1) Guidelines. In sum, the bank sponsor submits information to the Corps, which is subject to review and comment by the public, and by an interagency review team, composed of the Corps, the EPA, the US Fish and Wildlife Service, and possibly other agencies. Once this is approved by the interagency review team, a banking instrument is negotiated.

Examples of topics addressed in a banking instrument include the following:

  1. Long-term management. A plan for long-term management will be required in any instrument, as well as a commitment to implement such plan. Even for wetlands that are supposedly self-sustaining, certain maintenance activities, such as weed control and edge stabilization, will be needed.
  2. Wetland performance standards. Performance standards are identified as guidance for determining whether the bank is achieving ecological and hydrological objectives, and therefore is accruing credits.
  3. Credit accounting procedures. Credits will be determined based on the function and value of the wetlands. The amount of credits, or a method to determine the amount of credits, will be described in the instrument.
  4. Credit release schedule. A schedule may be developed to identify when credits may be available for sale and use by a permittee. Most banks are not fully developed into valuable wetlands when they are established. Thus, credits may not be immediately available at the time of establishment and a well-thought-out schedule can help reduce potential misunderstandings by the sponsor and Corps concerning future credit accrual and availability.
  5. Long-term availability of water resources. The bank sponsor may need to demonstrate that it holds adequate water rights to sustain the wetlands in perpetuity.
  6. Financial assurance to secure long-term support for wetlands. Financial Assurance in the form of a performance bond, letter of credit, legislative appropriation (for a public entity), or other mechanism is required for every bank. The amount of financial assurance will be agreed upon by the Corps and sponsor. In some cases, where satisfactory financial assurance is provided, the Corps may allow an initial credit release for third-party mitigation before successful wetlands exist within the bank.
  7. In-perpetuity real estate encumbrance for the “permanent” preservation of wetlands. The 404(1) (b)  guidelines require some type of site protection, such as a deed restriction, covenant, or easement, to ensure that banked wetlands are preserved in perpetuity. A practical consideration for entities creating a bank may be potential tax implications. For example, in Ohio, banks may be eligible for reduced property tax valuation, pursuant to Ohio state law.11 As another example, placing a conservation easement on the property may be advantageous from a tax perspective, depending on applicable state tax programs.

WETLAND BANKING MARKET

There is an entire economic and real estate market that revolves around wetland banking.

Wetland banking has been perceived as somewhat of a booming sector of the environmental economy, yet it experiences ups and downs, consistent with other economic trends. For example, in 2009 when home developments declined, so did the market for wetland banks. This was problematic for bank sponsors who relied on the need of housing developers to purchase credits from their banks.12 A similar outcome can be expected when other forms of development decline as well.

From a banker’s perspective, economic stimulus and growth means upward trends in the need for mitigation, and therefore upticks in their business. Hence, if and when the Clean Power Plan is implemented, renewable energy sources and infrastructure needs may increase and, correspondingly, cause an increase in wetland banking needs.

For a healthy market, it is crucial that wetland bankers be able to sell their credits to permittees, and in the inverse, for permittees to be able to use credits from banks. In several instances where the Corps has refused to acknowledge credits from banks, bank sponsors have challenged the Corps’ decision as causing financial harm to the sponsor and violating the banking instrument.13 In certain cases, courts have concluded that bank instruments are enforceable as contracts. Therefore, to the extent that a bank instrument describes credit accounting procedures and schedules, if the Corps fails to follow these provisions, it may become subject to a breach-of-contract claim.

OUTLOOK FOR WETLAND BANKING IN ENERGY

As noted, look for potential swells in the banking market caused by the need for new energy sources, transmission lines, and pipelines under the Clean Power Plan, as well as increased protected wetlands pursuant to the Clean Water Rule.

In addition, a concept in the banking market that could become increasingly more common in the near future is multipurpose banking. Multipurpose banks or conservation areas may be attractive for large-scale energy projects that cause multiple types of environmental impacts. For instance, a wind energy project that will impact wetlands and a species listed under the Endangered Species Act or Migratory Bird Treaty Act may, in theory, purchase credits from (or establish) a conservation bank that preserves an area composed of both wetlands and habitat for the applicable listed species in order to mitigate impacts under each type of regulatory program.14

While multipurpose banks/conservation areas are not a new concept, the establishment of these areas as banks to offset impacts under permitting programs is not common. Looking ahead, big projects like high-voltage interstate transmission lines will require creative ideas to overcome environmental impacts and public resistance. Multipurpose banking and conservation areas, established in advance with sweeping visions of improved, restored, or created wetlands and habitats may simultaneously help dissolve some public opposition and meet regulatory requirements.

Please contact Julie Rosen for a complimentary copy of this article as published in the November issue of the Natural Gas and Electricity Journal. Julie Rosen is an attorney in the Denver office of Ryley Carlock & Applewhite. Julie focuses her practice in the areas of environmental, energy resources and related litigation. She represents a wide variety of clients, including manufacturing companies, electric utilities, mining operations, agricultural operations, municipalities, individual landowners, real estate developers and financial institutions.

NOTES

  1. Impacts to other waters of the United States, such as streams, may be offset by mitigation banking as well.
  2. EPA Final Rule, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, signed August 3, 2015. (The Clean Power Plan rule was not yet published in the Federal Register at the time this article was submitted for publication. The signed, unpublished version is available at http://www2.epa.gov/sites/production/files/2015-08/documents/).
  3. EPA Final Rule, Clean Water Rule: Definition of “Waters of the United States,” 80 Fed. Reg. 37054 (June 29, 2015). There are differing perspectives and interpretations of the Clean Water Rule, and while there is disagreement as to whether the revised definition will in fact result in more wetlands falling within the scope of waters protected under the Clean Water Act Section 404, it is a possibility that may affect the banking market.
  4. Environmental Law Institute. (2015). Background on compensatory mitigation. Retrieved from http://www.eli.org/compensatory.
  5. This article focuses on wetland mitigation banks as related to the 404 permitting program; however, not all "mitigation banks” are created or used for 404 mitigation purposes. Some are used voluntarily by developers or operators to address community concerns.
  6. 33 USC § 1344 (Clean Water Act, Section 404); 33 CFR Part 332 (Corps regulations); 40 CFR Part 230 (EPA regulations).
  7. While this article discusses federal permits issued by the Corps, in some cases state or local wetland litigation rules may apply.
  8. 33 CFR Part 332; 40 CFR Part 230.
  9. See generally 33 CFR Part 332; 40 CFR Part 230.
  10. See Pioneer Reserve, LLC v. United States, 119 Fed. Cl. 201, 203 (2014); Davis Wetlands Bank, LLC v. US, 114 Fed. Cl. 113, 116 (2013).
  11. See Wetland Res. Ctr., L.L.C. v. Marion Cty. Aud., 157 Ohio App. 3d 203 (2004) (the Court of Appeals of Ohio, Third District, concluded that a wetland bank was eligible for a reduced tax valuation under the State of Ohio’s agricultural use valuation statute).
  12. Smith, G. (2009, January 28). Chicago-area wetland mitigation banks are bogged down. Chicago Tribune. Retrieved from http://articles.chicagotribune.com/2009-01-28/.
  13. See Pioneer Reserve, LLC v. United States, 119 Fed. Cl. 201 (2014); Davis Wetlands Bank, LLC v. US, 114 Fed. Cl. 113 (2013).
  14. See, e.g., Conservation Land Group’s Proposed Moosa Creek Mitigation Bank (2014), at http://conserveland.com/projects/mitigation-projects/.
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