Thomas P. McElligott, Retired Partner

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WDNR Issues Proposed Water Quality Trading Guidance

Environmental Law Alert Thomas P. McElligott, David A. Strifling

The Wisconsin Department of Natural Resources ("DNR") has invited public comment on two recently released guidance documents (collectively, the "Guidance") aimed at implementing water quality trading in Wisconsin Pollution Discharge Elimination System ("WPDES") permits. Generally, the Guidance allows WPDES permit holders to demonstrate compliance with water quality-based effluent limits (WQBELs) by compensating another party (i.e. "trading") to achieve less costly pollutant reduction with the same or greater benefit. However, the Guidance places significant regulatory burdens on credit purchasers. As a preliminary matter, DNR expects permittees to "optimize" wastewater treatment systems before seeking trades, meaning that permittees should utilize "minor operational changes or modifications to capture and remove as much of the traded pollutant as possible." After the optimization process is complete, the Guidance requires numerous regulatory submittals prior to trade effectiveness; it requires a credit purchaser to verify that the generator of the corresponding credits is meeting its responsibility and to document that in annual reports submitted during the life of the trade; and it places continued responsibility to meet applicable limits with the credit purchaser, even if purchased credits become unavailable due to the credit generator's actions. It also reduces all generated credits by a calculated "trade ratio" to account for various uncertainties related to the trade. DNR ultimately predicts that it will take five years or more to implement traded credits in a WPDES permit. The essential features of the Guidance are described in more detail below.

Generation and Type of Credits

Tradable credits are generated whenever a regulated source drops below the "credit threshold," which is set equal to applicable permit requirements (including WQBELs and technology-based effluent limits), statewide performance standards, or (in a TMDL watershed) applicable wasteload allocations, whichever is lowest. A point source credit generator must accept a permit limit that is lower than the most restrictive limit in its permit. The difference between the two limits is the amount of credit generated. DNR classifies these as "long-term" credits, meaning that they are available so long as the practice or measure that generates the credits remains effective. However, if a point source ceases discharging, then any credits generated by that source are no longer available for trade.

For nonpoint sources, the credit threshold is applicable statewide performance standards or TMDL load allocations, whichever is more restrictive. If a nonpoint source's current discharges exceed the applicable threshold, it can generate interim credits (valid for five years) if it reduces its discharge to the applicable threshold. It also may generate long-term credits if it reduces its discharge below the applicable threshold; the long-term credits are valid for the lifespan of the management practice.

 Trade Partners

Trades may occur between two point sources or between a point source and a nonpoint source. If a single permittee holds more than one WPDES permit, it may trade between the point sources identified in the various permits. In TMDL watersheds, a credit generator may trade within the drainage area contributing to the impaired segment that resulted in the allocation being assigned to it. Trades may occur upstream and downstream of the generator's discharge point within the impaired segment. In non-TMDL watersheds, in most cases the trade must occur with a credit generator upstream of the credit user's discharge point to prevent local violations of water quality standards.

Trade Ratios

Under the Guidance, credit users may not apply the full value of the credits they purchased for load reduction. Instead, the credits must be reduced by a "trade ratio" to account for a variety of factors. The final trade ratio for trades involving credits generated by a nonpoint source can never be less than 1.2:1 (credits generated: usable credits), and for trades involving credits generated by a point source the trade ratio can never be less than 1.1:1. The calculation of this ratio is spelled out in the Guidance and includes consideration of a variety of subfactors that measure the distance between the user and generator, their relative positions on the water body, general uncertainty, and other variables.

Implementing Trades in Permits

After a trade occurs, both the credit user's WPDES permit and (if one is required) generator's WPDES permit must both be modified to include terms and conditions related to the trade. DNR expects that the process of doing so will take five years or more following a permittee's decision to pursue trading. During this period, the credit user must submit a variety of documents to DNR, including a Notice of Intent to begin trading; a binding trade agreement between the credit purchaser and the credit generator; a water quality trading plan and checklist; and, in the case of trades with nonpoint sources, a management practice registration. DNR has already created draft versions of most of these forms and included them with the Guidance.

DNR will include a variety of conditions in the credit user's permit to memorialize the information submitted to the DNR in the notice of intent, water quality trading plan, and trade agreement. DNR will also require that permit limits must be complied with whether trading occurs or not − in other words, that the credit user bears the risk of the credit generator's potential failure. Moreover, in the case of trades with nonpoint sources, DNR will require the permittee to inspect the nonpoint source at least annually, and submit an annual report to DNR that confirms the installation of the management practice and its appropriate operation and maintenance. DNR will also include an explanation of any trades the permit incorporates in the Fact Sheet and Public Notice for the permit.

Both of the new guidance documents are available online here. DNR has set a deadline of April 26, 2013 for public comments on the Guidance.

For more information, please contact Tom McElligott at (414) 277-5531 / [email protected], Dave Strifling at (414) 277-5527 / [email protected] or your Quarles & Brady attorney.

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