Compensatory Mitigation for Losses of Aquatic Resources

Federal RegisterApr 10, 2008

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DEPARTMENT OF DEFENSE

Department of the Army, Corps of Engineers

33 CFR Parts 325 and 332

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 230

[EPA-HQ-OW-2006-0020; FRL-8545-4]

RIN 0710-AA55

Compensatory Mitigation for Losses of Aquatic Resources

AGENCIES:

U.S. Army Corps of Engineers, DoD; and Environmental Protection Agency.

ACTION:

Final rule.

SUMMARY:

The U.S. Army Corps of Engineers (the Corps) and the Environmental Protection Agency (EPA) are issuing regulations governing compensatory mitigation for activities authorized by permits issued by the Department of the Army. The regulations establish performance standards and criteria for the use of permittee-responsible compensatory mitigation, mitigation banks, and in-lieu programs to improve the quality and success of compensatory mitigation projects for activities authorized by Department of the Army permits.

This rule improves the planning, implementation and management of compensatory mitigation projects by emphasizing a watershed approach in selecting compensatory mitigation project locations, requiring measurable, enforceable ecological performance standards and regular monitoring for all types of compensation and specifying the components of a complete compensatory mitigation plan, including assurances of long-term protection of compensation sites, financial assurances, and identification of the parties responsible for specific project tasks.

This rule applies equivalent standards to permittee-responsible compensatory mitigation, mitigation banks and in-lieu fee mitigation to the maximum extent practicable. Since a mitigation bank must have an approved mitigation plan and other assurances in place before any of its credits can be used to offset permitted impacts, this rule establishes a preference for the use of mitigation bank credits, which reduces some of the risks and uncertainties associated with compensatory mitigation. This rule also significantly revises the requirements for in-lieu fee programs to address concerns regarding their past performance and equivalency with the standards for mitigation banks and permittee-responsible compensatory mitigation.

DATES:

The effective date is June 9, 2008.

ADDRESSES:

Headquarters, U.S. Army Corps of Engineers, Operations and Regulatory Community of Practice, 441 G Street, NW., Washington, DC 20314-1000. Headquarters, U.S. Environmental Protection Agency, Wetlands Division, Mail code 4502T, 1200 Pennsylvania Ave, NW., Washington, DC 20460.

The Corps and EPA have established a docket for this action under Docket ID No. EPA-HQ-OW-2006-0020. All documents in the docket are listed on the

http://www.regulations.gov

web site. Although listed in the index, some information is not publicly available, e.g., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically through

http://www.regulations.gov

or in hard copy at the Water Docket, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW., Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744, and the telephone number for the Water Docket is (202) 566-2426.

FOR FURTHER INFORMATION CONTACT:

Mr. David Olson at 202-761-4922 or by e-mail at

david.b.olson@usace.army.mil,

or Mr. Palmer Hough at 202-566-1374 or by e-mail at

hough.palmer@epa.gov.

Additional information can also be found at the Corps Headquarters Regulatory Program webpage at:

http://www.usace.army.mil/cw/cecwo/reg/index.html

or the EPA compensatory mitigation webpage at:

http://www.epa.gov/wetlandsmitigation.

SUPPLEMENTARY INFORMATION:

I. Background

II. General Comments and Responses

A. Overview

B. Most Frequently Raised Issues

1. Section 404(b)(1) Guidelines

2. Compensatory Mitigation Standards for Streams

3. Discretionary Language

4. Watershed Approach

5. In-Lieu Fee Programs

C. Other General Comments

III. In-Lieu Fee Programs

IV. Compliance With Section 314 of the NDAA

V. Organization of the Final Rule

VI. Discussion of Specific Sections of the Final Rule

VII. Administrative Requirements

I. Background

Compensatory mitigation involves actions taken to offset unavoidable adverse impacts to wetlands, streams and other aquatic resources authorized by Clean Water Act section 404 permits and other Department of the Army (DA) permits. As such, compensatory mitigation is a critical tool in helping the federal government to meet the longstanding national goal of “no net loss” of wetland acreage and function. For impacts authorized under section 404, compensatory mitigation is not considered until after all appropriate and practicable steps have been taken to first avoid and then minimize adverse impacts to the aquatic ecosystem pursuant to 40 CFR part 230 (i.e., the CWA Section 404(b)(1) Guidelines).

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. There are three mechanisms for providing compensatory mitigation:

permittee-responsible compensatory mitigation, mitigation banks

and

in-lieu fee mitigation.

Permittee-responsible mitigation is the most traditional form of compensation and continues to represent the majority of compensation acreage provided each year. As its name implies, the permittee retains responsibility for ensuring that required compensation activities are completed and successful. Permittee-responsible mitigation can be located at or adjacent to the impact site (i.e., on-site compensatory mitigation) or at another location generally within the same watershed as the impact site (i.e., off-site compensatory mitigation).

Mitigation banks and in-lieu fee mitigation both involve off-site compensation activities generally conducted by a third party, a mitigation bank sponsor or in-lieu fee program sponsor. When a permittee's compensatory mitigation requirements are satisfied by a mitigation bank or in-lieu fee program, responsibility for ensuring that required compensation is completed and successful shifts from the permittee to the bank or in-lieu fee sponsor. Mitigation banks and in-lieu fee programs both conduct consolidated aquatic resource restoration, enhancement, establishment and preservation projects; however, under

current practice, there are several important differences between in-lieu fee programs and mitigation banks.

First, in-lieu fee programs are generally administered by state governments, local governments, or non-profit non-governmental organizations while mitigation banks are usually (though not always) operated for profit by private entities. Second, in-lieu fee programs rely on fees collected from permittees to initiate compensatory mitigation projects while mitigation banks usually rely on private investment for initial financing. Most importantly, mitigation banks must achieve certain milestones, including site selection, plan approval, and financial assurances, before they can sell credits, and generally sell a majority of their credits only after the physical development of compensation sites has begun. In contrast, in-lieu fee programs generally initiate compensatory mitigation projects only after collecting fees, and there has often been a substantial time lag between permitted impacts and implementation of compensatory mitigation projects. Additionally, in-lieu fee programs have not generally been required to provide the same financial assurances as mitigation banks. For all of these reasons, there is greater risk and uncertainty associated with in-lieu fee programs regarding the implementation of the compensatory mitigation project and its adequacy to compensate for lost functions and services.

As noted in the preamble for the March 2006 proposal, the majority of the existing guidance regarding compensatory mitigation and the use of these three mechanisms for providing compensation exists in a number of national guidance documents released by the Corps and EPA over the past seventeen years (sometimes in association with other federal agencies such as the U.S. Fish and Wildlife Service and the National Marine Fisheries Service). Since these guidance documents were developed at different times, and in different regulatory contexts, concerns have been raised regarding the consistent, predictable and equitable interpretation and application of these guidance documents. In November 2003, Congress called for the development of regulatory standards and criteria for the use of compensatory mitigation in the section 404 program.

Section 314 of the National Defense Authorization Act (NDAA) for Fiscal Year 2004 (section 314) requires the Secretary of the Army, acting through the Chief of Engineers, to issue regulations “establishing performance standards and criteria for the use, consistent with section 404 of the Federal Water Pollution Control Act (33 U.S.C. 1344, also known as the Clean Water Act), of on-site, off-site, and in-lieu fee mitigation and mitigation banking as compensation for lost wetlands functions in permits issued by the Secretary of the Army under such section.” This provision also requires that those regulations, to the maximum extent practicable, “maximize available credits and opportunities for mitigation, provide flexibility for regional variations in wetland conditions, functions and values, and apply equivalent standards and criteria to each type of compensatory mitigation.”

In response to this directive, the U.S. Army Corps of Engineers and the U.S. Environmental Protection Agency (the agencies) published a proposed rule in Part II of the March 28, 2006, issue of the

Federal Register

(71 FR 15520), with a 60-day public comment period. As a result of several requests, the Corps and EPA extended the comment period by an additional 30 days. The comment period ended on June 30, 2006.

In the preamble to the March 2006 proposal, the agencies noted their decision, in light of their respective statutory roles in the section 404 program, to pursue this rulemaking as a joint effort between the Corps and EPA. The preamble also discussed the Corps's decision to develop these standards for all DA permits which could potentially require compensatory mitigation. Thus, in addition to Clean Water Act section 404 permits, these standards also apply to DA permits issued under sections 9 and 10 of the Rivers and Harbors Act of 1899. Finally, the preamble also discussed why these standards should apply to compensatory mitigation for impacts to streams and other open waters in addition to wetlands.

As discussed in the preamble to the March 2006 proposal, in 2001 the National Research Council (NRC) released a comprehensive evaluation of the effectiveness of wetlands compensatory mitigation required under section 404 of the Clean Water Act. This report noted concerns with some past wetland compensatory mitigation and provided recommendations for the federal agencies, states, and other parties to improve compensatory mitigation. This report was an important resource in the development of today's rule.

II. General Comments and Responses

In response to the proposed rule, approximately 12,000 comments were received, including about 850 distinct comments and 11,150 additional substantially identical e-mails and letters. Comments were provided by regulated entities, the scientific community, non-governmental organizations, mitigation bankers, in-lieu fee program sponsors, state and local government agencies, and other members of the public.

A. Overview

Most of the distinct commenters said that this rule is a necessary addition to regulations for implementing the Corps Regulatory Program and some expressed appreciation that the rule incorporates stakeholder feedback and lessons learned. Many commenters expressed general support for the proposed rule because: (1) It will promote predictability and consistency in compensatory mitigation; (2) it will further effective partnerships with private sector mitigation banks; (3) it responds to concerns raised by those participating in the development of Mitigation Action Plan products; (4) many provisions of the rule are consistent with the 2005 Millennium Ecosystem Assessment; (5) it brings greater technical clarity to the process of determining appropriate mitigation; (6) it provides greater focus on accountability through measurable and enforceable ecological performance standards, monitoring, and management; (7) it fosters incorporation of aquatic ecosystem science into compensatory mitigation plans; and (8) it increases public participation in the compensatory mitigation process. Some of these commenters also suggested modifications to the proposed rule, which are discussed in more detail below.

Some commenters, including most of the form letters, opposed the proposed rule or suggested extensive revisions to increase the protection of aquatic resources. The issues most frequently raised, considering both the individual and form letters, were: (1) Interaction of the proposed rule with the existing requirements of the Section 404 (b)(1) Guidelines, (2) compensatory mitigation standards for streams, (3) the amount of discretionary language in the proposed rule, (4) use of the watershed approach for identifying mitigation projects, and (5) the proposed phase-out of in-lieu fee mitigation. These five major issues and our responses to them are discussed below in part II.B. Many other general issues were raised as well, and a number of these are discussed in part II.C. Additional detail, and responses to comments on specific rule provisions, are provided in part VI.

B. Most Frequently Raised Issues

1. Section 404(b)(1) Guidelines

Many commenters stated that, consistent with existing regulations and policy, the rule should emphasize impact avoidance and that compensatory mitigation should not be considered until all efforts have been made to first avoid and then minimize impacts to streams and wetlands. Some commenters also asserted that the proposal would expand the district engineer's 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. Some further asserted that the proposal could be construed to allow permits to be issued even if they cause or contribute to significant degradation of aquatic resources, an action prohibited by the Section 404(b)(1) Guidelines (40 CFR 230.10(c)).

The agencies agree that impacts must be first avoided and then minimized, and that compensatory mitigation should be used only for impacts that cannot be avoided or minimized. The agencies disagree that the rule will weaken or undermine the 404(b)(1) Guidelines, which are codified in regulation and remain unchanged. These requirements are essential to meeting the overall objective of the Clean Water Act to restore and maintain the chemical, physical and biological integrity of the nation's waters. We have clarified that none of them have changed by adding a new paragraph at 33 CFR 332.1(c)(1) [40 CFR 230.91(c)(1)] stating that nothing in these new rules affects the requirement that all DA permits subject to section 404 of the Clean Water Act comply with applicable provisions of the Section 404(b)(1) Guidelines. Thus, this rule does not expand the district engineer's 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. Paragraph (c)(2) of this section has also been modified to clarify that individual section 404 permits will be issued only if compliance with all applicable provisions of the 404(b)(1) Guidelines has been achieved including those which require the permit applicant to take all appropriate and practicable steps to avoid and minimize adverse impacts to the aquatic ecosystem. For general permits, compliance with the Section 404(b)(1) Guidelines is clarified at 40 CFR 230.7.

In addition, a new paragraph at 33 CFR 332.1(f)(2) [40 CFR 230.91(f)(2)] has been added to the final rule which clarifies which provisions of the 1990 Memorandum of Agreement (MOA) between the Department of the Army and the Environmental Protection Agency on the Determination of Mitigation Under the Clean Water Act Section 404(b)(1) Guidelines have been superseded by this rule and which provisions remain in effect. Those that remain in effect include the provisions related to impact avoidance and minimization, evaluation of the least environmentally damaging practicable alternatives, and circumstances where the impacts of the proposed project are so significant that discharges may not be permitted regardless of the compensatory mitigation proposed.

Today's rule is focused on the compensation component of the mitigation sequence. Its purpose is to develop a comprehensive set of standards for compensatory mitigation pursuant to section 314 of the NDAA. Fulfilling this directive necessitates a detailed treatment of all critical aspects of compensatory mitigation. This does not affect compliance with other parts of our regulations, including the 404(b)(1) Guidelines. Additional discussion of this issue can be found in part VI of the preamble.

2. Compensatory Mitigation Standards for Streams

Many commenters stated that compensatory mitigation for stream impacts should not be addressed in this rule. Some stated that there is no scientific evidence that streams can be established (i.e., stream creation) or that other approaches taken in this rule such as stream restoration can compensate for stream losses. They suggested that the agencies should conduct further research on stream mitigation and demonstrate its success before including standards for stream mitigation in the rule. Some also noted that the statutory language in the NDAA refers only to wetlands.

On the other hand, other commenters expressed support for applying the rule to streams and other open waters. These commenters believe that physical alteration of aquatic resources should be mitigated to the extent practicable to support the objectives of the Clean Water Act and that because section 404 of the Clean Water Act authorizes discharges of dredged or fill material into lakes, streams, and wetlands, mitigation for those impacts should be required (and addressed in this rule) as well.

As noted in the preamble to the March 2006 proposal, we believe this rule should apply to compensatory mitigation for all types of aquatic resources that can be impacted by activities authorized by DA permits, including streams and other open waters. We recognize that the scientific literature regarding the issue of stream establishment and re-establishment is limited and that some past projects have had limited success (Bernhardt and others 2007).

Accordingly, we have added a new paragraph at 33 CFR 332.3(e)(3) [40 CFR 230.93(e)(3)] that specifically notes that there are some aquatic resources types that are difficult to replace and streams are included among these. It emphasizes the need to avoid and minimize impacts to these ‘difficult-to-replace' resources and requires that any compensation be provided by in-kind preservation, rehabilitation, or enhancement to the extent practicable. This language is intended to discourage stream establishment and re-establishment projects while still requiring compensation for unavoidable stream impacts in the form of stream corridor restoration (via rehabilitation), enhancement, and preservation projects, where practicable. District engineers will evaluate compensatory mitigation proposals for streams, and assess the likelihood of success before deciding whether the proposed compensation should be required.

Bernhardt, E.S., E.B. Sudduth, M.A. Palmer, J.D. Allan, J.L. Meyer, G. Alexander, J. Follastad-Shah, B. Hassett, R. Jenkinson, R. Lave, J. Rumps, and L. Pagano. 2007. Restoring rivers one reach at a time: Results from a survey of U.S. river restoration practitioners. Restoration Ecology 15:482-493.

We recognize 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. As noted by Bernhardt and others (2005),

“stream and river restoration can lead to species recovery, improved inland and coastal water quality, and new areas for wildlife habitat and recreational activities.” There is a growing body of research that documents successful outcomes for stream restoration projects, examines stream restoration techniques and provides recommendations for effective stream and river restoration.

Successful outcomes for stream restoration with respect to water quality, habitat creation, species recovery and recreation, have been documented by Baron and others (2002);

Buijse and others (2002);

Muotka and Pekka (2002);

Nakamura and Kunihiko (2006);

and Petersen (1999).

Criteria and recommendations for ecologically successful stream restoration have been addressed by Hassett and others (2005)

Kauffman and others (1997)

Lavendel (2002)

Palmer and others (2005)

and Whalen and others (2002).

Assessment of the physical and biological effects of restoration activities has been performed by Reeves and others (1997);

Slaney and others (1994)

and Solazzi and others (2000).

The applicability of specific tools to measure stream restoration success has been investigated by Paller and others (2000)

and Lester and others (2006).

Somerville and Pruitt (2004)

reviewed existing stream assessment and mitigation protocols and Roni and others (2002)

reviewed stream restoration techniques. Shields and others (2003)

discussed the unique challenges associated with stream restoration research.

Bernhardt, E.S., M.A. Palmer, J.D. Allan, G. Alexander, K. Barnas, S. Brooks, J. Carr, S. Clayton, C. Dahm, J. Follstad-Shah, D. Galat, S. Gloss, P. Goodwin, D. Hart, B. Hassett, R. Jenkinson, S. Katz, G.M. Kondolf, P.S. Lake, R. Lave, J.L. Meyer, T.K. O'Donnell, L. Pagano, B. Powell, and E. Sudduth. 2005. Synthesizing U.S. river restoration efforts. Science 308: 636-637.

Baron, J.S. et al. 2002. Meeting ecological and societal needs for freshwater. Ecological Applications 12: 1247-1260.

Buijse, A.D. et al. 2002. Restoration strategies for river floodplains along the large lowland rivers in Europe. Freshwater Biology 47: 889-907.

Muotka, T. and P. Laasonen. 2002. Ecosystem recovery in restored headwater streams: The role of enhanced leaf retention. Journal of Applied Ecology 39: 145-156.

Nakamura, K. and K. Amano. 2006. River and wetland restoration: Lessons from Japan. Bioscience 56(5): 419-129.

Petersen, M.M. 1999. A natural approach to watershed planning, restoration and management. Water Science and Technology 39(12): 347-352.

Hassett, B. et al. 2005. Restoring watersheds project by project: Trends in Chesapeake Bay tributary restoration. Frontiers in Ecology and the Environment 3(5): 259-267.

Kauffman, J. Boone, R.L. Beschta, N.O., and D. Lytjen. 1997. An ecological perspective of riparian and stream restoration in the western United States. Fisheries 22(5): 12-24.

Lavendel, B. 2002. The business of ecological restoration. Ecological Restoration 20: 173-178.

Palmer, M.A. et al. 2005. Standards for ecologically successful river restoration. Journal of Applied Ecology 42: 207-217.

Whalen, P.J., L.A. Toth, J.W. Koebel, and P.K. Strayer. 2002. Kissimmee River Restoration: A case study. Water Science and Technology 45(11): 55-62.

Reeves, G.H., D.B. Hohler, B.E. Hansen, F.H. Everest, J.R. Sedell, T.L. Hickman, and D. Shively. 1997. Fish habitat restoration in the Pacific Northwest: Fish Creek of Oregon. Pages 335-359 in J.E. Williams, C.A. Wood, and M.P. Dombeck, editors. Watershed Restoration: Principles and Practices. American Fisheries Society, Bethesda, Maryland.

Slaney, P.A., B.O. Rublee, C.J. Perrin, and H. Goldberg. 1994. Debris structure placements and whole-river fertilization for salmonoids in a large regulated stream in British Columbia. Bulletin of Marine Science 55: 1160-1180.

Solazzi, M.F., T.E. Nickelson, S.L. Johnson, and J.D. Rodgers. 2000. Effects of increasing winter rearing habitat on abundance of salmonoids in two coastal Oregon streams. Canadian Journal of Fisheries and Aquatic Sciences. 57: 906-914

Paller, M.H., M.J.M. Reichert, J.M. Dean, and J.C. Seigle. 2000. Use of fish community data to evaluate restoration success of a riparian stream. Ecological Engineering 15: 171-187.

Lester, R., W. Wright, and M. Jones-Lennon. 2006. Determining Target Loads of Large and Small Wood for Stream Rehabilitation in High-Rainfall Agricultural Regions of Victoria, Australia. Ecological Engineering 28: 71-78.

Somerville, D.E. and B.A. Pruitt. 2004. Physical stream assessment: A review of selected protocols for use in the Clean Water Act Section 404 Program. Prepared for the U.S. Environmental Protection Agency, Office of Wetlands, Oceans, and Watersheds, Wetlands Division (Order No. 3W-0503-NATX). Washington, DC, 213 pp.

Roni, P. et al. 2002. A review of stream restoration techniques and a hierarchical strategy for prioritizing restoration in Pacific Northwest watersheds. North American Journal of Fisheries Management 22: 1-20.

Shields, F. Douglas, C.M. Cooper Jr., Scott S. Knight and M.T. Moore. 2003. Stream corridor restoration research: A long and winding road. Ecological Engineering 20: 441-454.

Under this final rule, mitigation plans for all wetland compensatory mitigation projects must contain the following twelve elements: Objectives; site selection criteria; site protection instruments (e.g., conservation easements); baseline information (for impact and compensation sites); credit determination methodology; mitigation work plan; maintenance plan; ecological performance standards; monitoring requirements; long-term management plan; adaptive management plan; and financial assurances (see 33 CFR 332.4(c) [40 CFR 230.94(c)]). Existing literature regarding stream restoration, as well as our experience with past stream mitigation projects supports our decision to require mitigation plans for stream compensatory mitigation projects to contain the same twelve fundamental elements. Some commenters noted that aspects of the mitigation work plan will differ between stream and wetland mitigation projects. Today's rule highlights some of these potential differences by noting additional elements that may be necessary for stream mitigation project work plans. These elements include planform geometry, channel form, watershed size, design discharge, and riparian area plantings and can be found at 33 CFR 332.4(c)(7) [40 CFR 230.94(c)(7)].

Another important modification was made to the section of the rule describing ecological performance standards. Like the proposal, today's rule requires that every mitigation plan include objective and verifiable ecological performance standards to assess whether the compensatory mitigation project is achieving its objectives. Neither the proposal nor today's rule prescribe the individual variables or metrics that should be used to evaluate each aquatic resource type potentially restored, enhanced, established, or preserved in compensatory mitigation projects. Given the extremely large variation among the aquatic resource types found across the country, and the constant advances in the science of aquatic ecosystem restoration, overly prescriptive requirements would be impractical. However, in recognition of the need to strengthen this provision and to ensure that compensatory mitigation project performance standards reflect the latest advances in the science of stream and wetland restoration, we have modified the final rule at 33 CFR 332.5(b) [40 CFR 230.95(b)] to include a requirement that ecological performance standards be based on the best available science that can be measured or assessed in a practicable manner.

As stream scientists have noted, the proportion of stream restoration projects that have been monitored for performance is low (Bernhardt and others 2005).

Today's rule, however, requires monitoring of mitigation projects for a minimum of five years with longer monitoring periods required for aquatic resources with slow development rates. This monitoring requirement will provide new data on stream restoration performance that will serve to increase knowledge and improve stream mitigation over time. (See 33 CFR 332.6 [40 CFR 230.96]). Also, in response to public comment, we removed a provision from 33 CFR 332.6(a) [40 CFR 230.96(a)] that would have allowed the district engineer to waive all monitoring requirements if they were determined not to be practicable.

While section 314 of the NDAA refers only to the development of compensatory mitigation standards for wetlands, we believe that in order to improve the performance and results of all types of compensatory mitigation this rule should include compensatory mitigation standards for all types of aquatic resources that can be impacted by activities authorized by DA permits, including streams and other open waters. Section 404(b) of the Clean Water Act authorizes EPA to develop

the substantive environmental criteria used by the Corps in making section 404 permit decisions including those associated with all forms of compensatory mitigation. Also, section 501(a) of the Clean Water Act provides EPA with broad authority to conduct any rulemaking necessary to carry out its functions under the Clean Water Act.

While many stream restoration and rehabilitation activities have been conducted across the country, we recognize that not all of them have been successful. Much of the literature suggests that this is due to a lack of the kinds of comprehensive standards for project planning, implementation and management included in this rule. Accordingly, we determined that including stream mitigation in this rule would improve current standards and practices for compensatory mitigation of streams. Today's rule, with the addition of the above referenced modifications, includes the necessary provisions to appropriately treat stream mitigation. Additional discussion of this issue can be found in part VI of the preamble.

3. Discretionary Language

Many commenters expressed concern that the proposal leaves too much discretion to district engineers. Some commenters objected to use of “may”, “should”, and “can” in some rule provisions, and/or to use of the qualifier “appropriate and practicable” for some requirements. Commenters were concerned that such discretion might lead to authorization of inappropriate compensatory mitigation projects, inadequate enforcement and oversight, or excessive litigation.

In contrast, other commenters suggested even greater flexibility, to allow cost-effective compensatory mitigation based on case-specific circumstances.

In response to these comments, we have carefully evaluated all of the discretionary language in the proposed rule, and replaced it with binding and/or more clearly articulated requirements where appropriate. Such modifications were made to a number of key provisions in the rule including those related to mitigation type, the amount of mitigation necessary to offset permitted losses, financial assurances, credit releases, the use of preservation, ecological performance standards, and long-term site protection and management. Also, a number of requirements for in-lieu fee programs have been added to the rule, as part of the decision not to phase them out as originally proposed. (Note that the preamble to the proposed rule included an extensive discussion of and request for comment on alternatives to the proposed phase-out. The new requirements for in-lieu fee programs reflect many of the comments received.) These specific modifications and additions are discussed in more detail in part VI of the preamble.

With these modifications, we believe that today's rule achieves a proper balance of binding requirements and discretion. The rule will help improve the quality and success of compensatory mitigation, while providing flexibility necessary to ensure that compensatory mitigation requirements for a particular DA permit appropriately offset authorized impacts. Some discretionary language is necessary for this rule because resource types, project impacts, and compensatory mitigation practices vary widely across both projects and regions of the country. District engineers need to take such variations into account, including variations in state and local requirements that affect the implementation and long-term management of compensatory mitigation projects. For example, laws and regulations governing real estate instrument and financial assurances vary from state to state. In addition, practices for restoring, establishing, and enhancing aquatic resources vary by resource type and by region. For these reasons, discretionary language is used where appropriate to promote both regulatory efficiency and project success, and to ensure that required mitigation is practicable.

4. Watershed Approach

Many comments addressed the watershed approach included in the proposal. A majority of commenters expressed support for the use of a watershed approach to compensatory mitigation. They noted that use of a watershed approach would improve the sustainability of compensatory mitigation projects and ensure that they are better integrated with the needs of the watershed. However, some commenters believed that additional specificity in the requirements relating to the use of a watershed approach was needed. For example, commenters requested clarification regarding use of the watershed approach in the absence of a watershed plan, parameters needed to implement a watershed approach, and the definition of the terms “watershed,” “watershed plan” and “watershed approach.”

Other commenters opposed the watershed approach described in the proposed rule. Some were particularly concerned about use of the watershed approach in the absence of a detailed watershed plan, arguing that this could lead to inappropriate compensatory mitigation decisions and the cumulative loss of wetland functions. Others were more concerned about the analytical burden on permit applicants of developing watershed plans or justifying mitigation projects in terms of wider watershed considerations. Still others thought the concept was too ambiguous to be included in a regulation.

The agencies continue to believe that the watershed approach provides the appropriate framework for making compensatory mitigation decisions, but have made a number of changes to address specific comments. The primary objective of the watershed approach included in today's rule is to maintain and improve the quantity and quality of wetlands and other aquatic resources in watersheds through strategic selection of compensatory mitigation project sites. The watershed approach accomplishes this objective by expanding the informational and analytic basis of mitigation project site selection decisions and ensuring that both authorized impacts and mitigation are considered on a watershed scale rather than only project by project. This requires a degree of flexibility so that district engineers can authorize mitigation projects that most effectively address the case-specific circumstances and needs of the watershed, while remaining practicable for the permittee. In response to the concern about additional burden on permittees, the agencies recognize that the level of data and analysis appropriate for implementing the watershed approach must be commensurate with the scale of the project, and that there will be situations, particularly for projects with small impacts, where it would not be cost-effective to utilize a watershed approach. For this reason, the regulations at § 332.3(c)(1) [§ 230.93(c)(1)], state that the watershed approach is to be used to the extent appropriate and practicable, and the regulations at § 332.3(c)(3)(iii) [§ 230.93(c)(3)(iii)] state that the level of information and analysis must be commensurate with the scope and scale of the authorized impacts and functions lost.

We recognize that there are many different types of watershed plans that have been developed for purposes other than aquatic resource restoration, establishment, enhancement, and/or preservation activities and that such plans may be of limited use in making compensatory mitigation decisions. For example, some watershed plans are conceived to guide development activities or the placement of storm

water infrastructure. Therefore, we have modified § 332.3(c)(1) [§ 230.93(c)(1)] to state that the district engineer will determine whether a given watershed plan is appropriate for use in the watershed approach for compensatory mitigation.

We further recognize that in many areas, watershed plans appropriate for use in planning compensatory mitigation activities have not been developed. Therefore, consistent with the 2001 NRC Report, the watershed approach described in this final rule does not require a formal watershed plan. Although it would always be preferable to have an appropriate watershed plan, we believe that implementing a watershed approach to the degree practicable, even without a watershed plan, can improve compensatory mitigation site selection and project implementation. For example, the use of appropriately sited mitigation banks can support a watershed approach without using watershed plans. In the absence of an appropriate watershed plan, the watershed approach should be based on a structured consideration of watershed needs and how wetlands and other types of aquatic resources in specific locations will address those needs. To implement this approach, district engineers will utilize the considerations specified in § 332.3(c)(2) [§ 230.93(c)(2)] and available information on watershed conditions and needs, as described in § 332.3(c)(3) [§ 230.93(c)(3)].

In response to public input, we have revised the definition of “watershed plan” to clarify the kinds of plans appropriate for use in making compensation decisions. We have also added definitions for the terms “watershed” and “watershed approach” at § 332.2 [§ 230.92]. The appropriate watershed scale to use for the watershed approach will vary by geographic region, as well as by the particular aquatic resources under consideration. Since using a watershed approach is not appropriate in areas without watershed boundaries, such as marine waters, we have also added a provision (§ 332.3(c)(2)(v) [§ 230.93(c)(2)(v)]) to clarify that other types of spatial scales may be more appropriate in those areas. To enhance the use of the watershed approach, we have added a sentence to § 332.3(c)(2)(iv) [§ 230.93(c)(2)(iv)] stating that the identification and prioritization of resource needs should be as specific as possible. We have also added a provision, stating that a watershed approach may include on-site compensatory mitigation, off-site compensatory mitigation, or a combination of on-site and off-site compensatory mitigation (see § 332.3(c)(2)(iii) [§ 230.93(c)(2)(iii)]).

We have revised § 332.3(c)(3) [§ 230.93(c)(3)] to clarify that district engineers will use available information for the watershed approach. That available information will address watershed conditions and needs and include potential and/or priority sites for compensatory mitigation projects. We have also indicated potential sources of appropriate information, such as wetland maps, soil surveys, aerial photographs, local ecological reports, etc. Public input on the watershed approach and our response to this input including the above mentioned modifications are discussed in more detail in part VI of the preamble.

5. In-Lieu Fee Programs

Many commenters, including many state officials, opposed the proposed phase-out of in-lieu programs. These commenters indicated that in certain areas (especially rural and coastal regions, the West, and Alaska) there are few mitigation banks and little potential for their development, and that permittee-responsible compensatory mitigation is often impractical. In-lieu fee programs are therefore the best (or only) option for compensatory mitigation in these areas. Some commenters also argued that in-lieu fee programs provide important benefits that other types of mitigation do not, such as a more thorough consideration of the needs of a watershed and the most appropriate locations and mitigation types to sustain and enhance its long-term health. Some commenters representing in-lieu fee programs stated that if they were held to all of the same standards as mitigation banks, particularly the requirement to secure project sites before selling any credits, they would have to cease operation and these benefits would be lost.

Many of these commenters also acknowledged problems in the current administration and performance of in-lieu fee mitigation, but stated that these problems were due to existing requirements and policies (or the lack thereof) rather than the in-lieu fee concept itself. They suggested that instead of phasing out in-lieu fee programs, the final rule should include standards that address these problems and ensure that in-lieu fee programs do in fact deliver mitigation that compensates for the impacts associated with the credits they sell. Commenters noted that the NDAA does not require that these standards be exactly the same as those for mitigation banks but rather “equivalent” to the maximum extent practicable. Some standards for in-lieu fee programs suggested by commenters included: Limiting the number of credits that in-lieu fee programs can sell before they have secured sites, limiting the types of organizations that can be in-lieu fee sponsors, and establishing financial accounting standards to improve their accountability for credit fulfillment. A number of commenters acknowledged that even with significant improvements to in-lieu fee mitigation, mitigation banks would be more likely to minimize project uncertainties and temporal losses of aquatic resource functions. They suggested that the final rule should therefore stipulate that where the service areas of an in-lieu fee program and a mitigation bank overlap, the mitigation bank should be the preferred credit provider.

Other commenters supported the phase-out of in-lieu fee programs as proposed. These commenters pointed out shortfalls associated with current administration of in-lieu fee programs noting, for example, that prices for in-lieu fee credits are often too low and fail to cover all of the costs necessary to deliver the promised mitigation, including expenses for program administration, long-term maintenance of projects, and corrective action. This may result in undercutting of mitigation bank credit prices, since banks, as commercial ventures, must charge prices based on the full cost of producing compensation credits or go out of business. Furthermore, in-lieu fee programs often require fees from multiple permitted projects before they can initiate compensation projects, resulting in substantial delays between permitted impacts and compensation. Several commenters further stated that it was not fair for in-lieu fee programs to be allowed to continue to operate with lower or looser standards than mitigation banks and permittee-responsible mitigation. Commenters also noted that because credit release schedules for mitigation banks are tied to performance, they have a financial incentive to produce timely, successful mitigation that is lacking for in-lieu fee programs.

After carefully considering all comments received, the agencies have decided to retain in-lieu fee programs in today's rule as a separate and distinct mechanism for providing compensatory mitigation for DA permits. We believe they can fulfill an important role in providing effective mitigation in circumstances where mitigation banks and permittee-responsible mitigation are not practicable. At the same time, we have included a number of new requirements for in-lieu fee programs to improve accountability and

performance, based to a large extent on existing practice at the most successful currently-operating in-lieu programs. Specifically, we have added a requirement for a compensation planning framework at § 332.8(c) [§ 230.98(c)] which details how the in-lieu fee program will select and secure project sites and implement mitigation projects in a watershed context. The framework is essentially a watershed plan designed to support resource restoration, and must include an analysis of historic aquatic resource losses and current conditions, a description of the general amounts, types and locations of aquatic resources the program will seek to provide and a prioritization strategy for selecting and implementing compensatory mitigation activities. This type of advanced planning will ensure that in-lieu fee programs are guided by a thorough understanding of the needs, opportunities, and challenges of the areas in which they operate, which will allow them to select and design more successful projects and better estimate full project costs.

The final rule also requires that the in-lieu fee program instrument establish a cap on the number of credits that the program can sell before securing a compensatory mitigation project site and conducting aquatic resource restoration, establishment, enhancement, and/or preservation at that site. These are defined as “advance credits” (see § 332.2 [§ 230.92]) and the rules for their establishment and use are provided at § 332.8(n) [§ 230.98(n)]. The rule also limits sponsorship of in-lieu fee programs specifically to governmental or non-profit natural resource management entities (see definition of “in-lieu fee program” at § 332.2 [§ 230.92]). District engineers and Interagency Review Team (IRT) members should carefully evaluate the capabilities and demonstrated performance of these natural resource management entities prior to approving them as in-lieu fee program sponsors in order to minimize the risks associated with allowing advance credit sales.

We have added a provision at § 332.8(i) [§ 230.98(i)] requiring in-lieu fee programs to establish a program account, including criteria for the management of this account. Funds collected from permittees, including interest on these funds, may only be used for the selection, design, acquisition, implementation, and management of in-lieu fee projects, with a small percentage allowed for administrative costs.

Provisions at § 332.8(d)(6)(iv)(B)-(C) [§ 230.98(d)(6)(iv)(B)-(C)] and § 332.8(o)(5)(ii) [§ 230.98(o)(5)(ii)] were included to improve the estimation of in-lieu fee project costs and the establishment of adequate fee schedules. Today's rule ensures that the review, approval, and oversight of in-lieu fee programs is subject to the same level of interagency and public review as mitigation banks (see § 332.8(d) [§ 230.98(d)]). Similarly, today's rule requires in-lieu fee projects to develop mitigation plans that meet the same standards as those applicable to mitigation banks and permittee-responsible projects (see § 332.8(j) [§ 230.98(j)]).

Properly organized in-lieu fee programs which comply with the new requirements established by today's rule should actively support a watershed approach to compensatory mitigation, and will help advance goals for protecting and restoring aquatic resources within watersheds, especially in areas where there are no mitigation banks.

We recognize that even with these improvements to in-lieu fee programs, there will likely be less temporal loss of resources associated with mitigation provided by banks than with mitigation provided by in-lieu fee programs. We have therefore established a hierarchy in § 332.3(b) [§ 230.93(b)] for selecting the type and location of compensatory mitigation with an explicit preference for mitigation bank credits over advance credits from in-lieu fee programs when appropriate bank credits are available for use. Public input regarding in-lieu fee mitigation as well as all of these specific modifications and additions are discussed in more detail in parts III and VI of the preamble.

C. Other General Comments

Some commenters stated that the proposed rule should be revised to incorporate principles of ecological restoration and landscape ecology. Other commenters said that the proposed rule fails to recognize the dynamic nature of wetlands and provides disincentives for active management of wetland resources in ways that would benefit society. A few commenters remarked that the proposed rule does not adequately address compensatory mitigation for marine habitats or aquatic species.

We have revised the final rule to better incorporate principles of ecological restoration and landscape ecology, for example, at § 332.3(d) [§ 230.93(d)], which specifies detailed factors for the district engineer to use in determining ecological suitability for mitigation project sites. Section 404 directs the Corps to issue permits for discharges of dredge and fill material, not to promote “active management” of wetlands. To the extent that active management may provide an alternative to permitted discharges, permit applicants should consider such approaches as part of the avoidance and minimization mitigation sequencing. Also, both permitted projects and compensatory mitigation projects may require on-going active management to protect resources, and conditions for such management may be incorporated into DA permits where appropriate. Finally, management of existing wetlands may itself involve discharges requiring DA permits, and in this case permit conditions will address issues related to the management and protection of affected resources, in accordance with applicable regulations, including this rule. We disagree that the rule does not adequately address marine habitats and species. While the specific projects needed to mitigate impacts to marine resources may be different, the procedural and analytical framework established in the final rule applies equally well to freshwater and marine resources.

Several commenters said that the proposed rule did not address concerns raised in recent reports on compensatory mitigation in the Corps Regulatory Program that were issued by the Government Accountability Office (GAO). Some commenters said that the proposed rule incorporates some of GAO's recommendations, but expressed skepticism that the Corps has the resources to implement those provisions of this rule. These commenters asserted that the Corps needs to make compensatory mitigation compliance a high priority to ensure effective replacement of wetland acreage and function lost as a result of permitted activities.

One GAO report was issued in May 2001, and was entitled “Wetlands Protection: Assessments Needed to Determine Effectiveness of In-Lieu Fee Mitigation.” Another GAO report, “Wetlands Protection: Corps of Engineers Does Not Have an Effective Oversight Approach to Ensure That Compensatory Mitigation Is Occurring” was issued in September 2005. We have incorporated many of the recommendations of these GAO reports into this rule, by requiring the use of enforceable permit conditions, performance standards, and third-party agreements. In addition, this rule states that it supersedes certain agency guidance on compensatory mitigation, specifically the 1995 mitigation banking guidance, the 2000 in-lieu fee guidance, and Regulatory Guidance Letter (RGL)

02-02. That RGL provides guidance on compensatory mitigation projects for aquatic resources impacted by activities authorized by DA permits. This rule also clarifies the requirements for compensatory mitigation, as recommended by GAO. We agree that taking actions to determine compensatory mitigation compliance should be a high priority, and have provided general principles for establishing ecological performance standards and criteria. Corps districts and EPA regional offices will continue to work with other federal and state resource agencies to develop and refine specific performance standards and criteria to evaluate and ensure success of compensatory mitigation projects in their geographic areas of responsibility. These performance standards and criteria will take into account regional variations in aquatic resource characteristics, functions, and services.

A number of commenters discussed

ad hoc

mitigation, which has been defined in various reports as cash donations made by a permittee to satisfy their mitigation requirements. The majority of commenters stated that

ad hoc

mitigation should not be approved unless it meets the requirements specified in the rule. One commenter said that

ad hoc

mitigation is often unsuccessful because there is no evaluation process and no oversight for the compensatory mitigation that is to be completed, and there is no way to track the compensatory mitigation that was to occur. One commenter proposed that

ad hoc

mitigation should be allowed on a one-time basis where a compensatory mitigation opportunity and need arise concurrently, but are not of such a scale as to justify going through the review process in § 332.8 [§ 230.98]. Two of these commenters discussed

ad hoc

mitigation arrangements and stated that the Corps needs to improve record-keeping for

ad hoc

mitigation activities.

The May 2001 GAO report defines

ad hoc

mitigation as involving “mitigation payments from developers to third parties that are neither mitigation banks nor considered by the Corps to be in-lieu fee organizations.” For the purposes of this rule,

ad hoc

mitigation is considered to be a form of permittee-responsible mitigation. For a mitigation bank or in-lieu fee program to be used to provide compensatory mitigation for DA permits, and to have the responsibility for providing the required compensatory mitigation transfer from the permittee to the mitigation bank sponsor or in-lieu fee sponsor, there must be a mitigation banking or in-lieu fee program instrument approved by the district engineer in accordance with the procedures in this final rule (see § 332.8 [§ 230.98]). Any other compensatory mitigation arrangements are considered to be permittee-responsible mitigation where the permittee retains responsibility for providing the required compensatory mitigation, and this will be reflected in the terms of the DA permit. Permittee-responsible mitigation also includes any

ad hoc

payments made to governmental or non-governmental organizations that are not in accordance with the terms of an approved in-lieu fee program instrument. When a governmental or non-governmental organization accepts an

ad hoc

payment from a permittee, that organization is in essence acting as a contractor to provide the compensatory mitigation for that permittee, and the permittee retains responsibility for any long-term protection and/or management of the compensatory mitigation project.

We also recognize the importance of record-keeping for compensatory mitigation projects, and have established procedures for using permit conditions, instruments, and ledgers to track the implementation and success of those projects. The Corps will also track permitted impacts and compensatory mitigation through databases, such as the OMBIL Regulatory Module (ORM-2), which is the primary automated information system for the Corps Regulatory Program, and the Regional Internet Bank Information Tracking System (RIBITS). All 38 Corps districts are now using ORM-2, which will help standardize data collection in the Corps Regulatory Program. It will also be used to collect data to assess the performance of the Regulatory Program. RIBITS is an automated information system with an interactive Web site. It is currently designed to track the status of mitigation banks and to provide up-to-date information to mitigation bank sponsors and customers. We are also considering modifying RIBITS to track the status of in-lieu fee programs. Use of RIBITS is currently limited to several districts, but we are planning to make RIBITS the standard tool for tracking sale and production of compensatory mitigation credits by third parties.

Several commenters expressed appreciation that the agencies incorporated many of the recommendations made in the 2001 NRC Report. A few commenters acknowledged that the proposed rule prioritized the location and types of compensatory mitigation projects in accordance with the NRC's recommendations. However, they said that they disagree with the NRC's recommendations and suggested that the agencies establish a preference for on-site and in-kind mitigation in the final rule. They said that a preference for on-site and in-kind compensation would better support a “no net loss” goal for aquatic resources.

We disagree that the rule should establish a preference for on-site compensatory mitigation, because the failure rate for such projects is quite high. On-site compensatory mitigation activities, especially wetland restoration or establishment, are particularly sensitive to land use changes. Land use changes often alter local hydrology. Establishing appropriate hydrology patterns (i.e., duration and frequency) to support the desired aquatic habitat type is a key factor in successfully restoring or establishing those habitats. In many cases, there are circumstances in which on-site mitigation is neither practicable nor environmentally preferable. Under the watershed approach, it may be desirable to require some on-site mitigation measures to address water quality and quantify functions, and to require off-site mitigation to compensate for habitat functions.

We do agree that, in general, in-kind mitigation is preferable to out-of-kind mitigation because it is more likely to compensate for the functions and services lost at the impact site. The rule states that the compensatory mitigation should be of a similar type (e.g., Cowardin and/or hydrogeomorphic class) to the affected aquatic resource, unless the district engineer determines using the watershed approach described in the rule (see § 332.3(c) [§ 230.93(c)]) that out-of-kind compensatory mitigation will better serve the aquatic resource needs of the watershed. The term “in-kind” in § 332.2 [§ 230.92] is defined to include similarity in structural and functional type; therefore, the focus of the in-kind preference is on classes of aquatic resources (e.g., forested wetlands, perennial streams). However, all compensatory mitigation projects should provide a high level of functional capacity, even when compensating for degraded or low-quality resources. Replacement ratios may be used to adjust for the relative quality of impact sites and mitigation projects, where appropriate. With this rule, we are moving towards greater reliance on functional and condition assessments to quantify credits and debits, instead of surrogates such as acres and linear feet. We believe that more frequent use of such assessment methods will help improve the quality of aquatic resources in the United States.

For example, in a case where a project proponent is proposing to fill a degraded three acre wetland that provides one unit of wetland function per acre (as determined by a rigorous functional assessment method), the loss of that wetland may in some cases be offset by a compensatory mitigation project that provides fewer acres of high-functioning wetlands (as determined by the same functional assessment method). Conversely, where the impact is to a high-value resource, more than one-to-one replacement on an acreage basis may be necessary just to achieve functional equivalence between the impact and mitigation sites. Note that replacement ratios may also be greater than one-to-one for other reasons, such as to address uncertainty of success or temporal losses.

One commenter said that the Corps should be the principal agency administering the 404 wetlands regulatory program. The commenter stated that the involvement of multiple agencies in wetlands regulation only hinders the overall efforts of the Corps Regulatory Program. This commenter also stated that the Corps should build a stronger, more predictable compensatory mitigation program to both enhance environmental protection and provide a measure of certainty to both regulatory staff and permit applicants.

While we agree that the section 404 regulatory program should be as streamlined and efficient as possible, we do not agree that the involvement of other agencies necessarily hinders that efficiency. Today's rule will foster greater efficiency and predictability in the interagency process by providing clear deadlines for action on all types of compensatory mitigation, particularly banking and in-lieu fee program instruments. We note that the participation of other agencies in the section 404 permit process is required by various laws, regulations, and legally-binding agreements. For example, section 404(b) of the Clean Water Act specifically authorizes EPA to develop guidelines for the identification of disposal sites for dredged or fill material (the 404(b)(1) Guidelines), which provide substantive environmental criteria for avoidance, minimization and compensatory mitigation. The EPA is authorized by section 501(a) of the Clean Water Act to conduct any rulemaking necessary to carry out their functions under that act. As another example, the Fish and Wildlife Coordination Act and other statutes require consultation with the U.S. Fish and Wildlife Service and the National Marine Fisheries Service for activities that control or modify waterbodies.

Many commenters stated that the proposed rule is inconsistent with existing national regulations, and one commenter said that the proposed rule is inconsistent with regulations at 33 CFR 320.4(r), as well as the “Mitigation” general condition for the nationwide permits and other compensatory mitigation guidance documents that apply to the Corps Regulatory Program. This commenter also stated that the 404(b)(1) Guidelines provide no authority for requiring compensatory mitigation for unavoidable adverse impacts after all appropriate and practicable minimization has been required.

The agencies disagree with these comments. The Corps general mitigation policy at 33 CFR 320.4(r) describes types of mitigation, including avoiding, minimizing, rectifying, reducing, or compensating for resource losses. Since that provision was last promulgated in 1986, there have been policy changes that have resulted in the Corps requiring compensatory mitigation for more activities, not just those that result in significant resource losses. For example, when the nationwide permit regulations were revised in 1991, a provision was added (33 CFR 330.1(e)(3)) which stated that compensatory mitigation could be required by a district engineer to ensure that an NWP activity results in minimal adverse environmental effects. The final rule issued today also specifically states that it does not alter the regulations of 33 CFR 320.4(r), and that it supersedes certain guidance documents on compensatory mitigation. What is generally understood to be compensatory mitigation today (i.e., the restoration, establishment, enhancement, and/or preservation of aquatic resources) is in the 404(b)(1) Guidelines as an action to minimize adverse effects on populations of plants and animals (see 40 CFR 230.75(d)). Compensatory mitigation may also be required to satisfy other legal requirements, as a result of the public interest review process, or to compensate for other resource losses. As indicated in the preamble to this rule, today's rule does not affect the determination as to when compensatory mitigation is required, only the requirements for conducting such mitigation once the district engineer determines that it is necessary. As stated in the preamble to the March 28, 2006, proposed rule (71 FR 15524-15525), this rule does not change the threshold for determining when compensatory mitigation is required; instead it focuses on where and how compensatory mitigation will be provided. The threshold for determining when compensatory mitigation is required for DA permits is generally addressed through 33 CFR 320.4(r) and specifically for the nationwide permits at 33 CFR 330.1(e)(3).

A number of commenters stated that the proposed rule gives preference to certain groups. One commenter said that the proposed rule promotes the interests of non-profit organizations, government agencies, and academics, instead of restoration practitioners and entrepreneurs. One commenter remarked that wetland mitigation and market-based approaches have the potential to expand land conservation practices through private investments and to provide additional economic incentives to help retain working farms and forests. Another commenter said that a market-driven approach will help small developers and allow for increased entrepreneurship in compensatory mitigation. One commenter said that the proposed rule would damage the economic viability of wetland mitigation banking and encourage losses of wetlands in floodplains, which would exacerbate property damage caused by flooding.

Under this rule, any entity, whether a non-profit group, government agency or commercial entrepreneur, has the opportunity to develop and implement compensatory mitigation projects. We believe we have complied with the statute requiring the promulgation of this rule, by maximizing available credits while raising requirements and standards to help ensure ecological performance. When evaluating compensatory mitigation options, district engineers will consider what would be environmentally preferable to offset the authorized impacts. In many instances, the environmentally preferable compensatory mitigation will be in the form of mitigation banks or in-lieu fee programs because they usually involve consolidating compensatory mitigation projects and resources, and providing financial planning and scientific expertise. They may also reduce temporal losses of functions and reduce uncertainty over project success. We have added a provision that in-lieu fee sponsors must be governmental or non-profit organizations. We believe this is appropriate in light of the fact that only in-lieu fee programs are allowed to sell advance credits, before a site has been secured or a specific mitigation project reviewed and approved.

We disagree that the rule will adversely affect the economic viability of mitigation banks and encourage

losses of wetlands in floodplains. By further clarifying the requirements and timelines for mitigation bank approval, and by establishing a preference for mitigation bank credits we believe the final rule will in fact enhance the economic viability of mitigation banks. Since the focus of this rule is on compensatory mitigation, avoidance and minimization of impacts to wetlands located in floodplains is more appropriately addressed through the application of Subpart B of the 404(b)(1) Guidelines, compliance with Executive Order 11988 (Floodplain Management), and compliance with the floodplain management requirements of the Federal Emergency Management Agency and state and local governments.

One commenter said that the rule will slow down the permitting process for new energy projects. Three commenters stated that section 1221 of the Energy Policy Act of 2005 (Pub. L. 109-58), through section 216(h) of the Federal Power Act, requires federal permit decisions associated with transmission facilities to be made in one year, unless it is not possible under other laws. These commenters said that the one-year time frame applies to DA permits.

This final rule will not have an adverse effect on processing times for DA permits that authorize the construction of transmission facilities. The rule promotes the development of mitigation banks and in-lieu fee programs, which can be used to provide compensatory mitigation for energy projects that require DA permits. Securing credits from third-party mitigation providers can help shorten permit processing times, because there is no need to review and approve site-specific mitigation plans for permittee-responsible mitigation. In cases where appropriate third-party mitigation credits are not available, the review and approval of permittee-responsible mitigation projects should be more timely, because this rule establishes clear guidelines and requirements for those compensatory mitigation projects. This rule does not change the circumstances under which compensatory mitigation is required, so additional compensatory mitigation will not be required for energy projects.

Wetland Protection

Many commenters said that the proposed rule does not adequately protect the Nation's wetlands, does not support the goal of “no net loss” of wetlands, does not support the objective of the Clean Water Act to maintain the chemical, physical, and biological integrity of wetlands, and will result in a significant loss of wetland acreage across the country. Several commenters recommended that the final rule include provisions to make it more difficult to fill wetlands to ensure no net loss of wetland acreage and functions. However, one commenter said that although current federal regulations could be improved, those regulations are sufficient to ensure no net loss of wetlands in Florida. One commenter stated that over 33,000 acres of wetlands have been lost last year alone, and, with this much destruction, it is obvious that the agencies are not requiring enough avoidance of wetland impacts. Two commenters said that of the three goals stated in the proposed rule (i.e., to improve quality of mitigation, improve regulatory efficiency, and ensure opportunities for federal agency participation in mitigation banks), only one goal is focused on natural resource protection. These commenters also stated that regulatory efficiency should not be pursued at the expense of wetland protection.

A primary objective of the Clean Water Act is to restore and maintain the chemical, physical and biological integrity of the Nation's waters. Through its permit program, the Corps helps protect the aquatic environment by requiring project proponents to avoid and minimize regulated impacts to wetlands and other waters of the United States to the extent practicable. This rule was specifically promulgated to address compensatory mitigation. For activities that require a section 404 permit, avoidance and minimization are addressed through application of Subparts A through H of the 404(b)(1) Guidelines at 40 CFR part 230. Prior to issuing a permit, the Corps must evaluate the proposed work and its impacts on the aquatic environment and other public interest review factors, and determine whether the proposed work is in the public interest. Compensatory mitigation may be required to ensure that the proposed work is not contrary to the public interest and, if the activity involves discharges of dredged or fill material into waters of the United States, is in compliance with the 404(b)(1) Guidelines. The rule does not change or weaken existing regulatory requirements to avoid and minimize impacts to wetlands.

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.

This rule incorporates many of the recommendations of the 2001 NRC Report, as well as appropriate recommendations from other evaluations of wetland compensation, to provide measures to help improve the success of wetland compensatory mitigation projects. By improving the success of these projects, the Corps Regulatory Program will help support the Administration's goal of increasing wetland acreage and quality. We believe that the rule will both improve the quality and success of compensatory mitigation and increase predictability and efficiency in the regulatory program.

Three commenters recommended adding a provision to the rule from the 1990 mitigation Memorandum of Agreement (MOA) between the Army and EPA stating that no overall net loss of wetlands may not be achieved for each and every permit action, but the Corps would achieve this goal programmatically. One commenter noted that the “no net loss” goal for wetlands is required by statute for the Corps Civil Works Program (see 33 U.S.C. 2317(a)(1)).

That specific provision of the 1990 Mitigation MOA has not been superseded by this final rule. It is important to understand that the 1990 Mitigation MOA applies only to standard permits. It is not practicable or appropriate to require compensatory mitigation for every standard permit, or for every general permit authorization. The requirements of 33 U.S.C. 2317(a)(1) are more accurately presented as achieving an interim goal of “no overall net loss” of the nation's remaining wetlands base as measured by acreage and function, with a long-term goal of increasing the quality and quantity of the nation's wetlands. That provision of the United States Code applies to water resource development projects undertaken through Corps Civil Works program, not to activities authorized by DA permits.

Two commenters stated that developers should not be able to provide wetlands compensatory mitigation through mitigation banks or in-lieu fee programs. One commenter said that wetland buffers reduce adverse impacts of human disturbance on wetland habitats. Two commenters recommended emphasizing voluntary economic incentives and balancing economic needs with those of wetlands protection.

Under this rule, developers will be able to provide compensatory mitigation through mitigation banks, in-lieu fee

programs, or permittee-responsible mitigation. In many cases, the environmentally preferable compensatory mitigation will be provided through mitigation banks or in-lieu fee programs because they typically involve consolidating compensatory mitigation projects and resources, and providing financial planning and scientific expertise. For a particular activity requiring a DA permit, the Corps may consider any appropriate form of compensatory mitigation, as long as it complies with these regulations. We agree that wetland buffers often help ensure the long term viability of wetlands, and the rule promotes the use of such buffers. There are some federal programs that provide economic incentives to protect wetlands, but those programs have limited availability. Section 404 of the Clean Water Act is not structured to provide voluntary economic incentives for avoiding regulated activities in wetlands. Instead, it relies on a regulatory approach to wetland protection.

Aquatic Resource Functions, Services, and Values

A number of commenters discussed the concepts of “functions,” “services,” and “values” that were in the proposed rule. Two commenters suggested removing “values” and “services” from the rule. One commenter said there is disagreement on the definitions of these terms, and the rule should instead require a minimum one-to-one acreage ratio. One commenter said that functional capacity appears to represent natural wetland potential better than society-driven values and services and should be emphasized more. Another commenter said that the rule should explicitly require replacement of lost “values,” because a shift from a broad concept of “function and value” to a narrow concept of function alone ignores social services and values that are important to the public interest, such as protection from natural hazards. One commenter said that the phrase “non-use values such as biodiversity” will subject the regulatory agency and the regulated community to uncertainty and litigation as opponents who object to a project challenge the details of an impact. One commenter suggested that functions, values, and services found in a given wetland can best be measured after the wetland conditions are established using biological indices, and that a framework or methodology is needed.

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. We included definitions for all three terms in the proposed rule. After considering the comments received in response to these concepts, we have eliminated 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. Ecosystem services is a useful concept for assessing the public interest, an important consideration in the Corps Regulatory Program. Consideration of “services” provided by aquatic resources is usually qualitative, and can be accomplished through evaluations of compensatory mitigation options, including siting those projects near human populations.

Using the concept of “services” also allows us to focus on how the general population benefits from ecological functions, instead of whether potentially affected parties may or may not “value” a particular aquatic resource and the functions it provides. The term “values” is more subjective, since a particular ecosystem service may be perceived to be valuable by some individuals but not others. The term “values” can also be read to imply monetary valuation, which is difficult for most aquatic resource functions and is not generally practical for most decisions. Therefore, we believe the regulatory program is appropriately focused on protecting “functions” (the physical, chemical and biological processes that occur in aquatic resources) and “services” (the benefits to humans that result from these functions). Accordingly, we have eliminated the term “values” from the rule, including the reference to “non-use values such as biodiversity.” However, biodiversity is a potential service that some resources may provide.

The agencies have a long-standing policy of achieving no overall net loss for wetland acreage and function. Simply requiring one-to-one acreage replacement may not adequately compensate for the aquatic resource functions and services lost. Presently, there are methods that can be used by district engineers to assess aquatic resource functions or condition, such as hydrogeomorphic assessment methods and indices of biological integrity. There are efforts being undertaken to develop methods to assess ecosystem services, such as those that use indices of wetland function to reflect the services provided by wetlands.

A number of commenters expressed concern that offsite mitigation can lead to transfer of wetland ecosystem services from urban to rural areas. However, one commenter said that the rule should not be written for the purpose of preventing urban wetland values from migrating to rural areas because local jurisdictions have other means for preventing this (e.g., zoning ordinances, eminent domain). Another commenter stated that because of a shortage of suitable sites in populated areas, it may not be possible to establish ecologically viable mitigation banks in certain heavily urbanized areas. This commenter said that mitigation banks in urban areas should be allowed to generate more credit per unit of restored resource to make these sites financially feasible.

We recognize that aquatic resources in urban settings can provide important functions and services, and we believe it is important that urban areas not become devoid of aquatic resources simply because it is more difficult to successfully restore or establish aquatic habitat in developed areas, or to obtain suitable compensatory mitigation project sites. However, in certain situations self-sustaining and ecologically successful aquatic resource restoration or establishment projects may not be feasible in urban areas because of changes in land use and the resulting impacts to local surface hydrology and groundwater. In these types of situations, the rule allows compensatory mitigation for impacts to urban wetlands to be conducted in rural areas if the applicable requirements of the rule and the Section 404(b)(1) Guidelines are met. Under the watershed approach adopted in the final rule, district engineers may require compensatory mitigation at more than one site. For example, compensatory mitigation may be required on-site to offset losses of water quality and flood storage functions, while off-site compensation may be required to offset losses of habitat functions. The siting of mitigation banks is dependent upon potential mitigation bank sponsors securing land suitable for compensatory mitigation projects. Such land may not be available in urban areas at a price, and a rate of return on that investment, that is acceptable to the sponsor. Credit valuation must be based on the ecological functions and services provided by the compensatory mitigation project, not the difficulty or cost of siting and constructing it. However, where appropriate, district engineers may consider the relative

ecological value of scarce aquatic resources in urban areas (at both the impact and mitigation sites) in determining appropriate compensation ratios. While preservation may be the most appropriate form of compensatory mitigation in urban areas in some cases, we encourage district engineers to look for opportunities to restore or establish aquatic resources in appropriate areas.

Mitigation Effectiveness

Many commenters stated that compensatory mitigation projects do not effectively replace natural wetlands, because created wetlands do not support the variety of native biota found in natural ecosystems, and there is no guarantee that they will function as natural wetlands. A large number of commenters also said that the rule fails to address the fact that many aquatic systems cannot be created. The commenters stated that there is no scientific data showing that the functions of headwater streams, and wetlands such as bogs and fens, can be reproduced, and the proposed rule would weaken protections for these waters by sanctioning uncertain mitigation practices. Several commenters stated that the rule does not include major improvements suggested by the scientific community to improve wetlands compensatory mitigation.

We have carefully considered reviews and criticisms of compensatory mitigation projects, especially the 2001 NRC Report, during the development of this rule. We recognize that there are compensatory mitigation projects that do not fully succeed in replacing the functions and services of aquatic resources that are lost or altered as a result of permitted activities. In an effort to improve compensatory mitigation practices in the Corps Regulatory Program, we have incorporated recommendations made in the 2001 NRC Report and other reports. We believe that this final rule accomplishes that objective and will help increase the success and quality of aquatic resource restoration, establishment, and enhancement activities by focusing on effective site selection at a landscape and watershed scale, requiring enforceable permit conditions (including ecological performance standards), requiring monitoring of compensatory mitigation, and undertaking adaptive management to help ensure success. We recognize that some types of aquatic resources are difficult to replace, such as bogs, fens, vernal pools, and streams. In response to these comments, we have added § 332.3(e)(3) [§ 230.93(e)(3)], which emphasizes avoidance and minimization of impacts to difficult-to-replace resources, and if such avoidance and minimization is not practicable, requires that compensatory mitigation be provided through in-kind preservation, rehabilitation, or enhancement to the extent practical.

Mitigation Mechanisms

Several commenters said that the rule inappropriately treats permittee-responsible mitigation, mitigation banks, and in-lieu fee programs as though they are a single vehicle. Two commenters stated that in cases where a mitigation bank is successfully established, it should be preferred over permittee-responsible mitigation, but with the caveat that movement of aquatic resources from urban areas to rural areas should be monitored and possibly prevented. One commenter recommended that consolidated mitigation be allowed for linear facilities such as transmission lines. One commenter suggested the following clarification be included in the preamble to the final rule: “This rule is not intended to inhibit market-based opportunities for trading environmental credits beyond those required for compensatory wetland mitigation.” According to that commenter, this would allow private landowners to sell credits for environmental services gained beyond those required for compensatory mitigation for DA permits.

This rule establishes, to the extent practicable, equivalent standards for all types of mitigation, as required by section 314. The administrative and procedural requirements in the final rule vary, because there are fundamental differences among mitigation banks, in-lieu fee programs, and permittee-responsible mitigation. It is not possible to impose exactly the same requirements on these three sources of compensatory mitigation, and fulfill the other requirement of section 314, which is to “maximize available credits and opportunities for mitigation.” To maximize available credits, it is necessary to recognize the differences among the three sources, and impose equivalent standards and requirements to the extent practicable. Where it is not practicable to impose identical requirements, the rule adopts comparable alternative requirements to help ensure the ecological success of all types of compensatory mitigation. It is also important to emphasize that the rule applies equivalent

ecological

standards to all three types of compensatory mitigation; the differences are in procedures and timing of requirements. Site selection for third-party mitigation should focus on the ecological benefits that the mitigation banks or in-lieu fee projects will provide to the watershed. This may or may not result in migration of aquatic resources from urban to rural areas within that watershed.

For linear projects, such as roads and utility lines, district engineers may determine that consolidated compensatory mitigation projects provide appropriate compensation for the authorized impacts, and are environmentally preferable to requiring numerous small permittee-responsible compensatory mitigation projects along the linear project corridor. We do not believe it is necessary to explicitly state that this rule is not intended to inhibit market-based environmental credit trading, as the rule only applies to compensatory mitigation required for DA permits. The ability of private landowners to sell credits for environmental services gained beyond those required for compensatory mitigation for DA permits is more appropriately addressed through other applicable programs.

General Comments on Mitigation Banking

Many general comments were received regarding mitigation banking. Some commenters encouraged broader use of banks, many others criticized a perceived preference for mitigation banks in the proposed rule. Several commenters recommended providing greater incentives for Corps districts to process commercial mitigation bank requests. One commenter suggested that this rule include incentives to private landholders to participate in wetland mitigation banking. Many commenters said the rule inappropriately promoted the economic needs of the mitigation banking industry over the needs of watersheds, and that the preference for mitigation banks over other forms of compensatory mitigation is not justified.

We recognize that mitigation banking is an important tool for compensatory mitigation. In this final rule, we have established a preference for mitigation bank credits, since mitigation banks must have an approved mitigation plan and other assurances in place before credits can be provided to permittees (see § 332.3(b)(2) [§ 230.93(b)(2)]). Because of the requirements imposed on mitigation banks, they generally involve less risk and uncertainty than in-lieu fee programs and permittee-responsible mitigation. This preference is based on administrative criteria, not ecological criteria. To the best of our knowledge, there have been few studies by independent parties of the ecological

performance of mitigation banks. The studies that we have reviewed have shown that mitigation banks have experienced many of the same problems as permittee-responsible mitigation (see the environmental assessment completed for this rule for summaries of those studies). The ecological success of mitigation banks, in-lieu fee programs, and permittee-responsible mitigation is dependent on many of the same factors, such as selecting appropriate sites and establishing the proper hydrology. We are not aware of any independent studies on the ecological performance of in-lieu fee projects. As discussed below, in response to comments received as a result of the proposed rule, we are retaining in-lieu fee programs as another form of third-party mitigation, with robust requirements to help ensure that they provide effective compensatory mitigation.

The timelines in this rule for processing proposed mitigation banks and in-lieu fee programs will promote timely decisions on instruments for these third-party mitigation activities. Participation in mitigation banks is not limited to entrepreneurs; private landowners can also submit proposed mitigation banks for consideration. We recognize that mitigation banks are not currently available in many areas of the country, or will be able to provide in-kind compensation for some types of aquatic resources. Therefore, to support a watershed approach for compensatory mitigation, we are retaining in-lieu fee programs as a separate form of third-party mitigation in this final rule, because in-lieu fee programs can provide ecologically beneficial compensatory mitigation in areas not served by mitigation banks. The preference for mitigation banks can be overridden by district engineers on a case-by-case basis if, for example, an approved in-lieu fee program has released credits available, or the permittee is proposing a compensatory mitigation project that will restore an outstanding resource.

Several commenters said that references to economic factors should be removed from consideration of the mitigation service area and there should be a greater consideration of the watershed approach, in order to be more consistent with other forms of compensatory mitigation. Several commenters stated that overdependence on mitigation banks will promote less successful compensatory mitigation projects. They cited a recent study in Ohio that showed that mitigation banks have not provided successful mitigation for permitted impacts. Several other commenters noted that there are too many areas in the country that are underserved by mitigation banks. One commenter recommended non-profit management of mitigation banking, because non-profit entities can do more work for the actual cost and their ultimate goal is stream restoration, not maximizing the amount of profit.

Mitigation banks and in-lieu fee programs must be sited in such a way as to effectively replace lost aquatic resource functions and services and address key watershed needs within their service areas. However, consideration of economic factors is also important in determining the service area, to make it possible for third-party mitigation sponsors to develop and implement these projects. If service areas are too small to support economically viable mitigation banks or in-lieu fee programs, then we would have to rely on permittee-responsible mitigation. As discussed in the environmental assessment for this rule, permittee-responsible mitigation is generally less likely to be a successful source of compensatory mitigation. However, to ensure the benefits of third-party mitigation, economic factors should not supersede ecological considerations in the final service area determination. The benefits of mitigation banks and in-lieu fee programs are discussed in § 332.3(a)(1) [§ 230.93(a)(1)].

The agencies agree that there are certain advantages to non-profit and governmental agencies as third-party mitigation sponsors. They do not need to earn a profit, and are more likely to act in the public interest. However, commercial banks also have certain advantages. They have a strong financial incentive to provide effective, timely mitigation that may be lacking for non-commercial entities. Under today's final rule, mitigation bank sponsors may be either commercial, non-profit, or governmental entities, while in-lieu fee program sponsorship is limited to governmental and non-profit entities.

Some commenters supported the mitigation banking rules, while others disagreed with the proposal to eliminate in-lieu- fee programs. Several commenters said that the cost of bank credits should be established in the context of the marketplace. One commenter stated that over-promoting mitigation banks could lead to a monopolistic pricing structure. Numerous commenters asserted that the process of establishing a mitigation bank should be streamlined. Some commenters supported the termination of wetland mitigation banks that do not comply with the Clean Water Act.

In this final rule, we have established criteria and standards for both mitigation banks and in-lieu fee programs, to maximize the available credits for use in the Corps regulatory program, as well as the Corps Civil Works Program and military construction activities. Credit costs for mitigation banks will be determined by their sponsors. The rule does attempt to streamline the process for establishing both mitigation banks and in-lieu fee programs, while recognizing the need for thorough and effective IRT and public review before credit sales can begin. To accomplish these goals, the final rule establishes reasonable deadlines for each step in the review and approval process. To continue operating, approved mitigation banks and in-lieu fee programs must comply with the terms of their instruments and these regulations, and district engineers will take appropriate actions if credits are not produced in accordance with approved credit release schedules. This ensures compliance with the Clean Water Act.

Regional Issues

A number of commenters expressed concern about how the rule will be implemented at the district or regional level, or with regard to specific issues such as coal mining and port facilities. One commenter welcomed the improved consistency in Corps implementation of a federal mitigation regulation with similar standards, timelines, and laws across states, for administrative reasons rather than biological/ecological differences. One commenter expressed concern that Corps districts will develop stricter requirements than those in the rule and another commenter stated that the rule places too much authority with the district engineer and not enough with state and local officials who are more familiar with local needs. Other commenters stated that the rule could conflict with state or local programs, and if the state enacts stricter standards for mitigation, the Corps must adopt those standards into DA permits. Many commenters noted that mitigation banking is being given preference over other types of mitigation despite state agency efforts to develop rules to encourage site-specific in-kind mitigation. In this way, the proposed rule fails to account for existing state and local regulations. Numerous commenters stated that coordination between state, local, and federal administrators is necessary or the rule may undermine functioning state and local mitigation plans.

The rule provides district engineers the flexibility to address permit-specific situations, while ensuring clear and consistent national standards and requirements. While we expect district engineers to work closely with their state and local partners, particularly on Interagency Review Teams, it is essential that this rule is consistent with Congressional intent as provided by section 314. This rule must also be consistent with the other Corps regulations at 33 CFR parts 320 through 331, which govern the implementation of the Corps Regulatory Program. Of course, it would be desirable to have consistent compensatory mitigation requirements across the various levels of government that have regulatory authority over a particular project, but there are usually differences because of variability among agency authorities, missions, and objectives. State and local governments may impose different requirements to address local or regional needs or concerns. Compensatory mitigation decisions made by district engineers must address federal concerns and authority, and must focus on compliance with the Clean Water Act and other federal requirements. There are likely to be cases where the compensatory mitigation requirements imposed by the Corps are different from those imposed by state or local governments, but in most cases they are likely to be similar. All section 404 permits require section 401 water quality certification by states and tribes. Where states feel that federal requirements are not stringent enough, they may impose more protective requirements in accordance with their water quality standards.

In this final rule, preference is given to mitigation banks, if the authorized impacts occur in the service area of a mitigation bank that has the appropriate number and resource type of credits available. If permittee-responsible mitigation is required by a state or local government with regulatory authorities that are similar to the Corps under section 404 of the Clean Water Act or sections 9 or 10 of the Rivers and Harbors Act of 1899, and the mitigation project will appropriately offset the permitted impacts, then the district engineer may determine that the permittee-responsible mitigation is acceptable for the purposes of the DA permit. We encourage coordination among federal, state, and local governments to avoid duplicate or conflicting compensatory mitigation requirements, as long as those requirements are consistent with federal requirements.

Several commenters cited various successful state programs and said that these programs should not be subject to the additional administrative burden of IRT review and approval of each separate mitigation project, and that their success could be disrupted by application of the rule. A number of commenters discussed the unique regulatory scheme that applies to mining, stated that the rule does not recognize the temporary nature of coal mining impacts on streams, and that the agencies must reconsider application of some of the proposed requirements, particularly those addressing monitoring and long-term assurances, in the context of the mining industry's regulatory environment.

District engineers will continue to work with successful state programs to streamline the review process to the maximum extent possible under these regulations. Third-party mitigation projects will be reviewed by district engineers and other interested members of the IRT. That interagency review is often helpful in providing different areas of expertise to evaluate the potential that each compensatory mitigation project has for successfully offsetting functions lost as a result of impacts authorized by DA permits. Established relationships between state programs and their federal counterparts will not be disrupted by this rule. Corps oversight is necessary to ensure the continued success of these programs. To help take advantage of established relationships, we have added a provision to the final rule that allows the district engineer and any member of the IRT to enter into a memorandum of agreement to perform some or all review functions (see § 332.8(b)(5) [§ 230.98(b)(5)]). However, the district engineer cannot delegate his or her authority for final approval of instruments or other documents.

As for mining activities, this rule does not change how the Corps will evaluate permit applications or assess the need for compensatory mitigation for those activities. What constitutes a temporary impact, and the need for compensatory mitigation, is determined on a case-by-case basis, depending on the specific circumstances of the project. The district engineer will determine the appropriate time interval for distinguishing between temporary and permanent impacts. Monitoring of compensatory mitigation sites is required and monitoring reports must be submitted to the district engineer in accordance with the special conditions of the DA permit or the terms of the mitigation banking or in-lieu fee program instrument. However, the content and level of detail of monitoring reports is commensurate with the scale, scope, and type of the compensatory mitigation project. Requirements relating to financial assurances and long-term management are determined on a case-by-case basis, depending on the specific circumstances of the project.

Need for Clarification

Several commenters stated that the proposed rule does not specifically state whether it applies to general permits. Most of these commenters argued that the rule should apply solely to individual permits, and that nationwide and regional general permits should continue to be governed by 33 CFR part 330, because the requirements of the proposed rule conflict with the more flexible standards that apply to the nationwide permits and will greatly limit their utility. Two commenters stated that the proposed rule should also apply to general permits. One commenter said that the rule should include provisions that would eliminate all general permits that do not comply with the Clean Water Act.

The rule applies to compensatory mitigation required by all DA permits, including individual and general permits. We have made changes to this rule to clarify those provisions that are applied differently to individual permits and general permits. With these modifications, this rule does not conflict with the regulations at 33 CFR part 330, or the NWP general condition governing mitigation (i.e., general condition 20 of the 2007 nationwide permits, as published in the March 12, 2007, issue of the

Federal Register

(72 FR 11193)). District engineers will determine specific compensatory mitigation requirements for each permitted activity based on case-specific considerations, including whether the activity is being authorized under a general or individual permit. This rule does not alter the circumstances under which the district engineers require compensatory mitigation or the threshold for determining when compensatory mitigation is required for a particular activity. The compliance of general permits with section 404(e) of the Clean Water Act is addressed through application of the Corps regulations governing the issuance of general permits, as well as the criteria in the 404(b)(1) Guidelines for issuing general permits (40 CFR 230.7) and concerns about those permits that do not relate to compensatory mitigation are outside the scope of this rule.

One commenter recommended that the rule specify when the term “project”

refers to an authorized or permitted activity. One commenter recommended that the agencies reconsider use of the term “ecological.” Many readers may view this only in terms of species habitat, while in some cases other functions, such as flood control or water quality improvement, may be as or more important than habitat.

To provide clarity in the final rule, we have used the term “project” to refer to compensatory mitigation projects, and used the terms “permitted impacts” and “authorized impacts” when referring to the activities that adversely affect waters of the United States and may require compensatory mitigation. The term “ecological,” as used in this rule, is intended to be interpreted broadly as dealing with interrelationships of organisms (including humans) and their environment. The term “ecological” can refer to other features and functions of aquatic systems besides species habitat. For example, ecological functions provided by aquatic resources also include biogeochemical functions, which can help improve water quality. The agencies agree that water quality and flood control are important ecological services that should be compensated for when adversely impacted by permitted activities.

One commenter stated that the proposed rule has implications for USDA program participants who perform conservation or other activities in wetlands and for wetland activities conducted on National Forest System (NFS) lands. The USDA is exploring how it may facilitate its constituents' involvement in wetland mitigation activities.

This rule specifies compensatory mitigation requirements for DA permits. Compensatory mitigation projects may be conducted on agricultural lands and NFS lands. District engineers will consider the number and type of compensatory mitigation credits that may be provided through aquatic resource restoration, establishment, enhancement, and/or preservation activities on these lands, over and above any environmental improvements that result from USDA programs (see § 332.3(j) [§ 230.93(j)]). Resources that are restored, established, enhanced or preserved to satisfy the requirements of other federal programs may not also be used for compensatory mitigation for DA permits, although district engineers may evaluate and approve on a case-by-case basis situations where a consolidated project is used to satisfy more that one set of requirements, provided the same resource is not “double counted.” For example, if 10 acres of wetlands were needed as compensatory mitigation for a DA permit, and 10 acres were needed for some other federal program, a 20 acre project could be authorized to fulfill the requirements of both, but the same 10-acre project could not.

One commenter said that the agencies should use “District Commander” instead of “district engineer” when referring to the person that will implement this rule. The term “District Commander” refers to the person in charge of a particular Corps district. The term “district engineer” refers to the District Commander and any of his or her designees (i.e., persons who are authorized to take actions on his or her behalf). This rule uses the term “district engineer” because most day-to-day regulatory decisions are made by the District Commander's designees.

One commenter stated that subsurface impacts are not addressed, including subsurface extraction (mining) of oil, gas, ground water, and the aquifer matrix (e.g., rock, sand, shell). The commenter cited an example where a Corps permit involved the removal of thousands of acres (surface area) of aquifer matrix (in that case, limestone), resulting in greatly increased groundwater flow occurring in the vicinity of these mine pits despite erroneous assumptions of low flow by the regulatory agencies.

It is not possible in this preamble to address the details of the particular case the commenter cites. To the extent that DA authorization is required for subsurface extraction activities, district engineers will determine the need for compensatory mitigation on a case-by-case basis.

Transition to the New Rule

Several commenters recommended that the agencies clarify that the new regulations apply only to applications submitted after the effective date of the rules. One commenter added that the rule should recognize that applicants in the permitting process have expended substantial resources needed to obtain permits under the current rules, and those resources have been committed in reliance on the current rules governing compensatory mitigation. Therefore, the new requirements should not be applied retroactively to permit applicants who have invested substantial effort in developing data and plans under the previous rules and guidance. One commenter requested a clear statement that the rule does not apply to existing compensatory mitigation projects under Corps permits.

This final rule will apply to permit applications received after the effective date of this rule, unless the district engineer has made a written determination that applying these new rules to a particular project would result in a substantial hardship to a permit applicant. In such cases, the district engineer will consider whether the applicant can fully demonstrate that substantial resources have been expended or committed in reliance on previous guidance governing compensatory mitigation for DA permits. Final engineering design work, contractual commitments for construction, or purchase or long-term leasing of property will, in most cases, be considered a substantial commitment of resources. Permit applications received prior to the effective date will be processed in accordance with the previous compensatory mitigation guidance.

Need for Additional Guidance

Four commenters requested more detailed guidance on how and when riparian areas and upland buffers can be used as compensatory mitigation. Several commenters requested further guidance from agencies to implement the watershed approach consistently across the nation, on issues such as determination of watershed boundaries, information needed in watershed plans, and how to identify the needs of a particular watershed. Other commenters recommended that the agencies develop guidance on compensatory mitigation for open and navigable waters, performance standards, mitigation ratios, financial assurances, the implementation of adaptive management, and credit determination methods. Another commenter suggested that the agencies prepare regional reference manuals that provide guidance on how to best design compensatory projects appropriate to meet the needs of watershed units in that region.

Many of these questions, such as how to determine watershed scale and boundaries, must be answered by district engineers at a regional or local level, to address landscape variability and other factors. Other questions must be answered on a case-by-case basis, after considering the impacts and the compensatory mitigation that may be necessary to offset those impacts. However, we recognize the need to provide more information to the public and agency personnel, and we will continue to develop guidance, as necessary, outside of this rulemaking.

Economic Issues

Two commenters expressed concern over the increase in mitigation costs that will result from more stringent

performance standards and the delay of credit releases until performance is achieved. One commenter stated that the requirements of the rule will overly complicate the permitting process and ultimately impact the availability of affordable housing. If the costs of purchasing credits from a mitigation bank are too high, the district engineer should take that into account and allow other off-site or out-of-kind mitigation.

In some cases, the cost of performing compensatory mitigation may increase as a result of implementation of this rule. Since this rule is generally based on existing practice, with improvements to enhance performance and efficiency, we do not believe that it will cause a substantial increase in compliance costs. We believe that ecological performance standards and other aspects of this rule are necessary to improve the success of compensatory mitigation in the Corps Regulatory Program. District engineers will take costs into account when evaluating compensatory mitigation options, since practicability is one consideration when determining compensatory mitigation requirements for DA permits.

One commenter strongly objected to adding any provision in the final rule that would require the Corps to “determine what an adequate price might be” of compensatory mitigation credits as suggested in the discussion section of the proposed regulation.

The Corps will not determine the price of compensatory mitigation credits. The rule states that the cost of compensatory mitigation credits is determined by the sponsor of a mitigation bank or in-lieu fee program. However, the district engineer may evaluate fee schedules for in-lieu fee programs to determine whether those fees satisfy the criteria in § 332.8(n)(5)(ii) [§ 230.98(n)(5)(ii)], and are sufficient for providing the required compensatory mitigation.

Implementation Issues

A number of commenters stated that the requirements of the proposed rule will place an enormous burden on the Corps' staff and resources and may further delay implementation of projects. Numerous commenters asserted that additional resources must be allocated to reviewing monitoring reports, conducting site visits, and taking enforcement action when permittees and mitigation banks do not perform their prescribed mitigation requirements. Other commenters stressed the need to educate potential sponsors on how to operate wetland mitigation banks. Commenters also stated that the rule would place a disproportionate burden on permittees. However, another commenter stated that project proponents must consider mitigation requirements early in the project planning cycle to implement mitigation in advance of, or concurrent with, a project.

This rule will not place a large incremental burden on Corps staff and other resources because it builds on existing requirements and practices and promotes those that have been successful in the past. To develop this rule, we have considered the recommendations from the 2001 NRC Report and the 2001 and 2005 GAO reports, as well as other studies of compensatory mitigation projects, to establish regulations that will help ensure that compensatory mitigation successfully replaces functions that are lost as a result of permitted activities. Monitoring, site visits, and compliance activities are essential actions for ensuring compensatory mitigation success but they are not new. What is new is the greater clarity and consistency of requirements in these areas that the rule provides. The Corps already conducts compliance inspections on compensatory mitigation projects, including mitigation banks and in-lieu fee programs, as its resources allow and will continue to do so.

We believe that the rule will increase regulatory efficiency by providing clear, consistent requirements, improving the third-party mitigation review process, and encouraging compensatory mitigation planning to be performed in advance of permitted activities through the use of mitigation banks and in-lieu fee programs. We do not believe that this rule will place a substantial burden on permittees. As more credits are generated by third-party mitigation providers, burdens on permittees should be reduced. This rule does not change the circumstances under which compensatory mitigation is required. As in the past, the district engineer will require compensatory mitigation to the extent appropriate and practicable. This rule appropriately balances the need for consistency with the need for flexibility, including its requirements for permittee-responsible mitigation. District engineers will continue to determine on a case-by-case basis what is required to satisfy the requirements of the 404(b)(1) Guidelines and other aspects of the Corps Regulatory Program.

One commenter recommended that permit review staff go to each site before making a decision. Another commenter recommended that the agencies clearly define their roles ahead of time to reduce interagency conflicts, and that if such conflicts should occur, the Corps should work to resolve them rather than the applicant.

Because of resource constraints, site visits cannot be conducted for each permit application. Districts must prioritize their site visits to determine which sites require on-site evaluations. The Corps is the decision-maker for activities that require DA authorization. The Corps fully considers agency views when making its decisions regarding whether to issue or deny permits. This rule further clarifies the roles and responsibilities of the Corps and other agencies, including the Interagency Review Team, in the review and approval of compensatory mitigation, and provides realistic deadlines for each step in the process. The rule also contains a dispute resolution procedure through which disagreements among Federal agencies regarding third-party mitigation proposals will be addressed expeditiously.

A number of commenters discussed enforcement and compliance with mitigation permit conditions and claimed that there are insufficient staffing levels for these activities. Several commenters recommended that the Corps and state agencies place a stronger emphasis on staffing in order to increase permit compliance and enforcement of mitigation requirements. Several commenters cited the 2005 GAO report's finding that compliance with mitigation performance standards has been inadequate, which provides a disincentive for parties to comply with mitigation requirements. They stated that third-party mitigation instruments and/or permit conditions often do not adequately specify the mitigation activities to be performed, the standards to be achieved, and the time frames for performance. Several commenters requested clarification of the Corps' compliance authorities related to mitigation requirements.

The agencies agree that vigorous enforcement and compliance activities are necessary for the success of the regulatory program, including compensatory mitigation. The Corps believes that it has adequate resources in these areas. In the Corps Regulatory Program's performance measures required by the Administration's Program Assessment Rating Tool (PART), enforcement and compliance metrics comprise six of the eight performance measures. These performance measures relate to compliance inspections on activities authorized by individual permits and general permits, field inspections of active mitigation sites, compliance inspections or audits on active

mitigation banks and in-lieu fee programs, resolution of non-compliance issues, and resolution of enforcement actions. The inclusion of so many metrics in the PART reflects the high priority placed on enforcement and compliance activities by the Corps regulatory program, which will help address the concerns raised in the two GAO reports. This rule will also address compliance and enforcement issues by more clearly specifying the required information for both permittee-responsible mitigation and third-party mitigation instruments plans. This rule also includes new requirements related to ecological performance standards, monitoring and credit release schedules.

We have clarified the language in the rule that addresses non-compliance with compensatory mitigation permit conditions or third-party mitigation instruments and plans. Permittees responsible for mitigation as a permit condition will be subject to the compliance and enforcement provisions at 33 CFR part 326. If the district engineer determines that a mitigation bank or in-lieu fee program is not meeting performance standards or complying with the terms of the instrument, appropriate actions will be taken, such as requiring adaptive management, decreasing available credits, suspending credit sales altogether, and/or directing that financial assurance resources (e.g., escrow monies) be used to perform remediation or alternative mitigation. As a last resort, if a sponsor does not comply with the terms of its instrument, the district engineer can take appropriate legal action to compel compliance.

Three commenters suggested emphasizing that compliance with new mitigation requirements fully meets requirements of section 404 of Clean Water Act, therefore, there is no need for supplemental mitigation to address the uncertainty of mitigation outcomes.

Although this rule provides standards and requirements for compensatory mitigation for DA permits, there are provisions that allow district engineers to require additional compensatory mitigation when necessary to address the risk and uncertainty associated with compensatory mitigation projects. For example, adaptive management may involve requiring additional compensation if the original compensatory mitigation project does not perform as well as expected. As another example, higher amounts of compensatory mitigation may be required if the aquatic resource restoration, establishment, enhancement, and/or preservation activity is conducted after the permitted activity, to account for both temporal losses and the risk of failure associated with the prospective mitigation.

A few commenters expressed concern that if developers are responsible for developing watershed plans, and those plans are used by others to implement a watershed approach, this might create an incentive to develop a plan that meets future development expansion needs rather than watershed needs.

This rule does not require prospective permittees to develop watershed plans. District engineers will determine whether an existing watershed plan is appropriate for use in determining compensatory mitigation requirements (see § 332.3(c)(1) [§ 230.93(c)(1)]). In general, watershed plans will be developed by governmental and/or non-profit resource planners, in consultation with watershed stakeholders. The purpose of a watershed plan is to maintain and improve the quality and quantity of aquatic resources within a watershed, not to facilitate development. District engineers will ensure that watershed plans used to determine compensatory mitigation requirements for DA permits have been developed through appropriate processes to satisfy this purpose.

Transfer of Responsibility

In the proposal, we requested comments on the appropriate legal mechanism for transferring the responsibility for providing compensatory mitigation from the permittee to a mitigation bank or an in-lieu fee program. We proposed an option of using parallel permit conditions and instrument provisions, that would acknowledge the transfer of responsibility from the permittee to the sponsor. Another option we solicited comments on was co-permitting, where the sponsor would sign the DA permit and assume responsibility for providing compensatory mitigation credits.

Two commenters expressed support for co-permitting, but several other commenters said that co-permitting is not an appropriate mechanism for transferring responsibility. Some commenters said that a sponsor should only sign documents that deal exclusively with the credits, debits, and use of a mitigation bank for compensatory mitigation. Two commenters stated that transfer of responsibility from the permittee to a mitigation bank is an incentive for using mitigation banks. Several commenters supported the use of the suggested permit conditions and instrument provisions provided in the preamble to the proposed rule, when credits are to be secured from a mitigation bank.

After evaluating these comments, we have determined that the most effective approach for transferring compensatory mitigation responsibilities from a permittee to a mitigation bank or in-lieu fee program sponsor is through the use of permit conditions and instrument provisions. The rules governing this transfer are provided at § 332.3(l) [§ 230.93(l)]. This process requires submittal of appropriate documentation after the permittee has secured the appropriate number and resource type of credits from the sponsor. These requirements are discussed in greater detail in the preamble discussion of § 332.3(l) [§ 230.93(l)].

Other Issues

A couple of commenters submitted questions about the Corps permit application, other publications, and record-keeping. Commenters requested better guidance on the information required for permit applications, such as sample drawings and checklists, and recommended electronic filing of permit applications.

Many Corps districts have posted information on their web sites to assist permit applicants. Such information includes tips on providing complete permit applications, as well as sample drawings and checklists. The Corps regulations at 33 CFR 325.1(d) discuss what is required for a complete application for an individual permit. Project proponents should also review the general conditions for the nationwide permits and regional general permits to determine what is necessary for a complete general permit verification request. The Corps is developing an electronic permit application, which will allow its districts to accept permit applications through the Internet. As discussed above, the Corps is implementing a new automated information system to better track impacts authorized by authorized activities, and any required compensatory mitigation.

One commenter said that poor record-keeping has made it difficult to evaluate the successes and failures of individual projects and the regional and national impacts of the program. Commenters also asked that the public have easy access to all relevant planning documents during the public comment period on permits. One commenter recommended creating a clearinghouse for wetlands funding or information needs with a single person to track follow-up and successes. This could provide information to support a watershed approach in specific areas

and possibly to support in-lieu fee programs. One commenter said the rule should not apply to ephemeral washes.

Archiving of monitoring reports for compensatory mitigation projects is done in accordance with district-specific practices and resources. Monitoring reports are part of the administrative record for a permit action or third-party mitigation instrument, and are public information. However, a Corps district may charge reasonable fees for duplication to provide those reports to interested parties. It is impractical to make all planning documents available during public notice comment periods. Typically, not all of this information is provided to the Corps prior to the public comment period. However, the rule requires that public notice for DA permits include a discussion of mitigation plans, including any compensatory mitigation. Public comment can then help inform the development of detailed planning documents. The Corps does not intend at this time to create a clearinghouse for wetlands funding and wetlands-related information; however, the Corps will provide information to the public on mitigation required and fulfilled under the section 404 program. This rule only applies to compensatory mitigation for activities in waters of the United States authorized by DA permits. It does not alter the definition of “waters of the United States” at 33 CFR part 328 or 40 CFR 230.2(s). Discharges of dredged of fill material into features that are not waters of the United States do not require permits under section 404 of the Clean Water Act, and therefore would not require compensatory mitigation that would be subject to this rule. In cases where ephemeral washes are determined to be waters of the U.S., this rule applies; there are no technical reasons for addressing them differently from other waters of the U.S.

Several commenters highlighted general concerns regarding climate change. Some of these commenters cited important ecosystem services provided by wetlands, streams and other aquatic resources such as absorbing storm surges, providing drinking water, and sequestering carbon and noted that these ecosystem services will be of increasing importance as climate patterns shift. A few commenters wanted to know how concerns about climate change were considered in the development of today's rule.

We agree that protecting our Nation's existing aquatic resource base is an important way to help foster ecological and economic resilience as climatic patterns shift. Today's rule reaffirms the existing requirement to avoid and minimize impacts to the nation's aquatic resources and to require, in cases where it is appropriate and practicable to do so, compensatory mitigation for impacts that cannot be avoided or minimized. Compensatory mitigation projects planned and designed using the watershed approach and the standards provided by today's rule are likely to provide ecosystem functions and services that, in addition to offsetting losses resulting from activities authorized by DA permits, also provide the ecological and economic resilience needed to address climate change. For example, the reestablishment of a forested wetland may also provide carbon sequestration benefits, over the long term, through the growth of trees. As another example, coastal wetland restoration projects could be designed to take into account reasonably foreseeable rises in sea level.

III. In-Lieu Fee Programs

In the proposed rule we proposed to phase out in-lieu fee programs and require existing in-lieu fee programs to comply with the same standards and requirements as mitigation banks. In the preamble to the proposed rule, we also explained the differences between mitigation banks and in-lieu fee programs, and the agencies expressed concern that providing less stringent oversight or up-front requirements for in-lieu fee programs might not ensure that the compensatory mitigation is performed. Another concern was compliance with section 314 of NDAA, which directs us to apply equivalent standards and criteria to each type of compensatory mitigation to the maximum extent practicable. At the time, the agencies could not find strong grounds for concluding that meeting the same requirements as mitigation banks is not appropriate or practicable for in-lieu fee programs. The agencies also acknowledged that phasing out in-lieu fee programs would pose some challenges for the ability of the Corps Regulatory Program to support the objectives of the Clean Water Act and ensure high-quality mitigation in all parts of the country.

In response to the proposed rule, many commenters, including 29 states, as well as industry groups and environmental organizations, supported retaining in-lieu fee programs as a separate mechanism for providing compensatory mitigation for DA permits. These commenters said that an alternative form of third-party mitigation is needed in areas not serviced by mitigation banks. Many of these commenters also stated that the desired performance of in-lieu fee programs can be achieved by imposing appropriate rules and standards, with Corps oversight. Some commenters indicated that the proposal to phase out in-lieu fee programs is contrary to section 314, because it wouldn't comply with the statutory requirement for the rule to “maximize available credits.” Over 30 commenters described successful in-lieu fee programs.

After carefully considering all comments, for and against, we have decided to retain in-lieu fee programs as a distinct third-party compensation option, subject to equivalent ecological standards as the other types of compensatory mitigation (mitigation banks and permittee-responsible mitigation) but somewhat different administrative and procedural requirements. We agree that in-lieu fee programs are important sources of compensatory mitigation in areas that do not have mitigation banks, because they can provide consolidated compensatory mitigation projects that have greater ecological benefits than small, geographically separated, permittee-responsible mitigation. We also agree that in-lieu fee programs can provide important ecological and societal benefits by focusing primarily on the watershed needs and by siting multiple compensatory mitigation projects in strategic locations in a watershed. We believe that this final rule achieves the statutory mandate of section 314 in that it establishes, to the maximum extent practicable, equivalent standards for all three types of compensatory mitigation.

Commenters suggested various approaches to in-lieu fee programs. One commenter suggested that the agencies delay the effective date of the final rule until more conclusive data are available to support the decision of whether to retain or eliminate in-lieu fee programs. One commenter recommended forming a technical working group to evaluate the effectiveness of in-lieu fee programs and their role in compensatory mitigation. Another commenter recommended comparing poorly performing in-lieu fee programs to more successful programs, to evaluate the differences in organization, oversight, mitigation approach and quality of mitigation, and to develop appropriate standards and requirements. Many commenters proposed rule language to provide accountability and ensure ecological success for in-lieu fee programs.

We do not believe it is necessary to delay issuing a final rule until further studies can be done on in-lieu fee programs. We structured the proposed rule to solicit comment on appropriate

standards and criteria that could be established to ensure that in-lieu fee programs provide successful compensatory mitigation in a timely manner. Many of the requirements that apply to mitigation banks are applied to in-lieu fee programs, although some requirements will not be exactly the same, because of the fundamental differences between mitigation banks and in-lieu fee programs. Where it is necessary to promulgate different requirements for in-lieu fee programs, we believe those requirements will ensure the same level of success for in-lieu fee programs as for the other types of mitigation, and produce mitigation that meets the same high ecological standards. We have examined several successful in-lieu fee programs to establish effective standards and requirements.

In the preamble to the proposed rule, we posed a set of questions on the proposed phase-out of in-lieu fee programs, and solicited public comment on retaining in-lieu fee programs as a distinct regulatory entity. We asked for public comment on 7 specific areas in which requirements for in-lieu fee programs might differ from mitigation banks if they were retained: (1) The degree of up-front planning required before credits could be sold (e.g., in-lieu fee programs might not be required to identify and secure a site and provide detailed site plans for the compensatory mitigation project); (2) the level and types of financial assurances that would be required; (3) the types of projects for which they could be used (e.g., in-lieu fee programs might be limited to providing compensatory mitigation only for nationwide permits and other general permits, or for projects below a specified acreage cutoff, such as 1 acre); (4) the required compensation ratios (e.g., these could be higher for in-lieu fee programs than for mitigation banks); (5) the credit release schedule (e.g., in-lieu fee programs might be permitted to sell more credits at an earlier point in the planning process); (6) the specific types of aquatic resources for which they could be used to compensate (e.g., not allowing in-lieu fee programs for tidal wetlands or in coastal areas); and (7) the types of permitted sponsoring entities (i.e., in-lieu fee programs might be limited to government agencies and/or non-profit land stewardship entities with proven track records). Comments received in response to these questions are provided below. We also solicited comments on other ways in which the requirements for mitigation banks and in-lieu fee programs might differ.

Degree of up-front planning required before credits can be sold.

Several commenters stated that in-lieu fee programs should be subject to the same amount of up-front planning as mitigation banks. Other commenters suggested that instead of identifying a specific site (which is required for proposed mitigation banks, except for umbrella banks), in-lieu fee programs should identify specific types of sites (e.g., impounded salt marshes) that their program would target. Another commenter suggested that in-lieu fee programs should submit a full mitigation plan to the district engineer for approval before the start of each project. Commenters representing in-lieu fee programs said that it would be challenging in some cases to identify sites and provide detailed plans before selling credits, and that such a requirement might make it impossible for them to operate.

In recognition of these challenges, the final rule does not require the same level of up-front planning by in-lieu fee programs as it does for banks before credit sales can occur. However, it does require that a comprehensive program instrument be submitted to the Corps, reviewed by the IRT, and approved by the district engineer before any credit sales take place. Several new requirements have been added to the provisions for in-lieu fee program instruments, designed to ensure greater accountability and success in providing mitigation to fulfill credit sales in a timely manner. First, we have added a requirement in the rule for in-lieu programs fees to develop a compensation planning framework that will be used to select, secure, and implement aquatic resource restoration, establishment, enhancement, and/or preservation activities within the service area(s) for the in-lieu fee program. Specific sites may or may not be identified, but selection of the sites must be consistent with the compensation planning framework. The comprehensive planning framework is essentially a watershed plan for the service area of the in-lieu fee program. A mitigation plan that meets the requirements of § 332.4(c) [§ 230.94(c)] and is consistent with the comprehensive planning framework must subsequently be submitted and approved by the district engineer, in consultation with the IRT, for each in-lieu fee project site prior to commencing work. Second, the instrument will specify a limited number of advance credit sales that can occur before specific sites are secured and mitigation plans approved. Once that number of credits is sold, no more advance credits can be sold until an equivalent number of credits, tied to a specific site and mitigation plan, has been released in accordance with an approved credit release schedule. Third, the instrument must provide for the establishment of an account that will segregate funds received from credit sales and ensure that these funds, including interest earned, are used only to provide the required mitigation, minus a small allowance for administrative costs.

Required level of financial assurances.

A number of commenters stated that in-lieu fee programs should be required to provide the same level of financial assurances as mitigation banks. Two commenters asserted that these financial assurances would ensure a more successful completion of mitigation projects. Other commenters indicated that providing the same level of financial assurances as banks prior to beginning credit sales would be challenging for in-lieu fee programs, which usually do not have up-front investors, and might prevent them from operating. In addition, government agencies often face legal or procedural restrictions that prevent them from providing the same types of financial assurances that are generally required of banks.

The agencies believe that financial assurances are important to ensure successful initiation and completion of compensatory mitigation projects, but also recognize the challenges faced by in-lieu fee programs in this regard. Therefore, the rule states that the district engineer shall require sufficient financial assurances to ensure a high level of confidence that the compensatory mitigation project will be successfully completed, in accordance with applicable performance standards. There may be cases where financial assurances are not necessary because an alternate mechanism is available to ensure a high level of confidence that the compensatory mitigation will be provided and maintained (e.g., a formal, documented commitment from a government agency or public authority). Consideration of the sponsor's past performance in providing ecologically successful mitigation projects would also influence the district engineer's determination regarding the level of financial assurances necessary to ensure a high level of confidence in successful project completion—this is true for banks as well as in-lieu fee programs.

Types of projects for which in-lieu fee program credits could be used.

Several commenters stated that in-lieu fee programs should be limited to certain types of projects, such as those resulting in minor impacts. One commenter suggested limiting in-lieu fee programs

to activities that have less than 0.25 acre of impacts, and another commenter recommended restricting in-lieu fee programs to general permit activities resulting in less than one acre of impacts. Another commenter suggested that in-lieu fee programs should be available to provide compensation for impacts from linear transportation projects because those activities undergo environmental reviews and the compensatory mitigation is usually identified in advance of the proposed impacts. One commenter stated that in-lieu fee programs should not be restricted to a specific type or impact size. Two commenters said that in-lieu fee programs should only be used for activities authorized by general permit. A number of commenters stated that use of in-lieu fee programs should not be limited to a specific project size or permit type.

In most cases, in-lieu fee programs implement compensatory mitigation projects after the impacts authorized by DA permits have occurred. Therefore, the timing of compensatory mitigation projects provided by in-lieu fee programs results in some risk and uncertainty. To address that risk and uncertainty, and to reduce temporal losses of aquatic resource functions, we have established a preference hierarchy for mitigation options at § 332.3(b) [§ 230.93(b)]. This hierarchy, which is discussed in greater detail elsewhere in this preamble, generally provides a preference for mitigation bank credits, when the permitted activity is in the service area of an approved bank with the appropriate types of credits available. In the absence of an approved bank, in-lieu fee programs have certain advantages over permittee-responsible mitigation. They generally involve larger parcels, have access to appropriate scientific and technical expertise, may have a proven track record in establishing successful mitigation in the past, and will generally have a more fully developed watershed approach, developed through their required comprehensive planning framework. For these reasons, we do not believe it is appropriate to limit the use of lieu fee programs to any particular impact type or size. Rather, we believe the preference hierarchy described above will ensure that a mitigation option is selected with the highest probability of delivering successful, high-quality mitigation among the available choices in a given case.

Required compensation ratios.

A number of commenters stated that in-lieu fee programs should be required to mitigate at a certain ratio that should take into account temporal loss of wetland functions when compensatory mitigation is not fully functional at the time the permitted impacts occur. One commenter asserted that increasing the required mitigation ratios for in-lieu fee programs unfairly penalizes applicants in areas that do not have operating mitigation banks. Two commenters recommended higher mitigation ratios where in-lieu fee programs funds are used for preservation.

We have added § 332.3(f)(3) [§ 230.93(f)(3)] to allow district engineers to require additional compensatory mitigation in cases where released credits are not available to provide the appropriate type of compensatory mitigation. This additional compensatory mitigation is to account for the higher risk and uncertainty associated with compensatory mitigation projects that will be implemented after the permitted impacts have occurred. For all sources of compensatory mitigation, the amount of required compensation must be sufficient to replace lost aquatic resource functions. Other factors to be considered when determining the appropriate amount of compensatory mitigation to offset permitted impacts are: The method of compensatory mitigation (i.e., restoration, establishment, enhancement, preservation), the likelihood of success, differences between the functions lost at the impact site and the functions expected to be produced by the compensatory mitigation project, temporal losses of aquatic resource functions, the difficulty of restoring or establishing the desired aquatic resource type and functions, and/or the distance between the affected aquatic resource and the compensation site. The preference for released credits does not unfairly penalize permittees, since it is appropriate to require higher amounts of compensatory mitigation to account for risk and uncertainty. The rationale for the required compensation ratio must be documented in the administrative record for the permit action. In cases where preservation is used to provide compensatory mitigation, district engineers will generally require higher compensation ratios. While the rule does not explicitly differentiate between mitigation banks and in-lieu fee programs in the determination of ratios, the factors to be considered will generally result in higher ratios for in-lieu fee programs.

Credit release schedule.

One commenter stated that fewer credits should be released to in-lieu fee programs than to mitigation banks. In contrast, other commenters said that in-lieu fee programs should have 100 percent of their credits released in advance, and/or that they should have no limit on advance credit sales.

We do not agree that in-lieu fee programs should be allowed unlimited credit sales prior to providing any mitigation; this would not provide adequate assurance that credits will be fulfilled in a timely manner. However, in recognition of the fundamental differences between mitigation banks and in-lieu fee programs, the final rule does allow an in-lieu fee program to sell a limited number of credits before securing a compensatory mitigation project site and conducting aquatic resource restoration, establishment, enhancement, and/or preservation at that site. Those credits are called “advance credits” and the sponsor can only sell such credits up to the limit specified in its approved instrument—under no circumstances may credits be sold prior to approval of an instrument meeting the requirements of § 332.8 [§ 230.98]. The number of advance credits will be determined by the district engineer, in consultation with the IRT, and will be specified in the instrument by service area. The amount of available advance credits will be based on an evaluation of the compensation planning framework, the size of the service area(s), the resources available to the program (e.g., an independent funding stream for government sponsored in-lieu fee programs) and other considerations identified by the district engineer during consultation with the IRT. If the in-lieu fee program instrument covers more than one service area, the advance credit limit will be specified for each service area. In addition, as each in-lieu fee project is approved by the district engineer (in consultation with the IRT), it will have an associated credit release schedule. As in-lieu fee projects are implemented and credits released, advance credits are converted to released credits and the sponsor can sell additional advance credits in that service area. In certain limited cases, such as when there is insufficient permitted activity in a given service area to support a viable mitigation project within a reasonable time frame, the district engineer may authorize the use of released credits from a different service area to fulfill advance credits sales. This might occur, for example, with a state-wide program managed by a government agency. In such cases, the district engineer should ensure that the approved mitigation compensates for the lost resources to the extent feasible, even though it may be some distance away, or in a different watershed.

Limiting the establishment and use of in-lieu fee programs to specific types of aquatic resources or geographic regions.

Three commenters stated that in-lieu fee programs should be used only to provide compensatory mitigation for specific aquatic resource types. One commenter suggested that in-lieu fee programs should be retained solely for rapidly developing urban watersheds and coastal watersheds, and two commenters suggested that these programs be used specifically for stream compensatory mitigation. Two commenters said that use of in-lieu fee programs should not be restricted by resource type, but credits from in-lieu fee programs should be accepted only when those credits are different from the credits provided by a mitigation bank operating in the same service area.

In this final rule, we have not limited in-lieu fee programs to providing compensatory mitigation for specific types of aquatic resources or geographic regions, for much the same reasons that we have not limited them to specific project types or sizes. Instead, as discussed above, we have established a preference hierarchy in § 332.3(b) [§ 230.93(b)] that will ensure that mitigation options with the highest likelihood of success and greatest value to the watershed will be selected from the available choices. This flexibility is needed because there is great regional variation in aquatic resource types and watershed needs, and there is also much variability in the types of credits produced by both mitigation banks and in-lieu fee programs. We do not agree that in-lieu fee programs should be limited to certain types of aquatic resources, because in some cases they may provide the greatest assurance of delivering successful, high-quality mitigation for the resource in question, especially in areas where there are no mitigation banks.

Types of sponsoring entities.

Several commenters suggested that only federal or state governmental entities or non-profit land stewardship organizations be allowed to be in-lieu fee program sponsors, because they have the capacity to provide permanent stewardship of compensatory mitigation project sites. However, one commenter stated that there is no evidence that government agencies or non-profit organizations provide compensatory mitigation that is superior to that provided by for-profit entities.

Through the definition of “in-lieu fee program” provided in § 332.2 [§ 230.92], we have limited sponsorship of in-lieu fee programs to governmental or non-profit natural resources management entities. In this rule, we have established different requirements for mitigation banks and in-lieu fee programs that reflect basic differences in how those types of compensatory mitigation are provided and managed. In general, mitigation banks are established at single sites, to provide compensatory mitigation for pre-determined types of aquatic resource losses in a single or several neighboring watersheds. In contrast, in-lieu fee programs often provide compensatory mitigation at multiple sites within multiple service areas, and may serve areas where a mitigation bank is not economically viable because there is not sufficient development activity to ensure that enough credits can be sold within a reasonable time frame. For these reasons, in-lieu fee programs have fewer up-front planning requirements than mitigation banks, and are not expected to be operated as commercial ventures. The agencies thus believe it is appropriate to limit sponsorship of in-lieu fee programs to governmental or non-profit land management entities that operate explicitly in the public interest, rather than to serve the needs of investors. We are not aware of any independent studies that have examined the quality and ecological success of compensatory mitigation projects provided by for-profit entities versus governmental or non-profit entities, however we believe the rule provides appropriate safeguards and incentives to ensure that both types of entities (commercial and non-commercial) will provide successful compensatory mitigation given their differing organization, purposes, and constraints.

Preference for “in-place” compensatory mitigation.

Five commenters stated that in-lieu fee programs should be retained but that the rule should contain a preference for in-place compensatory mitigation. One commenter indicated that in-lieu fee programs and in-place mitigation should have the same level of preference. One commenter said that adding such a provision would promote poor environmental stewardship because in-lieu fee programs would be excluded from areas where there are high credit demands. Another commenter said that a preference for in-place compensation would not be desirable if it led to approved mitigation banks having large service areas, because the compensatory mitigation could be a substantial distance from the location of the permitted impacts. This commenter stated that in-lieu fee programs should be retained in the final rule to provide ecologically appropriate compensatory mitigation in areas with thin markets for mitigation bank credits.

In § 332.3(b) [§ 230.93(b)] we have established a preference hierarchy for compensatory mitigation options (i.e., mitigation banks, in-lieu fee programs, and permittee-responsible mitigation). We have established a preference for mitigation bank credits, because a secured site, an approved mitigation plan and other assurances must be in place before an initial allocation of credits can be sold or transferred to permittees. Before additional credits can be sold, the mitigation bank must achieve appropriate ecological milestones set out in its credit release schedule. Therefore, mitigation bank credits are generally more likely to be fulfilled sooner (or to be already fulfilled), than in-lieu fee program credits. We recognize, however, that this is not always the case. Some in-lieu fee programs may have the appropriate number and resource type of released credits available, and the final rule allows the district engineer to modify the hierarchy in cases where the reasons underlying it do not apply (e.g., an in-lieu fee program has available released credits that are just as certain and close to fulfillment as credits from a bank). When considering the options in § 332.3(b)(2)-(6) [§ 230.93(b)(2)-(6)], district engineers have the discretion to modify the hierarchy in order to approve the use of the environmentally preferable compensatory mitigation. Another example is when a permittee with a proven track record and access to appropriate scientific expertise proposes a high-value mitigation project, even though credits from an approved in-lieu fee program or mitigation bank are available.

Differences between the standards for mitigation banks and in-lieu fee programs

. Several commenters noted that the fundamental difference between in-lieu fee programs and mitigation banks is timing. Two of these commenters pointed out that mitigation banks, like in-lieu fee programs, receive credit before compensatory mitigation projects are implemented. Another commenter suggested that in-lieu fee programs should adhere to the same standards as mitigation banks for the implementation of compensatory mitigation projects, but should be allowed to collect funds before acquiring a compensatory mitigation project site. Two commenters stated that the rule should recognize the inherent differences between mitigation banks and in-lieu fee programs but that all sources of compensatory mitigation should be held to standards that assure successful performance. Another

commenter said that if the standards were the same for mitigation banks and in-lieu fee programs, private mitigation banks would dominate the process, resulting in poor geographic distribution of compensatory mitigation, significantly reduced ecological diversity, and less protection and restoration of important aquatic resources.

According to the 2001 NRC Report, the principal difference between mitigation banks and in-lieu fee programs is timing. Mitigation banks and in-lieu fee programs are financed and planned differently, which creates the timing difference observed by the NRC. Since commercial mitigation banks sponsors have up-front financing, they can acquire and plan their mitigation bank sites before submitting their proposals to district engineers for consideration. In contrast, in-lieu fee programs do not generally have this up-front financing available, so they must obtain funds from permittees (under an in-lieu fee program instrument or agreement) before they can acquire and plan in-lieu fee project sites, and implement those projects.

We agree that mitigation banks and in-lieu fee programs should be held to the same standards, to the maximum extent practicable, as required by NDAA section 314. We believe the final rule accomplishes this goal. The standards provided in this rule will help ensure that the compensatory mitigation provided by mitigation banks and in-lieu fee programs both offset the impacts incurred by permittees who secure credits from these third-party mitigation providers. To maximize compensatory mitigation options, the inherent differences between mitigation banks and in-lieu fee programs warrant somewhat different procedural requirements. The most substantial differences relate to timing and financing. We recognize that in-lieu fee programs are usually not able to capitalize compensatory mitigation projects up-front. Instead, they must collect funds from permittees before they

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