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Regulatory and ecological risk under federal requirements for compensatory wetland and stream mitigation
Todd BenDor a,*, J. Adam Riggsbee b
Department of City and Regional Planning, University of North Carolina at Chapel Hill, New East Building, Campus Box #3140, Chapel Hill, NC 27599-3140, United States b RiverBank Ecosystems, Austin, TX 78755, United States
a

article info
Article history: Received 14 August 2010 Received in revised form 7 April 2011 Accepted 9 May 2011

abstract
In 2008, federal regulators issued formal regulations governing wetland and stream mitigation in an effort to improve ecological quality and reduce uncertainty during the mitigation process. In this article, we explore how the federal regulations (the Rule) reduce compliance risks assumed by regulators when issuing permits that require wetland and stream mitigation under the U.S. Clean Water Act. Regulatory risk involves the timeliness and adequacy of mitigation provided for permitted impacts. The Rule attempts to accomplish this by requiring more consistent implementation of compensatory mitigation projects in

Keywords: Compensatory mitigation Mitigation banking Wetland and stream mitigation Water resources Aquatic restoration Environmental restoration risk

general, largely through a series of provisions that create equivalent ecological and mitigation standards for all sources of mitigation (mitigation banks, permittees and in-lieu fee programs). Between AprilMay 2009, we administered a national, web-based survey of mitigation bankers and other mitigation professionals (N = 156 responses; 47.7% response rate). Our results reveal banker perceptions that several Corps districts have incompletely implemented equivalent standards, and therefore a variety of barriers to abating regulatory risk continue to exist 1 year after the regulations took effect. Qualitative analysis of respondent comments revealed the reasoning behind these perceptions, including perceptions that regulatory conicts of interest involving close relationships with in-lieu fee (ILF) programs, as well as regulatory preference for NGO and government sponsored mitigation. Based on our results, it appears that Rule clarication may be necessary to further reduce regulatory uncertainty and promote high quality compensation. # 2011 Elsevier Ltd. All rights reserved.

1.
1.1.

Introduction and background

Wetland stream compensatory mitigation

The U.S. Clean Water Act (13 USC 1344) is a cornerstone of U.S. water policy that provides the U.S. Army Corps of Engineers (Corps) and U.S. Environmental Protection Agency (EPA) with the authority to regulate a range of threats to the physical, chemical and biological integrity of the nations waters including the regulation of discharges of dredged or ll

materials into aquatic ecosystems (Section 404). Over 30 years of legal decisions, policy positions, and federal regulations now require that development projects must: (1) avoid impacting wetlands or streams when practicable, (2) minimize unavoidable impacts, and (3) provide compensation for unavoidable impacts in the form of ecological restoration, enhancement, or preservation of similar, alternate resources (Hough and Robertson, 2009). To ensure compliance with this section of the Clean Water Act, development projects that impact wetlands or streams must secure state and federal permits.

* Corresponding author. Tel.: +1 919 962 4760; fax: +1 919 962 5206. E-mail address: bendor@unc.edu (T. BenDor). 1462-9011/$ see front matter # 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.envsci.2011.05.005

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The last step in this process (which is collectively known as compensatory mitigation) has driven the development of several compensation methods, in which wetland and stream offsets are provided by: (1) entrepreneurial ecological restoration rms (known as mitigation bankers) that speculatively invest in large restoration projects (mitigation banks) and sell compensation credits (wetland and stream offsets) to permittees, (2) government agencies or non-prots who collect and pool fees for impacts through in-lieu fee (ILF) programs that later fund restoration projects, or (3) the permittees themselves (e.g., land developers), a process known as permittee-responsible mitigation (PRM). This study presents the results of a web-based survey of a broad constituency of the U.S. mitigation banking industry that was aimed at understanding how a 2008 federal mitigation rule has transformed the industry. Our goal was to understand how the mitigation process could be improved to promote better aquatic ecological restoration and streamline implementation of critical water protection regulations. The Rules potential to transform the mitigation industry invites questions about compensation markets and the experience of bankers in this rapidly changing industry. We attempted to address several questions: during its rst year, did the Rule begin to make its intended impact in establishing equivalent ecological and performance standards for compensatory mitigation? Although the rule was designed to, at least partially, allay the risk experienced by regulators, what affect has it had on those actually practicing ecological restoration? What obstacles remain to elevating the quality

of compensatory mitigation? The survey assessed an array of banker perceptions of the Rules implementation and effect, which history has shown are often very different from those of regulators (Strand, 2009). We attempted to verify our results against additional datasets collected from the Corps.

1.2.

Mitigation conicts and regulatory risk

Conict between regulators and mitigation bankers has expanded in recent years. Since its establishment in the 1980s, the mitigation banking industry (Robertson, 2006) has disagreed with regulator decisions over ecological standards, geographic boundaries for selling mitigation credits, and the general ecological, legal, and economic equivalency of the three compensation methods. The industry has argued that the Corps and EPA have allowed ILF programs and permitteeresponsible mitigation to operate under less stringent ecological standards than those of mitigation banks, thereby promoting lower quality, inefcient ecological restoration (ELI, 2006; Urban et al., 1999; Wilkinson, 2008). Although the Corps and EPA have released national policy guidance documents that increasingly promote mitigation banking (Corps and EPA, 1995; EPA et al., 2003), individual Corps Districts (see Fig. 1) implementing mitigation regulations differ widely in: (1) their implementation and acceptance of mitigation banking, (2) their adoption of ecological and monitoring standards, and (3) their preferences for certain methods of providing compensatory mitigation. Conversely, regulators have historically argued that ecological standards and equivalency of compensation methods

Fig. 1 Map of corps districts and response counts.

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should largely be determined by the circumstances surrounding each individual restoration project (Corps, 1993; GAO, 2005). This is also in part the logic responsible for extensive decentralization of most regulatory decisions to authorities in each of the 38 individual Army Corps of Engineers districts (Fig. 1).1 We argue that this conict can largely be interpreted through dual conceptions of risk experienced within aquatic resource protection. In this article, we discuss what we term as regulatory risk, which is experienced by regulators (as a proxy for the public) who allow resource degradation to be offset under great uncertainty. When regulators issue a Section 404 permit and allow impacts to an aquatic resource, they assume a risk of litigation in the event the impact is not adequately offset by the proposed compensation. Failures (1) to establish compensation at all (e.g. failure to establish wetland plants or hydrology, failure to stabilize and vegetate stream banks; NRC, 2001), (2) to establish compensation in a timely fashion (e.g. performing restoration years after impacts have occurred, thereby creating long delays in restoring wetland or stream function; BenDor, 2009; Gutrich and Hitzhusen, 2004), and (3) failures in the long-term viability of compensation (e.g. creating compensation in locations or ways that are not sustainable in the long term; BenDor and Doyle, 2010), all represent risks to regulators that threaten to degrade aquatic resource integrity and violate the federal goal of no net loss of aquatic function (National Wetlands Policy Forum, 1988). Thus, while largely ecological, regulatory risk is ultimately an issue of statutory compliance. The second type of risk is experienced by mitigation bankers, which are private businesses whose return on investment is also uncertain due to changing regulator decisions and preferences, regional market conditions (e.g. regional economic development), and macroeconomic behavior (e.g. economic recessions). We discuss the second form of risk in another article (BenDor and Riggsbee, 2011).

(Corps and EPA, 2008, Page 19594; Strand, 2009).2 By contrast, permittee-responsible compensation and in-lieu fee programs usually provide compensation well after impacts have occurred (BenDor, 2009; ELI, 2006). Permittee-responsible projects also have an extremely high ecological failure rate (little is known about bank failure rates, but the U.S. National Research Council has suggested it is lower; NRC, 2001). Thus, according to the mitigation bankers argument, eliminating inlieu fee programs (ILFs) would ensure that mitigation credits available to the market come from previously implemented (or at least comprehensively planned and approved) sources, thereby reducing or eliminating temporal losses and increasing ecological quality (BenDor et al., 2009; Gutrich and Hitzhusen, 2004). One of the mechanisms through which the Rule attempts to improve the quality and success of compensatory mitigation projects (Corps and EPA, 2008, pg. 19594) is by making entrepreneurial mitigation banking (banking) more competitive and predictable. In theory, such an effort would involve creating equivalent standards (ecological, administrative and nancial) for all sources of compensation, and streamlining the process of creating, monitoring, and offsetting impacts through banks. The Rule articulates equivalent standards largely through provisions that extend existing banking requirements to ILF and PRM efforts. The theory is that equivalency of ecological performance standards will elevate the quality of compensation and reduce regulatory risk. We see how equivalent standards can, in theory, reduce regulatory risk as they are articulated through several channels within the Rule, including:

1.3.

2008 federal mitigation regulations

In April 2008, the Corps and the EPA issued the rst, national, legally binding standards governing compensatory mitigation (the Rule; 33 CFR parts 325 and 332; 40 CFR part 230 [Code of Federal Regulations (CFR)]). The Rule establishes a preference for mitigation banks over PRM and ILF sites, since the mitigation banks reduce some of the risks and uncertainties associated with compensatory mitigation (Corps and EPA, 2008, Page 19594) [Emphasis added]. In many ways the Rule represents an effort by regulators to reduce their exposure to risks of compensation failure. Although the ecological literature has questioned the overall efcacy of ecosystem restoration (especially stream restoration; Brown and Lant, 1999; Lave et al., 2008; Palmer and Filoso, 2009; Reiss et al., 2009) the banking industry has successfully argued that unlike other sources of compensatory mitigation, banks reduce some of the ecological risks, especially temporal losses of aquatic resources by providing advance compensation (at least in part) before impacts occur
In this study, we only discuss the 36 Corps districts in the contiguous United States, although there are also Districts in Hawaii and Alaska with very limited banking activity.
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(1) Requirements that Corps Districts establish service areas for mitigation banks and ILFs. Service areas are dened in the Rule as the geographic area within which impacts can be compensated at a specic bank or ILF site (Corps and EPA, 2008, Part 332.8(d)(6)(ii)(A)). For regulators, this could prevent systematic, net-losses of resources from individual watersheds (catchments). (2) Establishing a preference for in-kind mitigation, focused on preventing losses of specic classes of aquatic resources, such as forested wetlands and perennial streams (dened in Part 332.3(b)). Here, compensation is only accepted for resources of similar structural and functional type to the impacted resource (Part 332.2). For example, in some cases prior to the Rule, stream damage was often compensated with wetland restoration, thereby modifying the ecological functions of landscape-level aquatic ecosystems (Lave et al., 2008). (3) Requirements for equivalent ecological and performance standards. These include provisions that require: (a) limits on credit sales pre-dating project implementation (thereby reducing restoration delays and temporal losses; BenDor, 2009), (b) rigorous accounting practices detailing where and when compensation has actually been provided for
We should note that bank compensation is typically not fully provided in advance, but rather is sold according to release schedules that allow mitigation bankers to obtain capital to fund upfront investment costs (ELI 2002; NRC 2001).
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impacts, (c) public notice procedures and regulatory review processes, d) nancial assurances that ecological restoration will meet stated requirements, (e) equivalent project planning, detailing objectives and methods of ecosystem restoration to create intended compensation credits, and (f) equivalent ecological performance and monitoring standards, used to determine how many credits a project ultimately produces. (4) Requirements that new mitigation projects are conceived and approved within a watershed context, referred to as the watershed approach. Originally dened by the NRC (2001), the watershed approach involves the collection and use of more information about the landscape in which mitigation is performed, including ecological assessments of existing and reference conditions in an area (see Hough and Sudol, 2008 for more discussion). We begin by explaining our methodology, which is followed by a presentation and discussion of our results. Finally, we present conclusions and discuss the implications of our work for the future of the wetland and stream mitigation industry, as well as other, emerging ecosystem markets.

2.

Methodology

We developed a web-based survey designed to elicit banker, consultant, and other industry professionals perceptions of the equivalence of site approval processes, and ecological performance standards among compensatory mitigation methods. Surveys were sent to all members of the National Mitigation Banking Association (NMBA; http://www.mitigationbanking.org), as well as past participants in National Mitigation and Ecosystem Banking Conferences (trade association conferences focused on educating, networking, and growing the banking industry). This compound list comprises the most substantial register of banking practitioners ever collected. We did not attempt to survey members of the regulatory community as past efforts to survey the federal regulatory community have largely failed due to non-response (Rebecca Madsen, Ecosystem Marketplace, Personal Communication). We were also unable to compare participant responses with federal permit les; such les are often unavailable (lost), incomplete, and therefore inadequate for most research purposes (BenDor et al., 2007, 2009; Strand, 2010; Urban, 2009). Unfortunately, incomplete data on many mitigation decisions, combined with the highly politicized environment surrounding many mitigation programs (Robertson, 2009), precludes complete, independent verication of banker claims on a national scale. Many districts are still formalizing their decision making process, making additional verication difcult. Given this, it is important to again note that this study measures the perceptual experiences of mitigation bankers. While these perceptions may vary from those of regulators or other compensatory mitigation actors, banker experiences convey a wealth of information about continuing barriers and successes in the transforming mitigation industry. The Rule

identies mitigation banking as the preferred form of compensation, and many of the Rules sections are intended to reduce both entrepreneurial and regulatory risk simultaneously (i.e., equivalent standards also level the playing eld between banking and other mitigation methods). Therefore, the perceptions of mitigation bankers and their consultants largely determine the willingness of bankers and their investors to enter the market, generating prospective offsets. Meta-studies of web-based surveys have shown a wide range of response rates (2075%) that vary with a variety of survey design factors (Cook et al., 2000; Fricker et al., 2005). The survey was designed using the Total Design Method (Dillman et al., 2008), whereby surveys are constructed to enhance users experience as a means of increasing response rates (Hoddinott and Bass, 1986). This design entailed administration of a pre-survey notication email, which was followed by a questionnaire (approximately 2030 min long), and several rounds of reminder emails sent to respondents who had not nished the survey. Small incentives were also offered to respondents to further induce participation. The survey was pre-tested on a 5% sample to elicit feedback on length, structure, and question phrasing. In addition to standardized responses, we gave respondents the opportunity to provide optional, free form information to add response detail. We then used inductive qualitative coding to categorize and analyze these responses (Patton, 2001). The authors coded responses independently (inter-rater reliability [joint agreement probability] was > 90%), and any discrepancies were reconciled through discussions. Representative responses illustrating qualitative data trends are given in the results section, whereby N indicates the total responses to a question or question block, NQR indicates total qualitative responses received, and qualitative explanatory response categories are given in descending order of frequency.

3.
3.1.

Results
Respondent characteristics and in-kind mitigation

The survey was distributed to 327 individuals between midApril and late-May 2009. A total of 156 completed responses were received from individuals in 30 of 38 Corps Districts (Fig. 1). The resulting 47.7% response rate lies well within the bounds expected from web surveys administered with presurvey notication and incentives to respond (Cook et al., 2000). Of the respondents, 52% identied themselves as mitigation bankers, 32% as consultants, and 16% as attorneys, environmental restoration suppliers, bank nanciers, or a combination of these roles. When respondents were asked if they believe that the Rule promoted increased levels of in-kind mitigation in their District (N = 124 respondents to this question), 35.4% indicated that it had, while 46.0% indicated that it had not. Another 18.6% declined to respond.

3.2.

Equivalent standards: in-lieu fee programs

Of the respondents with an ILF program in their District (N = 92), 59% did not believe that regulators had placed limits

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on ILF advance credit sales, 43.5% perceived that ILFs had not established mandatory program accounts (a form nancial assurances, a long-standing requirement of mitigation banks), 59.8% believed that public and regulatory review and oversight processes were not equivalent to that of banks, and 56.5% believed that ILF programs were not developing mitigation plans equivalent to those required of banks (see Fig. 2). Signicant association (Pearson x2 < 0.05) was found between responses to all ILF-related questions. Only one signicant (Pearson x2 (6) = 17.94, p < 0.007) relationship was found between respondent role (e.g. consultant, mitigation banker, etc.) and response frequency; bankers were approx. twice as likely to state that their District had not placed a limit on the number of credits an ILF program could sell before planning and acquiring a mitigation project site. We allowed respondents to elaborate on their responses through open-ended follow-up questions that gave them space to detail their experiences and views. Historically, qualitative data collected in survey responses has been difcult to portray since it presents a wealth of information about respondent views, knowledge, and experiences. Studies typically present qualitative data by either sequentially articulating varying positions of respondents across a range of issues, thereby typifying variations in respondents across all issues, or by presenting the range of responses sequentially for each individual issue, thereby typifying variations in views of each individual issue (Yin, 2008). Like our presentation of quantitative response frequencies, we select the second approach and discuss each topic (e.g. mitigation preference structure,

attitudes towards PRM, ILF, etc.) separately, as recommended by Yin (2008). Qualitative analysis (NQR = number of qualitative responses for a given question; 22  NQR  33 for question block) revealed that respondents perceived low initial success in ILF compliance to be directly associated with Corps Districts that (in order of response frequency): (1) did not believe that the Rules ILF provisions applied to operating ILFs, (2) had no desire to comply with certain ILF provisions or actively sought to disregard the Rule in certain cases, (3) were in conict (or created complex relationships) with state regulations that interfere with the Rules ILF provisions, or (4) place heavy preferences on non-governmental organizations (NGOs) and government agencies running ILFs. Examples of 1: Our district is currently reviewing the Rule to determine how the district will respond to its mandates. At this point, the District views the Rule as a soft preference. . .they are not likely to feel there is a need to limit advanced credit sales. There isnt any public review and they seem to think they can manage the program. . .without the need to meet such standards. Examples of 2: They really dont know what it means to be in compliance with the new mitigation Rules. In-lieu fee programs have own under the radar of the regulatory process. . ..

Fig. 2 Perceptions of rule impacts on ILF programs.

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Fig. 3 Perceptions of rule changes on permittee responsible mitigation (PRM).

Examples of 3: The [state program] is based in statutes, and it must be amended to comply with the new Federal Rule. To date, there has been little focus on achieving compliance. To my knowledge, no IRT [Interagency Review Team]3 has reviewed any of the proposed [ILF compensation] sites in the eld to establish ecological values. The [state agency] who implements the plan also approves the [state] department of transportations impact permits. Example of 4: The Corps may feel that the in-lieu fee is more capable than mitigation banks. Furthermore, banks are made to make prots, and this may conict with some peoples view of the work at hand and duty to the environment. Several respondents were additionally concerned about conicts of interest by government agencies (including the Corps and various state agencies) that they perceive to both regulate aquatic impact permits and run ILF programs. Most of the in-lieu fee projects are derived and operated by government agencies or not for prot organizations. Several respondents blamed limited ILF provision enforcement on a lack of standardized policy for ILFs. Lax enforcement was also attributed to regulators that respondents believe to see government agencies and NGOs

as more appropriate sources of mitigation than private entities. Mitigation plans from the in-lieu fee program have not been reviewed under a years-long banking process, but only through a 45-day. . .process. The IRT assumes that [the ILF program] will perform more environmentally appropriate work than private enterprise. The volume of work from the in-lieu fee precludes adequate involvement from the IRT. [ILF program] projects are the rst ones allowed to slide through the cracks to save time. Survey questions next focused on the extent to which the Rule has affected permittee responsible mitigation practices.

3.3. Equivalent standards: permittee responsible mitigation (PRM)

Although a much higher fraction of respondents declined to respond to PRM questions (approx. 40%; presumably due to unfamiliarity with local permittee-led mitigation requirements and practices), only 23.4% believed that the Rule has led to changes in nancial assurance requirements for PRM (Fig. 3). The Corps is beginning to require more substantial assurance that projects will be implemented successfully. Additionally, 21.1% of respondents believed the Rule had caused changes in the implementation of the watershed approach for PRM, primarily through increases in in-kind mitigation and additional attention towards watershed-scale concerns. Finally, 21.1% and 20.3% of respondents believed the Rule was responsible for changes in ecological performance and monitoring standards, respectively. Similar to mitigation banking standards, respondents primarily referenced stricter

3 An Interagency Review Team [IRT] is the group of federal and state agency representatives that reviews mitigation bank proposals.

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Fig. 4 Perceptions of rule changes for mitigation banking.

and more tightly dened ecological standards for PRM in the wake of the Rule. Signicant association (Pearson x2 < 0.05) was found between responses to all PRM-related questions. No signicant relationships were found between respondent role (e.g. consultant, mitigation banker, etc.) and their responses to PRM-related questions.

IRT requires performance bonding, short-term maintenance escrow that is refundable, and long-term maintenance escrow (endowment).4

Was not required previously for the Corps in [my District]. Many respondents viewed increased nancial assurances positively: First of all, this is a good thing. Financial assurance requirements are more stringent. Monitoring requirements are tougher. Site selection is scrutinized more heavily. Larger percentage of restoration and enhancement vs. preservation is required. Only 34.9% saw changes in their districts implementation of a watershed approach for banks (45.7% did not), primarily through changes in the size of service areas. Regions are more important now [and] cross county lines.

3.4.

Equivalent standards: mitigation banking

Among the most unexpected results of the survey was the common perception that the Rule has produced or re-enforced barriers to banking, including conicts between the Rule and state/local law, conicts of interest between regulators and ILFs, and inter-agency confusion and conict (IRT members that interpret the Rule differently). Respondents described extensive inter-governmental conicts among the federal agencies interpreting the Rule as a major source of difculty. The [Corps] and the EPA are in a disagreement on the denition of long-term management. Once the Rule has been interpreted jointly by the IRT members, I feel as if it will make things run in much the same way as it did prior to the Rule. [P]ublishing a prospectus. . .takes about a year. . .and disagreement within the IRT on assessment methodology has cost us another 9 months in approval time and many, many dollars. . . Usually in the form of increased requirements, 41.1% of respondents saw changes in nancial assurances required for banks under the Rule, many of which were perceived to be new in respondents Districts (Fig. 4).

4 A performance bond is a surety bond issued by an insurance company or a bank to guarantee completion of a project by a contractor. A short term maintenance escrow involves the short term use of an independent, trusted third-party (typically a nancial bank) that receives and refunds money from a mitigation banker, with the release of such refund dependent on mitigation being completed properly (as veried by regulators).

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[Regulators] opened [the service areas] up from an 8 digit HUC [Hydrologic Unit Code]5 to a 6 digit HUC. Confusion as to the interpretation of watershed approach continues among many bankers. [Our District] has worked closely with [state regulators] to base wetland mitigation banks on an understanding of watershed processes from an ecological perspective. This is appropriate ecologically, and an area in which the state and District excel; these [watershed approach-related] boundaries do not always match the state-dened [service areas], which has created some confusion in the publics mind. Only 31.0% and 29.5% of respondents believed the Rule had affected changes in ecological and performance standards, respectively. These changes usually occurred through increased standards that were more strictly enforced and better dened. [There has been an] increase in use of functional assessment models and focus on performance metrics tied to measurable increase in function. [This] facilitates standardization rather than arbitrarily developed performance standards based on opinion rather than science. The IRT is more focused on functional assessment of credits as well as requiring ecological based performance standards for success criteria. The success criteria must be measurable. In several cases, respondents believed that monitoring periods had not been dened or enforced prior to the rule. However, respondents indicated the need for guidance relating to these standards, particularly given extensive interagency conicts, slowing of credit releases, and altered incentive structures. There is a lot of back and forth on performance standards. I dont think the IRT agencies have yet determined what they want as a group. . . Guidance on this would be helpful. . . Instead of playing the bring me a bigger rock game, it would be easier. . .if they provided guidance, including dening adequate sampling/area coverage for vegetation classication types. [T]here are many broad concepts in the Rule which are in need of rening through the implementation of regulatory guidelines which [our] District has yet to do. Signicant association (Pearson x2 < 0.05) was found between responses to all Bank-related questions. Two signi5 The US Hydrologic Unit Code (HUC) system was developed by the US Geological Survey to create a systematic delineation of nested catchments (sometimes called HUCs). For example, 6digit HUCs contain several 8-digit catchments, which contain numerous 8-digit, 10-digit, etc. catchments.

cant relationships were found between respondent role and response frequency. In both cases, a substantial number of self-identied consultants stated that the Rule changed the way their District regulated Banking Ecological performance (Pearson x2 (6) = 18.15, p < 0.007) and monitoring (Pearson x2 (6) = 17.70, p < 0.008) standards.

4.

Discussion

This survey was conducted approximately 1 year after the Rules effective date and was limited to the banking communitys perception of the Rules effectiveness. However, the extent to which the Rule has begun to force modication in compensatory mitigation standards is important, particularly given the prevalence of banking throughout the United States (ELI, 2006). According to bankers, it appears that the equivalent standards specic to banks (3042%) are more widely viewed as implemented than either PRM (2024%) or ILF mitigation (1020%) standards. This trend suggests that bankers perceived Districts to have more easily (or readily) implemented banking standards than PRM and ILF standards. While these results are obviously biased towards mitigation bankers (the major pool of our respondents), several survey participants (32%) were consultants, many of whom also provide services to permittees, regulators and ILFs. This bias notwithstanding, the array of explanations for perceptions of uneven Rule implementation reveal nuanced and important details about this growing industry.

4.1.

Regulatory preference

An on-going survey response theme involved the perception that IRT members, and Corps Districts in particular, prefer compensation provided by non-prots and government agencies over that provided by mitigation banks. One respondent felt that, the members of the IRT. . .include individuals that are openly biased against private environmental mitigation policies, do not trust businesses, and do not like the concept of prot in environmental restoration. Another respondent described the process of bank approval as unnecessarily combative arguing that, there is no private-public partnership here. These concerns are not new to the mitigation banking community (Mogensen, 2006; Robertson, 2004) and indicate signicant mistrust between the private and public components of the compensatory mitigation industry. Based on the frequency and geographic extent over which they were raised in the survey, these perceptions are widespread, suggesting entrenched ideological barriers to the implementation of a Rule that might otherwise benet private sector-sponsored compensation. If these perceptions mirror reality, several of the Rules provisions especially the preference structure may be difcult to implement to any meaningful degree. Bankers have long held the position that regulators require more from them than other mitigation providers (Strand, 2009). As a result, bankers have advocated policies requiring other compensation providers to meet the same standards. In this respect, the Rule partly represents the result of a

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prolonged effort by bankers to level the playing eld among mitigation methods. ILFs have up to 5 years to modify their instruments for compliance purposes, thus complete compliance was not expected. Rather, only 2 of approx. 50 operating ILF programs have been approved under the Rule (Palmer Hough, EPA Wetlands Division, Personal Communication). However, if bankers perceptions are accurate, whereby ILFs are not held to the same standards as banks, then the integrity of ILF programs in some Districts are drawn into question. Another specic complaint lodged by bankers concerns the ability of ILFs to accept fees without having identied a single compensation project (these concerns mirror examples in ELI, 2002), while bankers are typically required to demonstrate permanent protection of (e.g. via conservation easement) or investment in an approved site before selling bank credits (e.g. Corps and EPA, 2008). This operational distinction between ILFs and banks imply that ILFs incur less up-front nancial risk, giving them an additional competitive advantage.

5.1.

Barriers to entrepreneurial mitigation banking

5.

Conicts of interest

Bankers and their associates describe what they saw as conicts of interests at several levels within their districts. These conicts originate from the Rules granting of extensive authority to individual Corps Districts, especially within the context of ILF program accounts (Murphy et al., 2009 discuss this issue at length). This conict arises from the dual roles of Districts in regulating impacts (in some cases requiring payments to ILFs) and approving ILF program investments. Although the Corps cannot legally do so, many bankers stated that they believed the Corps actively ran ILF programs.6 However, respondents still perceived that Districts could decide that ILF compensation is more appropriate than bank credits (when available) for a given permit. By determining how and where ILF programs are used to provide compensation and by approving expenditures from ILF nancial program accounts, Districts assume considerable control and inuence over ILF programsa potential threat to a free, transparent market for compensation credits. The discretion authorized by the Rule may continue to allow Districts to be lenient with ILF standards, providing more exibility for Districts that operate ILF accounts. These results reect concerns expressed by ELI (2002), BenDor (2009), and Urban et al. (1999) regarding the accountability of ILFs. Districts should pay particular attention to these concerns and make every effort to ensure transparency, as they are likely to be points of contention with bankers and environmental interest groups. Better oversight and documentation will greatly improve ILF transparency, which is in the best interests of the environment, the public, ILF programs, and regulatory agencies.
The Corps cannot run an ILF program per requirements under the federal Miscellaneous Receipts Act (31 USC 3302), which prohibits an agency from receiving money in order to comply with its rules.
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Within a number of districts, we identied conicts between the Rule and state statues or local ordinances. According to several respondents, these scenarios have halted the development of mitigation banking within their districts. Perhaps the most interesting example of conicts between state/local and federal regulations was experienced in Florida, where a respondent described state and federal standards dictating different bank service areas. As a result, complications may arise in this District when banks attempt to use credits for aquatic compensatory mitigation, which is administered federally under Section 404 of the Clean Water Act (13 USC 1344), and water quality mitigation, which is administered by individual states under Section 401 of the same law (13 USC 1341). Forcing mitigation markets for multiple aquatic functions (e.g. water quality mitigation, wetland/stream compensation) to operate at different geographic scales can severely complicate market operation and permitting processes (Robertson and Mikota, 2007; Robertson and Hayden, 2008). Conicts of this nature increase uncertainty and risk for regulators, permittees, and the compensation industry. This uncertainty may create legal problems for future compensatory mitigation, thereby the construction of high quality compensation sites (including those by environmental nonprots) and potentially act as a barrier to the prospective development of mitigation banks. In these and other districts, our results point to the need for increased coordination between IRT agencies (state and federal) and legislative bodies (state and federal) to determine the exact rules for interfacing water quality, habitat, and aquatic ecosystem mitigation trading. Additionally, these areas may require more extensive documentation from regulators that claries Rule interpretation and the role of ILFs in providing compensatory mitigation within local jurisdictions.

5.2. Inter-agency review teams: confusion and disagreement

Respondents detailed scenarios in which federal interagency disagreements have added confusion to the process of establishing compensation sites, including mitigation banks. Among the most confusing provisions was the watershed approach, which respondents identied as vague in terms of both its denition and interpretation. This interpretation is left to individual Corps Districts and is often un-documented, which raised respondent concerns that the provision will be applied inconsistently across districts. This respondent concern mirrors recent literature criticizing the extent of which the Rule delegates decision making power to Districts (Murphy et al., 2009).

6.

Conclusions and implications

This survey provides several insights into the issues that affect uncertainty and risk experienced by regulators during the compensatory mitigation process. While actions taken by regulators to negate this risk are imperative to protecting aquatic resources, these actions can act as barriers to successful compensatory mitigation and mitigation banking.

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Among these barriers are perceptions that, although regulations voice preference for mitigation banking, state and federal agencies are more inclined to support compensation provided by NGO and government entities. Moreover, perceived regulator conicts of interests may give some ILF programs competitive advantages over banksa market condition that could hinder banking, potentially increasing some of the risks and uncertainties associated with compensatory mitigation (Corps and EPA, 2008, Page 19594). These conicts must be addressed, particularly in areas where regulators have close relationships with ILF programs, and are perceived to control the impact permits that get approved, the demand for compensation credits, and the behavior of the ILF program itself. Whether or not these views accurately reect regulatory actions, these perceptions have created a highly polarized environment, where important discussions focused on improving the efciency, effectiveness, equity, and legitimacy of aquatic ecosystem mitigation are largely dismantled at the local level. Our results reveal a surprising variety of banker experiences with the Rule, among both individual rms and Corps jurisdictions. While the decentralized nature of the Army Corps of Engineers inevitably yields stark and controversial differences between Districts (Urban, 2009), the treatment of individual bankers by regulators remains an area that needs to be studied in more depth. How do relationships with regulators, ecological expertise, and previous restoration experience factor into the ease of creating and selling compensation credits? This survey also points to a variety of areas where Rule clarication may be necessary to further reduce regulatory uncertainty and promote high quality compensation. In particular, regulators, at both the national, District, and state levels will need to clarify the watershed approach, the new guiding philosophy of compensatory mitigation. This clarication must include more specic recommendations on the role that watershed information, planning, and geography need to play in the future of wetland and stream mitigation. Moreover, rules must be created to reconcile, clarify, and streamline conicts within the federal regulatory process (among federal agencies), and with state agencies and regulations. Although substantial changes have occurred in the short time since the issuance of the Rule, on-going efforts to improve implementation will be important in the coming years, particularly as the mitigation industry begins to mirror other environmental markets that have transformed from small, cottage industries, into a larger, more transparent, better funded, and more diverse industry sectors (Nolles, 2006). However, elevation of compensatory mitigation to higher, more ecologically sustainable standards will be difcult unless extensive social and economic hurdles to implementing the Rule are overcome. On-going perceptions of conicts of interest that breed distrust between bankers and regulators, combined with multiple sources of uncertainty in the compensatory mitigation process, continue to present barriers to realizing the full potential of the Rule. Example of respondent distrust: Some of the [Army Corps] project managers are trying to come up with ways to

circumvent the Rule and keep control of the process in the hands of a very few. . .as it was before the Rule. Again, no oversight by higher management at [our District]. As deadlines for ILF compliance approach, it will be important that regulators and bankers improve communication (perhaps through a formal mediation process) and work together (perhaps through a series of facilitated stakeholder workshops) to ensure transparency in standards for Rule interpretation and implementation, regulator intentions, and banker responsibilities.

references

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