Montana Administrative Register Notice 17-339 No. 24   12/20/2012    
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In the matter of the adoption of New Rule I pertaining to nutrient trading








TO:  All Concerned Persons


1.  On October 11, 2012, the Board of Environmental Review published MAR Notice No. 17-339 regarding a notice of public hearing on the proposed adoption of the above-stated rule at page 1902, 2012 Montana Administrative Register, issue number 19.


            2.  The board has adopted New Rule I (17.30.1701) as proposed, but with the following changes, new matter underlined, stricken matter interlined:


            NEW RULE I (17.30.1701)  NUTRIENT TRADING  (1) and (2) remain as proposed.

            (3)  An owner or operator of a point source discharge may submit an application for nutrient trading to the department prior to or concurrent with an application for a new, or renewed, or modified MPDES permit.  The application must include the information specified in Montana's Policy for Nutrient Trading and be consistent with the guidelines and requirements contained in that policy.

            (4) through (5) remain as proposed.


            3.  The following comments were received and appear with the board's responses:


            COMMENT NO. 1:  We would ask the department to consider including metals trading as quickly as possible.  While we realize, as per other comments, the department wishes to implement nutrient trading before taking up other pollutants but very stringent metals limits are now showing up in municipal permits.  These limits require very costly technologies which generally have not been adapted to traditional wastewater treatment processes.  Implementing controls of metals, typically caused by historical mining activity, through non-point source controls could be very cost-effective versus removal in the wastewater plant.

            RESPONSE:  Currently trading is allowed for many pollutants in addition to nutrients pursuant to 75-5-703(2), Montana Code Annotated (MCA).  The new rule and Circular DEQ-13 focus on nutrients because they are some of the most common pollutants in surface waters and because the department is developing numeric nutrient standards that will require many point source discharges to reduce their nutrient discharges.  Even though metals are not specifically addressed in Circular DEQ-13, metals trading is currently allowed and may be proposed by a discharger for incorporation into their Montana Pollution Discharge Elimination System (MPDES) permit.  Circular DEQ-13 may be used as a guideline for non-nutrient trades with changes made where necessary to address the particular issues associated with other pollutants.  Circular DEQ-13 can be updated as needed for improvements to nutrient trading and to possibly include other pollutants as the need for that arises.


            COMMENT NO. 2:  The notice for this hearing on the new rules indicates that proposals for nutrient trading credits will only be considered during or before the application for renewal of a MPDES discharge permit.  We hope that there is some flexibility when the department considers a request for nutrient trading, particularly given what can be a long period of time between when a permit is applied for and ultimately reissued in final form.  Could the reopener provision of the discharge permit be used for consideration of a nutrient trading proposal?

            RESPONSE:  Section (3) of the new rule has been modified to specifically allow a trade to be incorporated during a permit modification.


            COMMENT NO. 3:  II Definitions (1) Baseline:  The definition of baseline needs to be clarified.  Although several instances are called out, the term is used to define an effluent limit (as described in a discharge permit) and also to describe numeric criteria for receiving water.  Baseline also needs to be defined for instances before numeric criteria for nutrients are adopted (i.e., to achieve variance levels).

            RESPONSE:  For the case where a TMDL has been established (or is scheduled to be completed) in the absence of a numeric standard, the TMDL will have a waste load allocation defined for each point source discharge.  That waste load allocation becomes the baseline for the point source discharger.  For cases where a TMDL is not needed and there are no numeric standards, the department can work with a discharger to interpret the narrative standards into a value to be used to develop a baseline.


            COMMENT NO 4:  II Definitions (2) Credit:  Further clarification of credits in the context of baseline is required.  Perhaps the department can generate guidance with examples to clarify what would constitute a credit verses achieving baseline conditions.

            RESPONSE:  The definition of credit expresses the concept in relation to baseline in the first and third sentence of the definition.  The board believes that existing definition is adequate to explain the concept that the seller needs to meet its applicable baseline before it can generate saleable credits.


            COMMENT NO. 5:  II Definitions (7) Trading Ratios:  Delivery Ratios as described is a nebulous term that could equate to anything or nothing.  If natural attenuation is used to discount credits removed from the receiving water, then the actual condition of the receiving water at the point of discharge should be used to determine the baseline condition to establish the evaluation.  Please define the criteria used to define delivery ratios to prevent arbitrary assignments.

            RESPONSE:  Circular DEQ-13 does not specify a particular method for deriving trading ratios for each potential trade scenario, but simply explains what these ratios are and how they are typically applied in the calculation of a credit.  This allows the department to rely on the experiences derived from other federal and state agencies when determining site-specific trading ratios.  However, based on previous public input to the department, the board did include Appendix A in Circular DEQ-13.  It provides trade ratios and/or delivery ratios for common nonpoint source BMPs and for septic system connections.  The board believes that these examples will cover a significant portion of future nutrient trades.

            The existing condition of the receiving surface water has no bearing on the calculation of the delivery ratio between the source of nutrients and the surface water.  Thus, it is not factored into the delivery ratio analysis as the comment suggests it should be.


            COMMENT NO. 6:  II Definitions (7) Trading Ratios:  Uncertainty Ratios need to be defined.  Criteria used to establish uncertainty ratios must be expressed and defined.

            RESPONSE:  Circular DEQ-13 does not specify a particular method for deriving uncertainty ratios for each potential trade scenario, but simply explains what these ratios are and how they are typically applied in the calculation of a credit.  The department will rely on the experiences derived from other federal and state agencies when determining site-specific trading ratios, as is already provided for some best management practices in Appendix A of Circular DEQ-13.


            COMMENT NO. 7:  III Key Principles (2) Trading in an impaired waterbody…:  Variance is used as an exemption to TMDL loads, but the term is not defined in the policy.  Please define the application of variances in context of the trading.

            RESPONSE:  This section is referring to nutrient standards variances, which are defined in 75-5-103(22), MCA.  Circular DEQ-13 has been amended to clarify this throughout the document.

            The department believes that Circular DEQ-13 adequately addresses variances in the context of trading.  Variances are also discussed throughout I, in II 2., and in III 2. (a).


            COMMENT NO. 8:  III Key Principles (3) …enforced via MPDES permit:  The draft policy places the burden for compliance on the MPDES permittee for their trading partner's actions.  This is not reasonable or equitable action.  The DEQ must develop enforceable mechanisms applicable to both trading partners.

            RESPONSE:  Assurance that the trade will remain viable through the term of the permit will be provided through the contractual obligations that will be required between the permittee and their trade partner (see V. 3. of Circular DEQ-13).  The permittee is responsible to maintain water quality, and the permit holder can best monitor compliance with the agreement.  Furthermore, holding the permittee responsible will give the department a single entity responsible for all permit terms.


            COMMENT NO. 9:  III Key Principles (4) What may be traded:  The DEQ should open up trading options for other parameters which are resulting in the same economic hardships to dischargers (e.g. metals and other conventional/ nonconventional pollutants).  Most municipal WWTP cannot effectively control metals removal and must upgrade their facilities to meet WQBEL for metals placed in their discharge permits.

            RESPONSE:  See Response to Comment No. 1.


            COMMENT NO. 10:  V Implementation (3) Trading Application:  The draft policy lists general details needed to evaluate the generation and use of credits to be incorporated into a discharge permit.  However, the specific requirements needed to determine completeness for an application to trade is lacking.  Also, one item on the list is outside the regulatory purview of the department (e.g., general contractual arrangements).

            RESPONSE:  The information required for each trade is anticipated to vary based on the specifics of the trade.  Rather than include a defined set of requirements that may or may not be applicable or useful in assessing a specific trade proposal, Circular DEQ-13 allows that information to be flexible to meet the needs of the trade.  As trading is a new tool to both permittees and the department, the board expects and encourages that permittees contemplating a trade will meet with the department early on in the permit application process to decide many of the details and information that need to be supplied to incorporate the proposed trade into the permit.

            Requiring evidence of a contract to support the trade is within the board's and department's authority.  The department is required to insure that conditions of a MPDES permit will not result in pollution of state waters and must have reasonable expectation that the permittee can and will meet those conditions.


            COMMENT NO. 11:  P. 1, I. Introduction:  The document states:  "Trading under this policy may take place under a variety of conditions that may arise after or before the adoption of numeric criteria for nutrients, including circumstances where trading is used to:  (1) comply with an approved total maximum daily load (TMDL) for nutrients; (2) offset a new or increased discharge of nutrients; (3) comply with water quality-based effluent limits for nutrients; or (4) offset a new or increased discharge of nutrients into 'high quality' waters."  It is unclear how (4) above would work with the State's nondegradation rule, and feel that the trading policy should include a brief section on how nondegradation rules would apply with respect to nutrient trading.

            RESPONSE:  Details of a trade would be the same regardless of whether the permittees effluent limit is based on nondegradation, water quality standards, variance, or a TMDL load allocation as they all result in a numeric limit.  A numeric limit based on the nondegradation rule is no different than a numeric limit based on another method.  The board believes that I of Circular DEQ-13 already addresses this comment in the section that is quoted in the comment.


            COMMENT NO. 12:  P. 1, I. Introduction:  The document states:  "All trades that involve point source discharges will be monitored and enforced under a Montana Pollutant Discharge Elimination System (MPDES) permit, except those that involve only nonpoint source trading partners."  Maintaining the monitoring requirements through the MPDES permit is good for the point source discharge, but it's unclear whether the non-point source credit would be verified by on-the-ground monitoring.  And it raises the question of how nonpoint to nonpoint source trades would be monitored.  We feel strongly that monitoring and verification of real nutrient reduction is critical for the credit side of the trade equation.

            RESPONSE:  Many trades involving nonpoint sources are difficult to verify by in-stream monitoring due to the multiple and variable sources of nutrients into most surface waters, and due to natural in-stream variation in nutrient concentrations.  The examples of nonpoint trade ratios provided in Appendix A use conservative assumptions or values derived from other states/federal agencies that have measured load reductions associated with a particular best management practice (BMP).

When the specific conditions of the trade warrant periodic verification, each permit will require the permittee to annually verify that the conditions of the trade are being adequately met and maintained to meet the enforcement provision of (5) of the rule (enforcement and compliance are also addressed in III. 3. and IV. 3. of Circular DEQ-13).  For example, verifying that connection of a septic system is being maintained is not necessary, nor practical, but verifying that fencing along a stream is maintained is a reasonable requirement.  III. 3. of Circular DEQ-13 will be modified to include the following language:  "When specific conditions of the trade need to be verified over time, the permit will require that the permittee submit an annual update to the department verifying that the conditions of the trade are being complied with."

The DEQ, however, will have the right to audit and inspect sites to ensure that statements made in the reports are accurate.  In addition, Circular DEQ-13 states that the trade credit can be changed or terminated in the permit if the conditions of the trade are not being met.  Nonpoint to nonpoint trades will not be enforced by the department as there is no regulatory authority to require reporting to the department.  The phrase "except those that involve only nonpoint source trading partners" has been deleted because the sentence applies only to trades that involve point sources.


            COMMENT NO. 13:  P. 3, II. Definitions 1. (a):  "A nonpoint source may not, however, terminate an existing Best Management Practice (BMP) to reduce the baseline requirement in order to generate credits for future trading purposes."  We believe this is a good and important requirement, but we're not convinced that it can be effectively enforced.  The department needs to develop a set of verifiable criteria to ensure that existing BMPs aren't terminated.

            RESPONSE:  The potential for misuse of the trading program can be minimized through the public comment that is incorporated into every trade involving a point source discharger through the MPDES permit public comment period.  Persons with local knowledge of existing BMPs that have been terminated and subsequently re-instated to provide credits for trading can provide that information to the department during the public comment period.  The department will then be able to address those comments accordingly to insure the trade complies with Circular DEQ-13.  As necessary, the department may also use other methods to insure BMPs have not been terminated.  One example would be analysis of historic air photography to document past practices that are being proposed for trade credits.


            COMMENT NO. 14:  P. 3 II. Definitions 2(b):  "A nonpoint source may generate credits by achieving nutrient reductions greater than required by a regulatory requirement applicable to that source."  We don't fully understand this statement, because most nonpoint sources have no applicable regulatory requirement.  If this refers to the TMDL, then it should be stated as such.

            RESPONSE:  Circular DEQ-13 has been amended to include nonpoint sources not subject to regulatory requirements.  For these sources nutrient reductions achieved by changing existing practices or conditions will qualify for credits.


            COMMENT NO. 15:  P. 5, II. Definitions 7. Trading Ratios:  "Once a trading ratio has been established for a specific BMP DEQ cannot change the ratio unless the BMP is not maintained as originally proposed."  We suggest that changes to ratios should be considered on a regular basis (permit cycles) if observation and/or monitoring indicates that the trading ratio is either not realistic or performing as expected.  Again, this is why we feel that ongoing monitoring of nonpoint source credits (by monitoring stream water quality) is important.

            RESPONSE:  Based on experiences in other states and discussions with experts in trading policies across the country, if the agreed upon trade ratios are periodically reviewed and changed it will effectively kill any incentive for trading to occur.  Permittees must have confidence that the resources spent to incorporate trades into the permit will remain valid and consistent from permit cycle to permit cycle.  However, as allowed in II. 7. (b) of the permit, the trade ratio can be changed if the BMP is not maintained as it is described in the permit.


            COMMENT NO. 16:  P. 8, IV. Fundamentals, 4. Where Trading May Occur (Boundaries):  "Geographical boundaries for trading will be based on watershed boundaries."  The watershed scale needs to be better defined, perhaps using HUC or stream order.

            RESPONSE:  It is necessary to limit trading to a specific HUC (hydrologic unit code) level or stream order because all trades will be reviewed for their site-specific impacts on water quality.  For example, if the location of a trade is relatively far from the location where water quality needs to be improved the department can apply a delivery ratio to account for pollutant attenuation if applicable.  Maintaining the trade boundary at a watershed scale allows more flexibility and thus more incentive for trading to occur.


Reviewed by:                                     BOARD OF ENVIRONMENTAL REVIEW




/s/ John F. North                                   By:  /s/ Joseph W. Russell                                 

JOHN F. NORTH                                           JOSEPH W. RUSSELL, M.P.H.

Rule Reviewer                                               Chairman


Certified to the Secretary of State, December 10, 2012.


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