Repost from National Wetlands Newsletter: Beyond Soft, Mushy, or Hard: The Mitigation Rule’s Preference Is Banking First

Dave Urban, President of the National Mitigation Banking Association, does a bang-up job here disconstructing the efforts of some (the minority) of regulators to avoid compliance with the provisions of the 2008 Final Mitigation Rule.  These provisions clearly define mitigation banks as the preferred regulatory option for permittees, to be utilized before In-Lieu Fee Programs or Do-It-Yourself “permittee responsible” mitigation.

No where is the disregard of the rule more true than North Carolina’s Wilmington District of the Army Corps of Engineers.  Regardless of your view toward mitigation or mitigation banks, the truth is that the Wilmington District has not followed the spirit or letter of the preference for mitigation from private providers.  Rather, the state Fee Program, the Ecosystem Enhancement Program (NCEEP), has received the de-facto preference for mitigating dredge and fill permits.

The Wilmington District’s preference for the Fee Program is reflected in a number of ways.  Devastating to mitigation bankers is the unequal administration of credit release and the watershed restrictions for credit sales. With regard to fee mitigation, for instance, the Wilmington District is extraordinarily generous to the NC Ecosystem Enhancement Program.  To private banks in the ground banks — not so much.  Our sites must be in the purchased, restored and functioning well before we receive 40% of the potential bank credits (the most parsimonious credit release in the South).  The Ecosystem Enhancement Program is allowed to mitigate for impact up to THREE YEARS AFTER the impact occurs.  With regard to watersheds, as has been well documented here, the NCEEP regularly runs roughshod over the (oh, so sacred for the bankers) 8-Digit Hydrologic Units Code (HUC) restrictions.

The improper preference for Fee Programs in some Districts manifests itself more deeply than the permit decision.  It is revealed clearly in the standards to which the mitigating party is held.  The fee program in the Wilmington District is held to extraordinarily low standards, and the banks are held to extraordinarily high standards.

I can’t hesitate to mention that this is emphatically NOT the case in a number of other Corps Districts — like Savannah and Galveston, who adhere to the rule with a fervor. But in our home state of North Carolina, a culture of bent-knee deference to the fee has developed alongside a posture of overly- skeptical caution toward banked mitigation.  But this is changing.  Recent discussion with the Chief-Not-Indian in South Atlantic Wilmington gives us much hope that the unequal treatment of fee versus bank may be addressed soon from the top.

The article below is posted from the National Wetlands Newsletter, an indispensable periodical for anyone interested in wetlands and constantly shifting wetland policy:

Beyond Soft, Mushy, or Hard: The Mitigation Rule’s Preference Is Banking First

The 2008 Mitigation Rule brought about major changes to the way the U.S. Army Corps of Engineers (the Corps) conducts mitigation. One of these changes was the creation of a regulatory hierarchy, which established mitigation banks as the first option in a list of mitigation options (33 C.F.R. §332.3(b)1-6). Section (b)2 specifically describes this first option as a “preference.” The preamble to the rule (73 Fed. Reg. 70 (Apr. 10, 2008)), which establishes the policy behind the rule, also discusses this hierarchy as a preference for mitigation bank credits in no less than 18 different places.

Although the preference is discussed in the preamble probably more than any other aspect of the rule, this aspect of the regulations is apparently hardest to implement. This difficulty is due to several factors: the reversal of emphasis from on-site permitee-responsible mitigation (PRM) to third-party watershed-approach mitigation; the inherent inertia in any bureaucratic organization; and the historic mistrust of entrepreneurial third-party mitigation providers.

This regulatory hierarchy has its basis in the enabling law (§314 of the National Defense Authorization Act of 2004), which requires the U.S. Department of the Army to maximize available credits and opportunities for mitigation and apply equivalent standards and criteria to each type of compensatory mitigation.

The preamble specifically links the preference and the law as follows:

With respect to maximizing available credits and opportunities for mitigation, the preference established in today’s rule for the use of credits provided by mitigation banks (see §332.3(b) [§230.93(b)]) should stimulate an increase in the number of mitigation banks and correspondingly the number of bank credits available for use.


Because there are fundamental differences in how these three types of compensatory mitigation are structured and conducted, we do not believe that Congress intended to require the promulgation of identical standards for all three methods of compensation. Instead, we interpret ‘‘equivalent’’ standards to mean standards which are equal in value, force, or meaning. . .We have also included a preference for bank credits over advanced credits from in-lieu fee programs. We thus believe that the final rule fulfills the statutory directive to provide ‘‘equivalent’’ standards for the three types of mitigation to the maximum extent practicable.

Thus, the reasons for the preference are to stimulate the “maximum” number of credits and to provide a regulatory “equivalence” to an inherently un-equivalent process, where PRM obtains all its “credits” up front, at the time of permit issuance, while mitigation banks and in-lieu fees receive credit over time.

Almost immediately after the promulgation of the rule, many mitigation bankers started talking to their respective Corps districts about the hierarchy provision in the rule, asking the district to honor the preference for mitigation banks. Across the board, many Corps officials replied that the preference was a “soft” preference, or even a “mushy” preference. At the 2010 National Ecosystem and Mitigation Banking Conference hosted by JTA Associates, several presenters reported on studies that they had conducted on the use of mitigation bank credits versus PRM, with most showing that the percentage of mitigation credits derived from mitigation bank credits had not changed appreciably due to the rule. However, during that same conference, the Assistant Secretary of the Army, the Honorable Jo-Ellen Darcy, clarified that, in her opinion, the preference was not “soft” or “mushy,” but perhaps even a “hard” preference. Later in the conference, Meg Gaffney-Smith, Chief of the regulatory program for the Corps, told a packed conference room that the Corps recognized the need to document better both hierarchy and compliance with the mitigation rule in all permit decisions.

Part of the reluctance to implement this preference is that prior to the mitigation rule, standard practice was to require on-site PRM. (See Clean Water Act §404(b)(1) Guidelines and the 1990 Mitigation Memorandum of Agreement between the Corps and the U.S. Environmental Protection Agency (EPA).) This had remained the practice despite the fact that the National Academy of Sciences recommended a “watershed approach” to mitigation and the use of third-party providers in its 2001 report on compensatory mitigation.

Interwoven with the shift toward third-party mitigation for the Corps is that a permit decision is, at heart, a reactionary process. The Corps issues permits only in reaction to a permit applicant’s proposal. The Corps evaluates that proposal in light of the law and the regulations and is not supposed to advocate any particular solution. The hierarchy in the rules is a change, in that it now places the Corps in a position to show a preference for a solution. Many Corps officials understandably do not want to be put in a position of advocacy, and, therefore, are reluctant to push the hierarchy, since they are not supposed to be advocates for any particular solution.

Implementing the preference is also stymied by the Corps’ historic mistrust of private, entrepreneurial third-party mitigation providers by Corps staff. Speaking very broadly, and based on my experience as both a regulator and a banker, the two groups of people are very different in outlook and temperament. One group is cautious and bound to follow established rules and regulations; the other needs to take risks and develop new practices. It follows, then, that there would be some natural friction between the two groups, which has led to both real and perceived mistrust. Not surprisingly, both sides have been disappointed with one another over the preference issue. The mitigation banking community has been frustrated that Corps officials have not, in the bankers’ opinions, been either informing or promoting the regulatory hierarchy. While Corps officials have been annoyed at the mitigation bankers for pushing a solution that applicants may not put in their permit applications.

Corps headquarters, EPA headquarters, and mitigation bankers have agreed that part of the solution will be better documentation in permit decisions of both the hierarchy and compliance of a permit with all the required components of a mitigation plan (33 C.F.R. §332.4(c)). Mitigation bankers are also asking Corps districts to better highlight available mitigation options and the rule hierarchy on Corps websites, similar to the way they provide applicants with access to permit forms and guidelines for permit applications. The ongoing rollout of the Regional Internet Bank Information Tracking System database will help, but it is not really designed to help a permittee [LY1] figure out mitigation options and hierarchy. The Chicago District used to have a mitigation guidelines handout that explained the different mitigation options available to a permitee[LY2] . Something along those lines, set up to explain the hierarchy, would be most helpful.

The mitigation rule puts no modifiers—soft, mushy, or hard—to the preference. Mitigation banks are the first in a hierarchy of mitigation. The preamble to the rule discusses why. Although the rule provides for district engineers to be able to override the preference, those reasons are limited, and must be documented. I ask the Corps to both provide applicants with easily accessed information about mitigation options in the district, and to provide documentation in the permits as to the compliance with the preference.

David Urban is Director of Operations at Ecosystem Investment Partners (EIP), a private equity fund manager that invests in a variety of mitigation and conservation banks. He is President of the National Mitigation Banking Association (NMBA) from mid-2010 to mid- 2011. The views expressed here are the author’s only and not the stated policy of either the EIP or the NMBA.