SEPA
United States
Environmental Protection
Agency
Office of Wastewater Management
   Water Permits Division
    EPA 833-R-07-004
   Water Quality Trading
             Toolkit
      for  Permit Writers
              August 2007

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Foreword
EPA is pleased to issue the Water Quality Trading Toolkit, the first-ever how-to-trade manual with real-
world examples. In January 2003, EPA released the National Water Quality Trading Policy which laid out
a framework for trading under the Clean Water Act. In 2004 we published the Water Quality Trading
Assessment Handbook to help users determine whether trading is environmentally viable and financially
attractive in a watershed. This Toolkit builds upon the two earlier documents and provides more detail
regarding actual design and implementation of trading programs. This document will not only help
permit writers incorporate trading into National Pollutant Discharge Elimination System (NPDES) permits
but is a guide for anyone interested in establishing a water quality trading program in their watershed.
We look forward to hearing about the innovative trading  programs generated by this useful resource.

Benjamin H. Grumbles
Assistant Administrator for Water
Disclaimer
This guidance expresses the U.S. Environmental Protection Agency's (EPA) support for implementation
of water quality trading through National Pollutant Discharge Elimination System (NPDES) permit-
ting. Implementation of water quality trading will be governed by existing requirements of the Clean
Water Act (CWA) and EPA's NPDES implementing regulations. Those CWA provisions and regulations
contain legally binding requirements. This document  does not substitute for those provisions or regula-
tions. The recommendations in this guidance are not  binding; the permitting authority may consider
other approaches consistent with the CWA and EPA regulations. The use of non-mandatory words like
"should," "could," "would," "may,"  "might," "recommend," "encourage," "expect," and "can" in this
guidance mean solely that something is suggested or recommended, and not that it is legally required,
or that the suggestion or  recommendation imposes legally binding requirements, or that following the
suggestion or recommendation necessarily creates an expectation of EPA approval. When EPA makes a
permitting decision, it will make each decision on a case-by-case basis and will be guided by the applica-
ble requirements of the CWA and implementing regulations, taking into account comments and infor-
mation presented at that  time by interested persons regarding the appropriateness of applying these
recommendations to the particular situation. EPA may change this guidance in the future.

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Water Quality Trading
       Toolkit
  for Permit Writers
        August 2007

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                                                  Water Quality Trading Toolkit for Permit Writers


Contents

Acknowledgements	v
Abbreviations and Acronyms	vii
Executive Summary	ix
Fundamentals of Water Quality Trading	1
  Introduction	1
     Toolkit Organization and Instructions	2
  Overview of Water Quality Trading	4
     NPDES  Permitting Authority Role in Water Quality Trading	5
     Legal and Policy Framework for Water Quality Trading	5
  Essential Trading Information for Permit Writers	10
     What Pollutant Trading Does EPA Support?	10
     What Is the Appropriate Geographic Scope for Water Quality Trading?	12
     Types of Trading Scenarios	14
     Under What Circumstances Does EPA Support Trading?	20
     What Are Some Factors Involved in Determining a Reduction Credit?	28
     What Types of Effluent Limitations Could Be Met Through Trading?	36
     What Are the Roles of Stakeholders?	38
     How to Know  if the Trading Program is Working	40
     Developing NPDES Permits for Specific Trading Scenarios	41
     Where  Can I Get More Information?	42
Water Quality Trading Scenario:
Single Point Source-Single Point Source Trading	1
  Trade Agreements	1
  Components of a NPDES Permit	4
     Permit  Cover Page	5
     Effluent Limitations	5
     Monitoring	12
     Reporting Requirements	14
     Special  Conditions	17
Water Quality Trading Scenario:
Multiple Facility Point Source Trading	1
  Trade Agreements	1
  Components of a NPDES Permit	5
     Permit  Cover Page	5
     Effluent Limitations  .	6
     Monitoring	13
     Reporting Requirements	15
     Special  Conditions	19

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         Water Quality Trading Toolkit for Permit Writers


         Water Quality Trading Scenario:
         Point Source Credit Exchange	1
           Credit Exchange Administration	1
           Trade Agreements	2
           Components of a NPDES Permit	4
              Permit Cover Page	4
              Effluent Limitations	5
              Monitoring	13
              Reporting Requirements	16
              Special Conditions	19
         Water Quality Trading Scenario:
         Point Source-Nonpoint Source Trading	1
           Quantifying Nonpoint Source Loads and Credits	2
              Potential Issues	2
           Establishing Baselines for Nonpoint Source Sellers	6
              Nonpoint Source Baseline Derived from TMDL Load Allocations	7
              Nonpoint Source Baseline Set at a Minimum Level of BMP Implementation	8
              Determining Maximum Feasible Nonpoint Source Load Reductions	9
           Accountability	11
              Mechanisms Under the NPDES Program	11
              Mechanisms Outside of the NPDES Program	11
           Trade Agreements	12
           Components of a NPDES Permit	15
              Permit Cover Page	15
              Effluent Limitations	16
              Monitoring	22
              Reporting Requirements	24
              Special Conditions	27
         Water Quality Trading Scenario:
         Nonpoint Source Credit Exchange	1
           The Function of a Nonpoint Source Credit Exchange	2
              Accounting for Delivery and Location Ratios in a Nonpoint Source Credit Exchange .... 3
           Quantifying Nonpoint Source Loads and Credits	4
              Potential Issues	4
           Establishing Baselines for Nonpoint Source Sellers	8
              Nonpoint Source Baseline Derived from TMDL Load Allocations	9
              Nonpoint Source Baseline Set at a Minimum Level of BMP Implementation	10
              Determining Maximum Feasible Nonpoint Source Load Reductions	11
           Accountability	13
              Mechanisms Under the NPDES Program	13
              Mechanisms Outside of the NPDES Program	13
11

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                                                Water Quality Trading Toolkit for Permit Writers


  Trade Agreements	14
                                                                                     r™\
     Trade Agreements with Nonpoint Source Credit Exchanges	14        ^
  Components of a NPDES Permit	18        ^
     Permit Cover Page	18        H
     Effluent Limitations	19        ^
     Monitoring	25        JJJ
     Reporting Requirements	27        co
     Special Conditions	30

Glossary

References

Appendix A Water Quality Trading Program Fact Sheets

Appendix B US EPA Office of Water, Water Quality Trading Policy

Appendix C Trading Forms and Templates

Appendix D Use of Cost Share

Appendix E Permit Writer Checklists

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Water Quality Trading Toolkit for Permit Writers

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                                                      Water Quality Trading Toolkit for Permit Writers
Acknowledgements
Virginia (Ginny) Kibler, Water Permits Division, Office of Wastewater Management,                     ^
Office of Water, U.S. Environmental Protection Agency, Washington, DC, was the primary                z-
author of this Toolkit.                                                                            '-•'
Many individuals assisted in this effort, including the following:
George Azevedo, Water Division, U.S. EPA, Region 5, Chicago, IL
Patrick Bradley, Water Permits Division, Office of Water, U.S. EPA, Washington, DC
Jim Curtin, Office of General Counsel, U.S. EPA, Washington, DC
Todd Doley, Engineering and Analysis Division, U.S. EPA, Washington, DC
Jordan Dorfman, Municipal Support Division, U.S. EPA, Washington, DC
Katharine Dowell, Water Policy Office, Office of Water, U.S. EPA, Washington, DC
Pete Ford, Office of General Counsel, U.S. EPA, Washington, DC
Mindy Gampel, Office of Policy, Economics and Innovation, U.S. EPA, Washington, DC
Lynda Hall, Wetlands Division,  Office of Water, U.S. EPA, Washington, DC
Sylvia Horwitz, Office of General Counsel, U.S. EPA, Washington, DC
Kavya Kasturi, ORISE intern, Water Permits Division, U.S. EPA, Washington, DC
Michele Knorr, Office of General Counsel, U.S. EPA, Washington, DC
Robert Koroncai, Water Protection Division, U.S. EPA, Region  3,  Philadelphia, PA
Maureen Krudner, Division of Environmental Planning and Protection, U.S. EPA,
       Region 2, New York City, NY.
Chris Lewicki, Assessment  and  Watershed Protection Division, U.S. EPA, Washington, DC
Mike Muse, Drinking Water Protection Division, U.S. EPA, Washington,
Brian Nickel, Office of Water and Watersheds, U.S. EPA, Region  10, Seattle, WA
Pooja Parikh, Office of General Counsel, U.S. EPA. Washington, DC
Amy Parker, Health and Ecological Criteria Division, U.S. EPA, Washington, DC
Eric Perkins, Office of Ecosystem Protection, U.S. EPA, Region  1,  Boston, MA
Jan Pickrel, Water Permits  Division, Office of Water,  U.S. EPA,  Washington, DC
Gerald Potamis, Office of Ecosystem Protection, U.S. EPA, Region 1, Boston, MA (retired)
Morgan Robertson, ORISE  intern, Wetlands Division, U.S. EPA, Washington, DC
Steve Rubin, Office of Enforcement and Compliance Assurance,  U.S.  EPA, Washington, DC
Claire Schary, Office  of Water and Watersheds, U.S. EPA, Region 10,  Seattle, WA
Lisa Thorstenberg, Water Division, U.S. EPA, Region 5, Chicago,  IL (retired)
Stephanie VonFeck, Municipal  Support Division, U.S. EPA, Washington, DC
Allison Wiedeman, Water Permits Division, U.S. EPA, Washington, DC
Richard Witt, Office of General Counsel, U.S. EPA, Washington, DC

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         Water Quality Trading Toolkit for Permit Writers

                  Water Permits Wet Weather Team
                  Kevin Bell, Office of Enforcement and Compliance Assurance, U.S. EPA, Washington, DC
                  Donald Brady, Water Permits Division, Office of Water, U.S. EPA, Washington, DC
                  Roosevelt Childress, Water Management Division, U.S. EPA, Region 4, Atlanta, GA
                  Susmita Dubay, Office of General Counsel, U.S. EPA, Washington, DC
                  Jack Faulk, Water Permits Division, Office of Water, U.S. EPA, Washington, DC
                  Barry Korb, Office of Policy, Economics, and Innovation, U.S. EPA, Washington, DC
                  Michael Lee, Office of General Counsel, U.S. EPA, Washington, DC
                  Jenny Molloy, Water Permits Division, Office of Water, U.S. EPA, Washington, DC
                  Hale Thurston, National Center for Environmental Assessment, Office of Research and
                         Development, Cincinnati, OH
                  Kevin Weiss, Water Permits Division, Office of Water, U.S. EPA, Washington,  DC
                  Marcus Zobrist, Water Permits Division, Office of Water, U.S. EPA, Washington, DC

                  States
                  Dan Dell, Department of Environmental Quality, Lansing, Ml
                  Steve Sommer, Pollution Control Agency, St. Paul, MN
                  Ann Smith, Department of Environmental Protection, Harrisburg, PA
                  Paul Stacey, Department of Environmental Protection, Hartford, CT
                  Andrew Zemba, Department of Environmental Protection, Harrisburg, PA

                  Municipality
                  Jim Middaugh, Bureau of Environmental Services, Portland, OR
                  In addition, Kellie DuBay, Greg Currey, Jennifer Ferrando, Christy Williams, Krista Carlson,
                  Jae Kim, Kristin Schatmeyer, Regina Scheibner, and Jeff Strong from Tetra Tech, Inc.,
                  contributed to the development, design, and final production of this Toolkit.
VI

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                                                     Water Quality Trading Toolkit for Permit Writers
Abbreviations and Acronyms

       AFO    animal feeding operation
      AML    average monthly limit
      AWL    average weekly limit
      BMP    best management practices
       BPJ    best professional judgment
     CBOD    carbonaceous biochemical oxygen demand
       CSO    combined sewer overflow
      CWA    Clean Water Act
      DMR    discharge monitoring report
       EPA    U.S. Environmental Protection Agency
       gpd    gallons per day
       ICIS    Integrated Compliance Information System
        LA    load allocation
      MEP    maximum extent practicable
       mgd    million gallons per day
       MS4    municipal separate storm sewer system
    NPDES    National Pollutant Discharge Elimination System
     NRCS    Natural Resources Conservation Service
      PBTs    persistent bioaccumulative toxics
       PCS    Permit Compliance System
     POTW    publicly owned treatment works
       RNC    reportable noncompliance
      SISL    Surface Irrigation Soil Loss
       SNC    significant noncompliance
     SWCD    Soil and Water Conservation District
     TBEL    technology-based effluent limitations
      TKN    total Kjeldahl nitrogen
     TMDL    total maximum daily load
        TN    total nitrogen
        TP    total phosphorus
       TRE    toxicity reduction evaluations
     USDA    U.S. Department of Agriculture
     USLE    Universal Soil Loss Equation
      WLA    wasteload allocation
   WQBEL    water quality-based effluent limitations
<***
n
                                                                                            Vll

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            Water Quality Trading Toolkit for Permit Writers
Vlll

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                                  Water Quality Trading Toolkit for Permit Writers
             Water Quality Trading
      KEYS TO  SUCCESS
Every trading program should strive to be:
T
 R
A
 D
 E
 ransparent
  Keep the public informed at every step of the process by:
  * Involving stakeholders in the design of the trading program
  * Communicating to the public information deemed necessary to
    maintain stakeholder confidence
 eal
  Show pollutant reductions and water quality improvement by:
  * Measuring reductions
  * Verifying BMP installation and maintenance, e.g., through a
    third party
ccountable
  Manage the program effectively by:
  * Including trade tracking mechanisms in the program design
  * Periodically reviewing the program's process and results
 efensible
  Base the program on sound science and protocol by:
  "A" Using dynamic water quality models
  * Requiring credit generators to certify credits
  * Developing scientifically based trading ratios

nforceable
  Establish responsibility for meeting or exceeding water quality
  standards by:
  * Incorporating clearly articulated trading provisions in NPDES
    permits
                                                      ix

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                                                           Water Quality Trading Toolkit for Permit Writers
Introduction
    For more than a decade, the U.S. Environmental Protection Agency (EPA) has promoted
    and supported the concept of water quality trading as an innovative approach for achiev-
ing water quality standards with flexibility and economic efficiency. A variety of pilot pro-
grams and projects have generated useful information on how to conduct water quality
trading, yet the number of actual trades that have occurred is relatively small. EPA believes
that as awareness of the potential benefits of water quality trading grows, National-Pollution
Discharge Elimination System (NPDES) permittees will be more interested in water quality
trading and request permitting authorities to incorporate trading provisions into their per-
mits. As a result, the process for crafting water quality trading programs and requirements
should involve the permitting authority staff as early as possible. This will help ensure that
trading programs are effective and workable and fully consistent with the implementation
and compliance framework of the permitting authority's NPDES program.

This Water Quality Trading Toolkit for Permit Writers (Toolkit) is intended to facilitate trad-
ing by providing NPDES permitting authorities with the tools they need to facilitate trading
and to authorize and incorporate trading in NPDES permits. Although the Toolkit primarily
targets state, tribal and EPA NPDES permitting authorities, it might also be useful to other
stakeholders  interested in water quality trading and the NPDES permitting process. Users of
the Toolkit should have an existing, fundamental understanding of both water quality trad-
ing concepts and the NPDES permitting process. To ensure consistency and minimize redun-
dancy, the Toolkit refers users to existing EPA guidance on water quality trading and NPDES
permit development and issuance whenever possible.

This guidance is based on EPA's Water Quality Trading Policy (Trading Policy) published in
January 2003. The Trading Policy was written on the assumption that, if a total maximum
daily load (TMDL) were in place, all trading partners would be covered by the TPvlDL. In this
case, wasteload allocations (WLAs) and load allocations (LAs) under the TMDL form the
baseline for trading. In all cases, permits must be designed to meet water quality standards as
required under Clean Water Act (CWA) section 301 (b)(1)(C). Inclusion of trading provisions in
NPDES permits should facilitate meeting this requirement.

Water quality trading  programs are necessarily tailored to meet the needs of the discharg-
ers and stakeholders in the watersheds for which they are developed. Because each water-
shed is unique, water quality trading  programs may exist in many different forms.  It would
be impracticable and cumbersome to attempt to cover in this document every possible type
of program that might be developed  to meet an individual watershed's needs. This Toolkit
attempts to equip program developers and permit writers with an  understanding of the
issues involved in water quality trading and the types of program characteristics that are best
suited to address them. The fact that  a particular trading program design or element is not
represented in the examples presented in the Toolkit does not necessarily mean that it is not
appropriate or would not be supported by EPA.

Fundamentals of Water Quality Trading
 Introduction  Overview of  Essential Trading
         Water Quality Information for                                Factors tor
         Trading     Permit Writers                Possible            Determining                    Is the Trading  NPDES Permits
                          Tradeable   Geographic Trading   Circumstances  Pollutant      Effluent Limit Stakeholder  Program    for Trading
                          Pollutants   Scope    Scenarios  for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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Water Quality Trading Toolkit for Permit Writers
          Toolkit Organization and Instructions
          With the permitting authority as the primary target user, the Toolkit first addresses broad
          water quality trading policy issues and then focuses on specific trading scenarios. Water qual-
          ity trading scenarios fall into two  major categories: (1) point source-point source trading and
          (2) point source-nonpoint source  trading. Point source-point source trading includes single
          point source-single point source trading, multiple facility point source trading, and  point
          source credit exchanges. Point source-nonpoint source trading includes single point source-
          nonpoint source trading and nonpoint source credit exchanges.

          The first section of the Toolkit, Fundamentals of Water Quality Trading, addresses broad
          water quality trading policy issues; this section applies to all Toolkit users. Within the Funda-
          mentals section, the Overview of  Water Quality Trading section addresses the role of NPDES
          permitting authorities in water quality trading and the legal and policy framework for water
          quality trading. The Essential Trading Information for Permit Writers section discusses specific
          water quality trading issues relevant to NPDES permitting authorities. Issues addressed in this
          section include the type of pollutants to be traded, definition of a pollutant reduction credit,
          circumstances conducive to trading, baselines for water quality trading, trading ratios, timing
          and duration of credits, and the geographic scope of trades. All Toolkit  users should have a
          thorough understanding of the policy and technical issues addressed in these sections before
          proceeding to the specific trading scenario sections. Understanding of the important policy
          and technical issues contained in the initial sections of the Toolkit is essential to prevent inef-
          fective  or inappropriate water quality trading conditions in NPDES permits.  After reviewing
          the initial sections of the Toolkit, the user is prepared to proceed to the appropriate section
          of the Toolkit that focuses on a specific trading scenario. The intent is to allow the Toolkit
          user to review only the information that applies to the specific trading scenario of interest.
          The following diagram (Figure 1)  is intended to help navigate the trading scenario sections of
          the Toolkit:
                                            Toolkit Navigation

                                                      Start
                            Will a
                        Credit Exchange
                           be used?
                Goto
            Nonpoint Source
      Goto
    Point Source-
   Nonpoint Source
     Trading
     Section
                                         More than two
                                         point sources?
                                                                       Yes>
                                                 \No
                   Point Source
                  Credit Exchange
                      used?
                                                               No,
                              ores
                                  Goto
                               Point Source-
                               Point Source
                                 Trading
                                 Section
                                                          Multiple Facility
                                                           Point Source
                                                             Trading
                                                             Section
                                             Goto
                                           Point Source
                                          Credit Exchange
                                            Section
          Figure 1. Toolkit navigation.
Fundamentals of Water Quality Trading
 Introduction  Overview of  Essential Trading
         Water Quality  Information for
         Trading     Permit Writers
                           Tradeable
                           Pollutants
       Possible
Geographic  Trading
Scope    Scenarios
Circumstances
for Trading
Factors for
Determining
Pollutant
Reduction Credits
                Is the Trading  NPDES Permits
Effluent Limit  Stakeholder  Program     for Trading
Types     Roles     Working?    Scenarios

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                                                            Water Quality Trading Toolkit for Permit Writers


For example, a permitting authority developing conditions in a NPDES permit to authorize
and facilitate trading between two single point sources would first review the Overview
of Water Quality Trading and Essential Trading Information for Permit Writers sections
for important policy and technical information and then carefully review the Single Point
Source-Single Point Source Trading scenario for specifics pertaining to trading between two
single point sources.

The Toolkit is intended to assist with developing and implementing NPDES permits that allow
for water quality trading. Each trading scenario section walks NPDES permitting authorities
through the normal process of developing the components of a NPDES permit and provides
the tools they need to incorporate water quality trading into that process. Each section of the
Toolkit contains two important components that supplement the narrative: (1) a hypothetical
trading example and (2) real-world examples that apply the trading concepts discussed in the
section.  Each of these components of the Toolkit is presented in a unique  format, as illustrat-
ed below, to ensure easy identification.


   Hypothetical Examples
   Hypothetical examples appear throughout each section highlighted in a blue-shaded text box.
         Real-World Examples
            Where applicable, each section includes either summaries of real-world examples or Web pages
            that provide more detailed information. These examples appear in a green-shaded text box. When
            actual permit provisions from these examples are available, see Appendix A for the exact permit
            language.
Fundamentals of Water Quality Trading
 Introduction  Overview of   Essential Trading
         Water Quality  Information for                                Factors for
         Trading     Permit Writers                Possible            Determining                    Is the Trading  NPDES Permits
                           Tradeable  Geographic Trading   Circumstances  Pollutant      Effluent Limit  Stakeholder  Program    for Trading
                           Pollutants  Scope    Scenarios  for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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Water Quality Trading Toolkit for Permit Writers
          Overview of Water Quality Trading

                 Water quality trading is an innovative, market-based approach that if used in certain
                 watersheds can achieve water quality standards more efficiently and at lower cost
          than traditional approaches. Costs to control discharges compared with runoff for a given
          pollutant often vary significantly in a watershed, creating the impetus for water quality trad-
          ing. Through water quality trading, facilities that face higher pollutant control costs to,meet
          their regulatory obligations can purchase pollutant reduction credits from other sources that
          can generate these reductions at lower cost, thus achieving the same or better overall water
          quality improvement. In most cases,  trading takes place on a watershed level under a pollut-
          ant cap (the total pollutant load that can be assimilated by a waterbody without exceeding
          water quality standards) developed through the TMDL process or a similar type of water
          quality analysis that produces information on pollutant loadings and resulting water quality
          conditions (USEPA 2004).

          For example, where a TMDL has been established, the baselines relative to which point
          sources and nonpoint sources can generate credits are their WLAs and LAs (for definitions,
          see glossary), respectively. To generate tradable credits, a source would need to reduce load-
          ings below the allocation set by the TMDL. A source buying credits would be able to increase
          its discharge over what would otherwise be allowed, but only by the amount of the credits
          purchased from another source (or sources) and subject to other conditions specified in the
          permit and trading program. The result would be that, at a minimum, the post-trade loadings
          from the trading sources would be equal to or less than the loadings that would have been
          discharged by the sources in the absence of trading. Trading programs may also be designed
          to require a net reduction in loadings when trading occurs.

          EPA's 2004 Water Quality Trading Assessment Handbook notes that,  in water quality trad-
          ing markets, the marketable product is the over control of pollutant  loadings. A pollutant
          reduction credit is the amount (mass) of  pollutant reduced over a specified time period
          (day, month, year) that is in excess of the required reduction for a certain source. The excess
          pounds of pollutant reduced can be  made available for a NPDES permittee to purchase as
          credits. It is important to note that, due to trade ratios, one pound of pollutant reduced at
          the seller's discharge location is not necessarily equal to one pound of pollutant reduced at
          the buyer's location. Therefore, for the purposes of this Toolkit, one credit will be equal to
          one unit of load reduction per time (Ib/day) at the location of the buyer.1 One credit may  be
          greater or less than one unit of load reduction per time at the location of the seller.
          1 The definition of a credit may vary from program to program.
Fundamentals of Walur Quality Trading
 Introduction
        Overview of  Essential Trading
        Water Quality Information for                               Factors for
        Trading     Permit Writers                Possible            Determining                    is the Trading  NPDES Permits
                         Tradeable  Geographic  Trading   Circumstances  Pollutant      Effluent Limit  Stakeholder  Program    for Trading
                         Pollutants  Scope    Scenarios  for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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                                                         Water Quality Trading Toolkit for Permit Writers


NPDES Permitting Authority Role in Water Quality
Trading
EPA or an authorized state, territory, or tribe is the permitting authority for NPDES permits.
When states are referenced in this document, it is meant to also include state, territorial, and
tribal permitting authorities.  Regardless of the entity issuing NPDES permits, the process for
crafting water quality trading requirements should involve the permitting authority staff.
This will help ensure that trading provisions are fully consistent with the implementation and
compliance framework of the particular jurisdiction's NPDES program. The role of  NPDES per-
mitting authorities in water quality trading should include the following:
    •  Advising state or local entities, as they develop trading frameworks, on what is
       needed for NPDES programs to authorize trading
    •  Developing enforceable trading provisions, NPDES permit limitations and conditions
       that meet the requirements of the CWA and its implementing regulations, consistent
       with the following:
       - EPA's Trading Policy
       - State laws, regulations, and policy
       - Any applicable trading program

    •  Helping to develop and implement mechanisms to ensure accountability and
       compliance with trading requirements. Examples include the following:
       - Credit certification forms
       - Trade tracking mechanisms
       - Enforcement if permit requirements are not met
       - Review of monitoring data from credit buyers and sellers

In addition to the expertise used to develop permits and especially water quality-based
effluent limits  (WQBELs), the NPDES permitting authority will need an understanding of the
following:
    •  The legal and policy framework for water quality trading
    •  The specific issues involved in incorporating water quality trading into NPDES permits
    •  The various trading scenarios and the types of sources, watersheds and pollutants for
       which they are appropriate

The remainder of this section briefly describes the federal legal and policy framework for
water quality trading and  provides examples of state regulations, policy, and guidance that
establish a framework for trading  or address specific aspects of trading.


Legal and Policy Framework for Water Quality Trading
Where trading is feasible, the terms of a trade will depend, in part, on the structure of a
trading program or other trading requirements developed by the state or other permitting
authority. These in turn must comply with federal and state rules that define the legal frame-
work within which trading programs and requirements are developed.

Fundamentals of Water Quality Trading
        Overview of  Essential Trading
        Water Quality Information for                               Factors for
        Trading     Permit Writers                 Possible           Determining                   Is the Trading  NPDES Permits
                         Tradeable   Geographic  Trading   Circumstances  Pollutant      Effluent Limit  Stakeholder  Program    for Trading
                         Pollutants   Scope     Scenarios  for Trading   Reduction Credits  Types      Roles     Working?    Scenarios

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Water Quality Trading Toolkit for Permit Writers


          Federal Law, Regulations, and Policy
          The CWA, 33 United States Code (U.S.C.) section 1251, et seq. and its implementing regula-
          tions establish the legal framework within which a trading program involving regulated point
          sources would be developed. The NPDES regulations at Title 40 of the Code of Federal Regu-
          lations (CFR) 122.44(d) describe the requirements for WQBELs that are set at  levels necessary
          to achieve water quality standards. EPA's Trading Policy provides states with guidance on how
          to facilitate trading consistent with the CWA and its implementing regulations. The Trad-
          ing Policy is included in this document as Appendix B. Many of the concepts in the Trading
          Policy are explored in greater detail in the section on Essential Trading Information for Permit
          Writers. In addition, relevant portions of the Trading Policy are referenced throughout the
          Toolkit.

          Under CWA section 301 (b), NPDES permits must contain technology-based effluent limita-
          tions (TBELs) and more stringent effluent limitations when necessary to meet applicable
          water quality standards. Trading cannot be used to meet TBELs, except where specifically
          authorized by effluent guidelines (e.g., the water bubble provisions in the effluent guide-
          lines for the Iron and Steel point source category).  EPA has promulgated regulations at 40
          CFR Part 122 specifying  when WQBELs under CWA  section 301(b)(1)(C) are necessary and
          how such limitations are to be derived. Among other things, EPA's regulations at 40 CFR
          122.44(d)(1)(vii) require the permitting authority to ensure that: (a) the level of water quality
          to be achieved by limits on point sources is derived from, and complies with, all applicable
          water quality standards; and (b) effluent limitations developed to protect a narrative  water
          quality criterion, a numeric water quality criterion, or both, are consistent with the assump-
          tions and requirements of any applicable WLA for the discharge prepared by the state and
          approved by EPA pursuant to 40 CFR 130.7. To be lawful, a WQBEL must be consistent  with
          the requirements of CWA section 301 (b)(1)(C) and  EPA's regulations at 40 CFR 122.44(d)(1).

          WQBELs must also be calculated at levels that do not result in  a shift in loadings that causes
          a localized impairment of designated uses. A localized impairment may occur wherever the
          applicable water quality criteria are exceeded. Where state or tribal water quality standards
          allow for mixing zones, the WQBELs must be consistent with the restrictions associated with
          those  mixing zones.

          The requirements of CWA section 301(b)(1)(C) and EPA's regulations at 40 CFR Part 122 apply
          to all WQBELs, including those based on a water quality trade.


          State  Regulations, Policy, and Guidance
          EPA issued its Trading Policy to encourage state  regulatory agencies to include trading as
          an option for a point source to meet water quality standards.  Some states have chosen to
          develop regulations, policy, or guidance to do any of the following:
              •  Establish a statewide or watershed trading framework
              •  Support local trading frameworks
              •  Address specific aspects of a trading program
Fundamentals of Water Duality Trading
 introduction
         Overview of  Essential Trading
         Water duality Information for                                Factors for
         Trading    Permit Writers                Possible            Determining                    is the Trading  NPDES Permits
                          Tradeahle   Geographic Trading   Circumstances  Pollutant      Effluent Limit Stakeholder  Program    for Trading
                          Pollutants   Scope    Scenarios  for Trading    Reduction Credits  Types     floles     Working?    Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers


State trading rules should be consistent with the CWA, NPDES permit requirements, and state
water quality standards. The following sections describe various state approaches for facili-
tating water quality trading.


Establishing a Statewide or Watershed Trading Framework
States may choose to develop state rules or regulations to facilitate the consistent and
efficient implementation of a statewide or watershed-wide trading program and provide a
regulatory framework for local rulemaking. Where a statewide or watershed trading pro-
gram is in place, permittees or other stakeholders interested in pursuing trading know what
is expected, what rules apply, and with whom they need to coordinate. NPDES authorities
should participate in the development of state rules to ensure trading  programs are consis-
tent with NPDES permitting requirements and will address the needs of permit writers.

Connecticut has adopted trading legislation. Public Act No. 01-180 establishes the trading
framework for a Long Island Sound Nitrogen Credit Exchange Program to be directed by a
Nitrogen Credit Advisory Board appointed by the General Assembly and the governor. The
Nitrogen Credit Exchange Program establishes a well-defined trading structure supported
and regulated by limits mandated in state law. The state legislation specifies trading  ratios
(e.g., delivery and location ratios) and accounting methodologies to formalize all calculations
used in trading.

States do not necessarily have to develop trading rules and regulations to provide a trading
framework. Some states have developed guidance documents and other tools to assist dis-
chargers interested in trading. Pollutant trading is recognized in Idaho's Water Quality Stan-
dards regulations, and the Idaho  Department of Environmental Quality (DEQ) has produced
the Pollutant Trading Guidance that establishes the procedures to be followed for pollutant
trading. The draft document specifies the conditions under which pollutant trading may take
place, establishes record-keeping and reporting procedures, and prescribes how best man-
agement practices (BMPs) are to be developed for each watershed in which pollutant trad-
ing occurs. Idaho DEQ and EPA Region 10 will rely on this document to convey information
to stakeholders about the state's  ground rules for authorizing and verifying trades and to
ensure a level of regulatory consistency  between the Lower Boise project and other emerg-
ing projects across the state. The  nonprofit organization established to record trades for the
Lower Boise and other watersheds with  trading programs will also refer to the guidance for
the transaction information it needs to record and make available to trading participants,
EPA and DEQ, and the general public.

Trade Facilitation
The Virginia General Assembly passed legislation authorizing the creation of a Chesapeake
Bay Nutrient Credit Exchange Program in 2005. This program includes the issuance of a
watershed-based  nutrient general permit that incorporates trading, as well as the forma-
tion of the Virginia Nutrient Credit Exchange Association, which coordinates and facilitates
trading among its members. The Virginia Department of Environmental Quality (VA DEQ) is
charged with developing the watershed-based permit and overseeing the credit exchange.
The VA DEQ must certify the credits purchased by facilities and publish a  record of all credits
Fundamentals of Water Quality Trading
 introduction
         Overview of  Essential Trading
         Water Quality Information for                                Factors for
         Trading    Permit Writers                Possible            Determining                    Is the Trading NPDES Permits
                          Tradeable  Geographic  Trading    Circumstances   Pollutant      Effluent Limit  Stakeholder   Program    for Trading
                          Pollutants  Scope    Scenarios  for Trading    Reduction Credits  Types     Holes      Working?   Scenarios

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Water Quality Trading Toolkit for Permit Writers


          available as well as the trades that have taken place. In addition, the legislation established
          that the VA DEQ may conduct audits of the Virginia Nutrient Credit Exchange Association to
          ensure completeness and accuracy of reports.


          Supporting Local Trading Frameworks
          Some states allow trading without having state trading rules, policy, or guidance specifi-
          cally addressing pollutant trading. For example, the North Carolina Department of Environ-
          ment and Natural  Resources (DENR) works with any watershed group interested in trading
          to develop a trading framework for that watershed and cover dischargers under an overlay
          permit. This trading framework originated in the Neuse River watershed. The state classified
          the river as a Nutrient Sensitive Water (NSW). Major fish kills in 1995 prompted legislation
          requiring nutrient controls and led the North Carolina Environmental Management Commis-
          sion (EMC) to  revise its 1988 Nutrient Management Strategy for the Neuse River Basin. The
          1997 strategy  established a goal that sources would reduce total nitrogen (TN) loads to the
          estuary by 30  percent by the year 2003. Subsequently, the North Carolina EMC adopted a
          rules package in 1998 to support the strategy. The rules were aimed at reducing TN impacts
          in the watershed by promoting nutrient management activities for agriculture, stormwater,
          point sources, and riparian areas. One of the rules under the strategy, the Wastewater Dis-
          charge Requirements rule, allowed dischargers to form an association to meet their allocated
          TN load collectively. Though not  expressly stated  in the rule, trading is allowed under this
          option among the members of the association. Members are allowed to purchase, sell, trade,
          or lease their individual portions of the estuary TN allocation (which are included in their
          permits as mass-based effluent limits) among co-permittees covered under an overlay permit
          so as long as they do not exceed  the association's overall estuary TN allocation (2.8 million
          pounds per year). Individual trades conducted under the overlay permits are typically not
          reviewed by the state.


          Market Drivers
          In most states, meeting water quality standards, WLAs under TMDLs, or other kinds of pollut-
          ant caps are the leading drivers for water quality trading markets; however, some states  have
          developed state regulations to allow trading in other circumstances, such as on Wisconsin's
          Red Cedar River. The primary regulatory driver for point sources involved in trading on the
          Red Cedar River is  Chapter NR 217 of the Wisconsin Administrative Code. This  chapter of
          the code mandates 1 mg/L total phosphorus (TP) discharge limits for municipal treatment
          plants with a monthly discharge exceeding 150 pounds of TP and for industrial sources with a
          monthly discharge exceeding 60  pounds of TP. This cap is used to control phosphorous load-
          ings and provides an incentive for water quality trading in the Red Cedar River watershed, as
          well as a baseline against which trading can be conducted.

          There may be  other specific aspects of a trading  program that a state chooses to address
          through regulation, policy or guidance, such as selection of approved BMPs for generating
          tradable credits from nonpoint sources or general eligibility requirements (e.g., compliance
          history) for point sources wishing to engage in a trading program. Permitting authorities
Fundamentals of Water Quality Trading
        Overview of  Essential Trading
        Water Quality Information for                               Factors for                             .,„„„„  .
        Trading    Permit Writers                Possible           Determining                    Is the Trading  NPDES Permits
                          Tradeable  Geographic  Trading    Circumstances  Pollutant      Effluent limit  Stakeholder   Program     for Trading
                          Pollutants  Scope    Scenarios   for Trading    Reduction Credits  Types     Roles      Working?    Scenarios

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                                                                Water Quality Trading Toolkit for Permit Writers


 should be familiar with all applicable federal and state policies, regulations, and guidance
 before beginning to develop a permit that incorporates trading.

 As is apparent from this discussion of the legal and policy framework for water quality trad-
 ing, the decision to incorporate trading into a NPDES permit requires careful consideration.
 The permitting authority should, first,  be aware of the broader state/local/watershed context
 for trading and consider how this context will affect the incorporation of trading provisions
 into NPDES permits. Specific permit conditions should be guided by state regulations and
 policies, including any established trading framework. The following section. Essential Trad-
 ing Information for Permit Writers, provides an overview of issues that permitting authorities
 should consider, within the context of established regulation and policy,  before developing
 permits that incorporate water quality trading.
Fundamentals of Water Quality Tra Jim
 Introduction
         Overview of  Essential Trading
         Water Quality Information for                                   Factors for
         Trading     Permit Writers                  Possible             Determining                      Is the Trading  NPDES Permits
                            Tradeable   Geographic  Trading   Circumstances  Pollutant       Effluent Limit  Stakeholder   Program    for Trading
                            Pollutants   Scope    Scenarios  for Trading    Reduction Credits  Types      Roles      Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                   Essential Trading Information for Permit

                   Writers

                       Permitting authorities are key players in any water quality trading program. Trades involv-
                       ing point sources, whether they are buyers or sellers, should be reflected in their NPDES
                   permits. Listed below are some fundamental issues regulatory authorities should address
                   when establishing a trading program or evaluating potential trading opportunities.2 It is
                   essential that the permitting authority have a clear understanding of these fundamental
                   issues and how they will affect development of the NPDES permit that implements water
                   quality trading.
                       •  Pollutants most suitable  for trading
                       •  Geographic scope of trading
                       •  Types of trading scenarios
                       •  Appropriate circumstances for trading
                       •  Definition of a pollutant reduction credit
                       •  Definition of a baseline for generating credits
                       •  Trading ratios
                       •  Types of effluent limitations that may be met through trading
                       •  Credit reconciliation based on timing and duration of credits
                       •  Role of stakeholders
                       •  Potential for and avoidance of localized  exceedances of water quality standards

                   Appendix E provides the permit writer with a list of fundamental questions that should be
                   answered when implementing water quality trading in a NPDES permit.


                   What Pollutant Trading Does EPA Support?
                   Not all pollutants are necessarily suitable for trading. Regulatory authorities should deter-
                   mine which pollutants may be traded within a specific watershed or as part of a particular
                   trading program and may determine that certain pollutants may not be traded at all. EPA's
                   Trading Policy supports trading for TN, TP, and sediment and indicates that other pollut-
                   ants may be considered for trading on a case-by-case basis. EPA does not support trading of
                   persistent bioaccumulative toxics (PBTs). For a list of pollutants that EPA considers PBTs see
                   www.epa.gov/pbt/index.htm. In general, pollutants that cause adverse water quality effects
                    This guidance is based on EPA's Trading Policy. The Trading Policy was written on the assumption that al! trading
                    partners would be covered by the same TMDL analysis. Thus, there are some suggestions within this document that
                    may not apply to trades in which the trading partners are not under the same TMDL. In all cases where trading
                    provisions are included in a permit, it remains the responsibility of the permitting authority to issue permits
                    designed to meet water quality standards as required under CWA section 301(b)(1)(C).
10
          Fundamentals of Water Quality Trading
          introduction  Overview of
                  Water Quality
                  Trading
Essential Trading
Information for                               Factors for
Permit Writers                Possible            Determining                    is the Trading  NPDES Permits
         Tradeable  Geographic  Trading   Circumstances  Pollutant      Effluent Limit  Stakeholder  Program    for Trading
         Pollutants  Scope    Scenarios  for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers


primarily as a result of cumulative loadings that are high relative to the contributions of any
individual source are more suitable for trading than those that exert acute effects over small
areas and in relatively low concentrations. Chapter 2 of EPA's Water Quality Trading -Assess-
ment Handbook provides more information regarding trading suitability analyses for specific
pollutants.

Nonconventional Pollutants                      ™   ~       ~
                                                             Nutrient trading programs:
EPA's Trading Policy explicitly supports trading to reduce
                     r    ,,.,,,.                ,         Long Island Sound. Connecticut
nutrients. A number of established trading programs and             °
pilot projects have shown that nitrogen and phosphorus          Lower Boise River>Idaho
can be successfully traded within a watershed to make            Truckee River, Nevada
progress toward meeting a TMDL and water quality               Neuse River Basill) North Carolina
standards. Appendices A and B of EPA's Water Quality Trading
               ..    ,     • ,  ,   .,  , •  ,     •                 Red Cedar River, Wisconsin
/Assessment Handbook provide detailed information on
evaluating trading suitability for phosphorus and nitrogen.        Southern Minnesota Beet Sugar
                                                             Cooperative, Minnesota
-r.   ..     r  i          r           •IM.J-                       %tm:tmm'?&Mix,•.•*. .ta****^**-^.^*. .

Does EPA Support Cross-Pollutant Trading?
EPA's Trading Policy supports cross-pollutant trading programs (i.e., trading  between two
different pollutant parameters) when mass loads that are approximately equal with respect
to their impacts on the aquatic environment can be calculated. The Trading  Policy explicitly
supports cross-pollutant trading for oxygen-related pollutants where there  is adequate
information to establish and correlate impacts on water quality.

         Rahr Malting Company, Minnesota
            The Rahr Malting facility offsets 5-day carbonaceous  biochemical oxygen demand (CBOD,-) dis-
            charges from its facility by funding upstream nonpoint source phosphorus reductions. This trade
            was implemented to reduce downstream oxygen demand (Breetz et al. 2004). Phosphorus loads
            affect oxygen demand and thus could be traded for CBODS once correlations between the impacts of
            the upstream phosphorus discharges and the downstream CBODg discharges were determined.


Fundamentals of Water Quality Trading
 Introduction  Overview of  Essential Trading
        Water Quality Information for
        Trading     Permit Writers
                             Factors for
             Possible            Determining                   is the Trading  NPDES Permits
Tradeable  Geographic Trading   Circumstances   Pollutant      Effluent Limit  Stakeholder  Program    for Trading
Pollutants  Scope    Scenarios  for Trading    Reduction Credits  Types     Roles     Working?   Scenarios

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Water Quality Trading Toolkit for Permit Writers


          What Is the Appropriate Geographic Scope for Water
          Quality Trading?
          EPA's Trading Policy states that all water quality trading should occur either within a water-
          shed or within a defined area for which a TMDL has been approved. But what, exactly, does
          "trading within a watershed" mean? For example, how large can the watershed be? Is it
          appropriate to trade between dischargers to different streams within the same watershed?
          Does it matter where the trading partners' discharges are located relative to one another?
          The answers to these questions will vary on the basis of a number of factors. In general, the
          geographic scope of a trade should be no larger than necessary to encompass the universe
          of sources that contribute to a specific water quality problem that is to be addressed through
          trading. Beyond this, regulatory authorities should carefully consider the following factors
          when determining the appropriate geographic scope of a water quality trade. Many of the
          decisions  regarding geographic scope are synonymous with decisions that define TMDLs. For
          this reason, EPA  encourages the inclusion of specific trading provisions in the TMDL itself.

          First, trading should occur only within a hydrologic unit that is appropriately defined to
          ensure that trades will maintain water quality standards within that unit, as well as within
          downstream and contiguous waters. Second, it is  important to remember that the purpose
          of trading is to improve water quality. This can occur only if the  parties to the trade dis-
          charge, either directly or indirectly, to the same waterbody where water quality improve-
          ment is necessary. This may involve trading across a wide geographic area if the waterbody
          to be addressed  drains a large area (e.g., the Chesapeake Bay), or across a small area if the
          impaired waterbody is itself small (e.g., an individual stream segment). Inappropriate  trading
          across geographic or hydrologic units (i.e., where the dischargers are not both contributing to
          the same  water quality problem) will not improve, and could worsen, water quality down-
          stream of the credit purchaser. Water quality trading is intended to provide opportunities for
          efficiently achieving and maintaining water quality standards within watersheds, as opposed
          to cleaning up one watershed at the expense of another.

          As  noted above, trades can also occur on a very small scale. The  Trading Policy supports
          several types of trading that, by definition, would occur below the watershed scale. Specifi-
          cally, pretreatment trading,  intraplant trading, and intramunicipal trading are limited  to the
          geographic scale that encompasses the collection system, facility, or municipality involved in
          trading.

          The appropriate size of the area within which trading may occur depends on the  specific
          characteristics of the site and the trade. Regulatory authorities should consider hydrogeologic
          conditions, fate and transport of pollutants, ecological parameters, the location and types of
          point sources, the parameters to be traded, and the regulations and management structure
          affecting the trading program in evaluating appropriate trading boundaries (USEPA 1996a).
          These factors, obviously, will vary from watershed to watershed  and  even within  watersheds
          depending on the pollutants and trading partners. Some example considerations are provided
          below.
Fundamentals of Water Quality Trading
Introduction   Overview of  Essential Trading
        Water Quality Information for
        Trading     Permit Writers
                         Tradeable
                         Pollutants
                                                      Factors for
                                       Possible           Determining                    Is the Trading NPDES Permits
                                Geographic Trading    Circumstances  Pollutant      Effluent Limit  Stakeholder   Program    for Trading
                                Scope    Scenarios   for Trading    Reduction Credits  Types     Roles      Working?   Scenarios

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                                                             Water Quality Trading Toolkit for Permit Writers


Regulatory authorities should take into account the following factors in determining appro-
priate boundaries for a trading program and the geographic coverage of a permit that incor-
porates water quality trading:
     • Where are the dischargers located relative to the waterbody for which reductions  are
       needed?
     • What is the distance between the potential trading partners' discharges, either along
       a shared receiving stream, or to the point where the receiving streams converge?3
     • Is the potential credit purchaser upstream or downstream of the potential credit
       generator?
     • If the credit generator is a nonpoint source, where is its loading released?
     • Are there diversions, tributaries, impoundments, drinking water intakes, or other
       water withdrawals between the potential trading partners' discharges?
     • What political boundaries exist between trading partners or within a watershed
       of interest that may impact the requirements or regulations affecting trades? Are
       potential partners regulated by the same permitting authority?
     • What are the water quality impacts and fate and transport (e.g., decay) characteristics
       of the pollutant(s) to be traded?"
     • Can appropriate trade ratios be established to account for the distance between
       trading partners' discharges?
     • Are other water quality trades being conducted in the waterbody, and how might
       they affect the water quality impacts of the trade being considered?

Interstate trading may be a viable option in some parts of the country. For instance, in  the
Chesapeake Bay, CWA section 117(g) says that the administrator, in coordination with other
members of the Chesapeake Bay Executive Council, "shall ensure that management plans are
developed and implementation is begun by signatories to the Chesapeake Bay Agreement  to
achieve and maintain - (A) the nutrient goals of the Chesapeake Bay Program for the quantity
of nitrogen and phosphorus entering the Chesapeake Bay and its watershed...". EPA inter-
prets this language as supporting the Chesapeake Bay states in establishing multijurisdictional
water quality trading programs as part of the management planning and implementation
necessary to achieve the Bay's nutrient goals.

Also, trading could be an option under already established interstate compacts (e.g., Ohio
River Valley Water Sanitation Commission (ORSANCO)). CWA section  103(b) expresses
 The difference between these two measuring points relates to the location of the trading partners and the
 waterbody of concern. If the waterbody of concern is downstream from the trading partners, the permitting
 authority should compare the distance between the buyer and the waterbody of concern and the seller and the
 waterbody of concern to determine the appropriate location ratio. If the buyer is on the waterbody of concern, the
 permitting authority should determine the distance between the buyer and the seller to calculate the appropriate
 delivery ratio. More information on trade ratios is available later in this document.
 Fate and transport modeling will often be needed and should be the same as or consistent with any model used to
 develop the TMDL
Fundamentals of Water Quality Trading
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios
                                                Circumstances
                                                for Trading
Factors for
Determining
Pollutant
Reduction Credits
                                                                                                           13
                Is the Trading  NPDES Permits
Effluent Limit  Stakeholder  Program    for Trading
Types     Roles     Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers


                    Congress' consent that states "negotiate and enter into agreements or compacts... for
                    (1) cooperative effort and mutual assistance for the prevention and control of pollution and
                    the enforcement of their respective laws relating thereto, and (2) the establishment of such
                    agencies, joint or otherwise, as they may deem desirable for making effective such agree-
                    ments and compacts." To be binding, the CWA says such agreements or compacts must be
                    approved by Congress.

                    For interstate trading  outside of congressionally approved compacts, section 103(a) of the
                    CWA directs EPA to "encourage cooperative activities by the states for the prevention, reduc-
                    tion, and elimination of pollution, [and] encourage the enactment of improved and, so far
                    as practicable, uniform state laws relating to the prevention, reduction, and elimination of
                    pollution." EPA believes that encouraging states to engage in cooperative, interstate activi-
                    ties like establishing multijurisdictional water quality trading programs designed to prevent,
                    reduce, and eliminate pollution is consistent with the directives in section 103(a).

                    In many cases, the trading boundaries will be established under a trading program  or agree-
                    ment, independent of the NPDES permit that implements the trade. As such programs and
                    agreements are developed,  NPDES permitting authorities should  provide input on the  appro-
                    priate trading boundaries on the basis of their experience permitting the facilities potentially
                    involved. In any case, the permitting authority should write permit conditions in such way as
                    to ensure that trades occur only within appropriate boundaries.
                    Types of Trading Scenarios
                    NPDES permitting authorities are likely to encounter a variety of trading scenarios. In general,
                    however, all trades included in permits will involve either trading between point sources or
                    trading between point sources and nonpoint sources. Trading between multiple point sources
                    or between point sources and nonpoint sources can occur with or without an intermediary or
                    broker to facilitate the trades. A third-party broker—a person, organization, or Web site—can
                    help trading partners identify one another in a watershed. For example, NutrientNet acts as a
                    Web-based broker.

            NutrientNet®
              The World Resources Institute has created a trading Web site (NutrientNet -
              www.nutrientnet.org), which acts as a trading broker, facilitating a way for buyers and sellers to
              connect, "by making it relatively easy for both point sources and nonpoint sources to estimate
              their remediation costs using standard, consistent methods, and by making the record of trade
              readily accessible. Specifically, NutrientNet is designed to serve the following functions:
                " Provide potential market participants and other stakeholders with background information
                  on nutrient trading;
                • Provide farmers, municipal treatment works, and industrial plants with tools for estimating
                  releases of nutrients to surface waters from their operations, exploring reduction options,
                  estimating the costs of achieving reductions;
14
•*^*       Fundamnntals of Water Quality Trading
           Introduction  Overview of  Essential Trading
                  Water Quality Information for
                  Trading     Permit Writers
                                    Tradeable   Geographic
                                    Pollutants   Scope
               Factors for
Possible           Determining                    Is the Trading  NPDES Permits
Trading    Circumstances  Pollutant      Effluent Limit  Stakeholder  Program    for Trading
Scenarios  for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers


  NutrientNet® (continued)
      » Help market participants identify potential trading partners;
      • Track the volume and type of trades within a watershed;
      • Share lessons learned about trading across the watersheds where it is being tried or
        considered; and
      " Provide information on water quality problems and trading as a possible means to address
        them." (World Resources Institute 2004)
Point Source-Point Source Trading
Trading between point sources is the most basic form of water quality trading. Point source-
point source trading is relatively straightforward, easily measurable, and directly enforce-
able. Trading between point sources is generally the easiest type of trading to implement,
to measure reductions from, and to ensure compliance and enforcement with because all
sources have a permit, the effectiveness of removal technologies is relatively well known, and
monitoring protocols are in place. For example, in a particular watershed a publicly owned
treatment works (POTW) that installs advanced technology to meet new nutrient limits could
create credits by achieving greater reductions than necessary to  meet its WQBELs. Other
POTWs in the same watershed may find that, instead of installing expensive new technology,
it is more economical for them to buy pollutant reduction credits to meet their own WQBELs.
Trading Between Two Point Sources
Single point source-single point source trades generally involve a trade agreement5
between two point sources (see Figure 2). In this type of trade, one point source is
the credit generator and the other is the credit
purchaser. For point source-point source
trades, a single permit can be issued
that incorporates or references
the trade agreement and
includes both point sources as
co-permittees. Alternatively,
each discharger can be issued
an individual permit with
trading provisions placed in each
permit.
Buyer
POTW
point source-
 point source
     trade
                                                     Figure 2. Point source-point source trade.
- A trade agreement is a document that specifies the overall trading policies that a buyer and a seller must follow to
 participate in trading. The NPDES permitting authority could approve the trade agreement and either reference
 the terms of the trade agreement in the NPDES permit or include the trade agreement as part of the permit for
 each point source participating in a trade.
Fundamentals of Wafer Quality Trading
                                                                                                      15
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope
•

Possible
Trading
Scenarios
                                              Circumstances
                                              for Trading
        Factors for
        Determining
        Pollutant
        Reduction Credits
                       is trie Trading  NPDES Permits
       Effluent Limit  Stakeholder   Program    for Trading
       Types     Roles      Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                    Multiple Facility Point Source Trading/No Exchange
                    Multiple facility point source trades involve a group of point sources operating under
                    trade agreement (see Figure 3). The agreement can
                    establish ground rules for trading to allow point
                    sources to trade among themselves as needed.
                    The trade agreement can specifically identify
                    the point sources that may participate in
                    water quality trading, or  it can identify
                    a geographic boundary (typically a
                    watershed) or a type of discharger,
                    or both, and allow qualifying point
                    sources to participate in trading as
                    desired or appropriate. An over-
                    all limit or cap set by the permit
                    regulates all trades. Point sources
                    trading under a multiple facility
                    trade agreement are sometimes
organized under a group that facili-
tates and oversees trading among the
members.
                                                                              a single
                                                        point source-
                                                        point source
                                                           trade
                                       Multiple
                                     Point Source
                                       Trading
          point source-
          point source
            trade
                                                                           point source-
                                                                            point source
                                                                              trade
                                                                Figure 3. Multiple point source trading.
 Neuse River Basin, North Carolina
    Point sources participate in the Neuse River Compliance Association and have coverage under a
    group compliance permit that includes individual and group allocations of TN. Members of the
    association can trade with each other as long as they remain under the cap. If the cap is exceeded,
    members will be subject to their individual limits. The North Carolina Division of Water Quality
    may take enforcement action against the compliance association and any individual discharger.
    When trades occur that involve nonmembers or new or expanding dischargers within the Neuse
    River Basin, the group cap is modified. If credits are not available from existing dischargers, a new
    or expanding discharger can also obtain an allocation by paying into the Wetlands Restoration
    Fund; however, it must pay at double the rate of a compliance association member, and the pur-
    chase must be sufficient to fund 30 years of nitrogen reduction.
                   Point Source Credit Exchanges
                   Another type of multiple facility point source trade involves a group of point sources that
                   may purchase credits from a central exchange as needed to comply with individual effluent
                   limitations (see Figure 4). The credit exchange is maintained by a separate entity, which may
                   be a state agency, a conservation district, or other organization established to administer the
16
          Fundamentals of Water Duality Trading
introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeabie
Pollutants


Geographic
Scope
*

Possible
Trading
Scenarios
                                                       Circumstances
                                                       for Trading
                                            Factors for
                                            Determining
                                            Pollutant
                                            Reduction Credits
               Is the Trading  NPDES Permits
Effluent Limit  Stakeholder  Program    for Trading
Types     Rofes     Working?    Scenarios

-------
                                                          Water Quality Trading Toolkit for Permit Writers
                                                               Point Source
                                                              Credit Exchange
credit exchange. Credits in the exchange are generated
by point sources that over control their discharges.
The trade agreement can specify how credits
may be generated and purchased, how trade
ratios are calculated, and individual and
group responsibilities for meeting effluent
limitations and overall pollutant loading
caps. Credit exchanges do not hold credits
for longer than the reconciliation period,
which typically corresponds to the type
of effluent limitation. For example, the
reconciliation period for trades to  meet
monthly average effluent limitations for
phosphorus would be one  month. For each
reconciliation period, new  credits are gener-
ated for purchase. The credit exchange would
likely have to be either operated by or approved
and overseen by a state regulatory agency.
                                                        Figure 4. Point source credit exchange.

         Long Island Sound, Connecticut
           POTWs in the Connecticut portion of the Long Island Sound watershed may participate in the Nitrogen
           General Permit and Nitrogen Credit Exchange Program. Participating POTWs must individually meet
           the annual average discharge limits in the permit or purchase the necessary credits to achieve their
           individual limits through the program, which is administered by an advisory board and Connecticut
           Department of Environmental Protection, POTWs performing better than required by their permit lim-
           its generate credits to sell through the program. The reconciliation period for this program is one year.


Point Source-Nonpoint Source Trades
Trading between point source buyers and nonpoint source sellers provides another oppor-
tunity to meet water quality standards. In successful point source-nonpoint source trading
programs, point sources benefit by purchasing credits for required reductions at lower cost
than technology upgrades; nonpoint sources benefit by gaining income from better resource
management; and water quality improves. One major advantage of trading is that it  may
reduce the cost to achieve water quality goals. For example, as shown in Figure 5,  it is often
less expensive to remove nutrients through the use of improved agricultural practices, such
as conservation tillage,  grass buffers, and enhanced animal waste management than through
upgraded municipal waste treatment.6 In developing point source-nonpoint source trading
programs and associated NPDES permits, extra care should be taken to ensure that nonpoint
source  load reduction uncertainty is  addressed. EPA's Trading Policy recommends that states
 Data for this table was taken from information gathered to support the Chesapeake Bay Commission's 2004 Cost-
 Effective Strategies for the Bay. There are other areas in the country where municipal waste treatment costs for TN
 have been shown to be lower, depending on the level of TN removal.
Fundamentals of Water Duality Trading
introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope
•

Possible
Trading
Scenarios
                                              Circumstances
                                              for Trading
                                                       Factors for
                                                       Determining
                                                       Pollutant
                                                       Reduction Credits
                                                                                                      17
               Is the Trading  NPDES Permits
Effluent limit  Stakeholder  Program    for Trading
Types     Roles     Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
BMP
           Nutrient Reduction Costs
                      Phosphorous  *   Nitrogen   '
                          ($/lb)
   Conservation
   tillage
   Agricultural
   grass bufffers
   Animal waste
   management/
   runoff control
                       $7.39

                      $20.69

                      $30.55
   ($/lb)

$5.73-$10.78

   $1.59

   $1.03


   $3.93
          Figure 5. Nutrient reduction costs for
                   Chesapeake Bay.
and tribes establish methods to account for uncer-
tainties inherent in trading with nonpoint sources.
These methods include monitoring to verify load
reductions, the use of greater than 1:1 trading ratios
between nonpoint and point sources (see the discus-
sion of trading ratios later in this document), using
demonstrated performance values or conservative
assumptions in estimating the effectiveness of non-
point source management practices, and retiring
credits. Permitting authorities should be aware of
such methods and incorporate them into permit
requirements for point source-nonpoint source
trades as appropriate. The nonpoint source trading
scenario sections of this document include detailed
discussions on using trading ratios to account for
uncertainties in nonpoint source modeling, BMP
effectiveness, and nonpoint source compliance.
                   There are a number of ways trading between point and nonpoint sources may occur. These
                   include single point source-nonpoint source trades, multiple facility point source-nonpoint
                   source trades, and multiple facility trades where credits are exchanged through a third party.

                   Single Point Source-Nonpoint Source  Trades
                   Single point source-nonpoint source trades involve a trade agreement between a single
                   point source and one or more nonpoint sources (see Figure 6). Under this type of trade, the
                   nonpoint source(s) reduce(s) pollutant loads below the established baseline to generate cred-
                   its, and these credits are purchased by the point source. Single point source-nonpoint source
                   trades should be reflected in an individual permit for the point source that either references
                   or incorporates the terms of the trade agreement.
                                                         Seller
                                                            point
                                                          source-
                                                          nonpoint
                                                           source
                                                            trade
                            Seller
                            Farm!
                                               ss$
                                       point source-
                                      nonpoint source
                                          trade
             point source-
            nonpoint source
18
                   Figure 6. Point source-nonpoint source trade.
         Fundamentals of Water Duality Trading
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope
•

Possible
Trading
Scenarios


Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits


Effluent Limit
Types
                                                                                       Is the Trading  NPDES Permits
                                                                                Stakeholder  Program    for Trading
                                                                                Holes     Working?    Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers
  Southern Minnesota Beet Sugar Cooperative, Minnesota
    The Southern Minnesota Beet Sugar Cooperative (SMBSC) wanted to build its own wastewater
    treatment plant; however, because of a WLA on the Lower Minnesota River, SMBSC had to
    completely offset its phosphorus discharge. To do so, SMBSC negotiated contracts with 256 of its
    member farmers to install BMPs (e.g., cover crops) to reduce their phosphorus loads.
                                                           Nutrient reduction
Nonpoint Source Credit Exchange
In this scenario, a credit exchange program is established
to buy credits from multiple nonpoint sources to sell
to point sources (see Figure 7). A credit exchange
could be managed by the state, a conservation
district, a private entity, or another third party. A
broker can be used to identify trading partners
and facilitate trades. There are two general
types of exchanges: (1) a broker-facilitated
exchange where the broker brings parties
together to trade directly with each
other and (2) a central exchange
where the point sources are
not required to deal directly
with nonpoint sources. For this
second type of exchange, the
credit sellers (nonpoint sources)
generate pollutant load reduc-
tions using a variety of approved
BMPs and sell the credits to the credit
exchange. Point sources may then purchase
credits from the credit exchange rather than directly from the nonpoint sources. This can save
transaction costs for the point source purchasers and minimizes administrative burden for
credit sellers. In addition, the credit exchange can perform various other functions such as
establishing standards for trading, incorporating monitoring, determining the maximum fea-
sible nonpoint source load reductions available to generate  credits in the watershed, setting
credit prices, determining eligibility of credits, ensuring that the buyer has a steady supply of
credits by creating a reserve pool of credits, verifying the operation and maintenance of BMPs,
and tracking important trade information for all participants. The credit exchange would likely
have to be either operated by or approved and overseen by a state regulatory agency.
                                         Buyer
                                         POTW
                                                    Figure 7. Nonpoint source credit exchange.
           Red Cedar River, Wisconsin
              The city of Cumberland participated in the Red Cedar River Nutrient Trading Pilot
              Program, which involves paying farmers in the Red Cedar watershed to install BMPs
              that reduce phosphorus loads. The Barren County Land Conservation Department
              facilitates the trades by negotiating with farmers and establishing contracts between
              the farmers and the city of Cumberland.
Fundamentals of Water Quality Trading
                                                                                                      19
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeaole
Pollutants


Geographic
Scope
*

Possible
Trading
Scenarios
                                              Circumstances
                                              for Trading
                                                      Factors for
                                                      Determining
                                                      Pollutant
                                                      Reduction Credits
               Is the Trading  NPDES Permits
Effluent Limit  Stakeholder  Program    for Trading
Types     Roles     Working?    Scenarios

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Water Quality Trading Toolkit for Permit Writers


          Under What Circumstances Does EPA Support Trading?
          Trading is driven by regulation, motivated by economics, and governed by project-specific
          trading rules. The drivers for trading are typically new, more stringent WQBELs in NPDES
          permits derived from new or existing water quality criteria, a TMDL or the establishment of
          a pollutant cap. For trading to be economically viable, there must be other sources that can
          achieve excess reductions at lower cost than the permitted point source. Other factors, such as
          a stakeholder agreement to implement a trading program, may also play an important role.


          Trading to Address Impaired Waters Under a Pollutant Loading
          Cap or TMDL
                Trades and trading programs in impaired waters for which a TMDL has been
                approved or established by EPA should be consistent with the assumptions and
                requirements upon which the TMDL is. established. EPA encourages the inclusion
                of specific trading provisions in the TMDL itself, in NPDES permits,  in watershed
                plans and the continuing planning process  (U5EPA 2003).

          TMDL development or the establishment of a pollutant cap often serves as the driver for
          point sources to get involved in trading. Therefore, water quality trading jorovisions included
          in NPDES permits often will address impaired waters where a TMDL or similar pollutant load-
          ing cap has been established. In these cases, the baseline water quality requirement for a
          particular point source is specified by a WLA in the TMDL and expressed in the point source's
          NPDES permit as a WQBEL that is consistent with the WLA. A point source's required pollut-
          ant reduction is the difference between the discharger's current pollutant load and the load
          required to meet the WQBEL.

          The facility could potentially have three options for complying with its WQBEL. One option
          is to implement pollution prevention, reuse, or recycling measures adequate to meet the
          WQBEL at the point of discharge. The second option is to install treatment technology. The
          third option is trading. Trading allows the facility to purchase the needed reductions from
          point or nonpoint source credit sellers in the watershed. The facility also could choose to
          implement some treatment or pollution reduction measure to partially reduce its discharge of
          the pollutant and purchase the remaining reductions through trading.

          If a discharger installs a control technology that results in pollutant reductions greater than
          those required by the WQBEL, the discharger may potentially generate credits. The number
          of credits generated would be the difference between the discharger's WQBEL in its permit
          implementing the WLA and the pollutant load actually discharged after installing treatment
          processes or other pollutant reduction measures.


          Trading to Address Impaired Waters Pre-TMDL
          EPA's Trading Policy specifically states that "EPA supports pre-TMDL trading in impaired
          waters to achieve progress toward or the attainment of water quality standards. EPA believes
          this may be accomplished by individual trades that achieve a net reduction of the pollutant
Fundamentals of Water Duality Trading
        Overview of   Essential Trading
        Water Quality  Information for
        Trading     Permit Writers                Possible
                         Tradeabie  Geographic  Trading
                         Pollutants  Scope    Scenarios
        Factors for
        Determining                   is the Trading  NPDES Permits
Circumstances Pollutant      Effluenl Limit Stakeholde'  Program    for Trading
for Trading   Reduction Credits  Types     Roies     Working?    Scenarios

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                                                           Water Quality Trading Toolkit for Permit Writers


traded or by watershed-scale trading programs that reduce loadings to a specified cap sup-
ported by baseline information on pollutant sources and loadings."

Trading is an option in impaired waters to reduce pollutant loads where a TMDL has not yet
been established, A pre-TMDL trade must not cause or contribute to further impairments of
the waterbody. CWA 301(b)(1)(C); 40 CFR 122.44(d)(1)(vii)(A). The Trading Policy presents
two approaches for pre-TMDL trading depending on the scale of the trade. One approach is
individual trades, which could be  individual point source-point source trades or individual
point source-nonpoint source trades. These sources may choose to trade to eliminate the
need for a TMDL or to ameliorate conditions for  a pending TMDL. An example of this type of
trading is the Great Miami River Watershed Trading Pilot Program. Trades should result in a
net reduction of the pollutant traded to ensure that further impairment to the waterbody is
avoided. (For details of this program, see Appendix A.)

The other approach is where a pollutant  loadings cap  has been set for a waterbody at a
watershed-scale through watershed-based permitting (e.g., Neuse River7) or a voluntary cap
has been set on a downstream waterbody and a  strategy has been developed to allocate
reductions within the watershed (e.g., Chesapeake 2000 Bay Agreement and Tributary Strate-
gies). A cap on total loadings can be derived from baseline information on pollutant sources
and loadings that is consistent with water quality standards. Trades can occur to make prog-
ress toward or meet that cap.

To establish a target or loading cap below current conditions that represents progress in the
attainment of water quality standards, it is necessary to quantify the current conditions. Cur-
rent conditions would be the pollutant loads represented by current permit and regulatory
requirements for point sources (i.e., the applicable effluent limitations or other quantified per-
formance requirements) and the current level of pollutant loads from all nonpoint sources and
background conditions. Once the total current pollutant load is quantified, EPA would support
trading to achieve a target or cap representing a reduction in the overall pollutant load.

For discharges to impaired waters pre-TMDL, trading need not trigger the anti-backsliding
provision of CWA section 402(o) or the limitations under CWA section 303(d)(4) even where
the effect of the permit authorizing trading is to allow a greater actual discharge from the
facility itself (because of the purchase of  credits) than  the previous permit issued to the trad-
ing point source. Allowing a facility to meet an established WQBEL through trading does
not necessarily constitute a less stringent effluent limitation as specified in section 402(o) if
the facility is still responsible for the same level of pollutant reduction. In that case, trading
merely offers the discharger an additional means of achieving that limitation and must not
result in a net increase in the pollutant discharged to the waterbody or in a localized  impair-
ment. Similarly, allowing a facility to meet a WQBEL through trading does not necessarily
constitute a revised effluent limit under section 303(d)(4)(A) if a facility is still responsible for
the same level of pollution reduction. All WQBELs, including those that are subject to CWA
section 402(o), must meet the requirements of CWA section 301(b)(1)(C). Section 301(b)(1)(C)
 In 1999 a TMDL was completed for the Neuse River. The Neuse River Compliance Association was formed before
 this TMDL, and the cap that was incorporated into the TMDL was set by the state as part of its 1997 nutrient
 strategy for the Neuse River.
Fundamentals of Water Quality Trading
Introduction Overview oi
Water Quali
Trading

Essential Trading
y Information for
Permit Writers
Tradeabie
Pollutants


Geographic
Scope


Possible
Trading
Scenarios
         Factors for
         Determining
Circumstances  Pollutant      Effluent Limit  Stakeholder
for Trading    Reduction Credits  Types      Rolss
                                                                                                        21
                                                                                                        *••*•
                                                                                  Is the Trading  NPDES Permits
                                                                                  Program     for Trading
                                                                                  Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                    requires that the limitations be set at levels necessary to achieve water quality standards,
                    which also includes avoiding localized impairments.

                    In the absence of a watershed-wide trading program to meet a specific target or pollut-
                    ant loading cap, EPA supports  individual pre-TMDL trades that achieve a net reduction in
                    loadings of the pollutant traded and, thus, progress toward attainment of water quality
                    standards.


                    Trading in  Unimpaired Waters
                    Federal regulations (40 CFR 131.12) establish requirements for states and tribes to develop
                    and adopt statewide antidegradation policies that, at a minimum, maintain and protect the
                    level of water quality necessary to support existing uses and to protect high-quality waters
                    including outstanding national resource waters. Where the level of water quality exceeds the
                    level necessary to support propagation  of fish, shellfish, and wildlife and recreation in and
                    on the water, federal regulations allow  a state or tribe to authorize new or increased pollut-
                    ant discharges to that water under two circumstances: (1) when the jurisdiction determines
                    that the new or  increased discharge would not lower water quality; or (2) when lower water
                    quality will occur, but the jurisdiction finds that such lower water quality is necessary to
                    accommodate important economic or social development in the area in which the waters are
                    located. In allowing lower water quality, a state or tribe must assure water quality adequate
                    to fully protect existing uses and also assure achievement of the most stringent statutory
                    and regulatory requirements for all new and existing point sources and all cost-effective and
                    reasonable BMPs for nonpoint source control (40 CFR 131.12(a)(2)).

                    When drafting or interpreting  their antidegradation policies, jurisdictions have the flexibility
                    under current law to determine when a new or increased discharge lowers water quality. A
                    jurisdiction can explicitly  provide in its antidegradation policy that no lowering of water qual-
                    ity occurs within the meaning of 40 CFR131.12(a)(2) in the case of new or increased discharges
                    when, as a result of a water quality trade, there is no net  increase of the pollutant being
                    discharged into the waterbody and the  trade will not result in any localized impairments. EPA
                    encourages jurisdictions to use trading in high-quality waters for the purpose of mitigating
                    the effects of new or increased discharges that, without the trade, might lower water quality.

                    It is important to note that this guidance does not preclude a jurisdiction from requiring an
                    antidegradation review under 40 CFR 131.12(a)(2) or from finding that a lowering of water
                    quality would  occur as a result  of a proposed new or increased discharge.  Nor is this guidance
                    intended to mean that there necessarily would be a lowering of water quality if there is a net
                    increase of pollutants. Rather, it simply  identifies a trade-related situation where a jurisdic-
                    tion could authorize a new or increased discharge without a review because the increased
                    load would be compensated for through trading.

                    Intraplant and Intramunicipal Trading
                    One straightforward form of trading is  intraplant trading, or trading between different
                    outfalls within a plant. Intraplant trading can be accomplished within the  context of a single
                    NPDES permit and, thus, does not require the establishment of a formal trading program.
">*)
*-~       Fundamentals of Water Quality Trading

Introduction



Overview of
Water Quality
Trading

i>
Essential Trading
information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading


Factors for
Determining
Pollutant
Reduction Credits


Effluen
Types
                                                                                         is the Trading  NPDES Permits
                                                                          Effluent Limit  Stakeholder  Program    for Trading
                                                                                 Roies     Working?    Scenarios

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                                                            Water Quality Trading Toolkit for Permit Writers


      EPA supports intraplant trading that involves the generation and use of credits
      between multiple outfalls that discharge to the same receiving water from a
      single facility that has been issued an NPDES permit (USEPA 2003).

A facility with multiple outfalls may receive a mass WLA of a particular pollutant through
a TMDL, another watershed-level analysis, or calculation of individual effluent limitations.
Typically a permitting authority would assign fixed, mass-based, effluent limitations to each
outfall contributing the pollutant by apportioning the loading on the basis of the outfall's
historical or design flow. By incorporating intraplant trading into the permit, the permitting
authority could assign the overall mass loading limitation to the facility but allow the permit
holder to manage  the facility as a system, apportioning the loading among outfalls in a way
that makes the most sense both technically and economically. The NPDES permit should still
ensure that the overall mass loading requirement for the facility is reflected in the effluent
limitations and that there  is no potential for creating a localized exceedance of water quality
standards.

Another form of trading that would not require establishing a formal trading program is
intramunicipal trading. Similar to intraplant trading, intramunicipal trading allows a munici-
pality to manage its multiple discharges as a system. The difference is that intramunicipal
trading involves trading among multiple facilities or point sources owned by a single munici-
pality that, traditionally, would be covered under separate individual NPDES permits. A
permitting authority could assign a  mass loading of a particular pollutant to the municipal-
ity as a whole (if appropriate) or to  its individual discharges on the basis of a TMDL or other
watershed-level analysis. An overall mass loading assigned to the. municipality would be
appropriate only where localized impacts would not be expected from  each of the municipal-
ity's individual discharges. The municipality could apportion the overall allocation among its
facilities to meet the overall mass limitation. Where its discharges received individual alloca-
tions, it still could trade among sources to allow them to meet those individual allocations.
This type of trading may be more complex than intraplant trading because trade ratios for
the different discharges may have to be established to address differences in their locations.
Also, the intramunicipal trading would have to be incorporated into NPDES permits by either
developing individual permits with coordinated requirements or developing an integrated
municipal permit. Where facilities are assigned individual allocations, a facility would have to
perform better than its WQBEL to generate credits. Any facility accepting credits would have
to first meet any applicable TBELs and ensure that its discharge would not create a localized
exceedance of water quality standards. This requirement could  be implemented through a
limit on the number of credits the facility may accept.

New sources and new dischargers, including those involved in intramunicipal trading must
meet the requirements of  40 CFR 122.4(i), which states that
      Wo permit may be issued to a new source or a new discharger,  if the discharge
      from its construction or operation will cause or contribute to the violation of
      water quality standards. The owner or operator of a new source or new discharg-
      er proposing to discharge into a water segment which does not meet applicable
      water quality standards or is  not expected to meet those standards even after
      the application of the effluent limitations required by sections 301(b)(1)(A) and
Fundamentals of Water Quality Trading
 Introduction   Overview of   Essential Trading
         Water Quality  Information for
         Trading     Permit Writers  ,           .  Possible
                          iradeable  Geographic  Trading
                          Pollutants  Scope    Scenarios
         Factors for
         Determining                     Is the Trading  NPDES Permits
Circumstances  Pollutant      Effluent Limit  Stakeholder   Program    for Trading
for Trading    Reduction Credits  Types     Roles      Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                          30l(b)(1)(B) of CWA, and for which the State or interstate agency has performed
                          a pollutants load allocation for the pollutant to be discharged must demon-
                          strate, before the close of the public comment period, that:
                               (1) There are sufficient remaining pollutant load allocations to allow for
                               the discharge; and

                               (2) The existing dischargers into that segment are subject to compliance
                               schedules designed to bring the segment into compliance with applicable
                               water quality standards. The Director may waive the submission of infor-
                               mation by the new source or new discharger required by paragraph (i)
                               of this section if the Director determines that the Director already has
                               adequate information to evaluate the request.

                    EPA interprets 40 CFR 122.4(i) to allow for a new source or new discharger to compensate for
                    its entire increased load through trading. In the  case of  intramunicipal trading, new sources or
                    dischargers operated by a municipality may discharge to an impaired water if their discharge
                    does not cause the municipality to exceed its overall cap for the pollutant(s) of concern.


  Clean Water Services, Oregon
    Trading of oxygen-demanding parameters is permitted between two wastewater treatment plants
    operated by Clean Water Services, a public utility in the Tualatin River Basin responsible for waste-
    water and stormwater management. These facilities are covered under a general permit that specifi-
    cally authorizes the Durham and Rock Creek Advanced Wastewater Treatment Facilities to trade
    CBOD5 and ammonia.
                    Trading Involving Wet Weather Point Sources
                    Several classes of wet weather point sources, including combined sewer overflows (CSOs),
                    discharges from municipal separate storm sewer systems (MS4), and stormwater discharges
                    from industrial activities, are regulated under the NPDES program and could provide oppor-
                    tunities for trading. The general framework for trading involving point sources8 is applicable
                    to wet weather point sources, with some additional considerations to account for the nature
                    of the wet weather point sources and their permits. First, wet weather point sources cannot
                    trade to meet their TBELs. EPA has not established effluent limitations guidelines for CSOs,
                    MS4s or most types of stormwater discharges associated with industrial activities; however,
                    the CWA provides technology-based standards for the different classes of wet weather point
                    sources. For CSOs and stormwater discharges from industrial activities, the technology-based
                    standard is Best Available Technology Economically Achievable/Best Conventional Pollutant
                    Control Technology. For MS4s, the technology-based standard is Maximum Extent Practicable
                    (MEP). Therefore, in the absence of effluent limitations guidelines, a permit writer must use
                    the CWA's technology-based standard to establish TBELs on a permit-by-permit basis using
                    the permit writers' best professional judgment (BPJ).
                    8 For more information about the general framework for trading involving point sources, see the discussion What
                     Discharge Limits Apply in Water Quality Trading? in this document.
24
          Fundamentals of Water Quality Trading
                         TF
           Introduction  Overview of  Essentiaj Trading
                  Water Quality information for
                  Trading     Permit Writers
                                    Tradeable
                                    Pollutants
       Possible
Geographic  Trading
Scope    Scenarios
         Factors for
         Determining
Circumstances  Pollutant      Effluent Limit Stakeholdei
for Trading    Reduction Credits  Types     Roles
is the Trading  NPDES Permits
Program    for Trading
Working?    Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers


EPA supports trading involving wet weather point sources where it can be shown to have a
water quality benefit. However, to ensure water quality improvement, the following condi-
tions are generally necessary for trading involving wet weather point sources to occur:
A Wet Weather Point Source as a Seller:
    •  The seller meets its most stringent effluent limitation (baseline), which is either its
       TBEL or WQBEL. Reductions in excess of the most stringent effluent  limitation are
       eligible to be sold as credits.
    •  The seller's permit or fact sheet includes numeric effluent limitations or allowable
       loads. The fact sheet for the seller's permit clearly describes the value of the trade in
       terms of a numeric pollutant load and clearly demonstrates that water quality objec-
       tives will be achieved after all trades have been made.
    •  The permit requires discharge monitoring to verify that all discharges involved  in the
       trade are performing consistent with expectations of the trade.
    •  No credit can be generated without an actual reduction in  pollutants. An existing
       discharge that is either uncontrolled or has existing controls with concentrations/
       loads that do not meet water quality standards would not be able to generate credits
       without achieving additional reductions.

A Wet Weather Source as a Buyer:
    •  The buyer's permit or fact sheet identifies numeric effluent limitations or allowable
       loads to be achieved to meet the technology-based standard (minimum control level).
    •  The permit or fact sheet identifies the actual  controls that the buyer must implement
       to meet its minimum control level.
    •  Credits are purchased to meet the buyer's baseline (WQBEL).
    •  Discharge monitoring data is available in advance of the trade to verify that the con-
       trol measures for the wet weather sources are capable of meeting minimum control
       levels. After the trade, discharge monitoring data is able to ensure the goals of the
       trade are being met.
Credits are generated only by actual reductions of pollutants in discharges. Credits should not
be for nondirect or indirect water quality-based  measures such as educational programs, pub-
lic outreach, and so on, unless these practices are translated  into quantified  load reductions.

 Lake Lewisville, Texas
    The city of Denton, Texas, draws its drinking water from and discharges its wastewater to Lake Lewisville.
    Lake Lewisville is also used for recreation. It is in the interest of the city of Denton to improve and maintain
    the quality of water in Lake Lewisville. Thus, Denton has implemented an aggressive water quality improve-
    ment program. More than 70 monitoring  sites have been installed in the three watersheds that encompass the
    city. The city has monitored a variety of- parameters monthly. This data plus extensive modeling has provided
    Denton with excellent data to assess the condition of its water as well as make future projections on the basis
    of expected growth. Denton is a stormwater phase II city and has gone well beyond the six minimum measures
    required by the stormwater phase II regulations. The city is investigating water quality trading as an option for
    developers as the city requires any sediment or nutrient loadings coming  from development to be compensated
    for through other reductions. Because the city has extensive monitoring and modeling of the water quality in
    the three watersheds, it will have the data to set the baseline for trading at pre-development conditions.
Fundamentals of Water Quality Trading
Introduction


Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers


Tradeable
Pollutants

Geographic
Scope

Possible
Trading
Scenarios
•
Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits
                                                                                Is the Trading  NIPDES Permits
                                                                 Effluent Limit Stakeholder  Program    for Trading
                                                                 Types     Roles     Working?    Scenarios

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        Water Quality Trading Toolkit for Permit Writers


                  Using Flow as the Trading Parameter
                  State and local regulations that regulate stormwater flow may create a market for wet
                  weather trading outside of the NPDES program. For example, state or local ordinances could
                  require offsets for wet weather flow and thus create a market for trading flow across all wet
                  weather sources to meet these requirements.


          Portland, Oregon
            The city of Portland, Oregon, is evaluating the viability of a stormwater trading program. An
            approach under evaluation would allow redevelopers to buy credits for flow reductions required
            for their site from other parties, for example from the city, which would install green streets. This
            trade may be viable where the permitting authority determined that the installation of green
            streets represented technology over and above what was determined to meet the MEP standard
            of the NPDES program. The first phase of the study will determine if the approach is economi-
            cally beneficial and if the program can provide acceptable environmental results. If the trading
            approach is determined to be feasible, later phases of the study will outline the model approach,
            determine the geographic trading area, select appropriate BMPs, and develop economic models
            for program valuation. In later phases, the city also plans to demonstrate the operation of the
            trading system by implementing a pilot program.
Vermont
  The state of Vermont is also developing an approach under which a form of trading could be used to meet flow
  restrictions. This approach would identify site-specific stormwater/hydrologic indicators for use as surrogate
  TMDL targets. The approach provides a tailored estimation of target stormwater runoff volumes and stream
  characteristics using reference watersheds that represent the stream channel conditions and pollutant load-
  ings necessary to support aquatic life. In addition to providing a tailored target for TMDLs, this site-specific
  approach will also generate information to support the development of stormwater permit limits on a
  watershed-basis. These limits could then serve as a baseline for trading.

  For the interim period before TMDL adoption, Vermont's 2005 rules for stormwater discharges to impaired
  waters (Vermont Environmental Protection Rules, Chapter 22) specify that new development in impaired
  waters must cause no net increase in sediment loading or hydrologic impact (VTDEC 2005). To achieve this
  standard, the rules allow for one of the following: (1) the development of projects that offset the new dis-
  charges within the same watershed; (2) payment of a stormwater impact fee to the state to obtain the neces-
  sary offset charge capacity9 (the fee is based on amount of impervious cover created and is used to purchase
  the comparable amount of impervious cover removed—or the discharge equivalent) from a stand-alone offset
  project within the watershed; or (3) a combination of options 1 and 2. To determine the size of the offset
  project or the amount of offset charge capacity needed, the applicant must calculate the increase in impervi-
  ous cover and sediment loading or hydrologic impact expected to result from the project following stormwater
  BMP implementation. The no-net-increase provision of the Vermont rules is consistent with 40 CFR 122.4(i)
  for new discharges to impaired waters.
                   Offset Charge Capacity is defined in Vermont's 2005 Stormwater Rules as "the amount of reduction in sediment
                   load or hydrologic impact that an offset project generates" (VTDEC, 2005).
        Fundamentals of Water Quality Trading
         introduction   Overview of  Essential Trading
                 Water Quality Information for
                 Trading    Permit Writers                Possible
                                  Tradeable   Geographic  Trading
                                  Pollutants   Scope    Scenarios
         Factors for
         Determining            '        Is the Trading  NPDES Permits
Circumstances  Pollutant      Effluent Limit Stakeholder  Program    for Trading
for Trading    Reduction Credits  Types     Roles     Working?    Scenarios

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                                                         Water Quality Trading Toolkit for Permit Writers
Pretreatment Trading
      EPA supports a municipality or regional sewerage authority developing and
      implementing trading programs among industrial users that are consistent with
      the pretreatment regulatory requirements at 40 CFfl Part 403 and the munici-
      pality's or authority's NPDES permit (USEPA 2003).
Pretreatment trading gives a municipality the flexibility to allow trading among industrial
users to meet its maximum allowable load as an alternative to allocating the load among
users directly. Under this trading scenario, the effluent limitations for the permitted waste-
water treatment facility would not change. The trading program itself can be established
and administered by the POTW that has responsibility for administering the pretreatment
program. The permitting authority need not incorporate the details of individual trades into
the wastewater treatment facility's permit; however, the permit should acknowledge that
the permittee has or will establish a pretreatment trading program to facilitate and supervise
trading among industrial users to meet the effluent limitations established in the permit. In
addition, before including pretreatment trading in a NPDES permit, the permitting authority
should confirm that pretreatment trading is permissible under municipal sewer use ordinanc-
es establishing local limits and other local requirements. In addition, indirect industrial users
cannot trade to meet categorical effluent discharge limits based on federal pretreatment
standards because these are technology-based standards or other national pretreatment
standards (e.g., general and specific prohibitions at 40 CFR 403.5). There are no categorical
pretreatment standards that specifically allow for trading. For more on pretreatment trading,
see Sharing the Load: Effluent Trading for Indirect Dischargers.

  Passaic Valley Sewerage Commissioners, New Jersey
     Indirect dischargers to the POTW may participate in trading to meet uniform local
     pretreatment limits.
Some Trading Scenarios Are Not Supported
EPA's Trading Policy does not support trading to meet TBELs. The intent of a TBEL is to require
a minimum performance level for point sources based on currently available treatment tech-
nologies. EPA expects all dischargers within a particular industrial category to achieve the
defined basic level of pollutant control and does not support the use of water quality trading
to meet technology standards. The only time trading is supported by EPA to meet TBELs is
when federal regulations expressly authorize trading. For example, existing technology-based
effluent guidelines for the iron and steel industry allow intraplant trading of conventional,
nonconventional, and toxic pollutants between outfalls under certain circumstances. The
Trading Policy does state that the Agency will consider including  provisions for trading in the
development of new and revised TBEL guidelines and other similar regulations. Unless such
effluent guidelines have been promulgated, permitting authorities should not include trad-
ing provisions into a permit designed to achieve compliance with TBELs.
      E PA does not support any use of credits or trading activity that would cause an
      impairment of existing or designated uses, adversely affect water quality at an
      intake for drinking water supply or that  would exceed a cap established under a
      TMDL (USEPA 2003).
Fundamentals of Water Quality Trading
Introduction Overview o
Essential Trading

Water Quality Information for
Trading

Permit Writers
Tradeable
Pollutants
Geographic
Scope


Possible
Trading
Scenarios
                                                      Factors for
                                                      Determining
                                             Circumstances  Pollutant     Effluent Limit
                                             for Trading    Reduction Credits Types
                                                                                                     27
                                                                                                     *- *
        Is the Trading  NPDES Permits
Stakeholder   Program    for Trading
Roles      Working?   Scenarios

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          Water Quality Trading Toolkit for Permit Writers


                    NPDES permits must not incorporate trades that would cause impairment of a designated use
                    (CWA 301(b)(1)(C); 40 CFR 122.44(d)(1)(vii)(A)). This restriction includes localized exceedances
                    of water quality standards caused by increased pollutant loads from a credit purchaser.

                    Also, NPDES permits should not incorporate trades that would adversely affect drinking
                    water systems by creating the need to  increase the level of drinking water treatment over
                    what was needed before the trade or by causing a water supplier to exceed regulatory stan-
                    dards established under the Safe Drinking Water Act.


                    What  Are Some Factors Involved in Determining a
                    Reduction Credit?

                    As stated  earlier, EPA's Water Quality Trading Assessment Handbook notes that, in water qual-
                    ity trading markets, the marketable product is the over control of pollutant loadings. A pollut-
                    ant reduction credit is a measured or estimated unit of pollutant reduction per unit of time at
                    the discharge location of the buyer or user of the credit.10 A seller generates excess load reduc-
                    tions by controlling its discharge beyond what  is needed  to meet its baseline. A buyer com-
                    pensates a seller for creating the excess load reductions, which are then converted into credits
                    by using trade ratios. Where appropriate, the buyer can use the credits to meet a regulatory
                    obligation. To determine when a pollutant reduction credit has  been generated, a regulatory
                    authority  will need to develop procedures for determining baselines for credit generation,
                    trading ratios, timing of credit generation, and the duration of credits. These issues are sum-
                    marized in the checklist in Appendix E and are  explained in the following sections.
            Si  -
        What Discharge Limits Apply in Water Quality Trading?
        Trading participants should have an understanding of three types of discharge limits: base-
        lines, minimum control levels, and trading limits (see Figure 8). Baselines apply to both a
                                        buyer and a seller. Minimum control levels are relevant
                                        only to the buyer and trading  limits are relevant only to
                                        the seller. Each  limit should  be contained in the trade
                                        agreement.
                 Discharge Limits
«   Credits to be Bought
Q ;
5
     Credits to be Sold
          Figure 8. Point source discharge limits.
                                                    Baselines
                                                    The baselines for water quality trading are the NPDES
                                                    permit limits (for point sources) or BMPs (for nonpoint
                                                    sources) that would apply in the absence of trading.
                                                    These baselines will vary depending on the sources
                                                    involved and the specific circumstances under which
                                                    trading will occur.
                   10 It is important to note that, because of trade ratios, one pound of pollutant reduced at the seller's discharge
                     location is not necessarily equal to one pound of pollutant reduced at the buyer's location. Therefore, for the
                     purposes of this Toolkit, one credit will be equal to one unit of load reduction per time (Ib/day) at the location of
                     the buyer. One credit may be greater or less than one unit of load reduction per time at the location of the seller.
                     Different programs may define credit differently.
28
          Fundamentals of Water Duality Trading
Introduction




Overview of
Water Quality
Trading


Essential Trading
information for
Permit Writers





Tradeable
Pollutants



Geographic
Scope


Possible
Trading
Scenarios



Circumstances
for Trading
*
Factors for
Determining
Pollutant
Reduction Credits



Effluent Limit
Types
                                                                                         Is the Trading  NPDES Permits
                                                                                 Stakeholder  Program    for Trading
                                                                                 Roles     Working?    Scenarios

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                                                         Water Quality Trading Toolkit for Permit Writers


Point Source Seller
The baseline for a point source seller is its most stringent effluent limitation. A point source
seller generates credits when it reduces its discharge below its baseline.

Point Source Buyer
Because a buyer cannot buy credits to meet its TBEL, a point source would buy credits only
if its WQBEL is more stringent than its TBEL. Therefore, the baseline for a point source buyer
would be its WQBEL. This WQBEL may be derived from a WLA in a TMDL or, in the absence of
a TMDL, through application of BPJ by the permit authority.
Nonpoint Source Seller
For a nonpoint source seller in a watershed under a TMDL, the source's baseline would be
derived from the nonpoint source's LA. In the absence of a TMDL, EPA's Trading Policy states
that state and local requirements and/or existing practices should determine a  nonpoint
source's baseline (see Figure 9). The trading program provisions
could also specify some additional minimum level of control that
nonpoint sources would have to achieve before they could gener-
ate credits. The baseline level of control should never be less than
existing practice.
       Nonpoint Source Seller
         Baseline for Trading
A more in-depth discussion of establishing a baseline for non-
point sources is provided in the nonpoint source trading scenario
sections of the Toolkit.

Minimum Control Levels
A discharger that chooses trading to meet its baseline can buy
credits; however, the discharger would still be expected to meet
a minimum control level at the point of discharge (see Figure 8).
The minimum control levels are either the TBELs specified in a
permit or the current discharge levels, depending on which are
more stringent. TBELs are derived from secondary treatment
standards for POTWs and effluent guidelines or BPJ for industries
(see Figure 10). After a discharger meets its minimum control
level through treatment, it can buy credits to meet its baseline.

A permitting authority can choose to impose a more stringent
minimum control level than the TBEL or current discharge to pre-
vent localized exceedances of water quality standards near the
point of discharge but not one that is less  stringent the TBEL. For
a more detailed discussion of how these minimum control levels
are incorporated into a permit, see the discussion in the trading
scenario sections.
       NPS Seller
      With TMDL
     Load allocation
  NPS Seller
Without TMDL
State and local
 requirements
and/or existing
   practice
Figure 9. Nonpoint source seller
         baseline for trading.
         Point Source Buyer
       Minimum Control Level
POTW
Buyer
Secondary '
Treatment * i
Industrial
Buyer
TBEL*
      * Must be stringent enough to
      avoid localized exceedences of
         water quality standards

Figure 10. Point source buyer
          minimum control level.
Fundamentals of Water Quality Trading
Introduction


	
Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers


Tradeable
Pollutants

Geographic
Scope

Possible
Trading
Scenarios

Circumstances
for Trading

factors for
Determining
Pollutant
Reduction Credits

Effluent Limit
Types
                                                                              Is the Trading NPDES Permits
                                                                      Stakeholder  Program    for Trading
                                                                      Roles     Working?   Scenarios
                                                                                                    29

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Water Quality Trading Toolkit for Permit Writers


          Trading Limits
          To become a seller, a discharger would control its pollutant discharge beyond its baseline. The
          seller can choose to what level it will control its pollutant discharge (based on the technology
          or BMPs it will implement) and this level becomes its trading limit (see Figure 8). If the seller
          does not meet its trading limit, it could violate its trade agreement, and the buyer could be
          out of compliance with its permit. The number of credits generated could be calculated by
          taking the difference between the seller's baseline and its trading limit and multiplying that
          difference by the applicable trading ratio.


          Developing Trade Ratios
          In many cases, pollutant credits are not generated on a "one pollutant pound-to-one pollut-
          ant credit" basis. Rather, some type of a trading ratio is used to either discount or normalize
          the value of pollutant credits. For example, a trading program with a trading ratio of 4:1
          would require a  buyer to purchase 4 pounds of  nitrogen reduction to achieve a credit worth
          one pound of nitrogen reduction from its facility. There is no set limit for how high a trading
          ratio can be.

          Trading ratios depend on the specific circumstances in the watershed. Factors that drive the
          use of trading ratios might relate to environmental conditions, pollutants, or programmatic
          goals. Although  existing trading  programs use various types of trading ratios and different
          terms to describe them, the basic categories of trading ratios are delivery, location, equiva-
          lency, retirement, and uncertainty}"1

          Delivery or location ratios are calculated as part of the overall trading ratio for a particular pair
          of sources to account for pollutant attenuation  because of the fate and transport character-
          istics of a pollutant, the unique characteristics of the watershed (e.g., hydrology, vegetation),
          distance, and time. This type of ratio accounts for the fact that a pound of a pollutant dis-
          charged upstream will not arrive as a pound of a pollutant at a given  point downstream.
                                     •  Delivery ratios are used when sources are directly discharg-
                                       ing to the waterbody of concern. These ratios account for
                                       the distance and unique watershed features (e.g., hydrolog-
                                       ic conditions) that will affect pollutant fate and transport
                                       between trading partners (see Figure 11). For example, an
                                       upstream point source is interested in trading with another
                                       point source that is several miles downstream. Because
                                       of the distance  between the two dischargers, modeling
                                       shows that a 5:1 delivery ratio should be applied to trades
                                       between the two sources. This means that the downstream
                                       point source would need to purchase 5 pounds of pollutant
                                       credits to achieve the equivalent of one pound of pollutant
                                       reduction at its own discharge point. Sources that are closer
                                       in proximity with less intervening hydrological features are
                                       likely to have a  lower delivery ratio.
              Delivery Ratio
Figure 11. Delivery ratio.
           ' It is important to note that trading programs are likely to use a variety of names for trading ratios and the
            categories described are generalized for simplicity.
Fundamentals of Water Quality Trading
Introduction   Overview of   Essential Trading
        Water Quality  Information for
        Trading     Permit Writers
              Possible
Tradeable   Geographic  Trading    Circumstances
Pollutants   Scope    Scenarios   for Trading
                                                        Factors for
                                                        Determining
                                                        Pollutant      Effluent Limit  Stakeholder
                                                        Reduction Credits  Types      Roles
                                                                                    Is the Trading  NPDES Permits
                                                                                    Program    for Trading
                                                                                    Working?   Scenarios

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                                                           Water Quality Trading Toolkit for Permit Writers


       Location ratios are used when sources are upstream of the waterbody of concern.
       These ratios account for the distance and unique watershed features between a
       pollutant source and the downstream waterbody (e.g., bay, estuary, lake, reservoir)
       that the trading program is trying to address (e.g., a hypoxic zone in a waterbody).
       The location  ratio allows credits to be traded between unique sources by convert-
       ing their loadings or reductions into credits needed or available at the waterbody
       of concern. Each source has a unique location ratio that reflects a source's rela-
       tive impact of pollutant loading or reduction on the waterbody of concern. There
       will likely be  differences in the water quality  impacts of a discharge of a pound
       of a pollutant near the area or waterbody of concern versus a pound of pollutant
       discharged farther upstream. Using Figure  12 to illustrate, sources in closer proxim-
       ity to the downstream waterbody of concern will have lower location ratios than
       sources farther upstream. The lower location ratio indicates that the mass of a
       pollutant load (e.g., one pound of nitrogen) from a source nearer the waterbody
       of concern has a greater impact on the waterbody. If the two sources in Figure 12
       wanted to trade, the location ratios of
       both sources would have to be figured into
       the trading ratio between the sources. For
       example,  suppose the location  ratio of the
       point source  were 2:1 and the location ratio
       of the nonpoint source were 3:1. Then the
       trading ratio for the two sources would
       include a  location component of 3:2. Note
       that while in this example consideration  of
       location ratios leads to a > 1:1  trading ratio,
       this is not necessarily always the case. If
       the seller were closer to the waterbody of
       concern than the buyer, this could lead to a
       trading ratio of < 1:1.
                           Nonpoint
                            Source
  Point £~
 Source
                              Location
                                Ratio
                     Waterbody
                     of concent
Figure 12. Location ratio.
Equivalency ratios adjust for trading different forms of the same pollutant. One pollutant
can exist in different forms. While two sources may discharge the same pollutant, the
composition of their discharges may differ with respect to the forms of the pollutant.
Pollutants from different sources can  be traded if they have the same effect on the
waterbody of concern or if their effects can be related by some factor. This factor is known
as an equivalency ratio. To calculate this ratio, the water quality impacts from each pollutant
source need to be estimated. For nutrients, the effect on water quality is related to the
percent of the nutrient that is biologically available in the source's discharge. Biologically
available nutrients are readily available for uptake by the biota. Nutrients can be present in
forms that are immediately biologically  available and in forms that are less accessible to the
biota. Excess biologically available nutrients contribute to eutrophication and degradation
of water quality. Those forms of nutrients that are not immediately biologically available
can become accessible to the biota (biologically available) through  different biological and
chemical cycling mechanisms. Hence, nutrients can be present as readily biologically available
or bound to sediment, and depending on environmental factors, such as climate, apparent
Fundamentals of Water Quality Trading
Introduction Overview of
Water Qual
Trading

rf 	
Essential Trading
y Information for
Permit Writers
Tradeabie
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading
                                                       Factors for
                                                       Determining
                                                       Pollutant      Effluent Limit Stakeholder
                                                       Reduction Credits  Types     Roles
                            Is the Trading  NPDES Permits
                            Program    for Trading
                            Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers


                    geology, residence time, and so on, have different effects on the waterbody of concern.
                    The relative biological availability of nutrients in the trading sources' discharges should be
                    incorporated into the equivalency ratio. For example, consider a point and nonpoint source
                    trading phosphorous. Generally, a point source's discharge will have a higher proportion of
                    biologically available phosphorous than a nonpoint source's discharge. While some of the
                    nonpoint source's bound phosphorous will convert into biologically available phosphorous,
                    it will generally still have a lower percentage of biologically available phosphorous than the
                    point source during the time frame the point source must account for the reductions. It is
                    important that the buyer offset its load with reductions that will have similar impacts on the
                    waterbody at the time the offset is needed. The number of pounds of the nonpoint source's
                    reduction that the point source will have to buy to have a similar impact on the biota in the
                    waterbody is the equivalency ratio.

                    An equivalency ratio  can also be used in cross-pollutant trading. While the general idea that
                    the water quality effects of the two pollutants should be equivalent or related by a factor
                    still holds, determination of the ratio may involve a more detailed study for cross-pollutant
                    trading than for single-pollutant trading. As with consideration of location  ratios, consider-
                    ation of equivalency  ratios may lead to either a greater or less than 1:1 trading ratio.

                    Uncertainty ratios account for multiple types of uncertainty that normally occur in point
                    source-nonpoint source trades. Most point source-point source trades should not require
                    an uncertainty ratio because measurement is relatively straightforward and both sources
                    are required to perform discharge monitoring in accordance with the terms of their permits.
                    However, challenges  exist in accurately measuring nonpoint source credit generation because
                    of complexities and cost associated with assessing and monitoring of pollutant load reductions
                    from BMPs  (see Figure 13).  Measurement uncertainty addresses the level of confidence in the
                    field  testing of a nonpoint source BMP. Implementation uncertainty is also accounted for in
                    this type of ratio, addressing the level of confidence that a nonpoint source BMP is properly
                    designed, installed, maintained, and operated (Moffett 2005). Together, these factors contrib-
                    ute to performance uncertainty (the risk of a BMP failing to produce the expected results). All
                                                          trading programs involving nonpoint sources should
                                                          address nonpoint source BMP performance uncer-
                                                          tainty through ratios, use of conservative assump-
                                                          tions in calculating  credits, or some other approach.
                                                          Where uncertainty ratios are used, they will gener-
                                                          ally be greater than 1:1, because there is greater
                                                          uncertainty associated with nonpoint sources (sell-
                                                          ers) than with point sources (buyers). The method of
                                                          reducing the uncertainty ratio is typically to improve
                                                          the certainty of nonpoint source load reductions
                     II     +»' *           MM        though monitoring, modeling, and estimating
                                      -J*-"  J w        effectiveness.
                         Ratio
          Figure 13. Uncertainty ratio.
32
          Fundamentals of Water Quality Trading
Introduction Overview of
Essential Trading

Water Quality Information for
Trading

Permit Writers
Tradeable
Pollutants
Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading
                                                                 Factors for
                                                                 Determining
                                                                 Pollutant      Effluent Limit
                                                                 Reduction Credits Types
Stakeholder
Roles
Is the Trading
Program
Working?
NPDES Permits
for Trading
Scenarios

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                                                          Water Quality Trading Toolkit for Permit Writers


Retirement ratios can be applied if a goal of the trading program is to accelerate achieve-
ment of water quality standards. These ratios retire a percentage of all credits generated,
and these credits cannot be sold. Therefore, the overall loading to the waterbody is reduced
with each trade that yields net water quality improvement. This form of  ratio can be particu-
larly useful in impaired waterbodies for which a TMDL has not yet been developed because
the exact reductions required of individual sources to achieve water quality standards might
not yet be known. For waterbodies where a TMDL has already been established, if each
source meets its LA or WLA, either through adopting control technologies or through credit
purchases, this should be sufficient to attain water quality standards. Where retirement ratios
are used, they should always be greater than 1:1 because their purpose is to accelerate water
quality improvements.

The trading ratio established for a particular trade might include one or  more of these ratios
depending on-the scenario. Some of these ratios might be uniform for an entire trading pro-
gram, while others might be specific to particular pairs of trading sources. EPA recommends
that trading programs be as specific as possible about which underlying ratios are to be used
and exactly how they are to be calculated when developing a trading ratio for a group of
sources. The trading program design may also allow for adjustments to the trading ratios
should uncertainties be greater or less than expected, means of control more or less effec-
tive, or if changes in watershed conditions occur. Being clear about how trading ratios are
calculated will also foster transparency and public acceptance of the program.
  Long Island Sound, Connecticut
    The Connecticut Department of Environmental Protection (CTDEP) gained information on
    nitrogen attenuation factors in Long Island Sound and during riverine transport by using the LIS
    3.0 Model and U.S. Geological Survey monitoring data for major tributaries. Attenuation factors
    were developed into location ratios, which are important for quantifying relationships between
    discharge points and actual delivery of nitrogen to Long Island Sound. These ratios combine to
    account for relative nitrogen impact on dissolved oxygen depletion in Long Island Sound from
    geographically distributed sources. They are used as trading ratios to put the 79 POTWs involved
    in trading on an equal basis, which is a critical component of the Nitrogen Credit Exchange. To
    calculate the overall  trade ratios, CTDEP multiplied the river location ratios for a tier within a
    particular management zone by the Long Island Sound transport efficiency from Connecticut's
    six management zones once the nitrogen reached the edge of the sound. Figure 14 illustrates the
    combined trading ratios for the management zones. CTDEP expresses the ratios as the decimal
    fraction of the nitrogen load delivered. CTDEP made the assumption that the tiers closest to the
    Long Island Sound have no nitrogen attenuation (i.e., they deliver 100 percent of the nitrogen
    load) and assigned the value of 1 as the ratio.
Fundamentals at Water Quality Trading

Introduction




Overview of
Water Quality
Trading


Essential Trading
Information for
Permit Writers




Tradeable
Pollutants



Geographic
Scope



Possible
Trading
Scenarios



Circumstances
for Trading
*

Factors for
Determining
Pollutant
Reduction Credits



Effluent Limit
Types
                                                                                                     33
                                                                               Is the Trading  NPDES Permits
                                                                       Stakeholder  Program    for Trading
                                                                       Roles     Working?    Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                           1.Q0
                                        Nitrogen Trading Zones
                   Figure 14. Long Island Sound, Connecticut, nitrogen planning zones.
                   Timing of Credit Generation and the Duration of Credits
                   The tinning of credit generation and the duration of credits is tied to the credit reconciliation
                   period. A credit reconciliation period is the period of time during which a seller generates
                   water quality credits and a buyer may use those credits to offset a pollutant load that it dis-
                   charges during that same period of time. Permitting authorities should be aware of how the
                   trading program defines a reconciliation period through both the timing of credit generation
                   and the duration of credits.

                   Timing of Credit Generation
                   The timing of trades is critical. A basic premise of water quality trading is that credits should
                   not be used before the time frame in which they are generated.  In general!, a permitting
                   authority should not allow for a pollutant reduction credit in a NPDES permit on the basis
                   of the proposed treatment by another point source or an unverified commitment to install a
                   BMP by a nonpoint source and their anticipated pollutant reduction.

                   Even after a practice is in place to achieve a reduction, the regulatory authority would need
                   to decide at what point a credit is actually available to be used in a trade. For example,  if
                   point source requirements are based on a total annual load, the  permitting authority might
                   determine that credits from a point source that is over controlling its discharge would not be
34
         Fundamentals of Water Quality Trading
introduction



Overview of
Water Quality
Trading

Essential Trading
information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading
*
Factors for
Determining
Pollutant
Reduction Credits


Effluenl Limit
Types


Stakeholder
Roles
                                                                                      is the Trading  NPDES Permits
                                                                                      Program    for Trading
                                                                                      Working?    Scenarios

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                                                           Water Quality Trading Toolkit for Permit Writers


available until the discharger has installed controls and has one year of monitoring data to
demonstrate total annual loadings and reductions. This could be appropriate if there were
uncertainty regarding the total amount of credits that would be generated, although this
could also be addressed through an uncertainty ratio, which might be relaxed after the first
year's worth of monitoring data were available. Credits that are based on shorter time peri-
ods may also require a period of time to demonstrate reductions or provide an understand-
ing of how loadings and reductions may vary over time. Also, credits generated by nonpoint
sources through installation of BMPs may not be available immediately because of a time
lag between installation of the BMP and its effectiveness in reducing loadings or otherwise
improving water quality. In some cases, the credit generation could be prorated on the basis
of the pollutant reduction the BMP is achieving during the current reconciliation period,
even where the BMP has not reached its maximum expected pollutant reduction efficiency.
This could be reflected in the trading ratio. The decisions as to when credits are available for
use may have already been made in the program design. The permitting authority should be
aware of these decisions.

Also, as noted previously, EPA's Water Quality Trading Assessment Handbook indicates that
trades should be consistent with the time periods that are used to determine compliance with
effluent limitations. For example, a point source that has effluent limitations with monthly
averaging periods should trade with sources that can generate credits on a monthly  basis,
and credits should be created in the same month they are expected to be used (e.g., a credit
created in August 2006 should be used  to compensate only for a discharge in August 2006).
The permitting  authority may have discretion to determine the appropriate averaging period
for WQBELs, depending on the pollutants of concern and other watershed specific factors
(see below).

Expiration of Credits
The permitting  authority should decide whether and when a credit expires. Point sources
generating credits should be able to continue to do so as long as they properly operate and
maintain the appropriate controls and are able to demonstrate reductions below WQBELs.
Credits generated by nonpoint sources, on the other hand, may decrease or expire if the BMP
installed to generate the credit gradually becomes less effective over time and is not main-
tained or replaced.

Also, because of temperature differentials, there may be seasonal fluctuation in the amount
of credits generated by either a point source or a nonpoint source and the amount of cred-
its needed by a point source, particularly for pollutants such as nutrients. In many parts of
the country, for point sources, nitrogen removal is  much more effective in the summer than
in the winter because of increased biological activity. Therefore, a point source might need
more credits (or only need credits) to compensate for discharges in the wintertime. For non-
point sources, the effectiveness of some land management BMPs fluctuates seasonally as well.
Because it might be difficult to coordinate the timing of nutrient discharges, some permitting
authorities have considered using annual mass-based discharge limits for nutrients, which facili-
tates trading these pollutants. Annual limits are appropriate only in certain circumstances (see
discussion below. Effluent Limits with Longer-Term (e.g., Annual) Compliance Periods).
Fundamentals of Water Quality Tradinl
introduction




Overview of
Water Quality
Tradina


Essential Trading
Information for
Permit Writers





Tradeabie
Pollutants



Geographic
Scope


Possible
Trading
Scenarios



Circumstances
tor Trading
Factors for
Determining
Pollutant      Effluent Limit
Reduction Credits Types
                                                                                                       •***
                                                                                Is the Trading  NPOES Permits
                                                                        Stakeholder  Program    for Trading
                                                                        Roles     Working?    Scenarios

-------
Water Quality Trading Toolkit for Permit Writers


          Often, point sources interested in purchasing credits express a desire to enter into contracts
          that include long-term commitments from sources generating credits to ensure the future
          availability of credits needed to compensate for their pollutant loads. Where possible, trad-
          ing programs should attempt to identify credit generators that are willing and able to reli-
          ably generate credits over an extended period of time (e.g., 5 to 10 years) to reduce the risk
          and uncertainty of trading for permitted point sources.

          In all cases, permitting authorities should ensure that NPDES permits incorporating water
          quality trading provide for periodic evaluation of pollutant reduction credits to ensure that
          the credits are still available and consistent with established trading program rules.


          Determining Maximum Feasible Nonpoint Source Load
          Reductions
          It is not feasible for a nonpoint source to control  100 percent of its pollutant runoff to a water-
          body. Therefore, it is important that some analysis be done to estimate the maximum amount
          of pollutant runoff that can be controlled from the nonpoint sources in a watershed. The dif-
          ference between this estimate and the nonpoint source's baseline equals the maximum non-
          point source load reductions available for trading.12 This is a way to ensure that credits being
          purchased result in actual reductions. This increases the surety that the trading program can
          meet its goal of achieving water quality standards.

          The trading program might want to include a mechanism for ensuring that this maximum
          tradable nonpoint source load reductions is not exceeded. This could be done, for example,
          by specifying the maximum tradable nonpoint source load reductions in the program docu-
          mentation and then tracking credit sales, and therefore load reductions, by nonpoint sources
          to ensure that this maximum is not exceeded.

          A more in-depth discussion of determining the maximum feasible nonpoint source load
          reductions is provided in the nonpoint source scenario sections of the Toolkit.


          What Types of Effluent  Limitations Could Be Met
          Through Trading?
          In general, WQBELs for nutrients, sediments and other parameters that do not have local-
          ized toxic effects are amenable to control via a trading system. WQBELs are most commonly
          expressed as maximum daily limits and average monthly limits (AMLs). EPA's Water Quality
          Trading Assessment Handbook notes that trades should be consistent with the time periods
          that are used to determine compliance with effluent limitations. Trading to meet  monthly
          average limits is more manageable for phosphorous and sediments than for nitrogen. Facili-
          ties trading phosphorous or sediments would potentially conduct only 12 trades during the
           The maximum tradable nonpoint source load reduction is not equal to the maximum number of credits available
           for trading in a watershed because of the impact of trading ratios. Because trading ratios can vary depending on
           many factors (as described in the Developing Trade Ratios section), determining the maximum number of credits
           is not as useful as determining the maximum tradable nonpoint source load reduction for the purpose of ensuring
           that every trade results in a reduction of total load to the waterbody.
Fiindaimintals of Water Quality Trading
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading

Factors for
Determinina
Pollutant
Reduction Credits
*

Effluent Limit
Types
                                                                              is the Trading  NPDES Permits
                                                                       Stakeholder  Program    for Trading
                                                                       Holes     Working?    Scenarios

-------
                                                          Water Quality Trading Toolkit for Permit Writers


course of the year. At the end of each month, each buyer and each seller would account for
credits bought and sold through credit tracking and certification. For facilities trading nitro-
gen, the permitting authority might want to consider setting annual limits due to the sea-
sonal fluctuation in  treatment effectiveness.


Effluent Limits With Longer-Term (e.g., Annual) Compliance
Periods
The NPDES regulations at 40 CFR 122.45(d) require that all effluent limits be expressed, unless
impracticable, as both AMLs and maximum daily limits (MDLs) for all dischargers other than
POTWs, and as average weekly limits (AWLs) and AMLs for POTWs. EPA has identified some
circumstances where limits expressed with these averaging periods are impracticable.

For nutrients, the concern generally is whether it is appropriate to establish effluent limita-
tions with longer, rather than shorter, averaging periods. This issue is particularly important
when considering trading, because nutrients are a frequent subject of trading programs.
Permitting authorities have some discretion on the use of nutrient effluent limitations with
longer averaging periods. EPA indicated its support for using annual limits, rather than MDLs,
AWLs,  and AMLs, to meet criteria for nutrients in the Chesapeake Bay and  its tidal tributaries
in a memorandum from James Hanlon, Director of the EPA Office of Wastewater Manage-
ment to EPA Region 3  and the Chesapeake Bay Program  Office, dated March 3, 2004 (Annual
Permit Limits for Nitrogen and Phosphorus for Permits Designed to Protect Chesapeake Bay
and its tidal tributaries from Excess Nutrient Loading under the National Pollutant Discharge
Elimination System). In this memorandum,  EPA affirmed that it is impracticable to express
permit effluent limits for nitrogen and phosphorus discharges in the Bay watershed on the
basis of nutrient criteria for the Chesapeake Bay  and its tidal tributaries in terms of monthly
average, weekly average, or maximum daily limitations because of a number of factors, such
as (1) the long residence time for nutrient loadings to the Chesapeake Bay and its tidal tribu-
taries,  (2) the focus on the far-field effects  of such  nutrients (rather than in the immediate
vicinity of the discharge), and (3) the need to reduce average pollutant loads globally rather
than maximum  loads from any one source.13

The circumstances in the Chesapeake Bay that make annual limits appropriate are not nec-
essarily unique. For other areas of the country, the memorandum states that "The estab-
lishment of an annual  limit with a similar finding of 'impracticability' pursuant to 40 CFR
122.45(d) may be appropriate for the implementation of nutrient criteria in other watersheds
when:  attainment of the criteria is dependent on long-term average loadings rather than
short-term maximum loadings; the circumstances match those [in the Chesapeake Bay and its
tidal tributaries]; annual limits are technically supportable with robust data and modeling...
and appropriate safeguards to protect applicable water  quality standards are employed."
Annual effluent limitations should be used only in these limited circumstances. Other than
  The applicable water quality criteria for the Chesapeake Bay are expressed as an annual average, so the underlying
  analysis of the memo is also applicable to implementation of other nutrient criteria where attainment of the
  criteria is dependent on long-term average loadings rather than short-term maximum loadings. Examples of such
  criteria include EPA's recommended CWA section 304(a) ecoregional nutrient criteria, which are expressed as an
  annual average.
Fundamentals of Water Quality Trading
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
fnr Trading

Factors for
Determining
Pollutant
Reduction Credits
•

Effluent Limit
Typss


Stakeholder
Rotes
                                                                                Is the Trading  NPDES Permits
                                                                                Program    for Trading
                                                                                Working?    Scenarios

-------
          Water Quality Trading Toolkit for Permit Writers


                    nutrients, most pollutants would not have annual limits. In addition, when considering
                    annual limits or other longer-term limits, the permitting authority should be certain that its
                    state regulations do not prohibit setting such limits.

                    Even for nutrients, the behavior of the pollutant and the type of criteria will affect whether
                    longer-term limits are appropriate or necessary. For example, in free-flowing streams where
                    there are no impoundments, annual limits for phosphorus might not be needed. Phosphorus
                    removal is not temperature dependent and AMLs may be most appropriate to protect  water
                    quality. Furthermore,  in cases where nutrient water quality criteria and WLAs to protect
                    those criteria are expressed on a shorter-term basis (generally to protect against local nutri-
                    ent impacts in rivers or streams), effluent limitations derived from those criteria or allocations
                    also should be expressed on a shorter-term basis, such as AMLs.14


                    What Are the Roles of Stakeholders?
                    Permitting authorities should consider the roles of permittees, other trading partners,  and
                    key stakeholders when incorporating water quality trading in NPDES permits.


                    Permittees
                    The permittee can be either a buyer or a seller of pollutant credits. The permittee's pri-
                    mary responsibility is compliance with the  provisions of the NPDES permit. Beyond basic
                    compliance, however,  permitting authorities should consider the additional roles of the
                    permittee(s). For example, the permittee is likely to play a primary role in developing the
                    specific trade agreement to be included or referenced  in the NPDES permit. The permittee
                    may be a good resource for information  useful to developing trade agreement provisions
                    and appropriate permit conditions. The permitting authority should consider the permittee's
                    responsibilities under any trading provisions and should establish conditional requirements in
                    the permit that apply if the permittee does not meet these trading responsibilities.

                    In some circumstances, the permittee may  be the manager of a trading program (i.e., pre-
                    treatment trading), or the sole trading participant (i.e., intraplant trading).


                    Unregulated Trading Partners
                    Often a permit will not place requirements on all of the partners involved in a trade, such  as
                    nonpoint sources or pollutant credit brokers. In those circumstances, the permitting author-
                    ity should consider how default by the unregulated partners could affect the permittee(s)'
                    compliance with the effluent limitations  and conditions in the permit. To the extent possible,
                    the permitting authority should incorporate appropriate, enforceable actions into  the  NPDES
                    permit to address nonperformance by an unpermitted trading partner. For example, the
                    trade agreement could provide that unregulated credit generators notify regulated credit
                    14 EPA Memorandum dated November 15, 2006, Establishing TMDL 'Daily' Loads in Light of the Decision by the U.S.
                     Court of Appeals for the D.C. Circuit in Friends of The Earth, Inc. v. EPA, et al.. Wo 05-5075, (April 25, 2006) and
                     Implications for NPDES Permits states, "EPA does not believe that the Friends of the Earth decision requires any
                     changes to EPA's existing policy and guidance describing how a TMDL's wasteload allocations are implemented in
                     NPDES permits."
oo
Jo        Fundamentals of Water Duality Trading
           Introduction   Overview of  Essential Trading
                   Water Quality Information for                                factors for
                   Trading     Permit Writers                 Possible           Determining
                                    Tradeable   Geographic  Trading    Circumstances  Pollutant      Effluent Limit
                                    Pollutants   Scope    Scenarios   for Trading    Reduction Credits  Types
        Is the Trading  NPDES Permits
Stakeholder  Program    for Trading
Roles     Working?    Scenarios

-------
                                                         Water Quality Trading Toolkit for Permit Writers


purchasers of any anticipated circumstance when the credits would not be available. In this
instance, the permit could require the regulated credit purchaser to provide notice to the
permitting authority, seek other credit sources, and implement alternate controls to reduce
pollutant loads in the permitted discharge.


Federal and State Agencies
Permitting authorities should not overlook the role of federal agencies such as the Natu-
ral Resources Conservation Service; Forest Service; Agricultural Research Service; and the
Cooperative State, Research, Education, and Extension Service, as well as similar state agen-
cies, when developing permits incorporating trades with forestry and agriculture nonpoint
sources. While NPDES permits cannot require nonpoint sources to implement  pollutant reduc-
tion BMPs or management practices, research  conducted by these agencies can help develop
and evaluate trading ratios and monitoring requirements. These agencies may also have
independent statutory and regulatory authorities that could be used to facilitate adoption
or implementation of trading provisions. The role of state agencies that serve as the NPDES
permitting authority is discussed in the Overview of the Toolkit.


Local Governments
Local governments can also play a major role in the administration of trading programs. In
addition to being a stakeholder that may provide comments on TMDLs or permits or being
a point source discharger within a watershed,  local governments  can manage and facilitate
trading.


         Red Cedar River, Wisconsin
           The  Barren County Land Conservation Department served as a third-party facilitator for the Red
           Cedar River Nutrient Trading Pilot Program, negotiating with farmers and establishing contracts
           between participating nonpoint sources and the city of Cumberland.
Citizens
Permitting authorities should take advantage of the potential contributions of interested citi-
zens to water quality trading efforts under the NPDES program. Permitting authorities should
develop permits and fact sheets that clearly describe the calculations and assumptions used
to determine baselines and trade  ratios. Particularly where nonpoint sources are involved in
the trade, the permit should clearly articulate the uncertainties associated with BMPs, their
implementation, maintenance and operation, and how these uncertainties will  be addressed,
to allow interested citizens the opportunity to provide information relative to the trade that
otherwise might not be accessible to the permitting authority (e.g., citizen monitoring).
Additionally, the permitting authority should require reporting of sufficient information to
evaluate compliance with trade agreements and permit conditions and should make that
information easily accessible to the public. Finally, EPA's Trading  Policy encourages states and
tribes to make electronically available to the public information on the trading partners, the
Fundamentals of Water Quality Trading
                                                                                                     on
                                                                                                     '*"•»
introduction




Overview of
Water Quality
Trading


Essential Trading
Information for
Permit Writers





Tradeable
Pollutants



Geographic
Scope


Possible
Trading
Scenarios



Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits



Effluent Limit
Typos
*


Stakeholder
Roles


Is the Trading
Program
Working?


NPDES Permits
for Trading
Scenarios

-------
       Water Quality Trading Toolkit for Permit Writers


                 quantity of credits generated and used, market prices where available, and delineations of
                 watershed or trading boundaries. Permitting authorities can consider including reporting
                 requirements associated with this information to allow interested citizens the opportunity
                 to identify potential trades and to help establish public credibility for NPDES permits that
                 include water quality trades. Interested citizens also have opportunities to participate in the
                 development of a trading program. The public can comment on any applicable TMDL as well
                 as the proposed permit before the permit takes effect. If the state establishes a statewide
                 trading program, the state should issue a draft for public comment before finalizing the
                 program.


                 How to Know if the Trading Program is Working
                 In this document, so far, we have covered five of the seven common elements of credible
                 trading programs outlined in the Trading Policy. We have discussed (1) legal authority,
                 (2) units of trade, (3) creation and duration of credits, (4) quantifying credits and addressing
                 uncertainty, and (5) public participation and access to information.  Compliance and enforce-
                 ment mechanisms are covered in each of the scenarios under monitoring and reporting
                 requirements and not covered here. This section focuses on the seventh element—program
                 evaluation.
"However beautiful the strategy, you should occasionally look at the results."
                                                                —Winston Churchill, 1874-1965
                EPA's Trading Policy suggests that trading programs conduct periodic assessments of environ-
                mental and economic effectiveness and make revisions as needed. "Environmental evalua-
                tions should include ambient monitoring to ensure impairments of designated uses (including
                existing uses) do not occur and to document water quality conditions. Studies should be
                performed to quantify nonpoint source load reductions, validate nonpoint source pollutant
                removalefficiencies and determine whether the anticipated water quality objectives have
                been achieved."

                To ensure that the trading program is meeting its goals, it is important that program evalua-
                tions be included in both the design and implementation of the trading program. This allows
                for adaptive management. Data and information collected can be used to assess whether the
                water quality goals of the program are being met and can be used to make program modi-
                fications where necessary. The results of these program evaluations and any changes that
                result should be made available for public comment.
       Fundamentals of Water Quality Trading
Introduction Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers


Tradeable
Pollutants

Geographic
Scope

Possible
Trading
Scenarios

Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits

Effluent Limit
Types

Stakeholder
Roles
                                                                                    Is the Trading NPDES Permits
                                                                                    Program   for Trading
                                                                                    Working?   Scenarios

-------
                                                       Water Quality Trading Toolkit for Permit Writers


Developing NPDES Permits for Specific Trading
Scenarios
Once a NPDES permit writer has a clear understanding of the fundamentals of water qual-
ity trading in general and how the specific characteristics of the trading program involving
regulated point sources will affect development of the NPDES permit, he or she should then
begin to develop a NPDES permit that incorporates trading. To do this, the permit writer
should determine the appropriate type of permit for the trading scenario and decide how the
trading scenario can be incorporated into a NPDES permit.


What Type of Permit Best Suits the Trading Scenario?
The rest of this toolkit is arranged by type of trading scenario. There are some trading sce-
narios that are more conducive to watershed or general permits and some scenarios where
individual permits are the best mechanism.  For more on permitting, see EPA's series  of guides
on watershed-based permitting including the Watershed-based National Pollutant Discharge
Elimination System (NPDES) Permitting Implementation Guidance (USEPA 2003b). Before
a permitting authority can begin including water quality trading requirements in a NPDES
permit, it should first determine the type of permit that is most appropriate for the  parties
involved in the trade or trades and the manner in which trading is conducted. There are two
basic types of permits—a permit that covers a single point source and a permit that covers
a group of point sources. A single point source permit is a permit specifically tailored to an
individual facility and is commonly referred to as an individual NPDES permit. The permittee
applies for a permit, and the permitting authority develops a permit for that particular facil-
ity on the basis of information contained in the permit application and other data submitted
by the permittee or assembled from other sources. A permit also may be issued to a  group of
point sources. Some permitting authorities have issued permits that cover multiple sources
but address only the particular pollutant or pollutants for which credits may be traded. This
type of permit is issued in addition to the existing permits for the facilities involved and,
hence, often is referred to  as an overlay permit.


How Can the Trading Scenario Be Incorporated Into  a NPDES
Permit?
Trading may be incorporated into NPDES permits in a number of ways depending on the
specifics of the trade. In some situations,  the trade provisions may be reflected in the per-
mit limits or other permit conditions imposed on the trading partners through the permit.
Regardless of how water quality trades are included in NPDES permits, it is imperative that
NPDES permitting authorities ensure the  trades meet specific criteria such as enforceability,
accountability, transparency, and consistency with water quality standards.

The permit should clarify what constitutes compliance with permit conditions, explain the
measurement and timing of compliance,  address compliance issues related to meeting per-
mit limits using water quality trading, and address compliance schedules. Most state water
Fundamentals of Water Quality Trading
Introduction



Overview of
Water Quality
Trading


Essential Trading
Information for
Permit Writers




Tradeable
Pollutants


Geographic
Scope

Possible
Trading
Scenarios


Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits


Effluent Limit
Types


Stakeholder
Roles

Is the Trading
Program
Working?
                                                                                   NPDES Permits
                                                                                   for Trading
                                                                                   Scenarios

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          Water Quality Trading Toolkit for Permit Writers
                    quality standards or implementing regulations authorize using compliance schedules. If that
                    authority is available, the permit writer may place a compliance schedule in the permit special
                    conditions.
                    Where Can I  Get More Information?

                    This concludes the key sections of the Toolkit that apply to all users. The remaining sections
                    of the Toolkit focus on specific trading scenarios. To determine which trading scenario is
                    appropriate to read next, use the Toolkit Navigation decision tree below (see Figure 15.) Note
                    that EPA developed the Toolkit with the expectation that users would read only the sections
                    applicable to their unique circumstances and interests; therefore, the trading scenario sec-
                    tions do repeat essential information to ensure that users get comprehensive information in
                    the trading scenario that best applies.
                                              Toolkit Navigation
                                                        Start
                             Wild
                         Credit Exchange
                            be used?
                     y
                Goto
            Nonpoint Source
            Credit Exchange
               Section
    Goto
 Point Source-
Nonpoint Source
   Trading
   Section
                                                                 Goto
                                                             MuWple FacitHy
                                                              Point Source
                                                                trading
                                                                Section   .
   Goto
Point Source-
Point Source
  Trading
  Section   ,
                                          '   Goto    '
                                           Point Source
                                          Credit Exchange
                                             Section
                    Figure 15. Toolkit navigation.
42
          Fundamentals of Water Quality Trading
Introduction



Overview of
Water Quality
Trading

Essential Trading
Information for
Permit Writers



Tradeable
Pollutants


Geographic
Scope


Possible
Trading
Scenarios


Circumstances
for Trading

Factors for
Determining
Pollutant
Reduction Credits


Effluent Limit
Types


Stakeholder
Roles


is the Trading
Program
Working?
•*

NPDES Permits
for Trading
Scenarios

-------
                       Water Quality Trading Scenario: Single Point Source-Single Point Source Trading
Water Quality Trading Scenario:
Single Point Source-Single Point Source Trading
Contents

Water Quality Trading Scenario:
Single Point Source-Single Point Source Trading	1
  Trade Agreements	1
  Components of a NPDES Permit	4
    Permit Cover Page	5
    Effluent Limitations	5
    Monitoring	12
    Reporting Requirements	14
    Special Conditions	17

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Water Quality Trading Toolkit for Permit Writers

-------
                                Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


Water Quality Trading Scenario:
Single Point Source-Single Point Source

Trading

This water quality trading scenario focuses on technical and programmatic issues related to
single point source-single point source trading, illustrated in Figure 1. Issues addressed under
this scenario include the following:
    •  Trade agreements
    •  Components of a National Pollutant
       Discharge Elimination System (NPDES)
       permit
       -  Permit cover page
       -  Effluent limitations
       -  Monitoring
       -  Reporting requirements
       -  Special conditions
Buyer
POTW
                                                               point source-
                                                               point source
                                                                   trade
                                             Figure 1. Point source-point source trade.
A hypothetical example (shown in highlighted boxes) is presented throughout this scenario
to illustrate how NPDES permit writers might work with credit buyers and sellers to assist
in trading and ensure each facility's NPDES permit contains the appropriate limits, require-
ments, and other conditions. Keep in mind that there are a range of options for incorporat-
ing trading provisions into a NPDES permit. The hypothetical example discussed throughout
this scenario illustrates just one of the many options a NPDES permit writer might use.
Trade Agreements
Typically, the terms that govern a trading program will be developed outside the NPDES per-
mit process and can be incorporated or reflected in the permit (see Appendix C). The U.S. Envi-
ronmental Protection Agency's (EPA) Water Quality Trading Policy (Trading Policy) describes
several mechanisms for implementing trading through NPDES permits (see Appendix B).
NPDES permits authorizing water quality trading should reference any existing trade agree-
ment in the permit or fact sheet. The permit writer may also incorporate specific provisions of
the agreement as appropriate (e.g., shared responsibilities for conducting ambient monitor-
ing) into the permit. All trade agreements referenced in NPDES fact sheets and permits should
meet certain minimum standards to help ensure the trades authorized by the permit are con-
sistent with water quality standards. At a minimum, the trade agreement should be a written
agreement and signed and dated by authorized representatives of all trading partners. Verbal
trade agreements should not be referenced in  NPDES permits. The written trade agreement
should contain sufficient detail to allow the permitting authority to determine with some
degree of certainty that the terms of the agreement will result in loading reductions and
generate sufficient credits to satisfy water quality requirements. If there is no formal, out-
side trade agreement, trading can still occur; however, the permit writer will need to more
Water Quality Trading Scenarios
I Point Source-Point Source
               Trade Agreements Components of a NPDES Permit
                                        Permit Cover Page  Effluent Limitations  Monitoring   Reporting Requirements Special Conditions

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Water Quality Trading Toolkit for Permit Writers



  Mystic River Example: Trade Agreements
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Newly approved TMDLa for Total Phosphorus for the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
                  Current Load: 80 Ibs/day (average monthly)

                  New WQBELb (based on WLA'): 57 Ibs/day (average monthly)	

                  Existing TBEL:  35 mg/L (average monthly) at an average flow of
                  _____	300,000 gpde = 82 Ibs/day	

                  Existing Treatment: None

                  Proposed New Treatment Capabilities:  Treatment to 40 Ibs/day
                                                          (average monthly)

    Credit Buyer: Auburn Carpet Manufacturers
                  Current Load: 40 Ibs/day (average monthly)

                  New WQBEL (based on WLA): 29 Ibs/day (average monthly)	

                  Existing TBEL:  1 mg/L (average monthly) at an average flow of 5 mgdf = 42 Ibs/day

                  Existing Treatment Capabilities: Treatment to 40 Ibs/day

                  Proposed New Treatment Capabilities: None

  Notes: a TMDL = Total maximum daily load; b WQBEL = water quality-based effluent limitation;
         c WLA = wasteload allocation; d TBEL = technology-based effluent limitations;
         e gpd = gallons per day;  mgd = million gallons per day

  Location: Meadeville Fertilizer Producers (credit seller) is approximately one mile upstream from
  Auburn Carpet Manufacturers (credit buyer) along the Mystic River.

  Applicable Trade Ratios: None. In this case, it is not necessary to apply a delivery ratio because of
  the close proximity of the sources to each other, nor an equivalency ratio because the same pollutant
  form is being traded, nor an uncertainty ratio because both parties can accurately monitor end-of-
  pipe loads.

  The minimum control level for Auburn Carpet Manufacturers is 40 Ibs/day (existing discharge),
  because this level is more stringent than the TBEL (42 Ibs/day) at the current level of discharge.
  Therefore, Auburn Carpet Manufacturers (buyer) needs to purchase credits equivalent to 11 Ibs/day
  of total phosphorus (TP) to meet its WLA (baseline) under the TMDL. Auburn Carpet Manufacturers
  has arranged to purchase equivalent credits from Meadeville Fertilizer Producers. Meadeville Fertil-
  izer Producers (seller) has a baseline of 57 Ibs/day (WLA) and new treatment will treat to 40 Ibs/day
  of TP loading. With this surplus of 17 Ibs/day, Meadeville Fertilizer Producers can sell 11 TP credits
  to Auburn Carpet Manufacturers (with no applicable ratios) and will still have 6 Ibs/day of surplus TP
  credits potentially available for sale to other permittees.
Water Quality Trading Scenarios
                "•
 Point Source-Point Source
                Trade Agreements Components of a NPDES Permit
                                            Permit Cover F
                                                      Effluent Limitations   Monitoring   Reporting Requirements  Special Conditions

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                                    Water Quality Trading Scenario: Single Point Source-Single Point Source Trading
                          Mystic River Example: Trade Agreements (continued)

   The NPDES permit writer worked with the facilities and other key stakeholders to craft the provi-
   sions of the trade agreement and provided the necessary information (e.g., baseline, minimum control
   levels) to facilitate the trade. As required, the permitting authority receives a written copy of the trade
   agreement that is signed and dated by authorized representatives of each facility. The permit writer
   reviews the written trade agreement to verify that the information is accurate and consistent with
   water quality standards. The permit writer develops permit requirements that are consistent with the
   provisions in the trade agreement, and incorporates those requirements in specific sections of the
   permit on effluent limitations (i.e., baseline, the minimum control level for the buyer and the trading
   limit for the seller), reporting and monitoring provisions.

   The permit writer incorporates the Phosphorus Analysis Report provision of the trade agreement into
   the permit to require the facilities to submit trade information to the permitting authority. This will
   allow the permitting authority to determine whether the buyer and seller maintain compliance with
   WQBELs and applicable TBELs.

   In addition to developing permit requirements coordinated with the provisions of the trade agree-
   ment, the permit writer will reference the written trade agreement in the fact sheets of each facility's
   NPDES permit and include copies of the signed trade agreement as an attachment. Each NPDES
   permit fact sheet will state that the facility's effluent limitation requirements are based on the WLA
   for the facility under the approved TMDL developed to  achieve water quality standards; the permit
   authorizes the use of trading as a tool to comply with the required WQBELs, and the permit contains
   provisions that reflect the relevant terms of the written trade agreement signed by both parties.

   The basic terms of the trade agreement are as follows:

     •  Trading partners more than one mile apart must apply a delivery ratio to all trades. Trading
        partners that discharge different forms of phosphorus must apply an equivalency ratio to all
        trades. (In the case of the trade between Meadeville Fertilizer Producers and Auburn Carpet
        Manufacturers, a delivery ratio is not necessary because they are only one mile from each other
        on the Mystic River. An equivalency ratio is not necessary because the facilities discharge the
        same form of phosphorus, and an uncertainty ratio is not necessary because each party is able to
        accurately monitor end-of-pipe loads.)

     •  A credit seller must first meet its baseline before generating credits eligible for trading. (Meadev-
        ille Fertilizer Producers will install control technologies that will treat to a phosphorus loading
        of 40 Ibs/day and must meet its WLA (baseline) of 57 Ibs/day, which will result in 17 Ibs/day of
        surplus (monthly average) load reduction eligible for trading.)

     •  A credit seller is subject to trading limits. A trading limit is calculated by subtracting the
        quantity of credits sold from the baseline.
        (Meadeville Fertilizer Producers has a trading limit = 57 Ibs/day - Quantity of Credits Sold.)

     •  A credit buyer can purchase credits to meet its facility's baseline. However, the credit buyer
        must first meet the facility's minimum control level before purchasing credits to meet the
        required baseline. (Auburn Carpet Manufacturers must meet its WLA (baseline) of 29 Ibs/day.
        The facility's minimum control level equals the facility's current discharge of 40 Ibs/day. This
Water Quality Trading Scenarios
 Point Source-Point Source I
                Trade Agreements  Components of a NPDES Permit
                                             Permit Cover Page  Effluent Limitations   Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers
                         Mystic River Example: Trade Agreements (continued)

       current discharge meets the existing TBEL of 1 mg/L (average monthly) of TP at the current
       level of discharge (5 mgd), which is equivalent to 42 Ibs/day at the current level of discharge. The
       facility must continue to meet the minimum control level of 40 Ibs/day before purchasing credits
       to meet its baseline. When Meadeville Fertilizer Producers' new control technologies are fully
       implemented, Auburn Carpet Manufacturers will purchase credits equivalent to 11 Ibs/day of TP.)

    •  Credit buyers and sellers must conduct TP monitoring that complies with regulatory agency
       requirements. In addition, credit buyers and sellers must complete and exchange monthly Phos-
       phorus Analysis Reports to track the amount of TP discharged and the total amount of TP load
       bought and sold between the facilities. (Each facility will continue to monitor TP as required
       under each facility's respective individual NPDES permit. Each facility will continue to complete
       and submit Discharge Monitoring Report (DMR) forms to the NPDES permitting authority, as
       required under each facility's respective NPDES permit. In addition, each facility will complete
       and exchange the monthly Phosphorus Analysis Reports.)

    •  Trades occur monthly, and credits may not be applied in any month other than the one in which
       the credits are generated.

  In a separate contract, Meadeville Fertilizer Producers and Auburn Carpet Manufacturers articulate
  the financial and liability conditions that the two facilities have agreed upon.
          explicitly describe the trading program in the fact sheet and authorize specific aspects of the
          trading program as permitconditions. Trading partners can specify the details pertaining
          to the negotiated terms of the trade (e.g., credit price, payment schedule, consequences for
          failure to fulfill negotiated terms) in a separate, written and signed contract.
          Components of a NPDES Permit
          NPDES permits that authorize water quality trading are no different than typical NPDES per-
          mits in many respects—they require the same structure, analyses, and justification. All permits
          have five basic components: (1) cover page; (2) effluent limitations; (3) monitoring and report-
          ing requirements; (4) special conditions; and (5) standard conditions. Standard conditions are
          the same for all NPDES permits and will not be addressed in this Toolkit. In addition, consistent
          with Title 40 of the Code of Federal Regulations (CFR) section 124.6, all permits are subject
          to public notice and comment. This  process provides all interested parties an opportunity to
          comment on the trading provisions  in the permit.

          Each NPDES permit is accompanied by a permit fact sheet. The information  in these fact
          sheets is not enforceable. The  purpose of the fact sheet is to explain the requirements in the
          permit to the public. Thus,  at a minimum, the fact sheet should explain any trading provisions
          in the permit. There is a wide variety of options for including trading information in the fact
          sheet that ranges from explaining the minimum control level (buyer) or trading limit (seller)
          to including the entire trading program.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements
                          Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                  Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


There are a variety of issues, however, that may require special consideration when developing
a permit incorporating water quality trading. Appendix E provides the permit writer with a list
of fundamental questions that should be addressed during the permit development process.


Permit Cover Page
The cover page of a NPDES permit typically contains the name and location of the permittee,
a statement authorizing the discharge, the specific locations for which a discharge is autho-
rized (including the name of the receiving water), and the effective period of the permit (not
to exceed 5 years). A permit incorporating or referencing provisions of a trade agreement
can refer to water quality trading on the cover page, but this is not necessary. If the state has
issued regulations or policy documents authorizing water quality trading, the permit writer
should consider referencing the regulations in the Authority section of the cover page. For
example, if trading is considered a water-quality management tool in a  state's Water Quality
Management Plan, this establishes clear authority for integrating trading into NPDES permits
and can be referenced on the cover page (Jones 2005).

         Clean Water Services, Oregon
            The Oregon Department of Environmental Quality addresses water quality trading on
            the cover page of the permit issued to Clean Water Services. For more information about
            this trading program, see Appendix A.


Effluent Limitations
Effluent limitations are the primary mechanism for controlling the discharge of pollutants
from point sources into receiving  waters. When developing a permit, the permitting author-
ity focuses much of its effort on deriving appropriate effluent limitations. As in all NPDES
permits, permits that include trading must include any applicable TBELs, or the equivalent
and, where necessary, WQBELs, that are derived from and comply with all applicable technol-
ogy and water quality standards.  Furthermore, limits must be enforceable, and the process
for deriving the limits should be scientifically valid and transparent.

EPA's Trading Policy does not support trading to meet TBELs unless trading is specifically
authorized in the categorical effluent limitation guidelines on which the TBELs are based.
Applicable TBELs thus serve as the minimum control level below which the buyer's treatment
levels cannot fall. This section discusses the overarching principles of how to express all appli-
cable effluent limitations in permits for dischargers participating in water quality trades.

Credit Buyers
Permits for credit buyers should include both the baseline, which is the  WQBEL that defines
the level of discharge the buyer would have to meet through treatment when not trading and
a minimum control level that must be achieved through treatment when trading. The permit
should also include the  amount of pollutant load to be offset (minimum control  level - base-
line) through credit purchases when trading. Most often, the applicable TBEL will serve as the
minimum control level.  A permitting authority can choose to impose a more stringent mini-
mum control level than the TBEL to prevent localized exceedances of water quality standards

Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPOES Permit
                                            'ermit Cover Page  Effluent Limitations   Monitoring   Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers



  Mystic River Example: Effluent Limitations
     What You Need to Know.,.
       Pollutant: Total Phosphorus
          Driver: Newly approved TMDL for Total Phosphorus for the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
                  Current Load: 80 Ibs/day (average monthly)

                  New WQBEL (based on WLA): 57 Ibs/day (average monthly)

                  Existing TBEL:  35 mg/L (average monthly) at an average flow of
                  	300,000 gpd = 82 Ibs/day	

                  Existing Treatment: None

                  Proposed New Treatment Capabilities: Treatment to 40 Ibs/day
                                                         (average monthly)

    Credit Buyer: Auburn Carpet Manufacturers
                  Current Load: 40 Ibs/day (average monthly)

                  New WQBEL (based on WLA): 29 Ibs/day (average monthly)

                  Existing TBEL:  1 mg/L (average monthly) at an average flow of 5 mgd = 42 Ibs/day

                  Existing Treatment Capabilities: Treatment to 40 Ibs/day

                  Proposed New Treatment Capabilities: None

  Location: Meadeville Fertilizer Producers (credit seller) is approximately one mile upstream from
  Auburn Carpet Manufacturers (credit buyer) along the Mystic River.

  Applicable Trade Ratios: None.

  Auburn Carpet Manufacturers' existing permit includes a TBEL based on state  treatment standards
  for TP, which the facility currently  meets. Meadeville Fertilizer Producers is also subject to a TBEL
  based on existing federal effluent limitation guidelines. Existing effluent limitations for each facility
  are less stringent than the limitations needed to meet the new WLAs established in the Mystic River
  TMDL.

  Meadeville Fertilizer Producers has recently been upgraded and has the potential to treat its discharge
  to a phosphorus loading of 40 Ibs/day. The facility's baseline requirement for trading is 57 Ibs/day
  (i.e., most stringent effluent limitation). Treating to the maximum capacity of the publicly owned
  treatment works (POTW) would result in an excess phosphorus reduction of 17 Ibs/day (baseline
  - treatment capacity).

  Auburn Carpet Manufacturers has no funds to upgrade to meet the facility's new WLA. The permit-
  ting authority is allowing the facility to trade to meet its new WQBEL (baseline based on WLA). The
  facility's current discharge of 40 Ibs/day meets the existing TBEL of 42 Ibs/day at the current level of
  discharge. To participate in trading, the facility must continue to treat to the current level of loading
Water Quality Trading Sconariosi
 F'oint Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page
                                                      Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading
                       Mystic River Example: Effluent Limitations (continued)

   (minimum control level) before purchasing credits to meet its baseline. Auburn Carpet Manufacturers
   would then be allowed to purchase credits equivalent to the difference between the minimum control
   level and the baseline (40 Ibs/day - 29 Ibs/day = 11 Ibs/day).

   On the basis of the provisions of the trade agreement, the permitting authority has verified that no
   trade ratios are necessary: fate and transport is not a significant issue because of the proximity of the
   facilities; they are discharging the same form of phosphorus; and there is no uncertainty because of
   direct measurement of TP loads.

   If Meadeville Fertilizer Producers chooses to sell 11 Ibs/day of the credits generated by the over treat-
   ment of its discharge, a trading limit will apply as follows:

                            Baseline - Credits Traded = Trading Limitation

                                 57 Ibs/day - 11 Ibs/day = 46 Ibs/day

   Meadeville Fertilizer Producers will be required to demonstrate that its discharge has an actual load-
   ing of no more than 46 Ibs/day during any period it is selling 11 Ibs/day of credits to Auburn Carpet
   Manufacturers.

   New permits are being developed to implement the new WLAs and authorize trading between the two
   facilities. The permits contain both interim and final effluent limitations. Interim effluent limitations
   are equal to current discharge, which is less than the existing TBEL for each facility. The new WQBELs
   and, therefore, trading provisions apply 2 years after the effective date of the permit. The permits will
   include effluent limitations equal to baselines, minimum control levels, and trading limits.

   Permit Language:
   Meadeville Fertilizer Producers
     A. Meadeville  Fertilizer Producers (permittee) is subject to interim and final effluent limitations
       for the discharge of total phosphorus from Outfall 001. As of ,
       the permittee must meet an  interim mass-based effluent limitation for total phosphorus of
       80 Ibs/day as a monthly average at Outfall 001. Through treatment or other pollutant reduc-
       tions at the facility, the permittee must meet a final mass-based effluent limitation for total
        phosphorus of 57 Ibs/day as a monthly average at Outfall 001. Compliance with the  final
       effluent limitations is required on .

     B. The permittee is authorized to generate and sell credits to an authorized credit Buyer or
       Buyers by further treating  or otherwise reducing the discharge of phosphorus at Outfall 001.
       If the permittee sells such credits, the average monthly effluent limitation of  57  Ibs/day no
       longer applies and the trading  limit for total phosphorus at Outfall 001 shall apply instead as
       follows:

               Monthly Average Trading Limitation = 57 Ibs/day - Quantity of Credits Sold.

    C. Credits sold and purchased may be applied only to the calendar month(s) in which they were
       generated.
Water Quality Trading Scenarios*
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                             Permit Cover Page
                                                       Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers



                      Mystic River Example: Effluent Limitations (continued)

  Permit Language (continued):

  Auburn Carpet Manufacturers
    A. Auburn Carpet Manufacturers (permittee) is subject to interim and final effluent limitations
       for the discharge of total phosphorus from Outfall 001. As of ,
       the permittee must meet an interim mass-based effluent limitation for total phosphorus of
       40 Ibs/day as a monthly average at Outfall 001. Through treatment or other pollutant reduc-
       tions at the facility, the permittee must meet a final  mass-based effluent limitation for total
       phosphorus of 29 Ibs/day as a monthly average at Outfall 001. Compliance with the final
       effluent limitations is required on .

    B. If the final effluent limitation is met through trading, the  permittee must purchase credits
       from authorized Sellers in an amount sufficient to compensate for the discharge of total
       phosphorus from Outfall 001 that is in excess of 29 Ibs/day as a monthly average, but at no
       time shall the maximum mass discharge of total phosphorus from Outfall 001 exceed 40 Ibs/
       day. Thus, the maximum mass discharge to be offset through credit purchases is 11 Ibs/day as
       a monthly average.

    C. Credits sold  and purchased may be applied only to the calendar month(s) in which they were
       generated.
          near the point of discharge but not one that is less stringent the TBEL. In a NPDES permit fact
          sheet, the effluent limitations for a credit buyer could be described as follows:
              •  The Discharger must meet, through treatment or trading, a mass-based effluent limi-
                 tation for Pollutant A of , but at no time shall the maximum mass discharge of Pollutant A
                 during  exceed the minimum control level of . Thus, the maximum mass discharge of Pollutant A to  be offset
                 through credit purchases is .

          Credit Sellers
          When a potential credit seller is able to reduce its discharge below its most stringent appli-
          cable effluent limitation (i.e., its  baseline), it may generate credits to sell. The quantity of
          credits that any given seller actually will be able to sell depends on the market for credits,
          agreements made with buyers, and any treatment requirements placed on potential buyers
          (i.e., the buyers' minimum control levels). Because of these factors, it is possible that a dis-
          charger will not be able to sell all the credits it generates.

          A credit seller's permit will include both the most stringent effluent limitation that would
          apply without trading (e.g., baseline) and a trading limit. The seller can choose to what level
          it will control its pollutant discharge (using technology or best management practices (BMPs)
Water Quality Trading Scenarios:
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page
                                                     Effluent Limitations  Monitoring   Reporting Requirements   Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


 it will implement), and this level becomes its trading limit. The baseline and trading limit
 could be described in the permit fact sheet as follows:
     •   Through treatment, the Discharger must meet a mass-based effluent limitation for
        Pollutant A of  effluent limitation  no
        longer applies and the trading limit for Pollutant A at Outfall 001  shall apply instead
        as follows: Trading Limitation =  - Quantity of Pounds Sold.

 The permit must include monitoring and reporting requirements for Pollutant A sufficient to
 demonstrate that the Seller actually has generated the credits it sells and, therefore, is meet-
 ing its trading limit.

 Pollutant Form, Units of Measure, and Timing Considerations
 The permit should explicitly identify the pollutant or pollutants being traded. The permitting
 authority should ensure that the trading program or agreement and the calculated WQBELs
 are consistent in terms  of the form of the pollutant, units of  measure, and timing.

 For example, if the pollutant specified in the WQBEL is nitrate-nitrogen, credits generated
 under the trade agreement should be for nitrate-nitrogen and not for total Kjeldahl nitrogen
 (TKN) or some other form. If, on the other hand, the WQBEL is for total nitrogen (TN), buyers
 and sellers should trade TN credits. In this case, a discharger may be  required to measure TN.
 If there are concerns about localized impacts, and WQBELs are also specified for a particu-
 lar form or forms of nitrogen, the  discharger may be required to monitor TKN, nitrite, and
 nitrate (all expressed as N) and then calculate its TN discharge.

 Also an equivalency ratio may be needed when two sources are trading pollutants such as
 TN or TP but are actually discharging different forms of nitrogen  or phosphorus (e.g., one
 discharger's phosphorus discharge is made up primarily of biologically available phosphorus,
 while its trading partner's discharge is primarily composed of bound phosphorus). An equiva-
 lency ratio may also be needed in cross-pollutant trading of oxygen-demanding pollutants
 (e.g., phosphorus and biochemical oxygen demand (BOD)). In this case, the equivalency ratio
 would equal the ratio between the two pollutants' impacts on oxygen demand. The trading
 program should account for any necessary equivalency ratios with regard to pollutant form
 or type; the permit writer needs to be aware of the pollutant form or type addressed in the
 trade agreement to ensure that the permit is consistent.

 In addition,  consistent reconciliation periods are essential in trading between point sources.
 The credit purchaser's permit limits for the traded pollutant and the credit seller's permit lim-
 its should have the same units and averaging period. Because both sets of limits are designed
to address the same water quality  problem, both should use the averaging period and units
that make the most sense to address that problem. Consistent units and averaging periods
will also simplify reconciliation of credit sales and purchases.
Water Quality Trading Scenarios!
 Point Source-Point Source
                Trade Agreements  Components of a NPOES Permit
                                            Permit Cover Page
                                                      Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers
  Mystic River Example: Pollutant Form, Units of Measure,
  and Timing
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Newly approved TMDL for Total Phosphorus for the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
    Credit Buyer: Auburn Carpet Manufacturers

  Pollutant Form
  Both trading partners discharge phosphorus year round. The TMDL indicates a need to control TP
  discharges. Each facility discharges the same form of phosphorus at the same percentage of solubility;
  therefore, no provisions are necessary in the permit to address the issue of pollutant form.

  Units of Measure
  The TP WQBELs based on the TMDL WLA are expressed in Ibs/day as a monthly average to correspond
  with the units and averaging period in  the TMDL. The TP limits in Meadeville Fertilizer Producers'
  existing permit are also expressed in Ibs/day as a monthly average. Monthly trades will be based on
  average monthly reductions demonstrated through monitoring.

  Timing of Credits
  Consistent with the state water quality standards, the permits include a 2-year compliance schedule
  for the new WQBELs derived from the TMDL requirements. These compliance schedules are included
  in the Special Conditions section of the permits for Meadeville Fertilizer Producers and Auburn Car-
  pet Manufacturers. According to these  compliance schedules, Auburn Carpet Manufacturers would
  not have a need to purchase credits until 24 months after permit issuance. This allows 12 months
  for Meadeville Fertilizer Producers to get its control technology fully operational and  12 months for
  the facility to gather monitoring data to verify that the technology is achieving the expected treat-
  ment efficiency and will generate credits as expected.  These data are necessary to better understand
  how loading and reduction may vary over time and to develop monthly credit generation data to
  correspond with monthly average effluent limitations. Trades will occur monthly to correspond with
  monthly average effluent limitations. Meadeville Fertilizer Producers will be able to continue to
  generate credits as long as the controls are properly operated and maintained, the facility is able to
  demonstrate reductions, and the facility does not become subject to more stringent requirements (i.e.,
  newly promulgated effluent guidelines or other more stringent technology-based controls, additional
  WQBELs to avoid localized exceedances of water quality standards) that would reduce or eliminate the
  credits. The ability of Meadeville Fertilizer Producers  to continue to generate credits will be assessed
  during the renewal of the permit every 5 years.
         Anti-backsliding, Antidegradation, and New Discharges Special
         Considerations
         The Trading Policy discusses anti-backsliding and antidegradation and how these provisions
         can be met through trading.
Water Quality Trading Scunarioss
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page
                                                     Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


Anti-backsliding
The term anti-backsliding refers to a statutory provision (Clean Water Act (CWA) section
402(o)) that, in general, prohibits the renewal, reissuance, or modification of an existing
NPDES permit that contains WQBELs, permit conditions, or standards that are less stringent
than those established in the previous permit (USEPA 1996b). The CWA establishes excep-
tions to this general anti-backsliding prohibition, EPA has consistently interpreted section
402(o)(1) to allow for less stringent effluent limitations if either an exception under section
402(o)(2) or, for WQBELs, the requirements of section 303(d)(4) are met (USEPA 1996b).
Section 402(o)(2) and 40 CFR 122.44(1) provide exceptions for circumstances such as material
and substantial alterations to the facility, new information, events beyond the permittee's
control, and permit modifications under other sections  of the CWA. Section 303(d)(4), which
applies only to WQBELs, allows a less-stringent WQBEL  in a reissued permit when the facil-
ity is discharging to a waterbody attaining water quality standards as long as the waterbody
continues to attain water quality standards even after the WQBEL is relaxed. In addition,
revising the limitation must be consistent with the state's antidegradation policy. If the
discharge is to a waterbody that is not attaining water quality standards, a less stringent
WQBEL is allowed only when the cumulative effect of all revised effluent limitations results in
progress toward attainment of water quality standards. (For a detailed discussion of the anti-
backsliding exceptions, see EPA's NPDES Permit Writers'Manual (EPA-833-B-96-003)). EPA's
Trading Policy states:
       EPA  believes that the anti-backsliding provisions  of Section 303(d)(4) of the
       CWA will generally be satisfied where a point source increases its discharge
       through the use of credits in accordance with alternate or variable water quality
       based effluent limitations contained in an NPDES permit, in a manner consistent
       with provisions for trading under a TMDL, or consistent with the provisions for
       pre-TMDL trading included in a watershed plan.

A permit writer should simply explain in the fact sheet of the permit how the limitations in the
permit, after accounting for any trading provisions, are at  least as stringent as the limits in the
previous permit or, alternatively, how anti-backsliding provisions of the CWA are satisfied.

Antidegradation
As repeated throughout this document, NPDES permits may not facilitate trades that would
result in nonattainment of an applicable water quality standard, including the applicable
antidegradation provisions of water quality standards. Permitting authorities should ensure
that WQBELs developed to facilitate trade agreements accord with antidegradation provi-
sions and that antidegradation  reviews are performed when required. Nothing in the Trad-
ing Policy per se changes how states apply their antidegradation policies, though states may
modify their antidegradation policies to recognize trading.

The Trading Policy states:
       EPA  does not believe that trades and trading programs will result in "lower
       water quality",..or that antidegradation review would be required under EPA's
       regulations when the trades or trading programs achieve a no net increase of
       the pollutant traded and do not result in any impairment of designated uses.
Water Quality Trading Scenarios!

 Point Source-Point Source
                Trade Agreements   Components of a NPDES Permit
                                            Permit Cover Page

                                                       Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          Special considerations for antidegradation relative to water quality trading depend on the
          tier of protection applied to the waterbody as described below.

          Tier 1 is the minimum level of protection under antidegradation policies. For Tier 1 waters,
          the antidegradation policy mandates protection of existing instream uses. Because EPA nei-
          ther supports trading activities nor allows issuance of permits that violate applicable water
          quality standards, which should protect existing uses at a minimum, any supported trading
          activities incorporated into a NPDES permit should not violate antidegradation policies appli-
          cable to Tier 1 waters.

          Tier 2 protects waters where the existing water quality is higher than required to support
          aquatic life and  recreational uses. Water quality in Tier 2 waters may be lowered (only to the
          level that would continue to support existing and designated uses), but only if an antidegra-
          dation review finds that (1) it is necessary to lower water quality to accommodate important
          social or economic development, (2) all intergovernmental  and public participation provisions
          have been satisfied, and  (3) the highest statutory and regulatory requirements for point sourc-
          es and BMPs for nonpoint sources have been achieved. The Trading Policy supports trading
          to maintain high water quality when trading is used to compensate for new or increased dis-
          charges. Thus, the Trading Policy supports reductions of existing pollutant loadings to com-
          pensate for the new or increased load so that the result is no lowering of water quality. A state,
          in applying its antidegradation  policy, may decide  to authorize a new or increased discharge
          to high-quality water and may decide to use trading to completely or partially compensate
          for that increased load. If the increased load to Tier 2 waters is only partially compensated for
          by trading, an antidegradation review would be required to address the increased load.

          Tier 3 protects the quality of outstanding national resource waters and waters of exceptional
          recreational  or ecological significance. In general,  antidegradation policies do not allow  any
          increase in loading to Tier 3 waters that would result in lower water quality. EPA supports
          trading in Tier 3 waters to maintain water quality.

          Monitoring
          Permitting authorities may want to consider developing monitoring and reporting require-
          ments to characterize waste streams and receiving waters, evaluate wastewater treatment
          efficiency, and determine compliance with permit conditions in the trade agreement. Moni-
          toring and reporting conditions of a NPDES permit may contain specific requirements for
          sampling location, sample collection method, monitoring frequencies, analytical methods,
          recordkeeping, and reporting. If the permit conditions include compliance with  provisions in
          a trade agreement, the permitting authority should include monitoring, recordkeeping and
          reporting requirements that facilitate compliance  evaluations and, where necessary, enforce-
          ment actions related to the trading requirements. Discharge monitoring requirements should
          be consistent with the provisions of the trade agreement in terms of pollutants and forms of
          pollutants monitored, reporting units, and timing. The permit provisions should ensure that
          the results of discharge monitoring will be useful to the permittees, the permitting author-
          ity, and the general public in determining whether the provisions of the trade agreement are
          being met.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page  Ef Ruent Limitations
                                                                 Monitoring  Reporting Requirements  Special Conditions

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                                  Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


Sample Collection and Analysis
If appropriate, the sampling locations should be consistent with the sampling location in each
facility's existing individual NPDES permit. For example, the same location used to sample for
compliance with effluent limitations in the existing permit should be  used for determining
compliance with new effluent limitations developed for traded parameters. Samples collected
as part of a self-monitoring program required by a NPDES permit must be performed in accor-
dance with EPA-approved analytical methods specified in 40 CFR Part 136 (Guidelines for Estab-
lishing Test Procedures for the Analysis of Pollutants Under the Clean  Water Act) where Part
136 contains methods for the pollutant of concern. Where no Part 136 methods are available,
the permit writer should specify which method should  be used for compliance monitoring.

Ambient Monitoring
Ambient monitoring is one way to show whether a trade agreement meets or improves water
quality. In addition to traditional discharge monitoring requirements, ambient water quality
monitoring may be appropriate at strategic locations to ensure that the trade is not creating
localized exceedances of water quality standards and to document the performance of the
overall trading program. Permits with mixing zones may include monitoring requirements as
appropriate to ensure that water quality criteria are not exceeded at the edge of the appli-
cable mixing zone.
   Mystic River Example: Monitoring
      What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus on the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
    Credit Buyer: Auburn Carpet Manufacturers

   Each facility is covered under an existing permit that includes a TBEL; therefore, each facility is cur-
   rently required to monitor its effluent monthly for TP to determine compliance. New permits have
   been developed for both facilities that incorporate new effluent limits based on the approved TMDL,
   as well as the necessary provisions and effluent limits to authorize trading.

   In the new permits, each discharger will be required to monitor for TP weekly. Ambient receiving
   water monitoring requirements are included in the existing NPDES permits and are adequate to
   ensure that localized exceedances of water quality standards do not develop as a result of trades.

   Permit Language:
   Both facilities
   The permittee shall monitor effluent total phosphorus a minimum of one time per week. The per-
   mittee shall determine the average monthly mass loading based on actual monthly average flow.
   Flow monitoring shall be continuous.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations
                                                                Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          Reporting Requirements
          Reporting requirements should be established to support the permitting authority's evalu-
          ation of water quality trading programs. For example, in addition to reporting discharge
          monitoring results, permitting authorities might require a permittee to report the number
          of credits purchased. Permitting authorities might also require an annual monitoring report
          specific to the pollutants involved in the trade to provide information on annual loading in
          accordance with the requirements of the trading program. Permits incorporating water
          quality trades should require reporting at a frequency appropriate to determine compliance
          with the trading provisions. Permitting authorities should consider any requirements of the
          trading programs related to monitoring and reporting and ensure the permits are consistent
          with these requirements. Permits may require reporting of monitoring results at a frequency
          established through the permit on a case-by-case basis, but in no case may that frequency be
          less than once per year.

          Trading programs may establish other reporting and tracking requirements as well. For
          example,  it is essential to have a mechanism for tracking trades. An additional form may be
          used such as a credit certificate form (see Appendix C). The permitting authority can hold
          point sources liable if they violate any trading provision included in the  permit or any trade
          agreement  incorporated by reference into the permit, and point sources are also liable if they
          do not meet their permit limits.

          Data Reporting to EPA
          EPA administers two systems to store NPDES permit data and track compliance, the Permit
          Compliance System (PCS) and the new Integrated Compliance Information System (ICIS).
          PCS is  the old computerized management information system that contains data on NPDES
          permit-holding facilities to track the permit, compliance, and enforcement status of these
          facilities.

          The new system, ICIS, was deployed  in June  2006 to approximately 20 states.  ICIS contains
          integrated enforcement and compliance information across most of EPA's programs including
          all federal administrative and judicial enforcement actions. In addition,  ICIS has the capability
          to track other activities occurring in an EPA Region that support enforcement and compliance
          programs. These include Incident Tracking, Compliance Assistance, and  Compliance  Monitor-
          ing. In the future, ICIS will be deployed to all states, and PCS will no longer be used.

          Neither PCS nor ICIS is structured to actually track trades.

          PCS is  designed to compare actual discharge monitoring data against required effluent limita-
          tions to determine a facility's compliance with its NPDES permit. To determine compliance
          under a trading scenario, it is necessary for the NPDES permitting authority to compare actual
          discharge monitoring data and the quantity of credits purchased or pounds sold against
          required effluent limitations. For credit sellers, compliance is tracked against the WQBEL,
          which  serves as the facility's baseline. For credit buyers, compliance is actually tracked against
          two effluent limitations—the minimum control level and the baseline. The challenge in using
          PCS to determine compliance under a trading scenario is that the system does not automati-
          cally make adjustments to the reported actual discharge—it will not add or subtract the load
Water Quality Trading Scenarios
I Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page   Effluent Limitations  Monitoring I Reporting Requirements  Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


traded. Therefore, this type of adjustment must be done before entering information into PCS
so that the system has only one reported number to compare against an effluent limitation.

To determine compliance for a credit seller, the NPDES permitting authority will need to know
that the sum of a credit seller's actual discharge and the number of pounds sold is less than
or equal to the most stringent effluent limitation (i.e., the baseline). Therefore, point source
credit sellers could report the sum of the facility's actual discharge and the number of pounds
sold and that amount would be entered into PCS. PCS would then compare the sum of the
actual discharge and the number of pounds sold against the facility's baseline; the sum should
be less than or equal to the facility's baseline to indicate that the facility is  in compliance.

Point source credit buyers not only have a baseline, but also a minimum control level (the
facility's TBEL or current discharge, whichever is more stringent). To determine compliance for
a credit buyer, the NPDES permitting authority will need to know that (1) the facility's actual
discharge is less than or equal to its minimum control level, and (2) that the number of credits
purchased result in the facility achieving its baseline. Therefore, point source credit buyers
could report two types of information: (1) the facility's actual discharge, and (2) the differ-
ence between the actual discharge and the quantity of credits purchased. Both numbers
would be  entered into PCS to determine compliance. PCS would compare the actual discharge
against the  minimum control level to determine permit compliance and eligibility as a credit
buyer. PCS would also compare the difference between the actual discharge and the quantity
of credits  purchased against the facility's baseline; the difference should be less than or equal
to the WQBEL to indicate that the facility has purchased enough credits to meet its baseline
and  remain  in  compliance with its WQBEL. PCS can accommodate two different effluent
limits for the same parameter; therefore, it has the capability to determine compliance with
both the minimum control level and the baseline for a credit buyer.

ICIS also allows the NPDES permitting authority to report two limits; therefore, this system
can also accommodate both the baseline and the minimum control level for credit buyers.
New DMR forms will also have two lines to report both the baseline and the minimum control
level. Like PCS, ICIS does not actually adjust actual discharges with the load traded. Under the
current design, ICIS will allow a facility with an existing NPDES permit to also have a trad-
ing partner  entered into the system. Once a trading partner is entered for  a facility, ICIS will
allow the entry of an adjusted  value—this is the reported actual  discharge adjusted by the
number of credits bought or sold. If an adjusted value is entered, this value is used to deter-
mine permit violations and percent exceedances (USEPA 2006).

In addition to challenges related to limits and the type of information to report, NPDES per-
mits with trading provisions might also raise issues related to reporting periods and auto-
mated compliance tracking. PCS will not support a reporting extension  beyond 30 days. This
type of reporting extension might be necessary in some instances to allow adequate time for
the administrative activities necessary for trading partners to coordinate and reconcile trades.
ICIS, however, will support a 45-day reporting period. In rare instances when a  permitting
authority uses annual limits, both PCS and ICIS will allow for one limit to be monthly and one
to be annual. However, the permitting authority will have to manually flag annual limit efflu-
ent violations for reportable noncompliance (RNC) and significant noncompliance (SNC) to
track compliance.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring
                                                                        Reporting Requirements Special Conditions

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Water Quality Trading Toolkit for Permit Writers



   Mystic River Example: Reporting
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus on the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
    Credit Buyer: Auburn Carpet Manufacturers

   Trades must be completed by a credit transfer deadline specified in the permit, and credits must be
   used in the same month they are generated; however, the permit allows the facilities 30 days to report
   the trades to account for administrative time and processing of notification forms. For the permit-
   ting authority to gauge compliance, the permit writer develops permit language that requires each
   discharger to submit monthly DMRs to the permitting authority by the 15th of the month following
   monitoring.  In conjunction with DMR reporting, the permit writer requires each facility to complete
   monthly Phosphorus Analysis Reports to track the amount of TP discharged and the total amount of
   TP load bought and sold between the facilities. Each discharger must submit the monthly Phosphorus
   Analysis Reports to the permitting authority and to the other facility.

   Permit Language:
 '  Meadeville Fertilizer Producers
   The Permittee must submit monthly discharge monitoring reports (DMRs) by the 15th day of the
   month following monitoring to the [Permitting Authority] for determining compliance with the
   effluent limitations provided in Section X of this permit. If the Permittee sells credits, as autho-
   rized under  Section X  of this permit,  the Permittee must also complete and submit a monthly
   Phosphorus  Analysis Report to both the permitting authority and all authorized credit buyers. The
   Phosphorus  Analysis Report must contain the information provided on the monthly DMR and the
   amount of credits sold to all authorized credit buyers.

   Auburn Carpet Manufacturers
   The Permittee must submit monthly discharge monitoring reports (DMRs) by the 15th day of the
   month following monitoring to the [Permitting Authority] for determining compliance with the
   effluent limitation provided in Section X of this permit. If this effluent limitation is met through
   trading, the Permittee must complete and submit a monthly Phosphorus Analysis Report to both
   the permitting authority and all authorized credit sellers. The Phosphorus Analysis Report must
   contain the  information provided on the monthly DMR  and the amount of credits purchased from
   all authorized credit sellers to compensate for the discharge of total phosphorus from Outfall 001.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations  Monitoring j Reporting Requirements Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading


 Special Conditions
 Special conditions are developed to supplement effluent limitations and may include require-
 ments such as BMPs, additional monitoring activities, ambient stream surveys, and toxicity
 reduction evaluations (TREs). Special conditions also include permit modification and reopen-
 er conditions, and can be used to address water quality trading or incorporate compliance
 schedules (if authorized by the permitting authority). Special conditions of a NPDES permit
 will be very important in incorporating the terms of a trade agreement. Even where the spe-
 cific terms of the agreement are  not directly incorporated into the permit, the special condi-
 tions can be used to refer to, and require compliance with, the trade agreement housed in a
 separate document.

 The special conditions included in a NPDES permit that incorporates trading will depend on
 provisions of the trade agreement and the effluent limitations and monitoring and reporting
 requirements established in the permit. However, the permitting authority should consider
 incorporating special conditions that support the trading conditions.

 Special conditions may also be  used to establish provisional requirements that apply if the
 credits on which the trading  limits are based are unavailable. Special conditions addressing
 group and individual liability, provisional requirements that apply when credits are unavail-
 able or when an individual or collective limit is exceeded, and outlining the specific require-
 ments for establishing trade  agreements among permittees can be important in issuing
 acceptable permits that will not require modification each time circumstances change for one
 of the dischargers covered under the permit.

 In addition, the special conditions section of the permit could  include a  compliance sched-
 ule. Compliance schedules for WQBELs are allowed only when state water quality standards
 or state regulations implementing such standards provide authority for using compliance
 schedules as well as when those limits are derived from water quality standards that were
 newly  adopted or substantially revised after July 1, 1977. Most state water quality standards
 or implementing regulations authorize using compliance schedules. If compliance schedule
 authority is available, the permit writer could place a compliance schedule in the permit
 special conditions that would give the discharger time to comply with provisions related to
 WQBELs and trading when those provisions are intended to be phased in over time.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations   Monitoring  Reporting Requirements
                                                                                     Special Conditions

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Water Quality Trading Toolkit for Permit Writers



   Mystic River Example: Special Conditions
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus on the Mystic River
    Credit Seller: Meadeville Fertilizer Producers
    Credit Buyer: Auburn Carpet Manufacturers

   The permit writer has developed the appropriate effluent limitations, monitoring, and reporting
   requirements for each facility. The special conditions for each facility's permit focus on general author-
   ity, credit definition, permit reopeners and modification provisions, compliance schedule, and enforce-
   ment liability.

   Permit Language:
   General Authority
   The permittee is authorized to participate in trading for the purposes of complying with the total
   phosphorus effluent limitations in Section X of this permit. The authority to use trading for com-
   pliance with these limits is derived from:  and section 402 of the
   federal Clean Water Act 33 United States Code (U.S.C.) section 1342. EPA's policies on Water Qual-
   ity Trading (1/13/03) and Watershed-Based NPDES Permitting (1/7/03) endorse water quality credit
   trading. Additionally the Mystic River TMDL authorizes water quality trading as a means of achiev-
   ing the allocations established by the TMDL.

   Credit Definition
   One credit will be equal to one in pound of total phosphorous per day on a monthly average basis.
   No trade ratios apply to the permittee's trades; therefore, each credit  purchased by an authorized
   buyer shall correspond to a one pound per day reduction by an authorized seller.

   Permit Reopeners, Modification Provisions
   The permitting authority may, for any reason provided by law, by summary proceedings or oth-
   erwise, revoke or suspend this permit or reopen and modify it to establish any appropriate con-
   ditions, schedules of compliance, or other provisions which may be necessary to protect human
   health or the environment or to implement the Mystic River TMDL. The permitting authority may
   also  reopen and modify the permit to suspend the ability to trade credits to comply with the total
   phosphorus effluent limitations in Section X of this permit.

   Compliance Schedule
   This  permit includes both interim and final effluent limitations for the discharge of total phospho-
   rus from Outfall 001. Compliance with the final effluent limitations  is required on .
Water Quality Trading Scenarios
 F'oint Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements
                                                                                    Special Conditions

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                                   Water Quality Trading Scenario: Single Point Source-Single Point Source Trading



                         Mystic River Example: Special Conditions (continued)

   Permit Language (continued):

   By March 1 of each year, the permittee shall submit a Compliance Plan Annual Report to describe
   the progress of actions undertaken to reduce total phosphorus discharges in the effluent dis-
   charged from Outfall 001  or to purchase equivalent credits and achieve  compliance with the final
   effluent limitations for the discharge of total phosphorus from Outfall 001  by .

   Enforcement Liability
   The permittee is liable for meeting its most stringent effluent limitation. No liability clauses
   contained in other legal documents (e.g., trade agreements, contracts) established between the
   permittee and other authorized buyers and sellers are enforceable under this permit.
Water Quality Trading Scenarios
 Point Source-Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements
Special Conditions

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Water Quality Trading Toolkit for Permit Writers

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                            Water Quality Trading Scenario: Multiple Facility Point Source Trading
Water Quality Trading Scenario:
Multiple Facility Point Source Trading
Contents

Water Quality Trading Scenario: Multiple Facility Point Source Trading .... 1
  Trade Agreements	1
  Components of a NPDES Permit	5
    Permit Cover Page	5
    Effluent Limitations	6
    Monitoring	13
    Reporting Requirements	15
    Special Conditions	 19

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Water Quality Trading Toolkit for Permit Writers

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                                       Water Quality Trading Scenario: Multiple Facility Point Source Trading
Water Quality Trading Scenario:

Multiple Facility Point Source Trading

This water quality trading scenario focuses on technical and
programmatic issues related to multiple facility point source
trading, illustrated in Figure 1. Multiple facility point
source trading is distinguished from single point
source-single point source trading by the fact that a
group of point sources operate under a single trade
agreement. All trades will be limited by the overall
limit or cap set by the permit. Issues addressed
under this scenario include the following:
    •  Trade agreements
    •  Components of a National Pollutant
       Discharge Elimination System (NPDES)
       permit
       - Permit cover  page
       - Effluent limitations
       - Monitoring
       - Reporting requirements
       - Special conditions
                                                                      Point Source
                                                                         Trading
                                                    Figure 1. Multiple point source trading.
A hypothetical example (shown in highlighted boxes) is presented throughout this scenario
to illustrate how NPDES permit writers might work with credit buyers and sellers to assist in
trading and ensure each facility's NPDES permit contains the appropriate limits, requirements,
and other conditions. Keep in mind that there are a range of options for incorporating
trading provisions into a NPDES permit. The hypothetical example discussed throughout this
scenario illustrates just one of the many options a NPDES permit writer might use.
Trade Agreements
Under multiple facility point source trading, trade agreements can specify the individual trades
between specific point sources or can establish ground rules for trading to allow point sources
to trade among themselves as needed. Typically, the terms that govern a trading program will
be developed outside of the NPDES permit process and can be incorporated or reflected in
the permit (see Appendix C). The U.S. Environmental Protection Agency's (EPA) Water Quality
Trading Policy (Trading Policy) describes several mechanisms for implementing trading through
NPDES permits (see Appendix B). NPDES permits authorizing water quality trading should refer-
ence any existing trade agreement in the permit and fact sheet. The permit writer may also
incorporate specific provisions of the agreement as appropriate (e.g., shared responsibilities for
conducting ambient monitoring) into the permit. All trade agreements referenced in NPDES
fact sheets and permits should meet certain minimum standards to help ensure the trades
authorized by the permit are consistent with water quality standards. At a minimum, the trade
Water Quality Trading Scenarios
 Multiple Point Source
               Trade Agreements  Components of a NPDES Permit
                                         Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          agreement should be a written agreement, signed and dated by authorized representatives of
          all trading partners. Verbal trade agreements should not be referenced in NPDES permits. The
          written trade agreement should contain sufficient detail to allow the permitting authority to
          determine with some degree of certainty that the terms of the agreement will result in loading
          reductions and generation of sufficient credits to satisfy water quality requirements. If there
          is no formal, outside trade agreement, trading can still occur; however, the permit writer will
          need to more explicitly describe the trading program in the fact sheet and authorize specific
          aspects of the trading program as permit conditions. Trading partners can specify the details
          pertaining to the negotiated terms of the trade (e.g., credit price, payment schedule, conse-
          quences for failure to fulfill negotiated terms) in a separate written and signed contract.
   St. Martin River Example: Trade Agreements
      What You Need to Know...
       Pollutant:  Total Phosphorus
          Driver:  Newly approved TMDL3 for Total Phosphorus for the St. Martin River Watershed
    Credit Seller:  Shepherd County POTW*
                   Existing TBELC: 120 Ibs/day (average monthly)

                   Current Loading: 120 Ibs/day (average monthly)

                   New WQBELd (based on WLA'): 110 Ibs/day (average monthly)	

                   POTW Treatment Capabilities: Treatment to 20 Ibs/day (average monthly)

   Credit Buyer #1: City ofOakdale WWTPf
                   Existing TBEL: 50 Ibs/day (average monthly)

                   Current Loading: 50 Ibs/day (average monthly)

                   New WQBEL (based on WLA): 35 Ibs/day (average monthly)
                   WWTP Treatment Capabilities: Treatment to 50 Ibs/day (average monthly)

   Credit Buyer #2: Town ofBarkley WWTP
                   Existing TBEL: 50 Ibs/day (average monthly)
                   Current Loading: 50 Ibs/day (average monthly)
                   New WQBEL (based on WLA): 35 Ibs/day (average monthly)

                   WWTP Treatment Capabilities: Treatment to 50 Ibs/day (average monthly)

   Notes: a TMDL = Total maximum daily load; b POTW = publicly owned treatment works;
         c TBEL = technology-based effluent limitations; d WQBEL = water quality-based effluent
         limitations;e WLA = wasteload allocation; f WWTP = wastewater treatment plant

   Watershed: Shepherd County POTW (credit seller) is approximately 9 miles upstream from the city
   of Oakdale WWTP (credit buyer 1) and 10 miles upstream from the town of Barkley WWTP (credit
Water Quality Trading Scenarios
I Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                           Water Quality Trading Scenario: Multiple Facility Point Source Trading
                     St. Martin River Example: Trade Agreements (continued)

   buyer 2) along the St. Martin River. All three facilities discharge into a segment of the river that has
   been listed as impaired for nutrients, and a phosphorus TMDL has just been approved.

   Applicable Trading Ratios:
     •  Delivery: On the basis of best available science, a delivery ratio of 3:1 ratio is needed for trades
        between Shepherd County POTW and either of the two credit buyers to account for the fate and
        transport of total phosphorus (TP) over the distance between the facilities. It is not necessary to
        apply an equivalency ratio because the same pollutant form is being traded, nor an uncertainty
        ratio because all parties can accurately monitor end-of-pipe loads.

   The facilities' existing individual permits include TBELs based on state treatment standards for TP.
   The permittees currently meet these TBELs. These existing effluent limitations are less stringent than
   the limitations needed to meet the new WLAs established in the St. Martin River TMDL. To facili-
   tate meeting the TMDL, the permitting authority has issued a watershed-based overlay permit that
   addresses phosphorus discharges from each of the three facilities. This permit also authorizes trading
   between Shepherd County and each of the two WWTPs downstream.

   Shepherd County POTW is a large, new facility and has the potential to treat its discharge to a phos-
   phorus loading of 20 Ibs/day. The facility's baseline requirement for trading is 110 Ibs/day (i.e., most
   stringent effluent limitation). Treating to the maximum capacity of the POTW would result in an
   excess phosphorus reduction of 90 Ibs/day (baseline - treatment capacity = excess reduction).

   The city of Oakdale and the town of Barkley WWTPs have not been upgraded and have no funds to
   upgrade to meet the new WLA. Both are small, rural localities and are not projecting substantial
   growth. The permitting authority is allowing both facilities to trade to meet their new WLAs (i.e.,
   baselines). However, to trade, both WWTPs would need continue to treat their discharges to meet the
   existing TBELs (i.e., the minimum control level). Both facilities  would then be allowed to purchase
   credits equivalent to the difference between the minimum control level and the baseline (50 Ibs/day
   - 35 Ibs/day = 15 Ibs/day).

   According to best available science, the permitting authority has determined that the application of
   a 3:1 delivery ratio is necessary to account for the fate and transport of phosphorus over the distance
   between the  seller (Shepherd County POTW) and the buyers. Therefore, for the buyers to account for
   the 15 Ibs/day of phosphorus loading necessary to compensate for each WWTP's discharge and meet
   their baselines, each must purchase 45 Ibs/day (monthly average) from the Shepherd County POTW
   (15 Ibs/day offset needed x 3:1 delivery ratio = 45 Ibs/day needed). The POTW seller can generate 90
   Ibs/day and, therefore, has an adequate supply of phosphorus credits to sell.

   The facilities have decided to enter into a trade agreement with  each other. The basic terms of the
   trade agreement are as follows:
    •  A trade ratio of 3:1 applies to trades between the buyer and sellers because of the distance
        between them.

    •  Shepherd County POTW (seller) will install control technologies that will result in a 90 Ibs/day
        of surplus load reduction eligible for trading.
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                             Permit Cover Page   Effluent Limitations   Monitoring  Reporting Requirements   Special Conditions

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Water Quality Trading Toolkit for Permit Writers



                    St. Martin River Example: Trade Agreements (continued)

    •  Shepherd County POTW has a trading limit = 110 Ibs/day - Quantity of Pounds Sold.

    •  City of Oakdale WWTP (credit buyer 1) has a WQBEL (baseline) of 35 Ibs/day that must be met
       through trading, treatment, or pollution prevention/The facility's minimum control level is the
       existing TBEL of 50 Ibs/day (average monthly) based on the TBEL for TP. The facility's current
       discharge of 50 Ibs/day meets the existing TBEL.

    •  City of Oakdale WWTP (credit buyer 1) needs to purchase credits equivalent to 15 Ibs/day of TP
       (baseline-minimum control level).

    •  Town of Barkley (credit buyer 2) has a WQBEL (baseline) of 35 Ibs/day that must be met through
       trading, treatment or pollution prevention. The facility's minimum control level is its existing
       TBEL, which is a loading limit of 50 Ibs/day of TP. The facility's current discharge of 50 Ibs/day
       meets the existing TBEL.

    •  Town of Barkley WWTP (credit buyer 2) needs to purchase credits equivalent to 15 Ibs/day of TP
       (baseline-minimum control level).

    •  Each facility will continue to monitor TP as required under each facility's respective individual
       NPDES permits.

    •  Trades occur monthly and credits may not be applied in any month other than the one in which
       the credits are generated.

    •  Each facility will continue to complete and submit Discharge Monitoring Report (DMR) forms to
       the NPDES permitting authority, as required under each facility's NPDES permit. In addition to
       DMR reporting, each facility will complete and exchange monthly Phosphorus Analysis Reports
       to track the amount of TP discharged and the total amount of TP load bought and sold between
       the facilities.

    •  Separate contracts between the seller and two buyers articulate the financial and liability condi-
       tions that each pair of facilities has agreed upon.

  The NPDES permit writer for the facilities receives a written copy of the trade agreement that is signed
  and dated by authorized representatives of each facility. The permit writer reviews the written trade
  agreement to identify information that is pertinent to each facility's NPDES permit. The permit writer
  incorporates provisions that outline trade-specific effluent limitations (i.e., baselines, the minimum con-
  trol levels for the buyers, and the trading limit for the seller) and reporting and monitoring provisions.

  The permit writer incorporates the Phosphorus Analysis Report provision of the trade agreement into
  the permit to require the facilities to submit trade information to the permitting authority. This will
  allow the permitting authority to determine whether the buyers and seller maintain compliance with
  WQBELs and applicable TBELs. Other components  of the trade agreement, such as issues of liability
  and penalty payment, are not enforceable through the NPDES permit and, therefore, would not be
  incorporated into the compliance provisions of each NPDES permit.

  The permit writer, with input from the permittees,  will develop an overlay NPDES permit that
  addresses only TP requirements for the three facilities. The permit writer will reference the written
  trade agreement in the fact sheet of the group's overlay NPDES permit.

Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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                                         Water Quality Trading Scenario: Multiple Facility Point Source Trading
 Components of a NPDES Permit
 NPDES permits that authorize water quality trading are no different than typical NPDES per-
 mits in many respects—they require the same structure, analyses, and justification. All permits
 have five basic components: (1) cover page; (2) effluent limitations; (3) monitoring and report-
 ing requirements; (4) special conditions; and  (5) standard conditions. Standard conditions are
 the same for all NPDES permits and will not be addressed in this Toolkit. In addition, consistent
 with Title 40 of the Code of Federal Regulations (CFR) section 124.6, all permits are subject
 to public notice and comment. This process provides all interested parties an opportunity to
 comment on the trading provisions in the permit.

 Each NPDES permit is accompanied by a permit fact sheet. The information in these fact
 sheets is not enforceable. The purpose of the fact sheet is to explain the requirements in the
 permit to the public. Thus, at a minimum, the fact sheet should explain any trading provisions
 in the permit. There is a wide variety of options for including trading information in the fact
 sheet that ranges from explaining the minimum control level (buyer) or trading limit (seller)
 to including the entire trading program.

 There are a variety of issues, however, that may require special consideration when  developing
 a permit incorporating water quality trading. Appendix E provides the permit writer with a list
 of fundamental questions that should be addressed during the permit development process.


 Permit Cover Page
 The cover page of a NPDES permit typically contains the name and location of the
 permittee(s), a statement authorizing the discharge, the specific locations for which a dis-
 charge is authorized (including the name of the receiving water), and the effective period of
 the permit (not to exceed 5 years). A permit  incorporating or referencing a trade agreement
 can refer to  water quality trading on the cover page, but this is not necessary. If the state has
 issued regulations or policy documents authorizing water quality trading, the permit writer
 should consider referencing the regulations in the Authority section of the cover page. For
 example, if trading is considered a water-quality management tool in a state's Water Quality
 Management Plan, this establishes clear authority for integrating trading into NPDES permits
 and can be referenced on the cover page (Jones 2005).

 The cover page may also address the specific pollutants regulated by the permit. For instance,
 the cover page of an overlay permit for TP may state that the overlay permit addresses only TP
 and that other parameters are addressed in each facility's individual permit.

         Clean Water Services, Oregon
            The Oregon Department of Environmental Quality addresses water quality trading on
            the cover page of the permit issued to Clean Water Services. For more information about
            this trading program, see Appendix A.
Effluent Limitations
Effluent limitations are the primary mechanism for controlling the discharge of pollutants
from point sources into receiving waters. When developing a permit, the permitting author-
ity focuses much of its effort on deriving appropriate effluent limitations. As in all NPDES
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements
                          Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          permits, permits that include trading must include any applicable TBELs, or the equivalent,
          and where necessary, WQBELs that are derived from and comply with all applicable technol-
          ogy and water quality standards. Furthermore, limits must be enforceable, and the process
          for deriving the limits should be scientifically valid and transparent.

          EPA's Trading Policy does not support trading to meet TBELs unless trading is specifically
          authorized in the categorical effluent limitation guidelines on which the TBELs are based.
          Applicable TBELs thus serve as the minimum control level below which the buyer's treatment
          levels cannot fall. This section discusses the overarching principles of how to express all appli-
          cable effluent limitations in permits for dischargers  participating in water quality trades.

          Credit Buyers
          Permits for credit buyers should include both the baseline, which is the WQBEL that defines
          the level of discharge the buyer would have to meet through treatment when not trading,
          and a minimum control level that must be achieved through treatment when trading. The
          permit should also include the amount of pollutant load to be offset (minimum control level
          - baseline) through credit purchases when trading. Most often, the applicable TBEL will serve
          as the minimum control level. A permitting authority can choose to impose a more stringent
          minimum control level than the TBEL to prevent localized exceedances of water quality stan-
          dards near the point of discharge but not one  that is less stringent than the TBEL. In a NPDES
          permit fact sheet, the effluent limitations for a credit buyer could be described as follows:
              •  The Discharger must meet, through treatment or trading, a mass-based effluent limi-
                 tation for Pollutant A of . If this effluent limitation is met through
                 trading, the Discharger must purchase credits from authorized Sellers in an amount
                 sufficient to compensate for the discharge of Pollutant A from Outfall 001  in excess
                 of , but at no time shall the maximum mass discharge of Pollutant A
                 during  exceed the minimum control level of . Thus, the maximum mass discharge of Pollutant A to be offset
                 through credit purchases is -cinsert minimum control level - baseline>.

          Credit Sellers
          When a potential credit seller is able to reduce its discharge below its most stringent appli-
          cable effluent limitation (i.e., its baseline), it may  generate credits to sell. The quantity of
          credits that any given seller actually will be able to sell depends  on the market for credits,
          agreements made with buyers, and any treatment requirements placed on potential buyers
          (i.e., the buyers' minimum control levels).  Because of these factors, it is possible that a dis-
          charger will not be able to  sell all the credits it generates.

          A credit seller's permit will  include both the most  stringent effluent limitation that would
          apply without trading (e.g., baseline) and a trading  limit. The seller can choose to what level
          it will control its pollutant discharge (using technology or best management practices (BMPs)
          it will implement), and this level becomes its trading limit.  The baseline and trading limit
          could be described in the permit fact sheet as follows:
              •  Through treatment, the Discharger must meet a mass-based effluent limitation for
                 Pollutant A of . The Discharger is  authorized to further treat its
Water Quality Trading Scenarios!
               "•"
I Multiple Point Source
I                Trade Agreements   Components of a NPDES Permit
                                            Permit Cover Page
                                                      Effluent Limitations Monitoring   Reporting Requirements  Special Conditions

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                                         Water Quality Trading Scenario: Multiple Facility Point Source Trading


       discharge, remove additional loading of Pollutant A, and generate and sell credits to
       an authorized credit Buyer or Buyers. If the Discharger sells such credits, the  effluent limitation  no
       longer applies and the trading limit for Pollutant A at Outfall 001 shall apply instead
       as follows: Trading Limitation =  - Quantity of Pounds Sold.

The permit must include monitoring and reporting requirements for Pollutant A sufficient to
demonstrate that the seller actually has generated the credits it sells and, therefore, is meet-
ing its trading  limit.

Aggregate or Individual Limitations
It may be appropriate for permit writers to include aggregate WQBELs that apply to the
group of point sources covered under a general or watershed permit. An aggregate effluent
limitation typically represents the sum of the pollutant WLAs for all permittees covered by
the permit. This allows maximum flexibility for trades among dischargers within the water-
shed but should be considered only if localized exceedances of water quality standards are
not a concern.  An aggregate limitation allows individual dischargers to discharge or trade
among themselves to any degree as long as the aggregate limitation is met and each dis-
charger complies with any applicable TBELs. An aggregate effluent limit may be most appro-
priate in a trading scenario involving many individual dischargers within a watershed having
a large-scale load reduction driver such as a TMDL for the entire waterbody or a percent load
reduction requirements for the watershed as a whole. This is functionally equivalent to hav-
ing a series of  individual WQBELs and no trading limits.

        Truckee Meadows Water Reclamation Facility, Nevada
            The Nevada Division of Environmental Protection authorized individual and aggregate
            effluent limitations in a permit issued to Truckee Meadows Water Reclamation Facility,
            For more information about this trading program, see Appendix A.
EPA does not endorse setting a multisource aggregate limit without also including in the
permit individual limits for each source covered. If the group of facilities does not meet
its aggregate limit and an individual source does not meet its limit on its own and does
not trade to meet it, enforcement action may be taken against this individual source. This
approach keeps co-permittees under the general or watershed permit that have met their
requirements free from liability when other co-permittees are responsible for the group
discharging above the aggregate limit.


  Neuse River Basin, North Carolina
    The Neuse River Compliance Association (NRCA) general permit has an aggregate TN allocation
    and each member of the association has an individual allocation. If the NRCA meets the aggre-
    gate limit for the year, the NRCA and each permittee are in compliance. If the aggregate limit is
    exceeded, then the NRCA is out of compliance and any member that exceeds its individual TN
    limit is also out of compliance and subject to enforcement action. For more information about
    this trading program, see Appendix A.
Water Quality Trading Scenarios;
 Multiple Point Source
               Trade Agreements   Components of a NPDES Permit
                                           Permit Cover Page
Effluent Limitations  Monitoring  Reporting Requirements   Special Conditions

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Water Quality Trading Toolkit for Permit Writers



  St. Martin River Example: Effluent Limitations
     What You Need to Know...
       Pollutant:  Total Phosphorus
          Driver:  Newly approved TMDL for Total Phosphorus for the St. Martin River Watershed
    Credit Seller:  Shepherd County POTW
                   Existing TBEL: 120 Ibs/day (average monthly)

                   Current Loading: 120 Ibs/day (average monthly)

                   New WQBEL (based on WLA): 110 Ibs/day (average monthly)

                   POTW Treatment Capabilities: Treatment to 20 Ibs/day (average monthly)

  Credit Buyer #1: City of Oukdale WWTP
                  Existing TBEL: 50 Ibs/day (average monthly)

                  Current Loading: 50 Ibs/day (average monthly)

                  New WQBEL (based on WLA): 35 Ibs/day (average monthly)

                  WWTP Treatment Capabilities: Treatment to 50 Ibs/day (average monthly)

  Credit Buyer #2: Town ofBarkley WWTP
                   Existing TBEL: 50 Ibs/day (average monthly)

                   Current Loading: 50 Ibs/day (average monthly)

                   New WQBEL (based on WLA): 35 Ibs/day (average monthly)	

                   WWTP Treatment Capabilities: Treatment to 50 Ibs/day (average monthly)

  Watershed: Shepherd County POTW (credit seller) is approximately 9 miles upstream from the city
  of Oakdale WWTP (credit buyer 1) and 10 miles upstream from the town of Barkley WWTP (credit
  buyer 2) along the St. Martin River. The segment of river to which all three facilities discharge has
  been listed as impaired for nutrients, and a phosphorus TMDL has just been approved.

  Applicable Ratios:
    •  Delivery: The trading program has established a 3:1 ratio for trades between Shepherd County
       POTW and either of the two credit buyers to account for the distance between the facilities.

  The facilities' existing individual permits include TBELs based on state treatment standards for TP.
  The permittees currently meet these TBELs. These existing effluent limitations are less stringent than
  the limitations needed to meet the new WLAs established in the St. Martin River TMDL. To facili-
  tate meeting the TMDL, the permitting authority has issued a watershed-based overlay permit that
  addresses phosphorus discharges from each of the three facilities. This permit also authorizes trading
  between Shepherd County POTW and each of the two WWTPs downstream.
Water Quality Trading Scenarioss
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Pagi
                                                      Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                          Water Quality Trading Scenario: Multiple Facility Point Source Trading
                  St. Martin River Example: Effluent Limitations (continued)

   If the Shepherd County POTW chooses to sell 90 Ibs/day of the credits generated by the over control of
   its discharge, a trading limit will apply as follows:

                            Baseline - Pounds Sold = Trading Limitation

                                110 Ibs/day - 90 Ibs/day = 20 Ibs/day

   The POTW will be required to demonstrate that its discharge has an actual loading of no more than
   20 Ibs/day during any period it is trading with the buyer WWTPs.

   A new overlay permit is being developed, which implements the new phosphorus WQBELs and autho-
   rizes trading between the facilities. Upon issuance of the permits, the new WQBELs and trading pro-
   visions will apply. The permits will include effluent limitations equal to baselines, minimum control
   levels, and trading limits.

   Table 1.  Monthly average mass-based effluent limitations for TP
Facility
Shepherd County POTW
City of Oakdale WWTP
Town of Barkley WWTP
Units
Ibs/day
Ibs/day
Ibs/day
Effluent limitation
without trading
110 (Baseline/WQBEL)
35 (Baseline/WQBEL)
35 (Baseline/WQBEL)
Effluent limitation
with trading
20"
50 (Minimum Control
Level/TBEL)
50 (Minimum Control
Level/TBEL)
   Trading limit - (WQBEL - pollutant loading necessary to generate quantity of credits sold)

   Permit Language:
   Shepherd County POTW
    A. The permittee shall be in compliance with the monthly average effluent limitations for total
       phosphorus in this permit if:
       a. The permittee has not sold any credits and the permittee's average monthly mass loading
          of total phosphorus is less than or equal to the Baseline (Effluent Limitation Without Trad-
          ing) set forth in Table 1; or,
       b. The permittee has sold total  phosphorus credits such that the effluent loading does not
          exceed the Trading Limit (Effluent Limitation with Trading) established in Table 1.
    B. Credits sold and purchased may be applied only to the calendar month(s) in which they were
       generated.

   City of Oakdale WWTP and Town of Barkley WWTP
    A. The permittee shall be in compliance with  the monthly average effluent limitations for total
       phosphorus in this permit if:
       a. The permittee has not purchased any credits and the permittee's average monthly mass
          loading of total phosphorus  is less than or equal to the Baseline (Effluent Limitation With-
          out Trading) set forth in Table 1; or,
Water Quality Trading Scenarios!
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page
Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


                 St. Martin River Example: Effluent Limitations (continued)

    Permit Language (continued):
       b. The permittee's effluent loading does not exceed the Minimum Control Level (Effluent
         Limitation With Trading) established in Table 1 and the permittee has purchased credits
         equivalent or greater than the difference between the baseline and the minimum control
         level.
    B. Credits sold and purchased may be applied only to the calendar month(s) in which they were
       generated.
         Pollutant Form, Units of Measure, and Timing Considerations
         The permit should explicitly identify the pollutant or pollutants being traded. The permitting
         authority should ensure that the trading program or agreement and the calculated WQBELs
         are consistent in terms of the form of the pollutant, units of measure, and timing.

         For example, if the pollutant specified in the WQBEL is nitrate-nitrogen, credits generated
         under the trade agreement should be for nitrate-nitrogen and not for total Kjeldahl nitrogen
         (TKN) or some other form. If, on the other hand, the WQBEL is for total  nitrogen (TN), buyers
         and sellers should trade TN credits. In this case, a  discharger may be required to measure TN.
         If there are concerns about localized  impacts, and WQBELs are also specified for a particu-
         lar form or forms of nitrogen, the discharger may be required to monitor TKN, nitrite, and
         nitrate (all expressed as N) and then calculate its TN discharge.

         Also,  an equivalency ratio may be needed when two sources are trading pollutants such as
         TN or TP but are actually discharging different forms of nitrogen or phosphorus (e.g., one
         discharger's phosphorus discharge is  made up primarily of biologically available phosphorus,
         while its trading partner's discharge is primarily composed of bound phosphorus). An equiva-
         lency ratio may also be  needed in cross-pollutant trading of oxygen demanding pollutants
         (e.g.,  phosphorus and biochemical oxygen demand (BOD)). In this case, the equivalency ratio
         would equal the ratio between the two pollutants' impacts on oxygen demand. The trading
         program should account for any necessary equivalency ratios with regard to pollutant form
         or type; the permit writer needs to be aware of the pollutant form or type addressed in the
         trade agreement to ensure that the permit is consistent.

         In addition, consistent reconciliation  periods are essential in trading between point sources.
         The credit purchaser's permit limits for the traded pollutant and the credit seller's permit lim-
         its should have the same units and averaging period. Because both sets of limits are designed
         to address the same water quality problem, both should use the averaging period and units
         that make the most sense to address  that problem. Consistent units and averaging periods
         will also simplify reconciliation of credit sales and purchases.
Water Quality Trading Scenarios*
 Multiple Point Source
               Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page
                                                     Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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                                         Water Quality Trading Scenario: Multiple Facility Point Source Trading
   St. Martin River Example: Pollutant Form, Units of Measure,
   and Timing
      What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus on the St. Martin River
    Credit Seller: Shepherd County POTW
   Credit Buyers: City ofOakdale and Town ofBarkley WWTPs

   Pollutant Form
   All trading partners discharge phosphorus year round. The TMDL indicates a need to control TP
   discharges. Each facility discharges the same form of phosphorus at the same percentage of solubility;
   therefore, no provisions are necessary in the permit to address the issue of pollutant form.

   Units of Measure
   The TP WQBELs based on the TMDL WLAs are expressed in Ibs/day as a monthly average to corre-
   spond with the units and averaging period in the TMDL. The limits in the trading partners' permits
   are also expressed in Ibs/day as a monthly average. Monthly trades will be based on average monthly
   reductions demonstrated through monitoring.

   Timing of Credits
   Credits will be available immediately upon permit issuance. Trades will occur monthly to correspond
   with monthly average effluent limitations. The purchased credits must be applied by the buyers during
   the same month that the seller generates them. The POTW will be able to continue to generate credits
   as long as the controls are properly operated and maintained, the facility is able to demonstrate reduc-
   tions, and the facility does not become subject to more stringent requirements (i.e., newly promul-
   gated effluent guidelines or other more stringent technology-based controls or additional WQBELs
   to avoid localized exceedances of water quality standards) that would reduce or eliminate the credits
   generated. The ability of the seller to continue to generate credits will be assessed during the renewal
   of the individual permits every 5 years.
Anti-backsliding, Antidegradation, and New Discharges Special
Considerations
The Trading Policy discusses anti-backsliding and antidegradation and how these provisions
can be met through trading.

Anti-backsliding
The term anti-backsliding refers to a statutory provision (Clean Water Act (CWA) section
402(o)) that, in general, prohibits the renewal, reissuance, or modification of an existing
NPDES permit that contains WQBELs, permit conditions, or standards that are less stringent
than those established in the previous permit (USEPA 1996b). The CWA establishes exceptions
to this general anti-backsliding prohibition. EPA has consistently interpreted section 402(o)(1)
Water duality Trading Scenarios;
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page
                                                     Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          to allow for less-stringent effluent limitations if either an exception under section 402(o)(2) or,
          for WQBELs, the requirements of section 303(d)(4) are met (USEPA 1996b). Section 402(o)(2)
          and 40 CFR 122.44(1) provide exceptions for circumstances such as material and substantial
          alterations to the facility, new information, events beyond the permittee's control, and per-
          mit modifications under other sections of the CWA. Section 303(d)(4), which applies only to
          WQBELs, allows a less-stringent WQBEL in a reissued permit when the facility is discharging to
          a waterbody attaining water quality standards as long as the waterbody continues to attain
          water quality standards even after the WQBEL is relaxed. In addition, revising the limitation
          must be consistent with the state's antidegradation policy. If the discharge is to a waterbody
          that is not attaining water quality standards, a less-stringent WQBEL is allowed only when
          the cumulative effect of all revised effluent limitations results in progress towards attainment
          of water quality standards. For a  detailed discussion of the anti-backsliding exceptions, see
          EPA's NPDES Permit Writers'Manual (EPA-833-B-96-003). EPA's Trading Policy states:
                EPA believes that the anti-backsliding provisions of Section 303(d)(4) of the
                CWA will generally be satisfied where a point source increases its discharge
                through the use of credits in accordance with alternate or variable water quality
                based effluent limitations  contained in an NPDES permit, in a manner consistent
                with provisions for trading under a TMDL, or consistent with the provisions for
                pre-TMDL trading included in a watershed plan.

          A permit writer should simply explain in the fact sheet of the permit how the limitations in
          the permit, after accounting for any trading provisions, are at least as stringent as the limits
          in the previous permit or, alternatively, how anti-backsliding provisions of the CWA are
          satisfied.

          Antidegradation
          As repeated throughout this document, NPDES permits may not facilitate trades that would
          result in nonattainment of an applicable water quality standard, including the  applicable
          antidegradation provisions of water quality standards. Permitting authorities should ensure
          that WQBELs developed to facilitate trade agreements accord with antidegradation provi-
          sions and that antidegradation reviews are performed when required. Nothing in the Trad-
          ing  Policy per se changes how states apply their antidegradation policies, though states may
          modify their antidegradation  policies to recognize trading.

          The Trading Policy states:
                EPA does not believe that trades and trading programs will result in "lower
                water quality"
                 ... or that antidegradation review would be required under EPA's regulations
                when the trades or trading programs achieve a no net increase of the pollut-
                ant traded and do not result in any impairment of designated uses.

          Special considerations for antidegradation relative to water quality trading depend on the
          tier of protection applied to the waterbody as described below.

          Tier 1 is the minimum level of protection under antidegradation policies.  For Tier 1 waters,
          the antidegradation policy mandates protection of existing instream  uses. Because EPA

Water Quality Trading Scenarios*
 Multiple Point Source
                Trade Agreements   Components of a NPDES Permit
                                            Permit Cover Page
                                                       Effluent limitations  Monitoring  Reporting Requirements  Special Conditions

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                                          Water Quality Trading Scenario: Multiple Facility Point Source Trading


 neither supports trading activities nor allows issuance of permits that violate applicable water
 quality standards, which should protect existing uses at a minimum, any supported trading
 activities incorporated into a NPDES permit should not violate antidegradation policies
 applicable to Tier 1 waters.

 Tier 2 protects waters where the existing water quality is higher than required to support
 aquatic life and recreational uses. Water quality in Tier 2 waters may be lowered (only to the
 level that would continue to support existing and designated uses) but only if an antidegrada-
 tion review finds that (1) it is necessary to lower water quality to accommodate important social
 or economic development, (2) all intergovernmental and public participation provisions have
 been satisfied, and (3) the highest statutory and regulatory requirements for point sources and
 BMPs for nonpoint sources have been achieved. The Trading Policy supports trading to main-
 tain high water quality when trading is used to compensate for new or increased discharges.
 Thus, the Trading Policy supports reductions of existing pollutant loadings to compensate for
 the new or increased load so that the result is no lowering of water quality. A state, in apply-
 ing its antidegradation policy, may decide to authorize a new or increased discharge to high
 quality water, and may decide to use trading to completely or partially compensate for that
 increased  load. If the increased load to Tier 2 waters is only partially compensated for by trad-
 ing, an antidegradation review would be required to address the increased load.

 Tier 3 protects the quality of outstanding national  resource waters and waters of exceptional
 recreational or ecological significance. In general, antidegradation policies do not allow any
 increase in loading to Tier 3 waters that would result in  lower water quality. EPA supports
 trading in Tier 3 waters to maintain water quality.


 Monitoring
 Permitting authorities may want to consider developing monitoring and reporting require-
 ments to characterize waste streams and receiving waters, evaluate wastewater treatment
 efficiency, and determine compliance with  permit conditions in trade agreements. Moni-
 toring and reporting conditions of a NPDES permit may contain specific requirements for
 sampling location, sample collection method, monitoring frequencies, analytical methods,
 recordkeeping,  and reporting. If the permit conditions include  compliance with provisions in
 a trade agreement, the permitting authority should include monitoring, record-keeping, and
 reporting  requirements that facilitate compliance evaluations and, where necessary, enforce-
 ment actions related to the trading requirements. Discharge monitoring requirements should
 be consistent with the provisions of the trade agreement in terms of pollutants and forms of
 pollutants monitored, reporting units, and timing. The permit provisions should ensure that
the results of discharge monitoring will be useful to the permittees, the permitting author-
 ity, and the general public in determining whether the provisions of the trade agreement are
 being met.

Sample Collection and Analysis
The same discharge sampling location used for compliance in any existing NPDES permits
should be  used for determining compliance with effluent limitations developed for traded
parameters. Samples collected as part of a self-monitoring program required by a NPDES
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations
                                                                 Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          permit must be performed in accordance with EPA-approved analytical methods specified
          in 40 CFR Part 136 (Guidelines for Establishing Test Procedures for the Analysis of Pollutants
          Under the Clean Water Act) where Part 136 contains methods for the pollutant of concern.
          Where no Part 136 methods are available, the permit writer should specify which method
          should be used for compliance  monitoring.

          Parties Responsible for Monitoring
          The trade agreement specifies the types and frequency of monitoring  needed as well as
          the parties responsible for monitoring. The individual facilities are ultimately responsible to
          ensure that effluent monitoring is completed and reported to the permitting authority. Any
          enforcement actions for failure to monitor and report will be against the individual facili-
          ties. The permitting authority should ensure that sufficient monitoring is required to allow
          permittees, agency compliance personnel, and the public to gauge whether dischargers are
          meeting their individual effluent limitations and requirements under the trade agreement.

  Neuse River Basin, North Carolina
    The state of North Carolina Department of Environment and Natural Resources included
    monitoring provisions in a permit issued to the NRCA and its co-permittee members to
    control nitrogen discharges. These provisions require  members of the NRCA to monitor
    their discharge as specified in their individual permits. In addition, the NRCA compiles
    and submits members' nitrogen monitoring results. Each member also has individual
    ambient monitoring requirements, but the NRCA is not required to conduct ambient
    monitoring. For more information about this trading program, see Appendix A.


          The permitting authority  might use a different approach for specifying monitoring require-
          ments, depending on the type of permit. For example, discharge monitoring under a multiple
          facility permit would be required of all individual dischargers and should be listed in the per-
          mit. If the permit is an overlay permit used to incorporate water quality trading for specific
          pollutants, the permitting authority may establish certain monitoring requirements, such as
          monitoring location, by reference to the facility's individual NPDES permit for consistency.
          Alternatively, the overlay  permit could specifically list the monitoring location and require-
          ments for each permittee or co-permittee.

          The permitting authority  may consider establishing more frequent monitoring for facili-
          ties with higher design flows than those with lower design flows. Monitoring and reporting
          requirements in a multiple facility permit, such as a watershed-based permit, may be a combi-
          nation of individual and watershed-wide requirements as described below.

         Ambient Monitoring
          Ambient monitoring is one way to show whether a trade agreement meets or improves water
          quality. In addition to traditional discharge monitoring requirements, ambient water quality
          monitoring may be appropriate at strategic locations to ensure that the trade is not creating
          localized exceedances of water quality standards and to document the performance of the
          overall trading program. Permits with mixing zones may include monitoring requirements as
          appropriate to ensure that water quality criteria are not exceeded at the edge of the applicable
          mixing zone.
Water Quality Trading Scenarios
               Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations
                                                               Monitoring  Reporting Requirements  Special Conditions

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                                          Water Quality Trading Scenario: Multiple Facility Point Source Trading
   St. Martin River Example: Monitoring
       What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus on the St. Martin River
    Credit Seller: Shepherd County POTW
   Credit Buyers: City ofOakdale and Town ofBarkley WWTPs

   Location: The dischargers are in the St. Martin River watershed.
   The facilities have existing TP monitoring requirements. The overlay permit will require monitoring
   at the same locations as established in the existing permits. In addition, the existing permit requires
   monthly monitoring for TP. Each discharger will be required to monitor for phosphorus weekly. For
   the permitting authority to gauge compliance, the permit writer will develop permit language that
   requires each discharger to submit monthly DMRs to the permitting authority by the 15th of the
   month following monitoring. Ambient receiving water monitoring requirements are included in the
   existing NPDES permits and are adequate to ensure that localized exceedances of water quality stan-
   dards do not develop as a result of trades.

   Permit Language:
   Each permittee shall monitor effluent total phosphorus a minimum of one time per week at exist-
   ing discharge monitoring locations established in each facility's existing NPDES permit. Each per-
   mittee shall determine the average monthly mass loading based on actual monthly average flow.
   Flow monitoring shall be continuous.


General or watershed-based  permits may establish  a comprehensive watershed monitor-
ing program. For example, to fulfill  monitoring requirements that are applied to multiple
dischargers,  permittees could establish a monitoring consortium to collect ambient water
quality data that supplements end-of-pipe monitoring data required by the permit. Through
this group-wide monitoring consortium, permittees could generate data to use in watershed
assessments.


Reporting Requirements
Reporting requirements should be established to support the permitting authority's evalu-
ation  of water quality trading programs. For example, in addition to reporting discharge
monitoring results, permitting authorities  might require a permittee to report the number
of credits purchased. Permitting authorities might also require an annual monitoring report
specific to the pollutants involved in the trade,  to provide information on annual loading
in accordance with the requirements of the trading program.  Permits incorporating water
quality trades should require reporting at a frequency appropriate to determine compliance
with the trading provisions. Permitting authorities should consider any requirements of the
trading programs related to monitoring and reporting and  ensure the permits are consistent
with these requirements. Permits may require reporting of  monitoring results at a frequency
Water Quality Trading Scenarios
                          *
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page  Effluent Limitations  Monitoring
                                                                       Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          established through the permit on a case-by-case basis but in no case may that frequency be
          less than once per year.

          Trading programs may establish other reporting and tracking requirements as well. For
          example, it is essential to have a mechanism for tracking trades. An additional form could be
          required such as a credit certificate form (see Appendix C). The permitting authority can hold
          point sources liable if they violate any trading provision included in the permit or any trade
          agreement incorporated by reference into the permit, and point sources are also liable if they
          do not meet their permit limits.
   St. Martin River Example: Reporting
       What You Need to Know...
       Pollutant: Total Phosphorus
    Credit Seller: Shepherd County POTW
   Credit Buyers: CityofOakdaleandTownofBarkleyWWTPs

   Location: The dischargers are located in the St. Martin River watershed.

   Applicable Ratios:
    • Delivery: The trading program has established a 3:1 ratio for trades between Shepherd County
       POTW and either of the two credit buyers to account for the distance between the facilities.

   An overlay permit is being developed for permittees in the St. Martin River watershed to facilitate
   trading. In addition to their existing, individual NPDES permits, each of the trading partners has
   applied for coverage under the overlay permit. The permit requires, in addition to monitoring reports,
   regular reporting of any changes to the trade agreement and reports for tracking trades. Because
   the facilities' individual permits contain monthly average effluent limitations for TP, monthly trade
   transactions will be necessary to maintain compliance. The trade agreement between the discharg-
   ers indicates that trades will be tracked by individual dischargers. Also, trading notification forms
   for trades between trading partners and monthly trading summaries for the entire program will be
   submitted by each discharger. Credits must be used in the same month they are generated and trading
   notification forms must be submitted to the regulatory agency by the 15th of the month following the
   trade. The permit gives the facilities 15 days to report the trades to account for administrative time
   and processing notification forms.

   In addition, the permit requires biannual reporting to summarize year-to-date transactions and
   actual reductions and loading reflected by monitoring.

   Permit Language:
   No trade is valid unless it is recorded by both the credit buyer and the credit seller and trading
   notification forms and a monthly summary of all trades for each calendar month are submitted to
   the permitting authority. The record-keeping system employed  by the permittee must be capable
   of ensuring that a  particular credit is not sold to more than one trading participant. Trading notifi-
   cation forms for each  monthly trade must be submitted to  by the 15th
   day of the month following the trade.
Water Quality Trading Scenarios
                Trade Agreements  Components of 3 NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring
                                                                        Reporting Requirements  Special Conditions

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                                          Water Quality Trading Scenario: Multiple Facility Point Source Trading


Data Reporting to EPA
EPA administers two systems to store NPDES permit data and track compliance, the Permit
Compliance System (PCS) and the new Integrated Compliance Information System (ICIS).
PCS is the old computerized management information system that contains data on NPDES
permit-holding facilities to track the permit, compliance, and enforcement status of these
facilities.

The new system, ICIS, was deployed in June 2006 to approximately 20 states. ICIS contains
integrated enforcement and compliance information across most of EPA's programs including
all federal administrative and judicial enforcement actions. In addition, ICIS has the capability
to track other activities occurring in an EPA Region that  support enforcement and compliance
programs. These include Incident Tracking, Compliance Assistance, and Compliance Monitor-
ing. In the future, ICIS will be deployed to all states, and PCS will no longer be used.

Neither PCS nor ICIS is structured to actually track trades.

PCS is designed to compare actual discharge monitoring data against required effluent limi-
tations to determine a facility's compliance with its NPDES permit. To determine compliance
under a trading scenario, it  is necessary for the NPDES permitting authority to compare actual
discharge monitoring data and the quantity of credits purchased or pounds sold against
required effluent limitations. For credit sellers, compliance is tracked against the WQBEL that
serves as the facility's baseline. For credit buyers, compliance is actually tracked against two
effluent limitations—the minimum control level and the baseline.  The challenge in using  PCS
to determine compliance under a trading scenario is that the system does not automatically
make adjustments to the reported actual discharge—it will not add or subtract the load trad-
ed. Therefore, this  type of adjustment must be done before entering information into PCS so
that the system has only one reported number to compare against an effluent limitation.

To determine compliance for a credit seller, the NPDES permitting  authority will need to
know that the sum of a credit seller's actual discharge and the number of pounds sold is less
than or equal to the most stringent effluent limitation (i.e., the baseline). Therefore, point
source credit sellers could report the sum of the facility's actual discharge and the number
of pounds sold, and that amount would be entered into PCS. PCS would then compare the
sum of the actual discharge and the number of pounds sold against the facility's baseline;
the sum should be  less than or equal to the facility's baseline to indicate that the facility is in
compliance.

Point source credit  buyers not only have a baseline, but also a minimum control level (the
facility's TBEL or current discharge, whichever is more stringent). To determine compliance for
a credit buyer, the NPDES permitting authority will need to know that (1) the facility's actual
discharge is less than or equal to its minimum control level, and (2) that the number of credits
purchased result in the facility achieving  its baseline. Therefore, point source credit buyers
could report two types of information: (1) the  facility's actual discharge, and (2) the differ-
ence between the actual discharge, and the quantity of  credits purchased. Both numbers
would be entered into PCS to determine  compliance. PCS would compare the actual discharge
against the minimum control level to determine permit compliance and eligibility as a credit
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements  Components of a NPOES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring
                                                                        Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          buyer. PCS would also compare the difference between the actual discharge and the quantity
          of credits purchased against the facility's baseline; the difference should be less than or equal
          to the WQBEL to indicate that the facility has purchased enough credits to meet its baseline
          and remain in compliance with its WQBEL. PCS can accommodate two different effluent
          limits for the same parameter; therefore, it has the capability to determine compliance with
          both the minimum control level and the baseline for a credit buyer.

          ICIS also allows the NPDES permitting authority to report two limits; therefore, this system
          can also accommodate both the baseline and the  minimum control level for credit buyers.
          New DMR forms will also have two lines to report both the baseline and the minimum control
          level. Like PCS, ICIS does not actually adjust actual discharges with the load traded. Under the
          current design, ICIS will allow a facility with an existing NPDES permit to also have a trad-
          ing  partner entered  into the system. Once a trading partner is entered for a facility, ICIS will
          allow the entry of an adjusted value—this is the reported actual discharge adjusted by the
          number of credits bought or sold. If an adjusted value is entered, this value is used to deter-
          mine permit violations and percent exceedances (USEPA 2006).

          In addition to challenges related to limits and the type of information to report, NPDES per-
          mits with trading provisions might also raise issues related to reporting  periods and auto-
          mated compliance tracking. PCS will not support a reporting extension beyond 30 days. This
          type of reporting extension might be necessary in some instances to allow adequate time for
          the administrative activities necessary for trading  partners to coordinate and reconcile trades.
          ICIS, however, will support a 45-day reporting period. In rare instances when a permitting
          authority uses annual limits, both PCS and ICIS will allow for one limit to be monthly and one
          to be annual.  However, the permitting authority will have to manually flag annual limit efflu-
          ent violations for reportable noncompliance (RNC) and significant noncompliance (SNC) to
          track compliance.
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements   Components of a NPDES Permit
                                            Permit Cover Page  Effluent Limitations  Monitoring
Reporting Requirements  Special Conditions

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                                          Water Quality Trading Scenario: Multiple Facility Point Source Trading


Special Conditions
Special conditions are developed to supplement effluent limitations and may include require-
ments such as BMPs, additional monitoring activities, ambient stream surveys, and toxicity
reduction evaluations (TREs), Special conditions also include permit modification and reopen-
er conditions and can be used to address water quality trading or incorporate compliance
schedules (if authorized by the permitting authority). Special conditions of a NPDES permit
will be very important in incorporating the terms of a trade agreement. Even where the spe-
cific terms of the agreement are not directly incorporated into the permit, the special condi-
tions will be used to refer to, and require compliance with, the trade agreement housed in a
separate document.

The special conditions included in a NPDES permit that implements trading will depend on
provisions of the trade agreement and the effluent limitations and monitoring and reporting
requirements established in the permit. However, the permitting authority should consider
incorporating special conditions that support the trading conditions. For example, the special
conditions of the permit may specify how and when trades may be conducted among permit-
tees or how an exceedance of an aggregate loading cap will be enforced among the permit-
tees responsible for exceeding their individual loading limits.

Special conditions may also be used to establish provisional requirements that apply if the
credits on which the trading limits are based are  unavailable. Special  conditions addressing
group and individual liability,  provisional requirements that apply when credits  are unavail-
able or when an individual or  collective  limit is exceeded, and outlining the specific require-
ments for establishing trade agreements among  permittees can be important in issuing
acceptable permits that will not require modification each time circumstances change for one
of the dischargers covered under the permit.

In addition, the special conditions section of the permit could include a compliance sched-
ule. Compliance schedules for  WQBELs are allowed only when state water  quality standards
or state regulations implementing such standards provide authority for using compliance
schedules as well as when those limits are derived from water quality standards that were
newly adopted or substantively revised after July 1, 1977. Most state water quality standards
or implementing regulations authorize using compliance schedules. If compliance schedule
authority is available, the permit writer could place a compliance schedule in the permit
special conditions that would give the discharger time to comply with provisions related to
WQBELs and trading when those provisions are intended to be phased in over time.
Water Quality Trading Scenarios
 Multiple Point Source
                Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page   Effluent Limitations  Monitoring  Reporting Requirements
                                                                                    Special Conditions

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Water Quality Trading Toolkit for Permit Writers



   St. Martin River Example: Special Conditions
       What You Need to Know...
       Pollutant: Total Phosphorus
    Credit Seller: Shepherd County POTW
   Credit Buyers: City ofOakdale and Town ofBarkley WWTPs
   Location: The dischargers are in the St. Martin River watershed.

   Applicable Ratios:
    • Delivery: The trading program has established a 3:1 ratio for trades between Shepherd County
       POTW and either of the two credit buyers to account for the distance between the facilities.

   The permit writer has developed the appropriate effluent limitations, monitoring, and reporting
   requirements for each facility. The special conditions for each facility's permit focus on general author-
   ity, credit definition, permit reopeners and modification provisions, and enforcement liability.

   Permit Language:
   General Authority
   The permittee is authorized to participate in trading for the purposes of complying with the total
   phosphorus effluent limitations in Section X of this permit. The authority to use trading for compli-
   ance with these limits is derived from: ; section 402 of the federal
   Clean Water Act 33 United States Code (U.S.C.) section 1342; and EPA's policies on Water Quality
   Trading (1/13/03) and Watershed-Based NPDES Permitting (1/7/03) endorse water quality credit trad-
   ing. Additionally the St. Martin  River TMDL authorizes water quality trading as a means of achieving
   the allocations established by the TMDL.

   Credit Definition
   One credit purchased by the buyers will be equal to three pounds of total phosphorous per day on
   a monthly average basis generated by the seller.

   Permit Reopeners, Modification Provisions
   The permitting authority may,  for any reason provided by law, summary proceedings or otherwise,
   revoke or suspend this permit or reopen and modify it to establish any appropriate conditions,
   schedules of compliance, or other provisions which may be necessary to protect human health or
   the environment or to implement the St. Martin River TMDL. The permitting authority may also
   reopen and modify the permit  to suspend the ability to trade credits to comply with the total
   phosphorus effluent limitations in Section X of this permit.

   Enforcement Liability
   The permittee is liable for meeting its most stringent effluent limitation. No liability clauses con-
   tained in other legal documents (e.g., contracts) established  between the permittee and other
   authorized buyers and sellers are enforceable under this permit.
Water Quality Trading Scenarios
I Multiple Point Source
I           -     Trade Agreements  Components of a NPDES Permit
                                           Permit Cover Page   Effluent Limitations  Monitoring   Reporting Requirements
                                                                                     Special Conditions

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                                 Water Quality Trading Scenario: Point Source Credit Exchange
Water Quality Trading Scenario:
Point Source Credit Exchange
Contents

Water Quality Trading Scenario:
Point Source Credit Exchange	1
  Credit Exchange Administration	1
  Trade Agreements	2
  Components of a NPDES Permit	4
    Permit Cover Page	4
    Effluent Limitations	5
    Monitoring	13
    Reporting Requirements	16
    Special Conditions	19

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Water Quality Trading Toolkit for Permit Writers

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                                              Water Quality Trading Scenario: Point Source Credit Exchange
Water Quality Trading Scenario:

Point Source Credit Exchange

This water quality trading scenario focuses on technical and pro-
grammatic issues related to water quality trading through a point
source credit exchange, illustrated in Figure 1. Point sources
that over control their discharges generate the credits in
the exchange, and a separate entity maintains the credit
exchange. The credit exchange would likely have to be
either operated by or approved and overseen
by a state regulatory agency. Issues addressed
under this scenario include the following:
    •  Credit exchange administration
    •  Trade agreements
    •  Components of a National Pollutant
       Discharge Elimination System (NPDES) permit
       - Permit cover page
       - Effluent limits
       - Monitoring
       - Reporting requirements
       - Special conditions
                                                Buyer
                                                PO1W
                                           Point Source
                                         Credit Exchange
                                                     Figure 1. Point source credit exchange.
A hypothetical example (shown in highlighted boxes) is presented throughout this scenario
to illustrate how NPDES permit writers might work with credit buyers and sellers to assist
in trading and ensure each facility's NPDES permit contains the appropriate limits, require-
ments, and other conditions. Keep in mind that there are a range of options for incorporat-
ing trading provisions into a NPDES permit. The hypothetical example discussed throughout
this scenario illustrates just one of the many options a NPDES permit writer might use.
Credit Exchange Administration
A variety of entities can establish and administer credit exchanges, including state agencies,
local governments, nonprofit nongovernmental entities, soil and water conservation districts,
private entities or other third parties. Management responsibilities for a credit exchange will
vary according to the watershed and needs of the trading partners. To address the potential
inadequacy of generated credits (i.e., treatment control failure), credit exchanges should
consider reserving credits that would be available to credit purchasers if the primary credit
source is insufficient. Entities administering credit exchanges can reserve credits in a number
of ways. One option is for the credit exchange to overbuy available credits from point sources
approved to generate credits. Another option is to require point source dischargers that want
the ability to purchase credits from the credit exchange—now or in the future—to pay a user
fee to the credit exchange that will in turn finance additional point source treatment controls
approved to generate credits.
Wator Quality Trading Scenarios
	*
 Point Source
 Credit Exchange
           Credit
           Exchange
           Administration
Trade      Components of a NPDES Permit
Agreements
                                           Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers
          Trade Agreements
          Typically, the terms that govern a trading program will be developed outside the NPDES per-
          mit process and can be incorporated or reflected in the permit (see Appendix C). The U.S. Envi-
          ronmental Protection Agency's (EPA) Water Quality Trading Policy (Trading Policy) describes
          several mechanisms for implementing trading through NPDES permits (see Appendix B).
          NPDES permits authorizing water quality trading should reference any existing trade agree-
          ment in the permit and fact sheet. The permit writer may also incorporate specific provisions
          of the agreement as appropriate (e.g., shared responsibilities for conducting ambient moni-
          toring) into the permit. All trade agreements referenced in NPDES fact sheets and permits
          should meet certain minimum standards to help ensure the trades authorized by the permit
          are consistent with water quality standards. At a minimum, the trade agreement should be a
          written agreement and signed and dated by authorized representatives of all trading part-
          ners. Verbal trade agreements should not be referenced in NPDES permits. The written trade
          agreement should contain sufficient detail to allow the permitting authority to determine
          with some degree  of certainty that the terms of the agreement will result in loading reduc-
          tions and  generation of sufficient credits to satisfy water quality  requirements. If there is  no
          formal, outside trade agreement, trading can still occur; however, the permit writer will need
          to more explicitly describe the trading program in the fact sheet and authorize specific aspects
          of the trading program as permit conditions. Trading partners can specify the details pertain-
          ing to the negotiated terms of the trade (e.g., credit price, payment schedule, consequences
          for failure to fulfill negotiated terms) in a separate, written and signed contract.

          For a credit exchange to succeed, adequate credits should be available to meet the demand
          of the purchasers;  therefore, a trade agreement could contractually obligate the credit gener-
          ators to create a certain number of credits to participate in the program. Likewise, the admin-
          istrator of the credit exchange might want to ensure that point sources purchase a  certain
          number of credits and include this obligation in an agreement, as well. The obligations could
          be for a defined period, such as one permit term. Penalties for not meeting the terms of the
          trade agreement should be clearly specified in the agreement and incorporated by reference
          into a NPDES permit.


  Flowing River Example: Trade Agreements
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Newly approved TMDLa for Total Phosphorus for the Flowing River Watershed
  Point Source Credit Exchange: Flowing River Watershed Phosphorus Credit Exchange (administered
  by the state)
  Participating Facilities: Chuck's Potash Company, Green and Go Fertilizers, Shag Rug, Inc., Troyville
  POTWb, Alpha Limited

  Notes: a TMDL = Total maximum daily load; h POTW = publicly owned treatment works

  Location: All facilities are less than a mile apart from each other along the Flowing River.
Water Quality Trading Scenarios
I Point Source             I
I Credit Exchange    Credit Exchange I Trade     Components of a NPDES Permit
f            Administration  j Agreements
I                    I                         Permit Cover Page Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                                  Water Quality Trading Scenario: Point Source Credit Exchange
                        Flowing River Example: Trade Agreements (continued)

   Applicable Trade Ratios: None. In this case, it is not necessary to apply a delivery ratio because of the
   close proximity of the sources to each other, nor an equivalency ratio because the same pollutant form
   is being traded, nor an uncertainty ratio because both parties can accurately monitor end-of-pipe loads.

   The state and stakeholders in the Flowing River watershed have cooperatively participated in the
   development of the Flowing River Watershed Phosphorus Credit Exchange to meet the point source
   facilities' wasteload allocation (WLA) under the approved phosphorus TMDL. To facilitate trading, the
   Flowing River Watershed Phosphorus Credit Exchange drafted a trade agreement that buyers and sell-
   ers must sign to participate. The basic terms of the trade agreement are as follows:
     •  The trade agreement establishes a contractual obligation between the credit buyers and sellers to
        participate for a period of 5 years.

     •  Participants that sign the trade agreement acknowledge that the facility's phosphorus discharg-
        es will be covered under a separate phosphorus overlay permit for all participants in the Flow-
        ing River Watershed Phosphorus Credit Exchange, as opposed to the facility's existing NPDES
        permit. The overlay permit is scheduled to be completed and become effective in one year.

     •  Trades occur annually at  the end of the TMDL season (June 1-September 30) on the basis of the
        seasonal mass loading of total phosphorus (TP) compared to seasonal phosphorus discharge
        limits for each facility.

     •  Monitoring and flow data is to be submitted to the Exchange quarterly by the end of the month
        following the quarter (April, July, October, and January).

     •  Before reconciling trade requirements, the Flowing River Watershed Phosphorus Credit
        Exchange will determine the value of a phosphorus credit on the basis of capital costs of TP
        removal, as well as operation and maintenance costs of pollutant controls.

     •  Each year, the Flowing River Watershed Phosphorus Credit Exchange will reconcile credit sales
        and purchases by March of the following calendar year.

     •  Each participant in the Flowing River Watershed Phosphorus Credit Exchange will have a
        baseline. Buyers will also have minimum control levels, and sellers will also have trading limits
        (baseline - credits sold) included in an appendix to the trade agreement. Facilities performing
        better than their baselines will receive payment from the Flowing River Watershed Phosphorus
        Credit Exchange for phosphorus credits generated, on the basis of annual price. Facilities that
        do not achieve their baseline, while meeting their minimum control levels, will owe payment to
        the Flowing River Watershed Phosphorus Credit Exchange for phosphorus credits equal to the
        amount discharged above their baseline.

     •  Each facility will be responsible for conducting weekly monitoring and monthly reporting to the
        permitting authority as required under the overlay permit.

   The Flowing River Watershed Phosphorus Credit Exchange will purchase excess phosphorus credits
   to ensure that sellers receive compensation for their phosphorus credits. However, the Flowing River
   Watershed Phosphorus Credit Exchange will not hold excess credits or make these credits available for
   future purchase.
Water Quality Trading Scenarios
 Point Source
 Credit Exchange   Credit Exchange
            Administration
Trade     Components of a NPDES Permit
Agreements
                                               Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers
                       Flowing River Example: Trade Agreements (continued)

  The NPDES permit writer for the facilities participating in the Flowing River Watershed Phosphorus
  Credit Exchange receives a written copy of the trade agreement that is signed and dated by authorized
  representatives of each participating facility. Although the NPDES permit writer is already familiar
  with the terms of the trade agreement because of participating in the development of the Flowing
  River Watershed Phosphorus Credit Exchange, the written and signed trade agreement indicates
  which facilities are planning to participate and should have coverage under the overlay permit.

  The permit writer will incorporate monitoring and reporting requirements necessary to determine
  compliance with the annual phosphorus discharge limits for each facility and facilitate trading
  through the Flowing River Watershed Phosphorus Credit Exchange. The NPDES permit writer will
  also specify compliance conditions, including the need to purchase phosphorus credits in a specified
  amount at a specified time to achieve the baseline, that are consistent with the terms of the trade
  agreement. However, the permit would not specify the cost for phosphorus credits or have the ability
  to name buyers and sellers.
          Components of a NPDES Permit
          NPDES permits that authorize water quality trading are no different than typical NPDES per-
          mits in many respects—they require the same structure, analyses, and justification. All permits
          have five basic components: (1) cover page; (2) effluent limitations; (3) monitoring  and report-
          ing requirements; (4) special conditions; and (5) standard conditions. Standard conditions are
          the same for all NPDES permits and will not be addressed in this Toolkit. In addition, consistent
          with Title 40 of the Code of Federal Regulations (CFR) section 124.6, all permits are subject to
          public notice and comment. This provides all interested parties an opportunity to comment
          on the trading provisions in the permit.

          Each NPDES permit is accompanied by a permit fact sheet. The information in these fact
          sheets is not enforceable. The purpose of the fact sheet is to explain the requirements in the
          permit to the public. Thus, at a minimum, the fact sheet should explain any trading provisions
          in the permit. There is a wide variety of options for including trading information  in the fact
          sheet that ranges from explaining the minimum control level (buyer) or trading limit (seller)
          to including the entire trading program.

          There are a variety of issues, however, that may require special consideration when developing
          a permit incorporating water quality trading. Appendix E provides the permit writer with a list
          of fundamental questions that should be addressed during the  permit development process.


          Permit Cover Page
          The cover page of a NPDES  permit typically contains the name and location of the
          permittee(s), a statement authorizing the discharge, the specific locations for which a dis-
          charge is authorized (including the name of the receiving water), and the effective period of
          the permit (not to exceed 5 years). If numerous permittees are covered, they can be listed in
          an appendix or attachment that is referenced on the cover page. A permit incorporating or
Water Quality Trading Scenarios
 Point Source
 Credit Exchange    Credit Exchange Trade
Components of a NPOES Permit
            Administration  Agreements
                                             Permit Cover Page  Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                                Water Quality Trading Scenario: Point Source Credit Exchange


referencing a trade agreement can refer to water quality trading on the cover page, but this
is not necessary. If the state has issued regulations or policy documents authorizing water
quality trading, the permit writer should consider referencing the regulations in the Authority
section of the cover page. For example,  if trading is considered a water-quality management
tool in a state's Water Quality Management Plan, this may establish authority for integrating
trading into NPDES permits and can be referenced on the cover page (Jones 2005).

The cover page may also address the specific pollutants regulated by the permit. For instance,
the cover page of an overlay permit for TP may state that the overlay permit addresses only TP
and that other parameters are addressed in each facility's individual permit.

         Long Island Sound, Connecticut
            Connecticut's General Permit for Nitrogen Discharges establishes the authority to
            discharge nitrogen as follows:
            (a) Eligible Activities or Discharges
            This general permit authorizes the discharge of total  nitrogen (TN) from the POTWs
            listed in Appendix 1 (of the original permit), provided the activities are conducted in
            accordance with this general permit.
            This general permit does not authorize any discharge of water, substance or material into
            the waters of the state other  than the one specified in this section. Any person or munic-
            ipality that initiates, creates, originates or maintains such a discharge must first apply
            for and obtain authorization under Section 22a-430 of the General Statutes.
            For more information about this trading program, see Appendix A.


Effluent Limitations
Effluent limitations are the primary mechanism for controlling the discharge of pollutants
from point sources into receiving waters. When developing  a permit, the permitting author-
ity focuses much of its effort on deriving appropriate effluent limitations. As in all NPDES
permits, permits that include trading must include any applicable technology-based effluent
limitations (TBELs), or the equivalent and, where necessary, water  quality-based effluent limi-
tations (WQBELs), that are derived from and comply with all applicable technology and water
quality standards. Furthermore, limits must be enforceable, and the process for deriving the
limits should be scientifically valid and transparent.

EPA's Trading Policy does not support trading to meet TBELs unless trading is specifically
authorized in the categorical effluent limitation guidelines on which the TBELs are based.
Applicable TBELs thus serve as the minimum control level below which the buyer's treatment
levels cannot fall. This section discusses the overarching principles of how to express all appli-
cable effluent limitations in permits for dischargers participating in water quality trades.

Credit Buyers
Permits for credit buyers should include  both the baseline, which is  the WQBEL that defines
the level of discharge the buyer would have to meet through treatment when not trading,
and a minimum control level that must be  achieved through treatment when trading. The


Watar Quality Trading Scenarios
	  '...:".	_  -"•--  •	•<                          i m
                 jnge  Trade      Components of a NPDES Permit
                                                                   Monitoring   Reporting Requirements  Speciai Conditio
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
_^_ .„. 	
Components of a NPDES Permit
Permit Cover Page

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Water Quality Trading Toolkit for Permit Writers


          permit should also include the amount of pollutant load to be offset (minimum control level
          - baseline) through credit purchases when trading. Most often, the applicable TBEL will serve
          as the minimum control level. A permitting authority can choose to impose a more stringent
          minimum control level than the TBEL to prevent localized exceedances of water quality stan-
          dards near the point of discharge but not one that is less stringent than the TBEL. In a NPDES
          permit fact sheet, the effluent limitations for a  credit buyer could be described as follows:
              •  The Discharger must meet, through treatment or trading, a mass-based effluent limi-
                 tation for Pollutant A of , but at no time shall the maximum mass discharge of Pollutant A
                 during  exceed the minimum control level of . Thus, the maximum mass discharge of Pollutant A to be offset
                 through credit purchases is .

          Credit Sellers
          When a potential credit seller is able to reduce  its discharge below its most stringent appli-
          cable effluent limitation (i.e., its baseline),  it may generate credits to sell. The quantity of
          credits that any given seller actually will be able to sell depends on the market for credits,
          agreements made with buyers,  and any treatment requirements placed on potential buyers
          (i.e., the buyers' minimum control levels). Because of these factors, it is possible that a dis-
          charger will not be able to sell all the credits it generates.

          A credit seller's permit will include both the most stringent effluent limitation that would
          apply without trading (e.g., baseline) and a trading limit. The seller can choose to what level
          it will control its pollutant discharge (using technology or best management practices (BMPs)
          it will implement) and this level becomes its trading limit. The baseline and trading limit
          could be described in the permit fact sheet as follows:
              •  Through treatment, the Discharger must meet a mass-based effluent limitation for
                 Pollutant A of . The Discharger is authorized to further treat its
                 discharge, remove additional loading of Pollutant A, and generate and sell credits to
                 an authorized credit Buyer or Buyers. If the Discharger sells such credits, the  effluent limitation  no
                 longer applies and the trading limit for Pollutant A at Outfall 001 shall apply instead
                 as follows: Trading Limitation =  - Quantity of Pounds Sold.

          The permit must include monitoring and reporting requirements for Pollutant A sufficient to
          demonstrate that the seller actually has generated the credits it sells and, therefore, is meet-
          ing its trading limit.

          Aggregate or Individual  Limitations
          It may be appropriate for permit writers to include aggregate WQBELs that apply to the
          group of point sources covered  under a general or watershed permit. An aggregate efflu-
          ent limitation typically represents  the sum of the pollutant WLAs for all permittees covered
          by the permit. This allows maximum flexibility for trades among dischargers within the
Water Quality Trading Scenarios
                                                        Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
F "
Components of a NPDES Permit
Permit Cover Page

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                                                Water Quality Trading Scenario: Point Source Credit Exchange
   Flowing River Example: Effluent Limitations
      What You Need to Know.,.
       Pollutant: Total Phosphorus
          Driver: Newly approved TMDL for Total Phosphorus for Flowing River
   Exchange Participants:
   Chuck's Potash Company
                  Current Load: 2,000 Ibs (total per season)
                  New WQBEL (based on WLA): 8,000 Ibs (total per season)	
                  New Treatment Capabilities: Treatment to 4,000 Ibs (total per season)
                  Excess Pounds Reduced: 4,000 Ibs (total per season)
   Green and Go Fertilizers
                  Existing Discharge: 2,500 Ibs (total per season)
                  New WQBEL (based on WLA): 2,000 Ibs (total per season)	
                  Treatment Capabilities: Treatment to 2,500 Ibs (total per season)
                  Pounds Needed: 500 Ibs (total per season)
   Shag Rug, Inc.
                  TBEL: 1,800 Ibs (total per season)
                  New WQBEL (based on WLA): 1.000 Ibs (total per season)	
                  Treatment Capabilities: Treatment to 1,800 Ibs (total per season)
                  Pounds Needed: 800 Ibs (total per season)
   Troyville POTW
                  TBEL: 10,000 Ibs (total per season)
                  New WQBEL (based on WLA): 8,000 Ibs (total per season)
                  New Treatment Capabilities: Treatment to 4,000 Ibs (total per season)
                  Excess Pounds Reduced:  4,000 Ibs (total per season)
   Alpha Limited
                  Existing Discharge: 1,200 Ibs (total per season)
                  New WQBEL (based on WLA): 500 Ibs (total per season)	
                  Treatment Capabilities:  Treatment to 1,200 Ibs (total per season)
                  Pounds Needed: 700 Ibs (total per season)
Water Quality Trading Scenarios
 Point Source
 Credit Exchange    Credit Exchange Trade     Components of a NPDES Permit
            Administration  Agreements
                                             Permit Cover Page
                                                       Effluent Limitations Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers
                     Flowing River Example: Effluent Limitations (continued)

   Location: All facilities are less than a mile apart from each other along the Flowing River.
   Applicable Trade Ratios: None.

   To facilitate trading amongst the dischargers, the Flowing River Phosphorus Credit Exchange
   (Exchange) is designed to facilitate the exchange of credits between point source credit generators and
   purchasers. The Exchange has developed a trade agreement that outlines how point sources can gener-
   ate and purchase credits, how to calculate trade ratios, as well as individual responsibilities for meeting
   effluent limitations. Trades occur once per year at the end of the TMDL season (June 1-September 30).

   Of the potential participants in the Exchange, only the municipal wastewater treatment facility's
   (Troyville POTW) and carpet manufacturer's (Shag Rug, Inc.) existing permits include TBELs. Both
   are meeting the TBELs. The state has developed a general watershed-based permit for phosphorus
   point source dischargers along the Flowing River. The permit authorizes trading and includes the sea-
   sonal mass loading WQBELs that are based directly on the WLA requirements of the TMDL.

   To comply with its seasonal WQBEL, a permittee may either meet the limitation at the point of dis-
   charge through treatment or other pollutant reductions at the facility or, after meeting its minimum
   control level (i.e., current discharge before the TMDL or applicable TBEL), pay into the Exchange to
   purchase necessary credits. The facility must treat its discharge to meet its minimum control level to
   purchase credits from the Exchange.

   To be eligible to sell credits to the Exchange, a facility must first treat the discharge to meet its most
   stringent effluent limitation, which, in this case,  is the WQBEL that implements the WLA. In addition,
   the state has established trading limits for all dischargers entering the Exchange as sellers, and these
   limitations must be met for the duration of the permit cycle.

   Permit Language:
   a. Effluent Limitations
     1. Seasonal total mass loading effluent limitations applicable to each permittee covered under
       this permit are set forth in Table 1, which is incorporated herein in its entirety, as part of this
       general permit.

     2. If the permittee participates in the Flowing River Phosphorus Credit Exchange, the permit-
       tee's total annual mass discharge of total phosphorus shall not exceed the Seasonal Mass
       Loading Limitation  (With Trading) outlined in Table 1.

     3. If the permittee does not participate in the Flowing River Phosphorus Credit Exchange, the
       permittee's total annual mass discharge of total phosphorus shall not exceed the Seasonal
       Mass Loading WQBEL (Without Trading).

     4. A permittee shall be out of compliance with the seasonal discharge limitations of the general
       permit and subject  to enforcement provisions if the facility's seasonal mass loading of total
       phosphorus exceeds the applicable discharge limitations outlined in (a) (1) and (2) above.

     5. Credits may be generated and used only between June 1-September 30.
Water Quality Trading Scenarios
 Point Source
 Credit Exchange    Credit Exchange  Trade      Components of a NPOES Permit
            Administration  Agreements
                                               Permit Cover Page
                                                         Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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                                                 Water Quality Trading Scenario: Point Source Credit Exchange
                     Flowing River Example: Effluent Limitations (continued)

     Table 1. Seasonal mass loading effluent limitations for TP
Discharger
Chuck's Potash
Company
Green and Go
Fertilizers
Shag Rug, Inc.
Troyville POTW
Alpha Limited
Units
Ibs
Ibs
Ibs
Ibs
Ibs
June 1-September 30
Seasonal mass loading
WQBEL
(without trading)
8,000
(Baseline/WQBEL)
2,000
(Baseline/WQBEL)
1,000
(Baseline/WQBEL)
8,000
(Baseline/WQBEL)
500
(Baseline/WQBEL)
Seasonal mass loading
limitation
(with trading)
i
2,500 (Minimum Control Level/
Existing Discharge)
1,800 (Minimum Control
Level/TBEL)
1
1,200 (Minimum Control Level/
Existing Discharge)
     1 Trading limit = (WQBEL  pollutant loading reduction necessary to generate quantity of credits sold)
watershed but should be considered only if localized exceedances of water quality standards
are not a concern. An aggregate limitation allows individual dischargers to discharge or
trade among themselves to any degree as long as the aggregate limitation is met. An aggre-
gate effluent limit may be most appropriate in a trading scenario involving many individual
dischargers within a watershed having a  large-scale load reduction driver such as a TMDL for
the entire waterbody or a percent load reduction requirements for the watershed as a whole.
This is functionally equivalent to having a series of individual WQBELs and no trading limits.

EPA does not endorse setting a multisource aggregate limit without also including in the per-
mit individual limits for each source covered. If the group of facilities does not meet its aggre-
gate limit and an individual source does not meet its limit on its own and does not trade to
meet it, enforcement action may be taken against this individual source. This approach keeps
co-permittees under the general or watershed permit that have met their requirements free
from liability when other co-permittees are responsible for the group discharging above the
aggregate limit.

         Neuse River Basin, North Carolina
            The Neuse River Compliance Association (NRCA) general permit has an aggregate total
            nitrogen (TN) allocation, and each member of the association has an individual alloca-
            tion. If the NRCA meets the aggregate limit for the year, the NRCA and each permittee
            are in compliance. If the aggregate limit is exceeded, the NRCA is out of compliance, and
            any member that exceeds its individual TN limit is also out of compliance and subject to
            enforcement action. For more information about this trading program, see Appendix A.
Water Quality Trading Scenarios
 Point Source
 Credit Exchange
            Credit Exchange  Trade      Components of a NPDES Permit
            Administration   Agreements
                                              Permit Cover Page
                                                        Effluent Limitations  Monitoring   Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          Pollutant form. Units of Measure, and Timing Considerations
          The permit should explicitly identify the pollutant or pollutants being traded. The permitting
          authority should ensure that the trading program or agreement and the calculated WQBELs
          are consistent in terms of the form of the pollutant, units of measure, and timing.

          For example, if the pollutant specified in the WQBEL is nitrate-nitrogen, then credits generat-
          ed under the trade agreement should be for nitrate-nitrogen and not for total Kjeldahl nitro-
          gen (TKN) or some other form. If, on the other hand, the WQBEL is for TN,  buyers and sellers
          should trade TN credits. In this case, a discharger may be required to measure TN. If there are
          concerns about localized impacts and WQBELs are also specified for a particular form or forms
          of nitrogen, the discharger may be required to monitor TKN, nitrite, and nitrate (all expressed
          as N) and  then calculate its TN discharge.

          Also an equivalency ratio may be needed when two sources are trading pollutants such as
          TN or TP but are actually discharging different forms of nitrogen  or phosphorus (e.g., one
          discharger's phosphorus discharge is made up primarily of biologically available phosphorus,
          while its trading partner's discharge is primarily composed of bound phosphorus). An equiva-
          lency ratio may also be needed in cross-pollutant trading of oxygen demanding pollutants
          (e.g., phosphorus and biochemical oxygen demand (BOD)). In this case, the equivalency ratio
          would equal the ratio between the two pollutants' impacts on oxygen demand. The trading
          program should account for any necessary equivalency ratios with regard to pollutant form
          or type; the permit writer needs to be aware of the pollutant form or type addressed in the
          trade agreement to ensure that the permit is consistent.

          In addition,  consistent reconciliation periods are essential in trading between point sources.
          The credit purchaser's permit limits for the traded pollutant and the credit seller's permit lim-
          its should  have the same units and averaging period. Because both sets of  limits are designed
          to address the same water quality problem, both should use the averaging period and units
          that make the most sense to address that problem. Consistent units and averaging periods
          will also simplify reconciliation of credit sales and purchases.
  Flowing River Example: Pollutant Form, Units of Measure,
  and Timing
     What You Need to Know...
  Pollutant: Total Phosphorus
  Driver: Newly Approved TMDL for Total Phosphorus for the Flowing River Watershed
  Point Source Credit Exchange: Flowing River Watershed Phosphorus Credit Exchange (administered
  by the state)
  Participating Facilities: Chuck's Potash Company, Green and Go Fertilizers, ShagRug, Inc., Troyville
  POTW, Alpha Limited

  Location: All facilities are less than a mile apart from each other along the Flowing River.
  Applicable Trade Ratios: None.
Water Quality Trading Scenarios
           Credit Exchange Trade      Components of a NPDES Permit
           Administration  Agreements
                                 \            Permit Cover Page I Effluent Limitations Monitoring  Reporting Requirements  Special Conditions

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                                                 Water Quality Trading Scenario: Point Source Credit Exchange
                Flowing River Example: Pollutant Form, Units of Measure,
                                                                 and Timing (continued)
   Pollutant Form
   The TMDL indicates a need for all trading partners to control phosphorus discharges. To meet the new
   WQBELs for phosphorus, several members of the Exchange will install new treatment technology to
   reduce loads beyond the 30 percent required by the TMDL and wish to sell the excess reductions in
   the form of credits to the Exchange, Other members are unable to meet the new WQBELs that will be
   in the overlay permit and are choosing to purchase phosphorus credits from the Exchange. However,
   the solubility of the phosphorus impacts the amount available biologically in the waterbody. The more
   soluble the phosphorus form, the more readily it can impact the waterbody. Therefore, trades between
   partners must account for the different solubility of various facilities' discharges.

   All members of the Exchange have monitored their effluent to determine the solubility of the phos-
   phorus discharged. The monitoring data showed that the solubility of phosphorus discharges were
   equitable among the dischargers in the Exchange; therefore, no equivalency ratio is necessary.

   Units of Measure
   The phosphorus WQBELs based on the TMDL WLA are expressed in Ibs as seasonal mass loadings to
   correspond with the units and averaging period in the TMDL. The phosphorus limits in most of the
   Exchange facilities' existing permits are also expressed in Ibs as seasonal mass loadings. The trade
   agreement also specifies Ibs as a seasonal mass loading. Annual trades will be based on seasonal mass
   loading reductions demonstrated through monitoring.

   Timing of Credits
   Credits are available beginning at the time of permit issuance. This allows 12 months before per-
   mit issuance for the Exchange to gather monitoring data to verify that the seller's technologies are
   achieving the expected treatment efficiency and will generate credits as expected after accounting
   for established ratios. These data are necessary to better understand how loading and reduction may
   vary over time. The general permit reflects these conditions. Trades will occur annually to correspond
   with seasonal mass-loading effluent limitations. The sellers will be able to continue to generate credits
   as long as the controls are properly operated and maintained, the facilities are able to demonstrate
   reductions, and the facilities do not become subject to more stringent requirements that would reduce
   or eliminate the credits (i.e., newly promulgated effluent guidelines or other more stringent technol-
   ogy-based controls, additional WQBELs to avoid localized exceedances of water quality standards).
   The ability of the sellers to continue to generate credits will be assessed during the renewal of the
   individual permits every 5 years.
Anti-backsliding, Antidegradation, and New Discharges Special
Considerations
The Trading Policy discusses anti-backsliding and antidegradation and how these provisions
can be met through trading.

Anti-backsliding
The term anti-backsliding refers to a statutory provision (CWA section 402(o)) that, in general,
prohibits the renewal, reissuance, or modification of an existing NPDES permit that contains

Water Quality Trading Scenarios
 Point Source
 Credit Exchange    Credit Exchange  Trade      Components of a NPDES Permit
            Administration  Agreements
                                              Permit Cover Page
                                                        Effluent Limitations  Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


          WQBELs, permit conditions, or standards that are less stringent than those established in the
          previous permit (USEPA 1996b). The CWA establishes exceptions to this general anti-back-
          sliding prohibition. EPA has consistently interpreted section 402(o)(1) to allow for less-strin-
          gent effluent limitations if either an exception under section 402(o)(2) or, for WQBELs, the
          requirements of section 303(d)(4) are met (USEPA 1996b). Section 402(o)(2) and 40 CFR
          122.44(1) provide exceptions for circumstances such as material and substantial alterations
          to the facility, new information, events beyond the permittee's control, and permit modifi-
          cations under other sections of the CWA. Section 303(d)(4), which applies only to WQBELs,
          allows a less-stringent WQBEL in a reissued permit when the facility is discharging to a water-
          body attaining water quality standards as long as the waterbody continues to attain water
          quality standards even after the WQBEL is relaxed. In addition, revising the limitation must
          be consistent with the state's antidegradation policy. If the discharge is to a waterbody that
          is not attaining water quality standards, a less-stringent WQBEL is allowed only when the
          cumulative effect of all revised effluent limitations results in progress towards attainment of
          water quality standards. For a detailed discussion of the anti-backsliding exceptions, see EPA's
          NPDES Permit Writers'Manual (EPA-833-B-96-003). EPA's Trading Policy states:
                EPA believes that the anti-backsliding provisions of Section 303(d)(4) of the
                CWA will generally be satisfied where a point source increases its discharge
                through the use of credits in accordance with alternate or variable water quality
                based effluent limitations contained in an NPDES permit, in a manner consistent
                with provisions for trading under a TMDL, or consistent with the provisions for
                pre-TMDL trading included in a watershed plan.

          A permit writer should simply explain in the fact sheet of the permit how the limitations  in
          the permit, after accounting for any trading provisions, are at least as stringent as the limits
          in the previous permit or, alternatively, how anti-backsliding provisions of the CWA are
          satisfied.

          Antidegradation
          As repeated throughout this document, NPDES permits may not facilitate trades that would
          result in nonattainment of an applicable water quality standard,  including the applicable
          antidegradation provisions of water quality standards. Permitting authorities should ensure
          that WQBELs developed to facilitate trade agreements accord with antidegradation provi-
          sions and that antidegradation reviews are performed when required. Nothing in the Trad-
          ing Policy per se changes how states apply their antidegradation  policies, though states may
          modify their antidegradation policies to recognize trading.

          The Trading Policy states:
                EPA does not believe that trades and trading programs will result in "lower
                water quality"
                ... or that antidegradation review would be required under EPA's regulations
                when the trades or trading programs achieve a no net increase of the pollutant
                traded and do not result in any impairment of designated uses.
Water Quality Trading Scenarios
Fint Source
:dit Exchange
Credit Exchange
Administration
Trade
Agreements
— f 	
Components of a NPOES Permit
Permit Cover Page
                                                        Effluent Limitations Monitoring  Reporting Requirements   Special Conditions

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                                                 Water Quality Trading Scenario: Point Source Credit Exchange


Special considerations for antidegradation relative to water quality trading depend on the
tier of protection applied to the waterbody as described below.

Tier 1 is the minimum level of protection under antidegradation policies. For Tier 1 waters,
the antidegradation policy mandates protection of existing instream uses. Because EPA nei-
ther supports trading activities nor allows issuance of permits that violate applicable water
quality standards, which  should protect existing uses at a minimum, any supported trading
activities incorporated into a NPDES permit should not violate antidegradation policies appli-
cable to Tier 1 waters.

Tier 2 protects waters where the existing water quality is higher than required to support
aquatic life and recreational uses. Water quality in Tier 2 waters may be lowered (only to the
level that would continue to support existing and designated uses) but only if an antidegra-
dation review finds that (1) it is necessary to lower water quality to accommodate important
social or economic development, (2) all intergovernmental and public participation provi-
sions have been satisfied, and (3) the highest statutory and regulatory requirements for point
sources and BMPs for nonpoint sources have been achieved. The Trading Policy supports trad-
ing to maintain high water quality when trading is used to compensate for new or increased
discharges. Thus, the Trading Policy supports reductions of existing pollutant loadings to
compensate for the new  or increased load so that the result is no lowering of water quality.
A state, in applying its antidegradation policy, may decide to authorize a new or increased
discharge to high-quality water and may decide to use trading to completely or partially
compensate for that increased load. If the increased  load to Tier 2 waters is only partially
compensated for by trading, an antidegradation review would be required to address the
increased load.

Tier 3 protects the quality of outstanding national resource waters and waters of exceptional
recreational or ecological significance. In general, antidegradation policies do not allow any
increase in loading to Tier 3 waters that would result in lower water quality. EPA supports
trading in Tier 3 waters to maintain water quality.


Monitoring
Permitting authorities may want to consider developing monitoring and reporting require-
ments to characterize waste streams and receiving waters, evaluate wastewater treatment
efficiency, and determine compliance with permit conditions in trade agreements. Moni-
toring and reporting conditions of a NPDES permit may contain specific requirements for
sampling location, sample collection method, monitoring frequencies, analytical methods,
recordkeeping, and reporting.  If the permit conditions include compliance with provisions in
a trade agreement, then  the permitting authority should include monitoring, record-keep-
ing and reporting requirements that facilitate compliance evaluations and, where necessary,
enforcement actions related to the trading requirements. Discharge monitoring requirements
should be consistent with the provisions of the trade agreement in terms of pollutants and
forms of pollutants monitored, reporting units, and timing. The permit provisions should
ensure that the results of discharge monitoring will be  useful to the permittees, the permit-
ting authority, and the general public in determining whether the provisions of the trade
agreement are being met.

Water Quality Trading Scenarios
 Point Source
 Credit Exchange    Credit Exchange  Trade      Components of a NPDES Permit
            Administration  Agreements
                                              Permit Cover Page Effluent Limitations
                                                                   Monitoring  Reporting Requirements  Special Conditions

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Water Quality Trading Toolkit for Permit Writers


         Sample Collection and Analysis
         The same discharge sampling location used for compliance in any existing NPDES permits
         should be used for determining compliance with effluent limitations developed for traded
         parameters. Samples collected as part of a self-monitoring program required by a NPDES
         permit must be performed in accordance with EPA-approved analytical methods specified
         in 40 CFR Part 136 (Guidelines for Establishing Test Procedures for the Analysis of Pollutants
         Under the Clean  Water Act) where Part 136 contains methods for the pollutant of concern.
         Where no Part 136 methods are available, the permit writer should specify which method
         should be used for compliance monitoring,

         Parties Responsible for Monitoring
         The trade agreement specifies the types and frequency of monitoring needed as well as the
         parties responsible for monitoring. The individual facilities are ultimately responsible to ensure
         that effluent monitoring is completed and reported to the permitting authority. Any enforce-
         ment actions for failure to monitor and report will be against the individual facilities. The
         permitting authority should ensure that sufficient monitoring is required to allow permittees,
         agency compliance personnel, and the public to gauge whether dischargers are meeting their
         individual effluent limitations and requirements under the trade agreement.

         Discharge monitoring under a multiple facility permit would be required of all individual dis-
         chargers and should be listed in the permit. If the permit is an overlay permit used to incor-
         porate water quality trading for specific pollutants, the permitting authority may establish
         certain monitoring requirements, such as monitoring location, by reference to the facility's
         individual NPDES permit for consistency. Alternatively, the permit could specifically list the
         monitoring location and requirements for each permittee or co-permittee.

         The permitting authority may consider establishing more frequent monitoring for facili-
         ties with higher design flows than those with lower design flows. Monitoring and reporting
         requirements in a multiple facility permit, such as a watershed-based permit, would be a
         combination of individual and watershed-wide requirements as described below.

         Ambient Monitoring
         Ambient monitoring is one way to show whether a trade agreement meets or improves water
         quality. In addition to traditional discharge monitoring requirements, ambient water quality
         monitoring may be appropriate at strategic locations to ensure that the trade is not creating
         localized exceedances of water quality standards and to document the performance of the
         overall trading program. Permits with mixing zones may include  monitoring requirements as
         appropriate to ensure that water quality criteria are not exceeded at the edge of the appli-
         cable mixing zone.

         General or watershed-based permits may establish a comprehensive, watershed monitor-
         ing program. For example, to fulfill monitoring requirements that are applied to multiple
         dischargers, permittees could establish a monitoring consortium to collect ambient water
         quality data that supplements end-of-pipe monitoring data required by the permit. Through
         this group-wide monitoring consortium, permittees could generate data to use  in watershed
         assessments.
Water Quality Trading Scenarios
                                                                                     Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
Components of a NPDES Permit
Permit Cover Page Effluent Limitations
Monitonng
Reporting Requirements

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                                                Water Quality Trading Scenario: Point Source Credit Exchange
   Flowing River Example: Monitoring
      What You Need to Know.,.
       Pollutant: Total Phosphorus
          Driver: Newly Approved TMDL for Total Phosphorus for the Flowing River Watershed
   Point Source Credit Exchange: Flowing River Watershed Phosphorus Credit Exchange (administered
   by the state)
   Participating Facilities: Chuck's Potash Company, Green and Go Fertilizers, Shag Rug, Inc., Troyville
   POTW, Alpha Limited

   Location: All facilities are less than a mile apart from each other along the Flowing River.

   The facilities discharging to Flowing River have existing TP monitoring requirements. The existing
   permits require monthly monitoring for TP. The overlay permit will require monitoring at the same
   locations as established in the existing permits. In addition, each discharger will be required to moni-
   tor for phosphorus weekly during June through September. For the permitting authority to gauge
   compliance, the permit writer will develop permit language that requires each discharger to submit
   monthly discharge monitoring reports (DMRs) to the permitting authority by the 15'1' of the month
   following monitoring. Ambient receiving water monitoring requirements are included in the existing
   NPDES permits and are adequate to ensure that localized exceedances of water quality standards do
   not develop as a result of trades.

   Permit Language:
     1. Each permittee shall monitor effluent total phosphorus a minimum of one time per week at
       existing discharge monitoring locations established in each facility's existing NPDES permit
       during the months of June through September. Each permittee shall determine the aver-
       age  monthly  mass loading based  on actual monthly average flow. Flow monitoring shall be
       continuous.

     2. During the remaining, off-season months, each permittee must monitor effluent total
       phosphorus at least one time per month in compliance with existing individual NPDES permit
       requirements and determine mass loading based on actual effluent flow. Each permittee
       shall monitor flow continuously.
Monitoring to Document Trades
The permitting authority should be aware of any monitoring responsibilities established in
the trading program or through the credit exchange and should ensure that the permit con-
ditions do not contradict these requirements. Where the trading program provides that the
point source conduct additional monitoring to document trades, the permit should incorpo-
rate or reference those requirements. Where the trading program provides that a third-party
conduct monitoring, the permit should also reference those requirements and clarify the
permittee's responsibilities, if any, for reporting or conducting these activities itself should
the third-party fail to fulfill its responsibilities.
Water Quality Trading Scenarios
                                                                  Monitoring  Reporting Requirements  Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
T 	
Components of a NPDES Permit
Permit Cover Page
Effluent Limitations

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Water Quality Trading Toolkit for Permit Writers


          Reporting Requirements
          Reporting requirements should be established to support the permitting authority's evalu-
          ation of water quality trading programs. For example, in addition to reporting discharge
          monitoring results, permitting authorities might require a permittee to report the number
          of credits purchased. Permitting authorities might also require an annual monitoring report  -
          specific to the pollutants involved in the trade, to provide information on annual loading in
          accordance with the requirements of the trading program. Permits incorporating water qual-
          ity trades should require reporting at a frequency appropriate to determine compliance with
          the trading provisions. Permitting authorities should consider any requirements of the trading
          programs related to reporting and ensure the permits are consistent with these requirements.
          Permits may require reporting of monitoring results at a frequency established through the
          permit on a case-by-case basis, but in no case may that frequency be less than once per year.

          Trading programs may establish other reporting and tracking requirements as well. For
          example, it is essential to have a mechanism for tracking trades. An additional form could be
          required such as a credit certificate form (see Appendix C). The permitting authority can hold
          point sources liable if they violate any trading provision included in the permit or any trade
          agreement incorporated by reference into the permit, and point sources are also liable if they
          do not meet their permit limits.

          Permitting authorities should consider establishing discharger trade reporting requirements
          to monitor trading activities and  any alternative compliance activities implemented if a facil-
          ity fails to generate credits as expected (see Special Conditions).  In addition, credit exchanges
          should consider holding surplus credits in reserve to be used to compensate for point source
          pollutant loads if a failed trade and the permitting authority may want the credit exchange
          to report the generation of these reserve credits as well.

          Data Reporting to EPA
          EPA administers two systems to store NPDES permit data and track compliance, the Permit
          Compliance System (PCS) and the new Integrated Compliance Information  System (ICIS).
          PCS  is the old, computerized management information system that contains data on NPDES
          permit-holding facilities to track the permit, compliance, and enforcement status of these
          facilities.

          The  new system, ICIS, was  deployed in June 2006 to approximately 20 states. ICIS contains
          integrated enforcement and compliance information across most of EPA's programs including
          all federal administrative and judicial enforcement actions. In addition, ICIS has the capability
          to track other activities occurring in an EPA Region  that support enforcement and compliance
          programs. These include Incident Tracking, Compliance Assistance, and Compliance Monitor-
          ing.  In the future, ICIS will  be deployed to all states, and PCS will no longer be used.

          Neither PCS nor ICIS is structured to actually track trades.

          PCS  is designed to compare actual discharge monitoring data against required effluent
          limitations to determine a  facility's compliance with its NPDES permit. To determine compli-
          ance under a trading scenario, it is necessary for the NPDES permitting authority to compare
Water Quality Trading Scenarios
                                                                         Reporting Beqairements  Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade Components of i
Agreements
NPDES Permit
Permit Cover Page
Effluent Limitations Monitoring

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                                                Water Quality Trading Scenario: Point Source Credit Exchange
   Flowing River Example: Reporting
      What You Need to Know.,.
   Pollutant: Total Phosphorus
   Driver: Newly Approved TMDL for Total Phosphorus for the Flowing River Watershed
   Point Source Credit Exchange: Flowing River Watershed Phosphorus Credit Exchange (administered
   by the state)
   Participating Facilities: Chuck's Potash Company, Green and Go Fertilizers, Shag Rug, Inc., Troyville
   POTW, Alpha Limited

   Location: All facilities are less than a mile apart from each other along the Flowing River.

   An overlay permit is being developed for permittees in the Flowing River watershed to facilitate
   trading for permittees that wish to trade through the Flowing River Phosphorus Credit Exchange
   (Exchange). In addition to their existing, individual NPDES permits, each of the trading partners have
   applied for coverage under the overlay permit. The overlay permit requires, in addition to monitoring
   reports to the permitting authority, regular reporting of any changes to the Exchange's trade agree-
   ment and reports for tracking trades. This information can be compiled by each individual permittee
   or by the Exchange but must be reported to the permitting authority.

   Because the overlay permit will contain seasonal, mass-loading effluent limitations for phosphorus for
   one particular season of the year, annual trade transactions will be necessary to maintain compliance.
   The trade agreement between the permittees and the Exchange indicates that trades will be tracked in
   an electronic trade tracking system. Credits must be used in the same period they are generated, and
   trading notification forms must be submitted to the regulatory agency by October 15.

   Permit Language:
   No trade is valid unless it is recorded in the Flowing River Phosphorus Credit Exchange electronic
   trade tracking system  or equivalent system that records all trades and generates trading notifica-
   tion forms and a summary of all trades valid between June 1 and September 30 of each year, in
   substantially the same format as forms approved by the state. The record-keeping system must
   be capable of ensuring that a particular credit is not sold to more than one trading participant.
   The trading notification forms and trading summary may be compiled by the Exchange, but each
   permittee is responsible for the submittal of all documentation and reports. Trading notification
   forms for each trade must be submitted to the  by October 15.
actual discharge monitoring data and the quantity of credits purchased or pounds sold against
required effluent limitations. For credit sellers, compliance is tracked against the WQBEL that
serves as the facility's baseline. For credit buyers, compliance is actually tracked against two
effluent limitations—the minimum control level and the baseline. The challenge in using
PCS to determine compliance under a trading scenario is that the system does not automati-
cally make adjustments to the reported actual discharge—it will not add or subtract the load
traded. Therefore, this type of adjustment must be done before entering information into PCS
so that the system has only one reported number to compare against an effluent limitation.


Water Quality Trading Scenarios
                                                                         Reporting Requirements  Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
— r 	
Components of a NPDES Permit
Permit Cover Page
Effluent Limitations Monitoring

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Water Quality Trading Toolkit for Permit Writers


          To determine compliance for a credit seller, the NPDES permitting authority will need to
          know that the sum of a credit seller's actual discharge and the number of pounds sold is less
          than or equal to the most stringent effluent limitation (i.e., the baseline). Therefore, point
          source credit sellers could report the sum of the facility's actual discharge and the number
          of pounds sold, and that amount would be entered into PCS. PCS would then compare the
          sum of the actual discharge and the number of pounds sold against the facility's baseline;
          the sum should  be  less than or equal to the facility's baseline to indicate that the facility is in
          compliance.

          Point source credit buyers not only have a baseline, but also a minimum control level (the
          facility's TBEL or current discharge, whichever is more stringent). To determine compliance for
          a credit buyer, the NPDES permitting authority will need to know that (1) the facility's actual
          discharge is less than  or equal to its minimum control level, and (2)  that the number of credits
          purchased result in the facility achieving its baseline. Therefore, point source credit buyers
          could report two types of information: (1) the facility's actual discharge, and (2) the differ-
          ence between the actual discharge and the quantity of credits purchased. Both numbers
          would be entered into PCS to determine compliance. PCS would compare the actual discharge
          against the minimum control level to determine permit compliance and eligibility as a credit
          buyer. PCS would also compare the difference between the actual discharge and the quantity
          of credits purchased against the facility's baseline; the difference should be less than or equal
          to  the WQBEL to indicate that the facility has purchased enough credits to meet its baseline
          and remain in compliance with  its WQBEL. PCS can accommodate two different effluent
          limits for the same parameter; therefore, it has  the capability to determine compliance with
          both the minimum control level  and the baseline for a credit buyer.

          ICIS also allows the NPDES permitting authority to report two limits; therefore, this system
          can also accommodate both the baseline and the minimum control  level for credit buyers.
          New DMR forms will also have two lines to report both the baseline and the minimum control
          level. Like PCS, ICIS does not actually adjust actual discharges with the load traded. Under the
          current design, ICIS will allow a facility with an existing NPDES permit to also have a trad-
          ing partner entered into the system. Once a trading partner is entered for a facility, ICIS will
          allow the entry of an  adjusted value—this is the reported actual discharge adjusted by the
          number of credits bought or sold. If an adjusted value is entered, this value is used to deter-
          mine permit violations and percent exceedances (USEPA 2006).

          In addition to challenges related to  limits and the type of information to report, NPDES per-
          mits with trading provisions might also raise issues related to reporting  periods and auto-
          mated compliance tracking. PCS will not support a reporting extension beyond 30 days. This
          type  of reporting extension might be necessary in some instances to allow adequate time for
          the administrative activities necessary for trading  partners to coordinate and reconcile trades.
          ICIS,  however, will support a 45-day reporting period. In rare instances when a permitting
          authority uses annual limits, both PCS and ICIS will allow for one limit to be monthly and  one
          to  be annual. However, the permitting authority will have  to manually flag annual limit efflu-
          ent violations for reportable noncompliance (RNC) and significant noncompliance  (SNC) to
          track compliance.
Water Quality Trading Scenarios
I Point Source
I Credit Exchange    Credit Exchange  Trade      Components of a NPDES Permit                             I
I            Administration  Agreements                                               I
I                                              Permit Cover Page  Effluent Limitations Monitoring I Reporting Requirements Special Conditions

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                                                Water Quality Trading Scenario: Point Source Credit Exchange


Special Conditions
Special conditions are developed to supplement effluent limitations guidelines and may
include requirements such as BMPs, additional monitoring activities, ambient stream surveys,
and toxicity reduction evaluations (TREs). Special conditions also include permit modification
and reopener conditions and can be used to address water quality trading or incorporate
compliance schedules (if authorized by the permitting authority). Special conditions of a
NPDES permit will be very important in incorporating the terms of a trade agreement. Even
where the specific terms of the agreement are not directly incorporated into the permit, the
special conditions will be used to refer to, and require compliance with, the trade agreement
housed in a separate document.

The special conditions included in a NPDES permit that incorporates trading will depend on
provisions of the trade agreement and the effluent limitations and monitoring and reporting
requirements established in the permit. However, the permitting authority should consider
incorporating special conditions that support the trading conditions. For example, the special
conditions of the permit may specify how and when trades may be conducted among permit-
tees or how an exceedance of an aggregate loading cap will be enforced among the permit-
tees responsible for exceeding their individual loading  limits.

Special conditions may also be used to establish provisional requirements that apply if the
credits on which the trading limits are based are unavailable. Special conditions addressing
group and individual liability, provisional requirements that apply when credits are unavail-
able or when an individual or collective limit is exceeded, and outlining the specific require-
ments for establishing trade agreements among permittees can be important in  issuing
acceptable permits that will not require modification each time circumstances change for one
of the dischargers covered under the permit.

In addition, the special conditions section of the permit could  include a compliance sched-
ule. Permit compliance schedules for WQBELs are allowed only when state water quality
standards or state regulations implementing such standards provide authority for using
compliance schedules as well as when those limits are derived from water quality standards
that were newly adopted or substantively revised after July 1, 1977. Most state water quality
standards or implementing regulations authorize using compliance schedules. If compliance
schedule authority is available, the permit writer could  place a compliance schedule in the
permit special conditions that would give the discharger time to comply with provisions relat-
ed to  WQBELs and trading when those provisions are intended to be phased in over time.
Water Quality Trading Scenarios
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
Components of a NPDES Permit
Permit Cover Page
Effluent Limitations Monitoring
Reporting Requirements
                                                                                    Special Conditions

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Water Quality Trading Toolkit for Permit Writers



  Flowing River Example: Special Conditions
     What You Need to Know...
  Pollutant: Total Phosphorus
  Driver: Newly Approved TMDL for Total Phosphorus for the Flowing River Watershed
  Point Source Credit Exchange: Flowing River Watershed Phosphorus Credit Exchange (administered
  by the state)
  Participating Facilities: Chuck's Potash Company, Green and Go Fertilizers, Shag Rug, Inc., Troyville
  POTW, Alpha Limited

  Location: All facilities are less than a mile apart from each other along the Flowing River.

  The NPDES permit writer has reviewed the signed trade agreement for TP trading between the point
  sources and the Flowing River Watershed Phosphorus Credit Exchange. The agreement describes how
  each discharger will meet its new WQBEL through trading with the Exchange. The NPDES permit
  writer has developed the appropriate effluent limitations, monitoring, and reporting requirements
  for the each discharger. The special conditions in the NPDES permit focus on general authority, credit
  definition, notification of amendment to the trade agreement, notification of unavailability of credits,
  permit reopeners and modification provisions, and enforcement liability.

  Permit Language:
  General Authority
  The permittee is authorized to participate in water quality trading with the Flowing River Water-
  shed Phosphorus Credit Exchange, as specified in the trade agreement, for the purposes of comply-
  ing with the phosphorus effluent limitations and the TMDL-related requirements of this permit
  (Table  1). The authority to use trading for compliance with these limits is derived from   and section 402 of the federal Clean Water Act 33 United States
  Code (U.S.C.) section 1342. EPA's policies on  Water Quality Trading (1/13/03) and Watershed-Based
  NPDES Permitting (1/7/03) endorse water quality credit trading. Additionally the Flowing River
  Phosphorus TMDL authorizes water quality trading as a means of achieving the allocations estab-
  lished by the TMDL.

  Credit Definition
  All credits used to comply with the effluent  limitations of this permit will be measured in pounds
  of total phosphorous per day on a monthly average basis. One trading credit will be defined as one
  (1) unit of pollutant reduction (pound of total phosphorus) to Flowing River. All valid credits are
  tradable. The permittee may purchase credits from or sell credits to the Exchange so long as the
  treatment technologies used to generate credits are documented as providing pollutant reductions
  beyond the wasteload allocations established for the credit exchange members in the Flowing
  River Phosphorus TMDL.

  Notification of Amendment to the Trade Agreement
  The permittee is required to notify the permitting authority in writing within 7 days of the Flow-
  ing River Watershed Phosphorus Credit Exchange Trade Agreement being  amended, modified, or
Water Quality Trading Scenarios
                                                                                    Special Conditions
Point Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
—w 	
Components of a NPDES Permit
Permit Cover Page Effluent Limitations Monitoring
Reporting Requirements

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                                               Water Quality Trading Scenario: Point Source Credit Exchange
                      Flowing River Example: Special Conditions (continued)

   revoked. This notification must include the details of any amendment or modification in addition
   to the justification for the change(s).

   Notification of Unavailability of Credits
   The permittee is required to notify the permitting authority in writing within 7 days of becom-
   ing aware that credits used  or intended for use by the permittee to comply with the terms of this
   permit are unavailable or determined to be invalid. This notification must include an explanation
   of how the permittee will ensure compliance with the WQBELs established in this permit, either
   through implementation of on-site controls or by conducting an approved emergency phosphorus
   offset project approved  by the NPDES permit writer.

   Permit Reopeners, Modification Provisions
   The permitting authority may, for any reason provided by law, summary proceedings or otherwise,
   revoke or suspend this permit or modify it to establish any appropriate conditions, schedules of
   compliance, or other provisions which may be necessary to protect human health or the environ-
   ment or to implement the Flowing River phosphorus TMDL. The permitting authority may also
   reopen and modify the permit to suspend the ability to trade credits to comply with the total
   phosphorus effluent limitations in Table 1-1.

   Enforcement Liability
   The permittee is liable for meeting its most stringent effluent limitation. No  liability clauses
   contained in other legal  documents (e.g., trade agreements, contracts) established between the
   permittee and other authorized buyers and sellers are enforceable under this permit.
Water Quality Trading Scenarios
Pornt Source
Credit Exchange
Credit Exchange
Administration
Trade
Agreements
Compon
sntsofaNPDESPermit
Permit Cover Page Effluent Limitations Monitoring
Reporting Requirements
                                                                                   Special Conditions

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Water Quality Trading Toolkit for Permit Writers

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                               Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
Water Quality Trading Scenario:
Point Source-Nonpoint Source Trading
Contents

Water Quality Trading Scenario: Point Source-Nonpoint Source Trading. ...  1
  Quantifying Nonpoint Source Loads and Credits	2
     Potential Issues	2
  Establishing Baselines for Nonpoint Source Sellers	6
     Nonpoint Source Baseline Derived from TMDL Load Allocations	7
     Nonpoint Source Baseline Set at a Minimum Level of BMP Implementation	8
     Determining Maximum Feasible Nonpoint Source Load Reductions	9
  Accountability	11
     Mechanisms Under the NPDES Program	11
     Mechanisms Outside of the NPDES Program	11
  Trade Agreements	12
  Components of a NPDES Permit	15
     Permit Cover Page	15
     Effluent Limitations	16
     Monitoring	22
     Reporting  Requirements	24
     Special Conditions	27

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Water Quality Trading Toolkit for Permit Writers

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                                       Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
Water Quality Trading Scenario:
Point Source-Nonpoint Source Trading
Significant water quality impacts may come from sources other
than regulated point sources. The permitting author-
ity, along with other stakeholders, may agree that
the best way to meet water quality standards would
be to involve the nonpoint sources in the water-
shed. Because nonpoint sources are not regulated by
the Clean Water Act (CWA), a trading program that
allows nonpoint sources to generate and sell credits
may  provide an economic incentive for these sources
to implement new or additional best management
practices (BMPs) that reduce pollutant loadings to
receiving waters.
                                                            sss
                                                        point source-
                                                       nonpoint source  farm
                                               Buyer        frac|e
                                               POTW
                                           Figure 1. Point source-nonpoint source trade.
Point source-nonpoint source trades necessitate a trade agreement between one or more
point sources and one or more nonpoint sources (see Figure 1). The nonpoint source(s)
reduce pollutant loads below an established baseline to generate credits, which the point
source may purchase. Point source-npnpoint source trades would be reflected in an indi-
vidual National Pollutant Discharge Elimination System (NPDES) permit for the point source
either by referencing or incorporating the terms of the trade agreement. Through trading,
the point source can meet water quality-based effluent limitations (WQBELs) at a lower cost
and, provided there is adequate accountability and verification, the nonpoint source will be
compensated for contributing to the point source's WQBELs.

A point source may purchase nonpoint source credits in one of two ways: (1) directly from
nonpoint source(s) by coordinating with a nonpoint source or a program administered by an
entity responsible for a group of nonpoint sources dischargers; or (2) from a nonpoint source
credit exchange that contains pollutant reduction credits contributed by numerous nonpoint
sources through implementation of approved BMPs. A permitting authority should be aware
of technical challenges and uncertainty associated with nonpoint source credit generation,
including how the trading program accounts for uncertainty in measuring nonpoint source
pollutant loads and how equitable baselines are set for nonpoint source credit sellers.

This water quality trading scenario presents the challenges related to nonpoint source credit
generation and then addresses issues specific to developing and  issuing NPDES permits that
implement point source-nonpoint source trades where the point source, or an entity rep-
resenting a group of point sources, purchases credits directly from one or more nonpoint
sources. Issues covered under this scenario include the following:
    •  Quantifying nonpoint source loads and credits
    •  Establishing baselines for nonpoint source sellers
    •  Accountability
    •  Trade agreements
Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source
Quantifying
Nonpoint
Source loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
        Accountability
Trade
Agreements
Components
of aNPDES
Permit
                                                   Permit
                                                   Cover Pa
                       Effluent
                       Limitations
                                                                 Monitoring
                              Reporting
                              Requirements
Special
Conditions

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Water Quality Trading Toolkit for Permit Writers


              •  Components of a NPDES permit
                 - Permit cover page
                 - Effluent limitations
                 - Monitoring
                 - Reporting requirements
                 - Special conditions

          A hypothetical example (shown in highlighted boxes) is presented throughout this scenario
          to illustrate how NPDES permit writers might work with credit buyers and sellers to assist
          in trading and ensure each facility's NPDES permit contains the appropriate limits, require-
          ments, and other conditions. Keep in mind that there are a range of options for incorporat-
          ing trading provisions into a NPDES permit. The hypothetical example discussed throughout
          this scenario illustrates just one of the many options a NPDES permit writer might use.


          Quantifying Nonpoint Source Loads and Credits
          For most continuous point source discharges, measuring pollutant loads and the effectiveness
          of controls is simply a matter of measuring pollutant concentrations in effluent and convert-
          ing concentration-based limits to mass-based limits using flow. Conversely, as noted in the
          U.S. Environmental Protection Agency's (EPA) Water Quality Trading Policy (Trading Policy),
          the diffuse nature of nonpoint source pollutants along with variability in precipitation; land
          management practices; and the effect of soil type, slope, and cover on pollutant  loadings to
          receiving waters creates a great degree of uncertainty in determining loading from nonpoint
          sources and measuring the effectiveness of BMPs. For example, pollutant loads in runoff from
          a crop field are dependent on crop type, soil type, slope, fertilizer use patterns, weather and
          the amount of time it takes for runoff to reach the receiving water. These factors could vary
          by season and from year to year; therefore, the pollutant load is highly variable and may be
          difficult to measure. The same factors contribute to  difficulties in  measuring the effectiveness
          of BMPs used to reduce nonpoint source pollutant loads.

          Nonpoint sources typically employ BMPs to reduce pollutant loading to a receiving water.
          BMPs are schedules of activities, technologies, structural controls, changes in or prohibitions
          of practices, maintenance procedures, and other measures to prevent or mitigate pollut-
          ant runoff to waters. Examples of nonpoint source BMPs include  riparian buffer plantings,
          wetland creation or restoration, sediment basins,  filter strips, crop sequencing, and nutri-
          ent management. Nonpoint source pollutant load reductions can sometimes be  measured
          directly, but trading programs typically use the best available performance information to
          estimate load  reductions for a particular BMP and then discount these estimated values using
          uncertainty ratios to account for the technical challenges in determining BMP effectiveness.


          Potential Issues
          Lag Time
          Permitting authorities should be aware of potential time lags between BMP installation and
          full pollutant  reduction efficiency. BMPs that are not yet fully functional cannot generate
Water Quality Trading Scenarios
Point Source-
Nonpoint Source
            Quantifying    Establishing   Accountability Trade      Components
            Nenpoint     Baselines            Agreements   of a NPDES
            Source Loads   for Nonpoint                    Permit      Permit     Effluent             Reporting     Special
            and Credits    Source Sellers                           Cover Page   Limitations   Monitoring    Requirements   Conditions

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                                          Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


the full number of expected credits. Credits generated by nonpoint sources through instal-
lation of BMPs may not be available immediately because of a time lag between installation
of the BMP and its effectiveness in reducing loadings or otherwise improving water quality.
In some cases, the credit generation could be prorated on the basis of the pollutant reduc-
tion the BMP is achieving during the current reconciliation period, even where the BMP has
not reached its maximum expected pollutant reduction efficiency. The decisions required to
determine when credits have been generated may have already been made in the program
design. The permitting authority should be aware of these decisions made in trading pro-
gram design.

If the trade agreement or other document external to the permit does not dictate how and
when credits become available for purchase, the NPDES permit should address the time lag
between BMP installation and full treatment efficiency (see Reporting Requirements).
                                              Proper operation and maintenance are criti-
                                              cal to ensuring the ongoing performance
                                              and attaining the expected life span of
                                              a BMP. Trading programs.should include
                                              mechanisms to ensure that BMPs installed
                                              to generate credits are being operated and
                                              maintained according to procedures and
                                              guidelines established by Natural Resources
                                              Conservation Service (NRCS), EPA, or  other
                                              agencies or product manufacturers.
Period of BMP Performance
The permitting authority should also deter-
mine whether and when a BMP's credit-gen-
erating capacity expires. Credit generation
by nonpoint sources might decrease or stop
if the BMP becomes less effective due to
a natural degeneration, a lack of mainte-
nance, or changing conditions on-site. A
BMP's life expectancy depends on proper
design, placement, and maintenance. Some
BMPs have a discrete or short life or must
be renewed. For example, nonpoint sources
must renew crop sequencing each season.
Other  BMPs have a longer life span but
require ongoing maintenance and repair to maintain effectiveness. For example, a sediment
catch basin requires periodic inspection to ensure structural integrity and regular cleaning to
remove and properly dispose  of collected sediments. In addition, activities or conditions may
change on-site affecting the efficiency of installed BMPs. For example, a vegetated buffer
strip designed to filter sediment from a 5-acre crop field may be overwhelmed and become
ineffective if the operator decided to increase the field size to 8 acres.

The permitting authority should specify in the permit the approved BMPs and associated
expected life  spans established by the trading program. Continued credit generation may
require periodic certification that a nonpoint source continues to implement a practice, that
the nonpoint source is taking specified operation and maintenance actions, and that the
BMP design and specification  are still appropriate for the site. The trading  program should
account for the life span of a credit source and determine when credits are deemed perma-
nently expired and thus unavailable for any future allocation.  Permits  implementing nonpoint
source trading can  contain or  reference provisions to require certification of BMP performance
and define when a BMP generating credits expires (see Reporting Requirements and Special
Conditions).
Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source
            Quantifying
            Nonpoint
            Source Loads
            and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
                             Accountability
Trade
Agreements
Components
of a NPDES
Permit
                                                       Permit
                                                       Cover Page
                        Effluent
                        Limitations
                                                                      Monitoring
                                Reporting
                                Requirements
Special
Conditions

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Water Quality Trading Toolkit for Permit Writers
  Lower Boise River, Idaho
    The Lower Boise trading framework addresses the issue of certifying BMP performance by having
    the NPDES point sources purchasing credits sign a Reduction Credit Certificate at the end of each
    month certifying that the BMP is still in place and that it produced a specific reduction amount
    during the month that just occurred. The NPDES buyer certifies that they are aware of the penal-
    ties for false certification by signing the Reduction Credit Certificate, which then establishes the
    credit that they can then transfer into their own account and use to cover their discharge. EPA and
    Idaho Department of Environmental Quality (Idaho DEQ) conduct random audits of some BMPs to
    determine if the certification was valid. For more information on trading in Idaho, see Appendix A.

          Uncertainty
          EPA's Trading Policy recommends that states and tribes establish methods to account for
          greater uncertainties in estimates of nonpoint source loads and reductions (see Appendix B).
          There are three types of uncertainty related to nonpoint source BMPs:
              •  Measurement uncertainty, which addresses the level of confidence in the field testing
                 of a nonpoint source BMP
              •  Implementation uncertainty, which addresses the level of confidence that a nonpoint
                 source  BMP is properly designed, installed, maintained, and operated
              •  Performance uncertainty, which addresses the risk of a BMP failing to  produce the
                 expected results

          Options for Addressing Uncertainty
          Uncertainty  Ratios
          The application of an uncertainty ratio helps ensure that actual loads resulting from a trade
          do not violate the water quality standards despite the inability to accurately measure them
          (Jones 2005). An uncertainty ratio should be applied to estimated nonpoint source load
          reductions to account for any potential inaccuracies in the methodology or assumptions used
          in the estimation. Uncertainty ratios are particularly important to account for potential inac-
          curacies in the  estimation methodology when credits from nonpoint source BMPs are esti-
          mated or calculated.

          Uncertainty, and therefore the uncertainty ratio, can be reduced by enhancing the level of
          confidence in BMP effectiveness values through employing one or more of the following
          three practices.

          Monitoring BMP Effectiveness
          Monitoring  BMPs installed for generating credits is the most effective method for reducing
          uncertainty. Two types of monitoring are possible. In some instances, it is possible to conduct
          edge-of-field monitoring to determine BMP performance. Another type of monitoring is ambi-
          ent monitoring. Placing monitoring  gauges in the stream at strategic locations between the
          buyer and the seller would allow for gauging water quality impacts of BMPs. EPA's Monitor-
          ing Guidance for Determining Effectiveness of Nonpoint Source Controls (EPA/841-B-96-004)
          provides guidance on the design of  water quality monitoring programs to assess  both impacts
          from nonpoint sources and effectiveness of control practices and management measures.

Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source
Quantifying   Establishing   Accountability  Trade      Components
Nonpoint     Baselines             Agreements   of a NPDES
Source Loads  tor Nonpoint                    Permit      Permit    Effluent            Reporting    Special
and Credits   Source Sellers                            Cover Page  Limitations  Monitoring    Requirements  Conditions

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                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


Modeling BMP Effectiveness
Modeling that uses local data to calculate nonpoint source pollutant loadings and BMP
effectiveness is also an important tool. For instance, estimates of pollutant reductions (e.g.,
total phosphorus (TP) and sediment) might be based on soil erosion reductions using the
standardized or revised Universal Soil Loss Equation (USLE). This method incorporates soil
type, plant cover, rainfall, slope, and agricultural conservation practice factors to calculate
the soil loss from an area. The soil loss information may then be translated to estimate load-
ings of sediment-bound phosphorus. An uncertainty ratio should be applied to modeled
estimates. All modeling should  be ground truthed by local monitoring data, which could
lead to a reduction in uncertainty.

Estimating BMP Effectiveness
Where monitoring and modeling are impracticable, BMP effectiveness can be estimated
through other means. For example, it might be possible to identify a set of tested BMPs with
performance data that have been well established through field testing or under controlled
conditions. These data may be used to estimate the reductions achieved at a nonpoint source
that installs one or more of the tested BMPs. The trading program, with input from local
soil and conservation experts, might identify a list of local BMPs that meet minimum design,
construction, maintenance, and  monitoring requirements. Preestablished performance data
can be used to estimate loading reductions for local nonpoint sources. Potential uncertainty
ratio reduction  is an advantage of implementing local BMPs with high levels of measurement
precision and accuracy.


  South  Nation River Watershed, Ontario, Canada
    The trading program established formulae that are used to calculate the amount of phosphorus
    that is controlled annually from various agricultural practices. For example, the formula used to
    calculate the amount of phosphorus (P) controlled through proper manure storage is as follows:

          Kg of P per year controlled = # of animals x animal phosphorus factor x days x 0.04
    where:
       • # of animals = the number of animals contributing manure to the area,

       • Animal phosphorus factor = U.S. Department of Agriculture's (USDA) estimates of the
        amount of phosphorus excreted per animal,

       « Days = the number of days that the animals are contributing manure to the area, and

       • 0.04 represents the assumption that approximately 4 percent of the total amount of manure
        excreted would have been transported in runoff from improperly stored manure.

    In addition to manure storage, formulae have also been established to calculate the amount of
    phosphorus controlled through use of clean water diversions, proper storage and handling of
    milkhouse washwater, preventing livestock access to watercourses, various cropping practices,
    and buffer strips (O'Grady and Wilson, no date).
Water Quality Trading Scenarios
           *
 Point Source-
 Nonpoint Source
Quantifying   Establishing   Accountability  Trade      Components
Nonpoint     Baselines             Agreements   of a NPQES
Source Loads  for Nonpoint                    Permit      Permit    Effluent             Reporting     Special
and Credits   Source Sellers                            Cover Page  Limitations  Monitoring    Requirements   Conditions

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Water Quality Trading Toolkit for Permit Writers
  The Idaho Department of Environmental Quality's Draft Pollutant Trading
  Guidance
    Idaho DEQ's November 2003 draft Pollutant Trading Guidance provides a list of approved agricul-
    tural BMPs that can be used to generate TP reduction credits for trading in the Lower Boise River
    watershed. The draft guidance document includes estimates of BMP effectiveness and uncertain-
    ty discounts for specific watersheds (the uncertainty discount is subtracted from the effective-
    ness estimate). The guidance also lists the procedures for determining the amount of credits and
    associated monitoring and maintenance requirements for each BMP. Table  1 lists selected BMPs
    approved by Idaho DEQ for use in nutrient trading in the Lower Boise River watershed. A sepa-
    rate list of watershed-specific  BMPs, along with effectiveness estimates and uncertainty ratios,
    will be generated for each watershed that would like to develop a trading program consistent with
    the Idaho Pollutant Trading Guidance. See Appendix A for more information  on trading in Idaho.
          Table 1. Selected BMPs approved for trading in the Lower Boise River watershed
BMP
Sediment basins (farm scale)
Constructed wetland
Microirrigation
Crop sequencing
Filter strips
Life span
20 years
15 years
10 years
1 season
1 season
Effectiveness
75%
90%
100%
90%
55%
Uncertainty
10%
5%
2%
10%
15%
          Establishing Baselines for Nonpoint Source Sellers
          As stated in the Essential Trading Information for Permit Writers section, a nonpoint source
          should meet the specified baseline before entering the trading market as a credit seller.
          Baseline is defined as the pollutant control requirements that apply to a buyer and seller in
          the absence of trading. After a seller meets its baseline, it can generate credits.1 A baseline for
          a nonpoint source can be derived from a load allocation (LA) established under a total maxi-
          mum daily load (TMDL). Where an LA does not exist, EPA's Trading Policy states that state and
          local requirements and/or existing practices should determine a nonpoint source's baseline
          (see Figure 2). The trading program provisions could also specify some additional minimum
          level of control that nonpoint sources would have to achieve before they could generate
          credits. The baseline level of control should never be less than existing practice. There are dif-
          ficulties associated with establishing baselines for nonpoint sources and, although permitting
          authorities may not have direct involvement in establishing these baselines, a permit writer
          should be aware of these issues and how they  might affect the trading provisions in  permits.

          To be reliable, trading programs establishing baselines for nonpoint source sellers should use
          the maximum amount of verifiable information on loadings in a watershed, such as a TMDL or
          other watershed loading analysis. Where a TMDL establishes a reliable LA for nonpoint sourc-
          es, an individual nonpoint source's portion of the LA can be used to set its trading baseline.
           Some trading programs may require a seller to implement controls beyond the baseline before generating credits.
Water Quality Trading Scenarios
 Point Source-
 Nonpoirrt Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
                 Accountability
Trade
Agreements
Components
ofaNPDES
Permit
                                                      Permit
                                                      Cover Page
                        Effluent
                        Limitations
                                                                     Monitoring
                                Reporting
                                Requirements
Special
Conditions

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                                          Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
Where a TMDL or similar analysis is not available or does not rep-
resent the most accurate information on nonpoint source loading
in the watershed, the trading program or state policy can establish
a set of minimum BMPs that a nonpoint source must  install to be
eligible for trading. The  pollutant load from the nonpoint source
after installing these BMPs would be considered the  baseline for
estimating further reductions that could then be counted as cred-
its. The permit should reference any state trading program or oth-
er document that contains the model used for estimating credits.
it is important to note that nonpoint source baselines established
using less-verifiable information on pollutant loading are likely to
have less public support and, more relevant to permit writers, may
be challenged as inconsistent with water quality standards.
                          Nonpoint Source Seller
                           Baseline for Trading
                         NFS Seller
                         With TMDL
                       Load allocation
          NPS Seller
        Without TMDL
        State and local
         requirements
        and/or existing
            practice
                   Figure 2. Nonpoint source seller
                            baseline for trading.
Nonpoint Source Baseline Derived from TMDL Load Allocations
An LA established under a TMDL defines the nonpoint source load reductions necessary to
achieve water quality standards. EPA would not support a trading program that allows non-
point sources to sell credits if the discharge is contributing to water quality impairment; there-
fore, nonpoint sources should meet their portion of the LA before generating credits to sell on
the trading market.
TMDLs might specify an LA for an individual nonpoint
source or for a category of nonpoint source dischargers
in a watershed. If established for an individual nonpoint
source (e.g., a single farm), the individual nonpoint source
should use the LA as its baseline for generating credits.
However, if the TMDL establishes an aggregate LA for a
category of nonpoint sources (e.g., all farms in a water-
shed) or all nonpoint sources on a particular tributary,
the watershed stakeholders, including the permitting
authority or trading program, need to decide how to
equitably distribute that aggregate LA among the indi-
vidual nonpoint source dischargers in a scientifically valid
manner. For example, if the LA is expressed as an overall
load reduction percentage (e.g., 25 percent reduction in
TN loading watershed-wide), the trading program might
require each nonpoint source discharger to reduce its
individual loading by that percentage before generating
credits. Alternatively, where the LA is expressed as a total
aggregate loading reduction (i.e., total pounds per day),
            EPA's Trading Policy states that where
            a TMDL is in place, the LA or other
            appropriate baseline serves as the threshold
            for nonpoint sources to generate credits.
            This does not mean that EPA requires all
            nonpoint sources in a watershed to meet
            an aggregate LA for a single nonpoint
            source to participate in trading. The Trading
            Policy's intent is that each nonpoint source
            participating in trading under a TMDL
            make reductions consistent with the LA
            before they can generate credits (additional
            reductions) for sale. This approach ensures
            that progress is made toward water quality
            standards with each trade. States have
            flexibility to set other appropriate baselines
            and can,  in fact, decide to require all
            nonpoint sources to meet the baseline
            before participating in trading.
the trading program would distribute the LA among the
individual nonpoint sources to define the baseline for each nonpoint source. The trading pro-
gram might use land cover, total production, proximity to the waterbody of concern, or some
other variable to determine the appropriate distribution of the aggregate LA among indi-
vidual nonpoint sources. The best method of distributing an aggregate LA among nonpoint
Water Quality Trading Scenarios
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers
                             Accountability
                                      Trade
                                      Agreements
Components
ofaNPDES
Permit
                                                       Permit
                                                       Cover Page
                Effluent
                Limitations
                                                                      Monitoring
Reporting     Special
Requirements   Conditions

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Water Quality Trading Toolkit for Permit Writers


          source dischargers will vary; watershed stakeholders should work together to determine the
          most appropriate method for establishing the nonpoint source baseline.

          Once the LA is equitably distributed among nonpoint sources in the watershed, an individual
          nonpoint source should reduce its load by its portion of the LA before it generates credits.
          To verify the required load reduction and quantify the credits generated after the baseline is
          met requires quantification of the nonpoint source load, either through direct monitoring or
          estimation. For more information, see the section on Quantifying Nonpoint Source Loads and
          Credits, above.


          Nonpoint Source Baseline Set at a Minimum Level of BMP
          Implementation
          In watersheds where a TMDL has not been developed, the nonpoint source baseline is
          derived from state, tribal, and local requirements. The nonpoint source should meet this
          baseline before generating credits. A trading  program can choose to require a more strin-
          gent level of BMP control before credits can be generated. In any case, the level of control
          required to generate credits should never be less than  existing practice.

          In any particular watershed, it is likely that different nonpoint sources will be at different lev-
          els or stages of BMP implementation. For example, in a watershed where animal feeding oper-
          ations (AFOs) are the primary nonpoint source pollutant contributors, some AFOs might be
          actively working with the NRCS to implement comprehensive nutrient management plans that
          minimize nutrient and sediment runoff. Other AFOs might not  have installed  any BMPs either
          because they do not participate in any NRCS programs or because they are in  the early stages
          of planning and implementation. These nonpoint source facilities might contribute a much
          greater pollutant load than those who have proactively reduced nonpoint source pollutants.
          A trading program can choose to require nonpoint sources to implement a minimum level of
          BMPs before trading to provide some level of equity among nonpoint source  credit generators
          in the watershed. In addition, implementing a minimum level of BMPs demonstrates a com-
          mitment on the part of the credit generators participating in the trading program.

          Trading programs should consider baseline equity issues among nonpoint source participants.
          EPA encourages states or trading programs to set a minimum level of BMP requirements for
          nonpoint sources before they can generate credits.

  Lower Boise River, Idaho
    In Idaho, DEQ. designates the nonpoint source baseline year (currently 1996 for the Lower Boise,
    but this may be amended on the basis of technical outcome of a pending TMDL) for each trading
    marketplace in the state. Each nonpoint source then calculates the baseline load for the baseline
    year and uses it to determine the eligibility of reductions to serve as credits for trading. In other
    words, in the Lower Boise River watershed, if a nonpoint source installed a BMP in 1999,  the farm
    would have already created eligible credits. However, pollutant reductions from a BMP installed in
    1994 would not be eligible. Nonpoint sources in Idaho are required to use the BMP List's estimating
    equation for particular BMPs (which incorporates the USDA Surface Irrigation Soil Loss (SISL) equa-
    tion) to calculate baseline loads. For more information about this trading program, see Appendix A.
Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source    Quantifying
            Nonpoint
            Source Loads
            and Credits
Establishing  Accountability  Trade      Components
Baselines            Agreements   ofaNPDES
forNonpornt                   Permit      Permit     Effluent             Reporting    Speciai
Source Sellers                           Cover Page  Limitations  Monitoring    Requirements  Conditions

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                                          Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


Where the nonpoint source baseline is set at a minimum level of BMP implementation, credits
can be generated after meeting the minimum level of control. Quantifying the credits gener-
ated will generally require quantification of the nonpoint source load after implementing the
minimum required BMPs, either through direct monitoring or estimation. For more informa-
tion, see the section on Quantifying Nonpoint Source Loads and Credits,  above. In certain
instances, it is impossible or impracticable to quantify a baseline by measuring or estimating
the nonpoint source pollutant load. In these cases, a trading program could allow nonpoint
sources to generate credits for estimated reductions from BMPs. For example,  if sufficient
data are available to establish that a particular BMP, installed under specified conditions, will
achieve a loading reduction of X Ibs/day, the nonpoint source might be allowed to generate
credits equivalent to X Ibs/day without actually having quantified the pollutant load before
installing the BMP. Trading programs should  use this approach only where sufficient data on
the efficacy of the BMPs are available to develop a reliable estimate of the expected reduc-
tions. The baseline pollutant load should always be quantified where  possible.

           Red Cedar River, Wisconsin
              TP reduction credits associated with a BMP were estimated using TP loading mod-
              els to estimate reductions from well-established and well-understood practices. Soil
              testing of each field was done to calculate the TP delivery to the stream from the field
              where the BMP was used (Breetz et al. 2004). For more information about this trading
              program, see Appendix A.


Determining  Maximum Feasible Nonpoint Source Load
Reductions
It is not feasible for a nonpoint source to control 100 percent of its pollutant runoff to a
waterbody. Therefore, it is important that some analysis be done to estimate the  maximum
amount of pollutant runoff that can be controlled from the nonpoint sources in a water-
shed. The difference between this estimate and the  nonpoint source's baseline equals the
maximum nonpoint source load reductions available for trading.2 This is a way to  ensure that
credits being  purchased result in actual reductions. This increases the  surety that the trading
program can  meet its goal of  achieving water quality standards.

A trading program can directly calculate the  maximum tradable nonpoint source load reduc-
tion for a watershed. A watershed's maximum tradable nonpoint source  load reduction can
be calculated by first determining the maximum feasible implementation of BMPs; second,
estimating the reduction from that level of BMP implementation on the basis of watershed
modeling, published BMP efficiency information, or best professional judgment (BPJ); and
finally, taking the difference between the maximum loadings reduction and the aggregate
baseline for all sellers. In addition, this calculation could be done for an individual farm.
2 The maximum tradable nonpoint source load reduction is not equal to the maximum number of credits available for
 trading in a watershed because of the impact of trading ratios. Because trading ratios can vary depending on many
 factors (as described in the Developing Trade Ratios section), determining the maximum number of credits is not
 as useful as determining the maximum tradable nonpoint source load reduction for the purpose of ensuring that
 every trade results in a reduction of total load to the waterbody.
Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source   Quantifying
            Nonpoint
            Source Loads
            and Credits
Establishing   Accountability  Trade      Components
Baselines            Agreements   of a NPDES
for Nonpoint                    Permit      Permit    Effluent             Reporting    Special
Source Sellers                            Cover Page  Limitations  Monitoring    Requirements  Conditions

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Water Quality Trading Toolkit for Permit Writers


          The trading program may want to include a mechanism for ensuring that this maximum trad-
          able nonpoint source load reduction is not exceeded. This could be done, for example, by
          specifying the maximum tradable nonpoint source load reductions in the program documen-
          tation and then tracking credit sales, and therefore load reductions, by nonpoint sources to
          ensure that this maximum is not exceeded.
  Pennsylvania's Tradable Loads for Addressing the Chesapeake Bay's
  Tributary Strategies
    In 2003, EPA developed a document titled The Technical Support Document for the Identification
    of Chesapeake Bay Designated Uses and Attainability to help states develop and adopt refined
    water quality standards to address nutrient- and sediment-based pollution in the Chesapeake
    Bay and its tidal tributaries. As part of this analysis, the Chesapeake Bay Program developed
    four nutrient reduction scenarios based on different levels of BMP and control technology
    implementation by 2010. The levels ranged from current implementation to "everything,
    everywhere, by everybody" (E3) which approximates the maximum nutrient and sediment
    load reductions available in the watershed. To create the most objective and uniform maxi-
    mum implementation level possible, the E3 scenario was developed without considering site-
    specific constraints and program participation levels. If these factors were considered, certain
    aspects of the E3 scenario may not be feasible. Nutrient and sediment loads resulting from
    each nutrient reduction scenario were  estimated using the Chesapeake Bay Program's Phase
    4.3 Watershed Model. For example, the estimated loadings for the E3 scenario for Pennsylva-
    nia agriculture were 21,153,000 Ibs TN/yr and 1,896,000 Ibs TP/yr. (More information on the
    development of the E3  scenario is available in Appendix A of the Technical Support Document
    available at: www.chesapeakebay.net/uaasupport.htm)
    Recognizing that model estimates based on the E3 scenario likely overestimated the maximum
    feasible nutrient and sediment load reductions, Pennsylvania made adjustments to the estimates
    to better represent a feasible effort. One adjustment was reducing by 10 percent the level of
    nonpoint source reductions estimated in the E3 scenario. The selection of a 10 percent reduction
    is subjective, since estimates of the feasible level of implementation for nonpoint source BMP
    implementation vary widely. Additionally, Pennsylvania estimated the reductions for those BMPs
    in Pennsylvania's Tributary Strategy that were not included in  the E3 scenario. These additional
    reductions were included in the revised  E3 scenario. The estimated loadings for the revised
    scenario for agriculture  were 21,819,000 Ibs TN/yr and 1,726,000 Ibs TP/yr. After adjusting the
    E3 scenario estimates, Pennsylvania estimated the maximum allowable credits as the difference
    between the load estimates from the revised E3 scenario and the Pennsylvania Tributary Strat-
    egy loadings goal. The Tributary Strategy loads for agriculture were 27,580,000 Ibs TN/yr and
    2,123,000 Ibs TP/yr yielding final tradable loads of 5,760,000 Ibs TN/yr and 397,000 Ibs TP/yr.
    The scenario values and the tradable load values will change as new BMPs are developed or the
    efficiencies of existing BMPs are revised.
Water Quality Trading Scenarios
Point Source-
Nonpoint Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
                            Accountability
                                     Trade
                                     Agreements
Components
ofaNPDES
Permit
                                                     Permit
                                                     Cover Page
                Effluent
                Limitations
                                                                   Monitoring
Reporting     Special
Requirements   Conditions

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                                        Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


Accountability

Mechanisms Under the NPDES Program
EPA's Trading Policy notes that "States and tribes should establish clear enforceable mecha-
nisms consistent with NPDES regulations that ensure legal accountability for the generation
of credits that are traded."

Such enforceable mechanisms might include, among other things, requirements for water
quality or effluent monitoring, credit purchase and sale accounting, and assessment of BMP
effectiveness. These mechanisms might be contained in state regulations, the project trade
agreement, or both. By incorporating such accountability provisions of the trade agreement
(or the entire trade agreement) into a NPDES permit, the state or tribe makes the point
source legally responsible for their performance.

EPA's Trading Policy also states that "In the event of default by another source generating
credits, an NPDES permittee using those credits is responsible for complying with the effluent
limitations that  would apply if the trade had not occurred."

To account for the possibility of a failed trade (e.g., insufficient generation of necessary cred-
its by the seller), EPA recommends that the permit (and any accompanying trade agreement)
clearly describe  the respective responsibilities and legal liability (if any) of the buyer and the
seller (see Special Conditions).


Mechanisms Outside the NPDES Program
To further clarify and protect their interests, the trading parties may choose to enter into a
contract or other agreement separate from any applicable  NPDES permit. Such a contract or
agreement could, where appropriate, address a variety of financial or legal considerations
and contingencies among the trading parties, including what happens in the case of default
by any party. For example, the point source buyer might use such a contract to memorialize
an agreement that the credits it needs are available, and the nonpoint source seller might use
such a contract to guarantee payment for its services.
         Great Miami River Watershed, Ohio
           After a soil and water conservation district's proposal is approved, the Miami Conser-
           vancy District (MCD, the broker of the program) enters into a contract with the successful
           soil and water conservation district for project implementation. The soil and water conser-
           vation district then enters into a project agreement with the nonpoint source responsible
           for implementing the BMPs. MCD tracks the credits generated and allocates them to the
           buyers. A separate Load Reduction Workgroup will evaluate the accuracy of reduction
           estimates every two years. For more information on this program, see Appendix A.
Water Quality Trading Scenarios
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
                            Accountability  Trade
                                     Agreements
Components
of a NPDES
Permit
                                                     Permit
                                                     Cover Page
                Effluent
                Limitations
                                                                   Monitoring
Reporting
Requirements
Special
Conditions

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Water Quality Trading Toolkit for Permit Writers


          Trade Agreements
          Typically, the terms that govern a trading program will be developed outside the NPDES per-
          mit process and can be incorporated or reflected in the permit (see Appendix C). The Trading
          Policy describes several mechanisms for implementing trading through NPDES permits (see
          Appendix B). NPDES permits authorizing water quality trading should reference any existing
          trade agreement in the permit fact sheet. The permit writer may also incorporate specific
          provisions of the agreement as appropriate (e.g., shared responsibilities for conducting ambi-
          ent monitoring)  into the permit.

          All trade agreements referenced in NPDES fact sheets and permits should meet certain
          minimum standards to help ensure the trades authorized by the permit are consistent with
          water quality standards. At a minimum, the trade agreement should be a written agree-
          ment, signed and dated by authorized representatives of all trading partners. Verbal trade
          agreements should not be referenced in NPDES permits. The written trade agreement should
          contain sufficient detail to allow the permitting authority to determine with some degree of
          certainty that the terms of the agreement will result in loading reductions and generation
          of sufficient credits to satisfy water quality requirements. If there is no formal, outside trade
          agreement, trading can still occur; however, the permit writer will  need to more explicitly
          describe the trading program in the fact sheet and authorize specific aspects of the trad-
          ing program as permit conditions. Trading partners can specify the details pertaining to the
          negotiated terms of the trade (e.g., credit price, payment schedule, consequences for failure
          to fulfill negotiated terms) in a separate, written and signed contract.
  Wells River Example: Trade Agreements
     What You Need to Know...
       Pollutant:  Total Phosphorus
          Driver:  Approved TMDL for Total Phosphorus for Wells River
    Credit Seller:  Patterson Soybean and Corn Farm (3,000 acres)

      •  Estimated Phosphorus Load from Farm with No BMPs:
         6,000 Ibs/yr (2 Ibs/ac/yr of TP x 3,000 acres)

      •  Estimated Phosphorus Load Reduction from Current BMPs (500 Acres under
         Conservation Tillage): 850 Ibs/yr (assumes 85 percent removal rate, or 1.7 Ibs/ac removed
         for every 2 Ibs/ac of loading; 1.7 Ibs/ac x 500 acres = 850 Ibs of TP/yr)

      •  Current TP Load: 5,150 Ibs/yr (6,000 Ibs/yr - 850 Ibs/yr = 5,150 Ibs/yr)

  Load Allocation (baseline): 15 percent load reduction from current TP load or load reduction of
  772.5 Ibs/yr (0.15 x 5,150 Ibs/yr = 772.5 Ibs/yr reduction).

      •  Estimated Total Load Reduction from Planned BMPs: 3703.5 Ibs/yr
             -   Nutrient Management Planning (assumed effectiveness of 35 percent reduction from
                 current load = 1,802.5 Ibs/yr)
Water Quality Trading Scenarios
Point Sotirce-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing Accountability
Baselines for
Nonpoint
Source Sellers

Trade
Agreements



Components
of a NPDES
Permit

                                                     Permit
                                                     Cover Page
Effluent
Limitations
                                                                   Monitoring
Reporting     Special
Requirements   Conditions

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                                          Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
                           Wells River Example: Trade Agreements (continued)

                  90 foot riparian buffer zone along 20 stream miles (assumed 80 percent load reduc-
                  tion from treated area of 1,188 acres with a loading of 2 Ibs/ac; treated area is equal
                  to riparian buffer length and width, plus 400 ft of land adjacent to buffer = 20 stream
                  miles of 90 ft riparian buffer, in addition to 400 ft of adjacent land = 1,188 acres;
                  1,188 acres x 2 Ibs/ac of TP = 2,376 Ibs/yr of TP loading; 0.80 x 2,376 Ibs/yr = 1,901
                  Ibs/yr of TP load reduction from riparian buffer treated area)

       •  Load Eligible for Trading after Meeting Load Allocation as Baseline: 2,931 Ibs/yr
          (3,703.5 Ibs/yr - 772.5 Ibs/yr = 2,931 Ibs/yr; 2,931 Ibs/yr average monthly = 8 Ibs/day)
   Credit Buyer: Springtown POTW

       •  Existing TBELb: 500 Ibs/day (average monthly)

       •  Current Loading: 500 Ibs/day (average monthly)

       •  New WQBEL (based on WLAC): 475 Ibs/day (average monthly)

       •  WWTPd Treatment Capabilities: Treatment to 500 Ibs/day (average monthly)

       •  Load Reduction necessary to remain in compliance with WQBEL: 25 Ibs/day (average
          monthly)
   Notes: 3 POTW = publicly owned treatment works; b TBEL = technology-based effluent limitations;
         c WLA = wasteload allocation; A WWTP = wastewater treatment plant

   Location: Patterson Soybean and Corn Farm (credit seller) is located approximately one mile
   upstream from Springtown POTW (credit buyer) along the Wells River.

   Applicable Trade Ratios:
       •  Uncertainty Ratio: 2:1

       •  Location Ratio: Unnecessary because both sources discharge directly into Wells River

       •  Delivery Ratio: Unnecessary because of close proximity of facilities

       •  Equivalency Ratio: 2:1 because of the different solubility of phosphorus between the point
          and nonpoint sources

   The Springtown POTW is scheduled to renew its permit in 2 years. Its new permit will contain a new,
   more stringent WQBEL for TP that reflects its TMDL WLA. To meet the necessary load reduction,
   the Springtown POTW will have to purchase TP credits from a number of local nonpoint sources and
   enter into several trade agreements. The trade agreement with the Patterson Soybean and Corn Farm
   is one of four trade agreements that the Springtown POTW has with local nonpoint sources (other
   farms trading are Maybelle's Farm, U-Pick'Em Vegetable Farm, and Larry's Vegetable Coop.)

   The basic terms of the trade agreement as they pertain to Patterson Soybean and Corn Farm are as follows:
    •  Patterson Soybean and Corn Farm will implement BMPs that will result in an estimated TP load
        reduction of 3,703.5 Ibs/year; approximately 2,931 Ibs/yr will be available for trading after meet-
        ing the 15 percent load reduction baseline.
Water Quality Trading Scenarios
                                                       Permit    Effluent            Reporting    Special
                                                       Cover Page  Limitations   Monitoring    Requirements  Conditions
Point Source-
Nonpoint Source
Quantifying
Nonpoint
Source loads
and Credits
Establishing Accountability
Baselines for
Nonpuint
Source Sellers
Trade
Agreements
Components
ofaNPDES
Permit

-------
Water Quality Trading Toolkit for Permit Writers
                           Wells River Example: Trade Agreements (continued)

    • Patterson Soybean and Corn Farm guarantees this TP load reduction for a period of 5 years to
       coincide with Springtown POTW's NPDES permit term.

    • Springtown POTW will require 25 Ibs/day of TP reduction to meet its WQBEL (its WLA).

    • Springtown POTW will purchase all of Patterson Soybean and Corn Farm's load reduction eligible
       for trading of 8 Ibs/day (average monthly). However, on the basis of the 2:1 uncertainty ratio
       applied to all nonpoint source TP credits and the 2:1 equivalency ratio to account for differences
       in solubility, Springtown POTW's purchase of 8 Ibs/day from Patterson Soybean and Corn Farm is
       equal to only 2 TP credits toward its required load reduction of 25 credits/day to meet its WQBEL.

    • Patterson Soybean and Corn Farm will begin BMP implementation 12 months before the effec-
       tive date of Springtown POTW's renewed NPDES permit to ensure that BMPs are achieving
       estimated pollutant load reductions and are generating full credits.

    • Springtown POTW will enter into a memorandum of understanding with the Wells County Soil
       and Water Conservation District (SWCD) to perform monthly monitoring and inspections at
       Patterson Soybean and Corn Farm to ensure that estimated TP load reductions are achieved
       through BMP implementation. If the Wells County SWCD fails to perform this function, Spring-
       town POTW will conduct the monthly monitoring and inspections and submit the necessary
       monitoring and inspection reports.

    • Failure to fulfill the terms of this trade agreement will result in Patterson Soybean and Corn
       Farm's ineligibility to participate in future trading activities with any permitted point sources in
       the state for a period of 5 years from the time of the breach of the trade agreement terms.

  The NPDES permit writer for the facilities receives a written copy of the trade agreement that is
  signed and dated by authorized representatives of Springtown POTW and Patterson Soybean and
  Corn Farm. The permit writer reviews the written trade agreement to verify that the information
  related to baselines and estimated pollutant load reductions are accurate and do not conflict with any
  of Springtown POTW's existing NPDES permit requirements. During the permit renewal process, the
  NPDES permit writer will incorporate provisions authorizing the purchase of TP credits from non-
  point sources that enter into trade agreements with approved terms. At that time the permit writer
  will also modify Springtown POTW's effluent limitations, monitoring, reporting, and special condi-
  tions requirements to authorize the purchase of nonpoint source TP credits to achieve compliance
  with the facility's WQBEL. The permit writer will reference each written and signed trade agreement
  in the Springtown POTW NPDES permit fact sheet and attach a copy of each trade agreement as part
  of the permit's administrative record.

  In a separate contract, Springtown POTW and Patterson Soybean and Corn Farm articulate the finan-
  cial and liability conditions that they have agreed upon. Springtown will develop contracts with each
  farm it trades with. The terms of the separate contracts, which the permit writer does not ask to see
  because it has no bearing on the NPDES permit requirements for the Springtown POTW, are as follows:
    • Springtown POTW will pay Patterson Soybean and Corn Farm $16 per credit of TP reduced on a
       monthly basis, after the Wells County SWCD has verified the TP load reductions.

  Springtown POTW will follow the same process with the other farms to generate a total of 25 credits.
Water Quality Trading Scenarios
 Point Source-
 Nonpoint Source   Quantifying    Establishing   Accountability
            Nonpoint     Baselines for
            Source Loads   Nonpoint
            and Credits    Source Sellers
Trade     Components
Ajreaments  of a NPDES
        Permit      Permit    Effluent             Reporting    Special
                 Cover Page  Limitations  Monitoring    Requirements  Conditions

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                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
Components of a NPDES Permit
NPDES permits that authorize water quality trading are no different than typical NPDES per-
mits in many respects—they require the same structure, analyses, and justification. All per-
mits have five basic components: (1) cover page; (2) effluent limitations; (3) monitoring and
reporting requirements; (4) special conditions; and 5) standard conditions. Standard condi-
tions are the same for all NPDES permits and will not be addressed in this Toolkit. In addition,
consistent with title 40 of the Code  of Federal Regulations (CFR) section 124.6, all permits are
subject to public notice and comment. This process provides all interested parties an opportu-
nity to comment on the trading provisions in the permit.

Each NPDES permit is accompanied by a permit fact sheet. The information in these fact
sheets is not enforceable. The purpose of the fact sheet is to explain the requirements in the
permit to the public. Thus, at a minimum, the fact sheet should explain any trading provisions
in the permit. There is a wide variety of options for including trading information in the fact
sheet that ranges from explaining the minimum control level (buyer) or trading limit (seller)
to including the entire trading program.

There are a variety of issues, however, that might require special consideration when devel-
oping a permit incorporating water quality trading with nonpoint sources. Appendix E pro-
vides the permit writer with a list of fundamental questions that should be addressed during
the permit development process.


Permit Cover Page
The cover page of a NPDES permit typically contains the name and location of the
permittee(s), a statement authorizing the discharge, the specific locations for which a dis-
charge is authorized (including the name of the receiving water), and the effective period of
the permit (not to exceed 5 years). In addition, the cover page may list the pollutants regulat-
ed by the permit. For instance, the cover page of an overlay permit for TP may state that the
overlay permit addresses only TP and that other parameters are addressed in each facility's
individual permit.

The cover page also could specifically authorize trading between the permitted point source
and the nonpoint source(s) generating credits. However, whereas the cover page for a permit
that includes trading between point sources would include the specific authorized discharge
locations for each point source, because a nonpoint source is a diffuse pollutant source (e.g.,
farms, ski areas, golf courses), a permit that implements a trade with a nonpoint source trad-
ing partner might not reference a specific discharge location for the  nonpoint source involved
in the trade. The cover page could, however, simply name the nonpoint source either by
category (e.g., farms, golf courses) or by the name of the specific nonpoint source (e.g.. Rock
Creek Dairy, Rolling Hills Country Club) and provide a general description of nonpoint source
location (e.g., Hudson River at West Point).

The cover page also should address the regulation, legal authority, policy statements, plan-
ning documents and the trade agreement that support trading between point and nonpoint
Water Quality Trading Scenarios
                                                      Permit    Effluent             Reporting     Special
                                                      Cover Page  Limitations  Monitoring    Requirements   Conditions
Point Source-
Nonpoint Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
Accountability Trade
Agreements
Components
of 3 NPDES
Permit

-------
Water Quality Trading Toolkit for Permit Writers


          sources in the Authority section of the cover page. If the state has issued regulations or policy
          documents authorizing water quality trading, the permit writer should reference these. For
          example, if trading is considered a water-quality management tool in the state's Water Qual-
          ity Management Plan, this may establish authority for integrating trading into NPDES permits
          and can be referenced on the cover page (Jones 2005).


          Effluent Limitations
          Effluent limitations are the primary mechanism for controlling the discharge of pollutants
          from point sources into receiving waters. When developing a permit, the permitting author-
          ity focuses much of its effort on deriving appropriate effluent limitations. As in all NPDES
          permits, permits that include trading must include any applicable TBELs, or the equivalent
          and, where necessary, WQBELs, that are derived from and comply with allapplicable technol-
          ogy and water quality standards. Furthermore,  limits must be enforceable, and the process
          for deriving the limits should be scientifically valid and transparent.

          EPA's 2003 Trading Policy does not support trading to meet TBELs unless trading is specifically
          authorized in the categorical effluent limitation guidelines on which the TBELs are based.
          Applicable TBELs thus serve as the minimum control level below which the buyer's treatment
          levels cannot fall. This section discusses the overarching principles of how to express all appli-
          cable effluent limitations in permits  for dischargers participating  in water quality trades.

          Credit Buyers
          Permits for credit buyers should include both the baseline, which  is the WQBEL that defines
          the level of discharge the buyer would have to meet through treatment when not trading,
          and a minimum control level that must be achieved through treatment when trading. The
          permit should also include the amount of pollutant load to be offset (minimum control level
          - baseline) through credit purchases when trading. Most often, the applicable TBEL will serve
          as the minimum control level. A permitting authority can choose to impose a more stringent
          minimum control level than the TBEL to prevent  localized exceedances of water quality stan-
          dards near the point of discharge, but  not one that is less stringent than the TBEL. In a NPDES
          permit or fact sheet, the effluent limitations for a credit buyer could be described as follows:
              •  The Discharger must meet, through treatment or trading, a mass-based effluent limi-
                 tation for Pollutant A of , but at no time shall the maximum mass discharge of Pollutant A
                 during  exceed the minimum control level of 
-------
                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
   Wells River Example: Effluent Limitations
      What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus for Wells River
   Credit Seller: Patterson Soybean and Corn Farm (3,000 acres)
     • Estimated Phosphorus Load from Farm with No BMPs:
       6,000 Ibs/yr (2 Ibs/ac/yr of TP x 3,000 acres)

     • Estimated Phosphorus Load Reduction from Current BMPs (500 Acres Under Conser-
       vation Tillage): 850 Ibs/yr (assumes 85 percent removal rate, or 1.7 Ibs/ac removed for every
       2 Ibs/ac of loading; 1.7 Ibs/ac x 500 acres = 850 Ibs of TP/yr)

     • Current TP Load: 5,150 Ibs/yr (6,000 Ibs/yr - 850 Ibs/yr = 5,150 Ibs/yr)

     • Load Allocation (baseline): 15 percent load reduction from current TP load or load reduction
       of 772.5 Ibs/yr (0.15 x 5,150 Ibs/yr = 772.5 Ibs/yr reduction)

     • Estimated Total Load Reduction from Planned BMPs: 3703.5 Ibs/yr

     • Load Eligible for Trading after Meeting Load Allocation as Baseline: 2,931 Ibs/yr
       (3,703.5 Ibs/yr - 772.5 Ibs/yr = 2,931 Ibs/yr; 2,931 Ibs/yr = 8 Ibs/day average monthly)

   Credit Buyer: Springtown POTW
     m Existing TBEL: 500 Ibs/day (average monthly)
     • Current Loading: 500 Ibs/day (average monthly)
     • New WQBEL (based on WLA): 475 Ibs/day (average monthly)
     • WWTP Treatment Capabilities: Treatment to 500 Ibs/day (average monthly)
     • Load reduction necessary to remain in compliance with WQBEL: 25 Ibs/day (average monthly)

   Location: Patterson Soybean and Corn Farm (credit seller) is approximately one mile upstream from
   Springtown  POTW (credit buyer) along the Wells River.

   Applicable Trade Ratios:
     • Uncertainty Ratio: 2:1
     • Equivalency: 2 :1

   Springtown  POTW needs to purchase credits from four different nonpoint sources to account for
   a reduction of 25 Ibs/day (average monthly) to meet the new WLA. The permit will be renewed in 2
   years, which allows time for the nonpoint source BMPs at Patterson's Corn and Soybean Farm (and
   others) to be fully operational. Until that time, the existing TBEL continues to apply.

   The permit writer for Springtown POTW will include limitations that will apply in the event of trad-
   ing and limitations that will apply if no trading occurs—the WQBEL (baseline) and the  minimum
   control level if trading occurs (existing TBEL).
Water Quality Trading Scenarios
                                                             Effluent            Reporting     Special
                                                             Limitations  Monitoring    Requirements   Conditions
Point Source-
Nonpolnt Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
	 r
Accountability Trade
Agreements
Components
ofaNPDES
Permit
Permit
Cover Page

-------
Water Quality Trading Toolkit for Permit Writers
                       Wells River Example: Effluent Limitations (continued)

  Permit Language:

  Table 2. Monthly average mass loading effluent limitations for TP
Facility
Springtown POTW
Units
Ibs/day
Existing TBEL
500
WQBEL
475 (Baseline)
Effluent limitation
with trading
500 (Minimum
Control Level/TBEL)
    A. Springtown POTW is authorized to discharge total phosphorus from Outfall 001 to the Wells
       River provided the discharge meets the limitations set forth herein. Provision X of this permit
       authorizes the permittee to purchase water quality trading credits for total phosphorus from
       nonpoint sources within the Wells River watershed that meet baseline requirements before
       trading.

    B. The discharge from Outfall 001 shall comply with the monthly mass loading of total phospho-
       rus established by either a. or b.:

       a. The WQBEL set forth in Table 2; or,

       b.  The Effluent Limitation with Trading set forth in Table 2 provided the permittee has
          secured total phosphorus credits from Patterson's Corn and Soybean Farm and other non-
          point sources sufficient to offset any discharge in excess of the WQBEL set forth in Table
          2. The number of total  phosphorus credits required to be purchased shall be calculated as
          follows:

       Credits required = (Actual Discharge - WQBEL) x Trade ratio

       Where:
          Actual discharge = the total phosphorus load, expressed in Ibs/day as a monthly average,
          Trade ratios = 4:1 (uncertainty and equivalency)

    C. Credits purchased by the permittee may be applied only for the calendar month(s) during
       which they were generated by Patterson's Corn and Soybean Farm or other nonpoint sources.
         Pollutant Form, Units of Measure, and Timing Considerations
         The permit should explicitly identify the pollutant or pollutants being traded for which trad-
         ing is permitted. The permitting authority should ensure that the trading program or agree-
         ment and the calculated WQBELs are consistent in terms of the form of the pollutant, units of
         measure, and timing.

         For example, if the pollutant specified in the WQBEL is nitrate-nitrogen, credits generated
         under the trade agreement should be for nitrate-nitrogen and not for total Kjeldahl nitrogen
         (TKN) or some other form. If, on the other hand, the WQBEL is for total nitrogen (TN), buyers
         and sellers should trade TN credits. In this case, a discharger may be required to measure TN.
Water Quality Trading Scenarios
Point Source—
Nonpoint Source


	 f 	
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
Accountability Trade
Agreements


Components
ofaNPDES
Permit


Permit
Cover Page
Effluent
Limitations  Monitoring
                                                                            Reporting    Special
                                                                            Requirements  Conditions

-------
                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


If there are concerns about localized impacts, and WQBELs are also specified for a particu-
lar form or forms of nitrogen, the discharger may be required to monitor TKN, nitrite, and
nitrate (all expressed as N) and then calculate its TN discharge.

Also an equivalency ratio may be needed when two sources are trading pollutants such as
TN or TP but are actually discharging different forms of nitrogen or phosphorus (e.g., one
discharger's phosphorus discharge is made up primarily of soluble  phosphorus while its
trading partner's discharger is primarily non-soluble phosphorus).  An equivalency ratio may
also  be  needed in cross-pollutant trading of oxygen demanding pollutants (e.g., phosphorus
and  biochemical oxygen demand (BOD)). In this case, the equivalency ratio would equal the
ratio between the two pollutants' impacts on oxygen demand. The trading program should
account for any necessary equivalency ratios with regard to pollutant form or type; the
permit writer simply needs to be aware of the pollutant form or type addressed in the trade
agreement to ensure that the permit is consistent.
   Wells River Example: Pollutant Form, Units of Measure,
   and Timing
      What You Need to Know...
        Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus for Wells River
   Credit Seller: Patterson Soybean and Corn Farm (3,000 acres)
   Credit Buyer: Springtown POTW
   Location: Patterson Soybean and Corn Farm (credit seller) is approximately one mile upstream from
   Springtown POTW (credit buyer) along the Wells River.
   Applicable Trade Ratios:
    •  Uncertainty Ratio: 2:1
    •  Equivalency Ratio: 2:1

   Pollutant Form
   The TMDL indicates a need for Springtown POTW, the credit buyer, to control TP discharges. The
   facility will not be able to meet the new limit with current treatment capabilities. Springtown POTW
   has entered into a trading agreement with several upstream nonpoint sources (farms) that will be able
   to generate the credits it needs to meet its WQBEL based on the TMDL WLA.  The TMDL includes LAs
   for the farms (credit sellers). Each seller operation will implement BMPs necessary to reduce phos-
   phorus loads beyond the baseline requirements. With  assistance from the permitting authority, an
   equivalency ratio of 2:1 was developed to account for the difference in solubility between the point
   source and the farms.

   Units of Measure
   The WQBELs based on the TMDL WLA are expressed in Ibs/day as a monthly average to correspond
   with the units and averaging period in the TMDL. The limits in the POTW's existing permit are also
   expressed in Ibs/day as a monthly average. The TP load reductions assumed in the trading agreements
Water Quality Trading Scenarios
                                                             Effluent             Reporting    Special
                                                             Limitations  Monitoring    Requirements  Conditions
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
	 1
Accountability Trade
Agreements



Components
of a NPDES
Permit



Permit
Cover Page

-------
Water Quality Trading Toolkit for Permit Writers
                   Wells River Example: Pollutant Form, Units of Measure,
                                                                and Timing (continued)
  for the agricultural BMPs will be calculated and expressed in Ibs/day as a monthly average to deter-
  mine the number of credits they can generate to sell to the POTW.

  Timing of Credits
  Credits are available beginning at the time of permit renewal. This allows 12 months for the farms'
  BMPs to be fully implemented and 12 months to gather monitoring data to verify that the BMPs are
  achieving the expected phosphorus control efficiency and will generate credits as expected. These
  data are necessary to better understand how loading and reduction may vary over time and to develop
  monthly credit generation data to correspond with monthly average effluent limitations. Trades will
  occur monthly to correspond with monthly average effluent limitations. The farms will be able to
  continue  to generate credits as long as the nutrient management plans are  properly implemented and
  updated as necessary, they are able to demonstrate reductions, and the nonpoint source baseline does
  not change in a way that would reduce or eliminate the credits. The ability of the farms to continue to
  .generate credits will be assessed during the renewal of the POTW's permit  every 5 years.
         Anti-backsliding, Antidegradation, and New Discharges Special
         Considerations
         EPA's Trading Policy discusses anti-backsliding and antidegradation and how these provisions
         can be met through trading.

         Anti-backsliding
         The term anti-backsliding refers to a statutory provision (CWA section 402(o)) that, in gen-
         eral, prohibits the renewal, reissuance, or modification of an existing NPDES permit that con-
         tains WQBELs, permit conditions, or standards that are less stringent than those established
         in the previous permit (USEPA 1996b). The CWA establishes exceptions to this general anti-
         backsliding prohibition. EPA has consistently interpreted section 402(o)(1) to allow for less-
         stringent effluent limitations if either an exception under section 402(o)(2) or, for WQBELs,
         the requirements of section 303(d)(4) are met (USEPA 1996b). Section 402(o)(2) and 40 CFR
         122.44(1) provide exceptions for circumstances such as material and substantial alterations
         to the facility, new information, events beyond the permittee's control, and  permit modifi-
         cations under other sections of the CWA. Section 303(d)(4), which applies only to WQBELs,
         allows a less-stringent WQBEL in a reissued permit when the facility is discharging to a water-
         body attaining water quality standards as long as the waterbody continues to attain water
         quality standards even after the WQBEL is relaxed. In addition, revising the limitation must
         be consistent with the state's antidegradation policy. If the discharge is to a waterbody that
         is not attaining water quality standards, a less-stringent WQBEL is allowed only when the
         cumulative effect of all revised effluent limitations results in progress toward attainment of
         water quality standards. For a detailed discussion of the anti-backsliding exceptions, see EPA's
         NPDES Permit Writers'Manual (EPA-833-B-96-003). EPA's Trading Policy states:
                EPA believes that the anti-backsliding provisions of Section 303(d)(4) of the
                CWA will generally be satisfied where a point source increases its discharge

Water Quality Trading Scenarios
                     Establishing    Accountability  Trade     Components
                     Raselinfis fnr           Aoreemfints  of a NPOES
                                                                             Reporting     Special
                                                                             Requirements   Conditions
Point Source-
Non point Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
	 1
Accountability Trade
Agreements



Components
of a NrtJES
Permit



Permit
Cover Page


Effluent
Limitations



Monitoring

-------
                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


       through the use of credits in accordance with alternate or variable water quality
       based effluent limitations contained in an NPDE5 permit, in a manner consistent
       with provisions for trading under a TMDL, or consistent with the provisions for
       pre-TMDL trading included in a watershed plan.

A permit writer should simply explain in the fact sheet of the permit how the limitations in
the permit, after accounting for any trading provisions, are at least as stringent as the limits
in the  previous permit or, alternatively, how anti-backsliding provisions of the CWA are
satisfied.

Antidegradation
As repeated throughout this document, NPDES permits may not facilitate trades that would
result in nonattainment of an applicable water quality standard, including the applicable
antidegradation provisions of water quality standards. Permitting authorities should ensure
that WQBELs developed to facilitate trade agreements accord with antidegradation provi-
sions and that antidegradation reviews are performed when required. Nothing in the Trad-
ing Policy per se changes how states apply their antidegradation policies, though states may
modify their antidegradation policies to recognize trading.

The Trading Policy states:
       EPA does not believe that trades and trading programs will result in "lower
       water quality"
       ... or that antidegradation review would be required under EPA's regulations
       when the trades or trading programs achieve a no net increase of the pollut-
       ant traded and do not result in any impairment of designated uses.

Special considerations for antidegradation relative to water quality trading depend on the
tier of  protection applied to the waterbody as described below.

Tier  1 is the minimum level of protection under antidegradation policies. For Tier 1 waters,
the antidegradation policy mandates protection of existing instream uses. Because EPA nei-
ther supports trading activities nor allows issuance of  permits that violate applicable water
quality standards, which should protect existing uses at a minimum, any supported trading
activities incorporated into a NPDES permit should not violate antidegradation policies appli-
cable to Tier 1  waters.

Tier 2 protects waters where the existing water quality is higher than required to support
aquatic life and recreational uses. Water quality in Tier 2 waters may be lowered (only to the
level that would continue to support existing and designated uses) but only  if an antidegra-
dation review finds that (1) it is necessary to  lower water quality to accommodate important
social or economic development, (2) all intergovernmental and public participation provi-
sions have been satisfied, and (3) the highest statutory and regulatory requirements for point
sources and BMPs for nonpoint sources have been achieved. The Trading Policy supports trad-
ing to maintain high water quality when trading is used to compensate for new or increased
discharges. Thus, the Trading Policy supports reductions of existing pollutant loadings to
compensate for the new or increased load so that the  result is no lowering of water quality.
Water Quality Trading Scenarios
                                                                              Reporting     Special
                                                                              Requirements   Conditions
Point Source-
Nonpoint Source




Quantifying
Nonpamt
Source loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
	 r
Accountability Trade
Agreements



Components
of a NPDES
Permit




Permit
Cover Page



Effluent
limitations




Monitoring

-------
Water Quality Trading Toolkit for Permit Writers


          A state, in applying its antidegradation policy, may decide to authorize a new or increased
          discharge to high-quality water, and may decide to use trading to completely or partially
          compensate for that increased load. If the increased load to Tier 2 waters is only partially
          compensated for by trading, an antidegradation review would be required to address the
          increased load.

          Tier 3 protects the quality of outstanding national resource waters and waters of exceptional
          recreational or ecological significance. In general, antidegradation policies do not allow any
          increase in loading to Tier 3 waters that would result in lower water quality. EPA supports
          trading in Tier 3 waters to maintain water quality.


          Monitoring
          Permitting authorities may want to consider developing monitoring and reporting require-
          ments to characterize waste streams and receiving waters, evaluate wastewater treatment
          efficiency, and determine compliance with permit conditions in the trade agreement. Moni-
          toring and reporting conditions of a NPDES permit may contain specific requirements for
          sampling location, sample collection method, monitoring frequencies, analytical methods,
          recordkeeping, and reporting. If the permit conditions include compliance with provisions in
          a trade agreement, then the permitting authority should include monitoring, record-keep-
          ing and reporting requirements that facilitate compliance evaluations and, where necessary,
          enforcement actions related to the trading requirements. Discharge monitoring requirements
          should be consistent with the provisions of the trade agreement in terms of pollutants and
          forms of pollutants monitored, reporting units, and timing. The permit provisions should
          ensure that the results of discharge monitoring will be useful to the permittee, the permit-
          ting authority, and the general public in determining whether the  provisions of the trade
          agreement are being met. Permits that authorize point source-nonpoint source trades also
          should address the unique considerations for monitoring and reporting that will facilitate
          evaluating the effectiveness of BMPs used to generate pollutant reduction credits.

          Sample Collection and Analysis
          The same discharge sampling  location used for compliance in any existing NPDES permits
          should be used for determining compliance with effluent limitations developed for traded
          parameters. Samples collected as part of a self-monitoring program required by a NPDES per-
          mit must be performed in accordance with EPA-approved analytical methods specified in 40
          CFR Part 136 (Guidelines for Establishing Test Procedures for the Analysis of Pollutants Under
          the Clean Water Act) where Part 136 contains methods for the pollutant of concern. Where
          no Part 136 methods are available, the permit writer should specify which method the point
          source should use for compliance monitoring.

          Parties Responsible for Monitoring
          In a permit that authorizes trading between a point source(s) and one or more nonpoint
          sources, the permittee(s) will  be responsible for all of the monitoring activities that would
          normally be required in any NPDES permit. If the permit is an overlay permit covering mul-
          tiple point sources and is used to  incorporate water quality trading for specific pollutants,
          the permitting  authority may establish monitoring requirements by reference to the facility's

Water Quality Trading Scenarios
                    Establishing   Accountability   Trade     Components
                    Baselines tor            Aoreements  of a NPDES
                                                                             Reporting     Special
                                                                             Requirements   Conditions
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpomt
Source Sellers
	 1
Accountability Trade
Agreements


f 	 1 	
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations



Monitoring

-------
                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


individual NPDES permit for consistency. Alternatively, the overlay permit could specifically
list the monitoring location and requirements.

Ambient Monitoring
Ambient monitoring is one way to show whether a trade agreement meets or improves water
quality. In addition to traditional discharge monitoring requirements, ambient water quality
monitoring may be appropriate at strategic locations to ensure that the trade  is not creating
localized exceedances of water quality standards and to document the performance of the
overall trading program. Permits with mixing zones may include monitoring requirements as
appropriate to ensure that water quality criteria are not exceeded at the edge of the appli-
cable mixing zone.

BMP Monitoring and Trade Tracking
To assure that nonpoint source BMPs are performing properly, the permitting  authority
should add permit conditions specifying that a BMP  be monitored and inspected on a regu-
lar basis. The trading program itself might establish these responsibilities. In some cases,
monitoring and inspections are conducted by point sources. In other cases, a third party may
assume responsibility for BMP monitoring.

Under any of these scenarios, the permitting authority should be aware of the monitoring
and reporting responsibilities established in the trading program and should ensure that
permit conditions do not contradict these requirements. Where the trading program provides
that the point source conduct nonpoint source BMP  inspections and monitoring, the permit
should incorporate or reference those requirements. Where the trading program provides
that a third party conduct inspections and monitoring, the permit should also  reference those
requirements and clarify the  permittee's responsibilities, if any, for reporting or using the
information and data gathered through the  inspections and monitoring activities or conduct-
ing these activities itself should the third party fail to fulfill its responsibilities.

Where the trading program does not establish clear  mechanisms and responsibilities for BMP
monitoring, the permitting authority should require them of the permittee. In addition, the
permitting  authority might include a special  condition in the permit that requires either the
discharger or someone contracted  by the dischargers to conduct routine inspections to verify
that BMPs are being maintained and operated as required to retain pollutant reduction
efficiency.

Permitting authorities should consider developing  trade tracking forms and establishing dis-
charger trade reporting requirements to monitor trading activities and any alternative com-
pliance activities implemented if a  BMP fails to perform as expected (see Special Conditions).
Water Quality Trading Scenarios
Point Source-
Nonpoint Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
— 	 	 1
Accountability Trade
Agreements
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations
Monitoring
Reporting
Requirements
Special
Conditions

-------
Water Quality Trading Toolkit for Permit Writers



  Wells River Example: Monitoring
     What You Need to Know...
     •  Pollutant:  Total Phosphorus
          Driver:  Approved TMDL for Total Phosphorus for Wells River
  Credit Seller: Patterson Soybean and Corn Farm (3,000 acres)
  Credit Buyer: Springtown POTW
  Location: Patterson Soybean and Corn Farm (credit seller) is approximately one mile upstream from
  Springtown POTW (credit buyer) along the Wells River.
  Applicable Trade Ratios:
    •  Uncertainty Ratio: 2:1
    •  Equivalency Ratio: 2:1

  The facility's existing permit includes TBELs that are based on state treatment standards for TP and
  monitoring requirements for sampling the effluent monthly for TP to determine compliance. A new
  permit has been developed for the POTW, which incorporates the new effluent limits (based on the
  approved TMDL) as well as the necessary provisions and effluent limits to authorize trading.

  In the new permit, the POTW will be required to monitor for TP weekly and must submit monthly dis-
  charge monitoring reports (DMRs) year-round by the 15th of the second month following monitoring
  to the permitting authority to gauge compliance. Ambient receiving water monitoring requirements
  are included in the existing NPDES permits and are adequate to ensure that localized exceedances of
  water quality standards do not develop as a result of trades.

  Permit Language:
    •  The permittee shall monitor effluent total phosphorus a minimum of one time per week. The
       permittee shall determine the average monthly mass loading based on actual monthly aver-
       age flow. Flow monitoring shall  be continuous.
         Reporting Requirements
         The permitting authority should establish reporting requirements to support the evaluation
         of water quality trading programs. For example, in addition to reporting discharge monitor-
         ing results, permitting authorities might require a permittee to report the number of credits
         purchased. Permitting authorities might also require an annual monitoring report specific to
         the pollutants involved in the trade, to provide information on annual loading in accordance
         with the requirements of the trading program. Permits incorporating water quality trades
         should require reporting at a frequency appropriate to determine compliance with the trad-
         ing provisions. Permitting authorities should consider any requirements of the trading pro-
         grams related to monitoring and reporting and ensure the  permits are consistent with these
         requirements. Permits may require reporting of monitoring results at a frequency established
         through the permit on a case-by-case basis but in no case may that frequency be less than
         once per year.


Water duality Trading Scenarios
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
	 , 	 1
Accountability Trade
Agreements


r 	
Components
ol a NPDES
Permit



Permit
Cover Page


Effluent
Limitations Monitoring


Reporting
Requirements


Specta!
Conditions

-------
                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


Trading programs may establish other reporting and tracking requirements as well. For
example, it is essential to have a mechanism for tracking trades. An additional form could be
required such as a credit certificate form (see Appendix C). The permitting authority can hold
point sources liable if they violate any trading provision included in the permit or any trade
agreement incorporated by reference into the permit, and point sources are certainly liable if
they do not meet their permit limits.

Permit writers also might want to require verification of project installation and performance
specifications before the credits may be used, as in the example above. The permit could
include provisions requiring the point source purchaser to provide the required verification.

Data Reporting to EPA
EPA administers two systems to store NPDES permit data and track compliance, the Permit
Compliance System (PCS) and the new Integrated  Compliance Information System (ICIS).
PCS is the old, computerized management information system that contains data on NPDES
permit-holding facilities to track the permit, compliance, and enforcement status of these
facilities.

The new system, ICIS, was deployed in June 2006 to approximately 20 states. ICIS contains
integrated enforcement  and compliance information across most of EPA's programs including
all federal administrative and judicial enforcement actions. In addition, ICIS has the capability
to track other activities occurring in an EPA Region that support enforcement and compliance
programs. These include Incident Tracking, Compliance Assistance, and Compliance Monitor-
ing. In the future, ICIS will be deployed to all states and PCS will no longer be used.

Neither PCS nor ICIS is structured to actually track trades.

PCS is designed to compare actual discharge monitoring  data against required effluent
limitations to determine a facility's compliance with its NPDES permit. To determine compli-
ance under a trading scenario, it is necessary for the NPDES permitting authority to compare
actual discharge monitoring data and the quantity of credits purchased against required
effluent limitations. For credit buyers, compliance is actually tracked against two effluent
limitations—the minimum control level and the baseline. The challenge in using PCS to deter-
mine compliance under a trading scenario is that the system does not automatically make
adjustments to the reported actual discharge—it will not subtract the quantity of credits
purchased.  Therefore, this type of adjustment must be done before entering information
into PCS so that the system has only one reported number to compare against an effluent
limitation.

Point source credit buyers have a baseline and a minimum control level  (the facility's TBEL or
current discharge, whichever is most stringent). To determine compliance for a credit buyer,
the NPDES permitting authority will need to know that (1) the facility's actual discharge is
less than or equal to its minimum control level, and (2) that the number of credits purchased
results in the facility achieving its baseline. Therefore,  point source credit buyers could report
two types of information: (1) the facility's actual discharge, and (2) the difference between
the actual discharge and the quantity of credits purchased. Both numbers would be entered
Water Quality Trading Scenarios
Point Source-
Nonpoint Source
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines for
Nonpomt
Source Sellers
Accountability Trade
Agreements
T 	
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations
Monitoring
                                                                              Reporting    Special
                                                                              Requirements  Conditions

-------
Water Quality Trading Toolkit for Permit Writers



  Wells River Example: Reporting
     What You Need to Know...
       Pollutant: Total Phosphorus
          Driver: Approved TMDL for Total Phosphorus for Wells River
  Credit Seller: Patterson Soybean and Corn Farm (3,000 acres)
  Credit Buyer: Springtown POTW
  Location: Patterson Soybean and Corn Farm (credit seller) is approximately one mile upstream from
  Springtown POTW (credit buyer) along the Wells River.

  Applicable Trade  Ratios:
    •  Uncertainty Ratio: 2:1

    •  Equivalency Ratio: 2:1

  The renewed permit will require, in addition to monitoring reports, regular reporting of any changes
  to the trade agreement, and reports for tracking trades. The facility's individual permit will contain
  monthly average effluent limitations for TP; therefore, monthly trade transactions will be necessary
  to maintain compliance. The trade agreement between the dischargers indicates that trades will be
  tracked by the POTW. The trade tracking system will generate trading notification forms and monthly
  trading summaries for the entire program. Credits must be used in the  same month they are gener-
  ated, and trading notification forms must be submitted to the regulatory agency by the 15stl of the
  month following the trade.

  Permit Language:
    •  No trade is valid  unless it is recorded in the permittee's electronic trade tracking system or
       equivalent system that records all trades and generates trading  notification forms and a
       monthly summary of all trades valid for each calendar month, in substantially the same for-
       mat as forms approved by the state. Trading notification forms for each monthly trade must
       be submitted to  by the 15th day of the month following the trade.
          into PCS to determine compliance. PCS would compare the actual discharge against the
          minimum control level to determine permit compliance and eligibility as a credit buyer. PCS
          would also compare the difference between the actual discharge and the quantity of credits
          purchased against the facility's baseline; the difference should be less than or equal to the
          WQBEL to indicate that the facility has purchased enough credits to meet its baseline and
          remain in compliance with its WQBEL. PCS can accommodate two different effluent limits for
          the same  parameter; therefore, it has the capability to determine compliance with both the
          minimum control level and the baseline for a credit buyer.

          ICIS also allows the NPDES permitting authority to  report two limits; therefore, this system
          can also accommodate both the baseline and the minimum control level for credit buyers.
          New DMR forms will  also have two lines to report both the baseline and the minimum control
          level. Like PCS, ICIS does not actually adjust actual discharges with the number of credits


Water Quality Trading Scenarios

                     Establishing   Accountability  Trade     Components
                     Baselines tor           Aareements  of a NPDES
                                                                             Reporting    Special
                                                                             Requirements  Conditions
Point Source-
Nonpoint Source




Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
	 1
Accountability Trade
Agreements


F
Components
of a NPDES
Permit




Permit
Cover Page



Effluent
Limitations




Monitoring

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                                         Wate?' Quality Trading Scenario: Point Source-Nonpoint Source Trading


bought. Under the current design, ICIS will allow a facility with an existing NPDES permit to
also have a trading partner entered into the system. Once a trading partner is entered for
a facility, ICIS will allow the entry of an adjusted value for the buyer—this is the reported
actual discharge adjusted by the number of credits bought. If an adjusted value is entered,
this value is used to determine permit violations and percent exceedances (USEPA 2006).

In addition to challenges related to limits and the type of information to report, NPDES per-
mits with trading provisions might also raise issues related to reporting periods and automated
compliance tracking. PCS will not support a reporting extension beyond 30 days. This type
of reporting extension might be necessary in some instances to allow adequate time for the
administrative activities necessary for trading partners to coordinate and reconcile trades. ICIS,
however, will support a 45-day reporting period. In rare instances when a permitting authority
uses annual limits, both PCS and ICIS will allow for one limit to be monthly and one to be annu-
al. However, the permitting authority will have to manually flag annual limit effluent violations
for reportable noncompliance (RNC) and significant noncompliance (SNC) to track compliance.


Special  Conditions
Special conditions are developed to supplement effluent limitations and may include addi-
tional monitoring activities, management practices, pollution prevention requirements, ambi-
ent stream  surveys, compliance schedules (if authorized by the permitting authority), and
toxicity reduction evaluations (TREs). Special conditions also include permit modification and
reopener conditions, and can be used  to address water quality trading.  Special conditions of
a NPDES permit will be very important in incorporating the terms of a trade agreement. Even
where the specific terms of the agreement are not directly incorporated into the permit, the
special conditions will be used to refer to, and require compliance with, the trade agreement
housed in a separate document.

The special conditions included in a NPDES permit that incorporates trading will depend on
provisions of the trade agreement and the effluent limitations and monitoring and reporting
requirements established in the permit. However, the permitting authority should consider
incorporating special conditions that support the trading conditions. For example, the special
conditions of the permit may specify conditions for purchasing credits, additional monitoring
and special reporting requirements, and special conditions for failed trades.

Specifying Conditions for Purchasing Credits
As discussed above, because of the uncertainty associated with credits generated on the basis
of BMPs, permits that implement trades between point sources and nonpoint sources should
clearly reference acceptable practices and approaches to credit generation. The permitting
authority or the entity managing the trade might determine the appropriate BMPs outside
of the permit development process; however, the suite of approved BMPs or other approved
pollutant reduction approaches should be identified in the permit. The  permitting author-
ity might choose to include these conditions as part of the effluent limitations section of the
permit, or as a special condition. While the permit cannot require a nonpoint source to use a
particular BMP to generate credits, it can prohibit a point source from purchasing credits that
were not generated through use of approved BMPs.
Water Quality Trading Scenarios
                                                                                     Special
                                                                                     Conditions
Point Source-
Nonpoint Source
Quantifying
Nonpnint
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
Accountability Trade
Agreements
-f 	
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations Monitoring
Reporting
Requirements

-------
Water Quality Trading Toolkit for Permit Writers


          The special conditions that address point source-nonpoint source trading also should address
          the timing of when credits are available and when the credit source expires. As discussed
          above, continued credit generation will require periodic certification that a practice is still
          in place and that specified operation and maintenance actions are being taken. Permitting
          authorities might consider establishing monitoring and reporting requirements to ensure
          that BMPs generating credits are properly installed and maintained to continue generating
          credits. Such requirements are especially important if available credits are calculated and
          monitoring data are not required or available to verify pollutant reductions.

          Special conditions also could be used to specify the reconciliation period for credits or when
          credits may be used relative to when they are generated. Effluent limitations will dictate the
          reconciliation period, as discussed above, but special conditions can clarify the reconciliation
          period and ensure that credits are  not based on future reductions that cannot be verified,
          thus reducing the risk of noncompliance.

          Special conditions addressing liability, provisional requirements that apply when credits are
          unavailable or when a limit is exceeded, and outlining the specific requirements for establish-
          ing trade  agreements among dischargers can be important in issuing an acceptable permit
          that will not require modification each time circumstances change for  one of the dischargers
          participating in the trading program covered under the permit.
  Lower Boise River, Idaho
    The Lower Boise model uses pounds of TP as its unit of measurement and reconciles
    trade account balances monthly against the reported discharge amounts. The point
    source must sign and submit new Reduction Credit Certificates at the end of each month
    to establish the credit for that month that they can transfer to their own account using
    the Trade Notification Form. The credits can be used only to compensate for pollutant
    discharge for the same month in which they were created. The trades are monitored
    through the automated Trade Tracking System. For more information about this trading
    program, see Appendix A.
         Additional Monitoring and Special Reporting
         The permitting authority might articulate special monitoring requirements as special condi-
         tions, as described above. Additional monitoring might be required to assess the effective-
         ness of BMPs or to verify BMP installation, implementation, and maintenance. Any special
         conditions established to determine BMP effectiveness should specify who is responsible
         for conducting monitoring and inspections to verify BMP effectiveness and the accuracy of
         the trade  ratios assumed in the permit. It is important for a permitting authority to track
         permit trading activities especially for point source-nonpoint source trades, and permitting
         authorities should consider establishing special conditions that facilitate tracking. For point
         source-nonpoint source trades, the permitting authority might require the point source to
         provide additional information on the nonpoint source(s) generating the credits reported in
Water Quality Trading Scenarios
                                                                                     Special
                                                                                     Conditions
Point Source-
Nortpoint Source




Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers
1
Accountabiiity Trade
Agreements



Components
of a NPDES
Permit




Permit
Cover Page



Effluent
Limitations Monitoring



Reporting
Requirements

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                                         Water Quality Trading Scenario: Point Source-Nonpoint Source Trading


the tracking report. For instance, the permit might require the permittee to provide tracking
information, if not already specified in the permit, such as the following:
     •  Identification of nonpoint source (name, address, phone number)
     •  Type and location of BMP
     •  Monitoring method and frequency
     •  Monitoring results (actual measured quantities, or observations regarding installation
       and maintenance, at nonpoint source)
     •  Subtraction of a portion of the reported reduction amount (in pounds) to meet any
       retirement ratio requirement as specified in the trade agreement
     •  Conversion of reduction quantity to normalized measure of loading (multiply by
       trade ratio, including location or delivery ratio, equivalency ratio, and uncertainty
       ratio, where applicable)
     •  Time period for which credit is verified, per monitoring requirements for that BMP
     •  Certifying statement signed by the point source that the information provided is true,
       accurate and complete, and that the installation, maintenance, and monitoring of the
       BMP meets the requirements for that BMP as specified in the trade agreement (Idaho
       DEQ 2000)

This information could be provided to the permittee by another entity, such as a soil and
water conservation district, through a mechanism such as a memorandum of understanding.

Special Conditions for Failed Trades
The success of a trade depends on credit sellers fulfilling trade obligations. Special condi-
tions might be used to establish provisional requirements that apply if the credits needed
are unavailable and a point source is unable to comply with its calculated WQBELs on it own.
These special conditions would be included in a permit in addition to any enforcement provi-
sions. The trading program should address what degree of risk the permittee bears from pur-
chasing credits that are not delivered or are later proven invalid. The trade agreement may
describe the respective responsibilities of the buyer and the seller in the case of a failed trade.
In any case, the burden of compliance falls on the permittee. The permittee can  address the
risk of trade failure in a private contract with the seller. The permit might require the permit-
tee to notify the permitting authority when a trade fails and how and when it will-either
secure credits from an alternate source or comply with the calculated WQBELs established  in
the permit. Monthly reconciliation minimizes risk by requiring certification from buyers and
sellers on a monthly basis.

Finally, the permitting authority may establish a mechanism for holding surplus credits in
reserve as a  means of managing the uncertainty of nonpoint source trading. All  such reserved
credits would be generated in the same time period they are used or traded. Special condi-
tions could establish the availability of credits held in reserve to the permittee and any condi-
tions placed on the permittee  if it desires to use reserved credits.
Water Quality Tiading Scenarios
Point Source-
Nonpoint Source




Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoini
Source Sellers
	 1
Accountability Trade
Agreements


f 	
Components
of a NPDES
Permit




Permit
Covef Page



Effluent
Limitations Monitoring



Reporting
Requirements
                                                                                      Special
                                                                                      Conditions

-------
Water Quality Trading Toolkit for Permit Writers


         Accountability
         Permits that cover one or more point sources buying credits from one or more nonpoint sourc-
         es generating and selling credits should explicitly state that the permitted point sources are
         responsible for meeting effluent limitations derived from water quality standards regardless
         of whether the nonpoint source trading partners comply with the terms of a trade agreement.
  Wells River Example: Special Conditions
     What You Need to Know.,.
       Pollutant:  Total Phosphorus
          Driver:  Approved TMDL for Total Phosphorus for Wells River
  Credit Seller: Patterson Soybean and Corn Farm (3,000 acres)
  Credit Buyer: Springtown POTW
  Location: Patterson Soybean and Corn Farm (credit seller) is approximately one mile upstream from
  Springtown POTW (credit buyer) along the Wells River.

  Applicable Trade Ratios:
    •  Uncertainty Ratio: 2:1

    •  Equivalency Ratio: 2:1

  The NPDES permit writer has reviewed the signed trade agreement for TP trading between the POTW
  and the farms. The agreement describes how the POTW will meet its new WQBEL through trading
  with Patterson Soybean and Corn Farm and three other farms in the watershed. The NPDES permit
  writer has developed the appropriate effluent limitations, monitoring, and reporting requirements for
  the POTW. The special conditions in the NPDES permit focus on general authority, credit definition,
  notification of amendment to the trade agreement, notification of unavailability of credits, permit
  reopeners and modification provisions, and enforcement liability.

  Permit Language:
  General Authority
  The permittee is authorized to participate in water quality trading with Patterson Soybean and
  Corn Farm, Maybelle's Farm, U-Pick'Em Vegetable Farm, and Larry's Vegetable Coop as specified in
  the written signed trade  agreements, for the purposes of complying with the phosphorus effluent
  limitations and the TMDL-related requirements of this permit (Table 2). The authority to use
  trading for compliance with these limits is derived from 
  and section 402 of the federal Clean Water Act 33 United States Code (U.S.C.) section 1342. EPA's
  policies on Water Quality Trading (1/13/03) and Watershed-Based NPDES  Permitting  (1/7/03)
  endorse water quality credit trading. Additionally the Wells River Phosphorus TMDL  authorizes
  water quality trading as a means of achieving the allocations established by the TMDL.

  Credit Definition
  Credits will be measured  in pounds of total phosphorous per day on a monthly average basis. One
  trading credit shall be defined as one (1) unit of pollutant reduction (pound of TP) to Wells River.
Water Quality Trading Scenarios
Point Source-
Nonpoint Source



Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines for
Nonpoint
Source Sellers

Accountability Trade
Agreements


T 	
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations Monitoring


Reporting
Requirements


Special
Condttic

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                                        Water Quality Trading Scenario: Point Source-Nonpoint Source Trading
                          Wells River Example: Special Conditions (continued)

   All pollutant load reductions purchased by the permittee will be in the form of equivalent TP cred-
   its that represent pollutant load reductions with the appropriate uncertainty and equivalency trad-
   ing ratios applied as detailed in the trade agreement between the permittee and nonpoint source
   trading partners. All valid credits are tradable. The permittee may purchase credits from the farms
   so long as the BMPs utilized to generate credits are documented as providing pollutant reductions
   beyond the load allocation, established in the Wells River Phosphorus TMDL.

   Permit Language (continued):
   Notification of Amendment to the Trade Agreement
   The permittee is required to notify the permitting authority in writing within 7 days of the trade
   agreement being amended, modified, or  revoked. This notification must include the details of any
   amendment or modification in addition to the justification for the change(s).

   Notification of Unavailability of Credits
   The permittee is required to notify the permitting authority in writing within 7 days of becom-
   ing aware that credits used or intended for use by the permittee to comply with the terms of this
   permit are  unavailable or determined to be invalid. This notification must include an explanation
   of how the permittee will ensure compliance with the WQBELs established in this permit, either
   through implementation of on-site controls or by conducting an approved emergency phosphorus
   offset project approved by the NPDES permit writer.

   Permit Reopeners, Modification Provisions
   The permitting authority may, for any reason provided by law, summary proceedings or other-
   wise,  revoke or suspend this permit or modify it to establish any appropriate conditions, schedules
   of compliance, or other provisions which may be necessary to protect human health or the envi-
   ronment or to implement the Wells River Phosphorus TMDL. The permitting authority may also
   reopen and modify the permit to suspend the ability to trade credits to comply with the TP efflu-
   ent limitations in Table 2.

   Enforcement Liability
   The permittee is liable for meeting its most stringent effluent limitation. No liability clauses
   contained in other legal documents (e.g.,  trade agreements, contracts) established between the
   permittee and other authorized buyers and sellers are enforceable under this permit.
Water Quality Trading Scenarios
Point Souree-
Nonpaint Source
Quantifying
Nonpomt
Source Loads
and Credits
Establishing
Baselines for
Nonpoint
Source Sellers
	 r
Accountability Trade
Agreements
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations Monitoring
Reporting
Requirements
                                                                                    Special
                                                                                    Conditions

-------
Water Quality Trading Toolkit for Permit Writers

-------
                                   Water Quality Trading Scenario: Nonpoirtt Source Credit Exchange
Water Quality Trading Scenario:
Nonpoint Source Credit Exchange
Contents

Water Quality Trading Scenario: Nonpoint Source Credit Exchange	1
  The Function of a Nonpoint Source Credit Exchange	2
     Accounting for Delivery and Location Ratios in a Nonpoint Source Credit Exchange .  . . .3
  Quantifying Nonpoint Source Loads and Credits	4
     Potential Issues	4
  Establishing Baselines for Nonpoint Source Sellers	8
     Nonpoint Source Baseline Derived from TMDL Load Allocations	9
     Nonpoint Source Baseline Set at a Minimum Level of BMP Implementation	10
     Determining Maximum Feasible Nonpoint Source Load Reductions	11
  Accountability	13
     Mechanisms Under the NPDES Program	13
     Mechanisms Outside of the NPDES Program	13
  Trade Agreements	14
     Trade Agreements with Nonpoint Source Credit Exchanges	14
  Components of a NPDES Permit	18
     Permit Cover Page	18
     Effluent Limitations	19
     Monitoring	25
     Reporting Requirements	27
     Special Conditions	30

-------
Water Quality Trading Toolkit for Permit Writers

-------
                                           Water Quality Trading Scenario: Nonpoint Source Credit Exchange


Water Quality Trading Scenario:

Nonpoint Source Credit Exchange

Significant water quality impacts may come from sources other than regulated point sources.
The permitting authority, along with other stakeholders, may agree that the best way to
meet water quality standards would be to involve the nonpoint sources in the watershed.
Because nonpoint sources are not regulated by the Clean Water Act (CWA), a trading pro-
gram that allows nonpoint sources to generate and sell credits may provide an economic
incentive for these sources to implement new or additional best management practices
(BMPs) that reduce pollutant loadings to receiving waters.

Single point source-nonpoint source trades necessitate a trade  agreement between a point
source and one or more nonpoint sources. The nonpoint source(s) reduce pollutant loads below
an established baseline to generate credits, which the point source may purchase. Single point
source-nonpoint source trades would be reflected in an individual  National Pollutant Discharge
Elimination System (NPDES) permit for the point source either by referencing or incorporating
the terms of the trade agreement. Through trading, the point source can meet water quality-
based requirements at a lower  cost and, provided there is adequate accountability and verifi-
cation, the nonpoint source will be compensated for contributing to the point source's water
quality-based requirements. A point source may purchase nonpoint source credits in one of two
ways: (1) directly from nonpoint source(s) by coordinating with a nonpoint source or a program
administered by an entity responsible for a group of nonpoint source dischargers; or (2) from
a nonpoint source credit exchange that contains pollutant reduction credits contributed by
approved nonpoint source BMPs. There are two general types of exchanges: (1) a broker-
facilitated exchange where the broker brings parties together for trades and (2) a central
exchange where the point sources are not required to deal directly with nonpoint sources.

This water quality trading scenario focuses specifically on the second type of exchange and
presents the challenges related  to nonpoint source credit generation and then addresses issues
specific to developing and issuing NPDES permits that implement  point source-nonpoint
source trades where the point source,  or an entity representing a  group of point sources,
purchases credits from a nonpoint source credit exchange. Issues covered under this scenario
include the following:
    •  The function of a nonpoint source credit exchange
    •  Quantifying nonpoint source loads and credits
    •  Establishing baselines for nonpoint source sellers
    •  Accountability
    •  Trade agreements
    •  Components of a NPDES permit
       - Permit cover page
       - Effluent limits
       - Monitoring
       - Reporting  requirements
       - Special conditions
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange
The Function of a  Quantifying   Establishing   Accountability Trade     Components
Nonpoint Source  Nonpoint    Baselines           Agreements  of a NPDES
Credit Exchange  Source Loads  for Nonpoint                  Permit    Permit   Effluent
         and Credits   Source Sellers                        Cover Page Limitations  Monitoring
                                                                             Reporting   Special
                                                                             Requirements  Conditions

-------
Water Quality Trading Toolkit for Permit Writers


          A hypothetical example (shown in highlighted boxes) is presented throughout this scenario
          to illustrate how NPDES permit writers might work with credit buyers and sellers to assist
          in trading and ensure each facility's NPDES permit contains the appropriate limits, require-
          ments, and other conditions. Keep in mind that there are a range of options for incorporat-
          ing trading provisions into a NPDES permit. The hypothetical example discussed throughout
          this scenario illustrates just one of the many options a NPDES permit writer might use.


          The Function of a Nonpoint Source Credit  Exchange
          A nonpoint source credit exchange is a centralized pool of credits established by a third-
          party who buys credits from nonpoint sources to sell to point sources (Figure 1). The
          purpose of a nonpoint source credit exchange is to allow point sources to purchase nonpoint
          source pollutant reduction credits through a credit
          exchange managed by a third party, whether
          government, private, or nonprofit. This is
          different than point source-nonpoint
          source trading, however, in that the
          point sources are not directly trading
          with nonpoint sources. Rather,
          nonpoint sources generate
          pollutant load reductions and
          sell these pollutant load
          reductions as credits to the
          credit exchange. Point
          sources may then
          purchase credits
          from the credit
          exchange rather
          than independently
          identifying and
          purchasing credits
          directly from
          nonpoint sources.
                                                           Nutrient reduction
                                        Buyer
                                        POTW
                                                        NPS Credit
                                                      -, Exchange
                                                                      $$$
                                                   Figure 1. Nonpoint source credit exchange.
          A variety of entities can establish and administer credit exchanges, including state agencies,
          local governments, nonprofit nongovernmental entities, soil and water conservation districts,
          private entities or other third parties. Management responsibilities for the credit exchange
          will vary according to the watershed and needs of the trading partners. Nonpoint source
          credit exchanges perform many of the functions that a point source and nonpoint source
          would otherwise have to perform (e.g., trade negotiations) as potential trading partners. In
          addition to negotiating the trades, the credit exchange can provide continuity by establish-
          ing standards for trading, defining credits eligible for trading, setting credit prices, verify-
          ing the operation and maintenance of BMPs, and tracking important trade information
          for all participants. A nonpoint source credit exchange might perform some or all of these
          functions,  thereby influencing the roles of the trading partners accordingly. The more respon-
          sibility that rests with the exchange, the more streamlined the process of negotiating a trade
Water Quality Trading Scenarios
          *
Nonpoint Source
Credit Exchange
          The Function of a  Quantifying   Establishing   Accountability Trade
          Nonpoint Source Nonpoint    Baselines
          Credit Exchange Source Loads  for Nonpoint
                   and Credits   Source Sellers
                                                    Components
                                            Agreements  of a NPDES
                                                    Permit    Permit    Effluent
                                                           Cover Page  Limitations  Monitoring
                                                                                 Reporting    Special
                                                                                 Requirements  Conditions

-------
                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


agreement may be for the point source and the permitting authority. The role the exchange
takes on could greatly reduce the transaction costs of trading. Given that the nonpoint source
credit exchange might perform some of these functions, the responsibilities of the permit-
ting authority and the point source trading partner pertaining to trade negotiation might be
streamlined during the permit development process.


Accounting for Delivery and Location  Ratios in a Nonpoint
Source Credit Exchange
Because the nonpoint source credit exchange is an intermediary between the credit genera-
tors and the credit users, delivery and location ratios must be accounted for by the nonpoint
source credit exchange. If the credit exchange is tracking individual credits, in other words,
if it knows which nonpoint source generated the credits that are being sold to a particu-
lar point source, a delivery ratio could be established that applies to that trade. Where all
dischargers are discharging directly to the waterbody of concern, this method of equalizing
water quality impacts of pollutant loads from various sources might be necessary.

Where the dischargers are upstream of the waterbody of concern, it might be more efficient
for the credit exchange to apply location ratios to all the credit purchases and sales that it
makes. Because the amount of reduction produced at the source is greater than  the amount
of reduction that reaches the downstream waterbody of concern, a location ratio specific
to that source is applied to convert the source's reduction to credits available at the water-
body of concern. After location ratios are applied, the credit exchange will be purchasing
and selling standardized credits for the waterbody of concern. For example, if a  nonpoint
source credit generator has a 5:1 location ratio with a downstream waterbody of concern
(i.e., for every 5 units of pollutant discharged from the nonpoint source, one unit of pollutant
reaches the waterbody of concern), the credit exchange would purchase 5 units of pollutant
reduction  from that nonpoint source for every credit that becomes available for  sale from
the exchange. Likewise, if a point source credit user has a 3:1 ratio with the waterbody of
concern, each credit purchased  by that point source would count for 3 units of end of pipe
pollutant reduction.

A permitting authority should be aware of technical challenges associated with nonpoint
source credit generation, including how the trading program accounts for uncertainty in
measuring nonpoint source pollutant loads and how equitable baselines are set for nonpoint
source credit sellers, when developing NPDES permits that implement point source-nonpoint
source trades. One benefit of using a nonpoint source credit exchange is that the entity
administering the credit exchange will have the primary responsibility for resolving these
nonpoint source, credit-generation issues. This section presents the technical challenges
related to  nonpoint source credit generation and then addresses issues specific to develop-
ing and issuing NPDES permits that implement point source-nonpoint source trades where
the point source, or an entity representing a group of point sources, purchases credits from a
nonpoint source credit exchange.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability  Trade
        Agreements
                                                   Components
                                                   of a NPDES
                                                   Permit
                                                           Permit    Effluent
                                                           Cover Page  Limitations  Monitoring
                                            Reporting   Special
                                            Requirements  Conditions

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Water Quality Trading Toolkit for Permit Writers
          Quantifying Nonpoint Source Loads and Credits
          For most continuous point source discharges, measuring pollutant loads and the effective-
          ness of controls is simply a matter of measuring pollutant concentrations in effluent and
          converting concentration-based limits to mass-based limits using flow. Conversely, as noted in
          U.S. Environmental Protection Agency's (EPA) Water Quality Trading Policy (Trading Policy),
          the diffuse nature of nonpoint source pollutants along with variability in precipitation, land
          management practices, and the effect of soil type, slope, and cover on pollutant loadings to
          receiving waters, creates a great degree of uncertainty in determining loading from nonpoint
          sources and measuring the effectiveness of BMPs. For example, pollutant loads in runoff from
          a crop field are dependent on crop type, soil type, slope, fertilizer use patterns, weather and
          the amount of time it takes for runoff to reach the receiving water. These factors could vary
          by season and from year to year; therefore, the pollutant load is highly variable and may be
          difficult to measure. The same factors contribute to difficulties in measuring the effectiveness
          of BMPs used to reduce nonpoint source pollutant  loads.

          Nonpoint sources typically employ BMPs to reduce  pollutant loading to a receiving water.
          BMPs are schedules of activities, technologies, structural controls, changes in or prohibitions
          of practices, maintenance procedures, and other measures to prevent or mitigate pollut-
          ant runoff to waters. Examples of nonpoint source BMPs include riparian buffer plantings,
          wetland creation or restoration, sediment basins, filter strips, crop sequencing, and nutri-
          ent management. Nonpoint source pollutant load reductions can sometimes be measured
          directly, but trading programs typically use the best available performance information to
          estimate load reductions for a particular BMP and then discount these estimated values using
          uncertainty ratios to account for the technical challenges in determining BMP effectiveness.

          Potential Issues
          Lag Time
          Permitting authorities should  be aware of potential time lags between BMP installation and
          full pollutant reduction efficiency. BMPs that are not yet fully functional cannot generate the
          full number of expected credits. Credits generated by nonpoint sources through installation
          of BMPs may not be available  immediately because of a time lag between installation of the
          BMP and its effectiveness in reducing loadings or otherwise improving water quality. In some
          cases, the credit generation could be prorated on the basis of pollutant reduction the BMP
          is achieving during the current reconciliation period, even where the BMP has not reached
          its maximum expected pollutant reduction efficiency. The decisions required to determine
          when credits have been generated may have already been made in the program design. The
          permitting authority should be aware of these decisions made in trading program design.

 Clean Water Services, Oregon
    Clean Water Services can compensate for the heat load from publicly owned treatment
    works (POTWs) with nonpoint sources generating credits through increased shade provided
    by riparian planting. Because trees provide more shading as they grow, a component of
    Oregon Department of Environmental Quality's (DBQ) Heat Source model is used to deter-
    mine effective shade for each project based on the year of initiation.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange  The Function of a
          Nonpoint Source
          Credit Exchange
Quantifying   Establishing   Accountability Trade      Components
Nonpoint    Baselines            Agreements  ofaNPDES
Source loads  for Nonpaint                   Permit    Permit    Effluent            Reporting    Special
and Credits   Source Sellers                         Cover Page  Limitations Monitoring    Requirements  Conditions

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


If the trade agreement or other document external to the permit does not dictate how and
when credits become available for purchase, the NPDES permit should address the time lag
between BMP installation and full treatment efficiency (see Reporting Requirements).
                                                          Proper operation and maintenance are criti-
                                                          cal to ensuring the ongoing performance
                                                          and attaining the expected life span of
                                                          a BMP. Trading programs should include
                                                          mechanisms to ensure that BMPs installed
                                                          to generate credits are being operated and
                                                          maintained according to procedures and
                                                          guidelines established by Natural Resources
                                                          Conservation Service (NRCS), EPA, or other
                                                          agencies or product  manufacturers.
Period of BMP Performance
The permitting authority should also determine whether
and when a BMP's credit generating capacity expires.
Credit generation by nonpoint sources might decrease or
stop if the BMP becomes less effective  due to a natural
degeneration, a lack of maintenance, or changing condi-
tions on-site. A BMP's life expectancy depends on proper
design, placement, and maintenance. Some BMPs have a
discrete or short life or  must be renewed.  For example,
nonpoint sources must  renew crop sequencing each sea-
son. Other BMPs have a longer life span but require ongo-
ing maintenance and repair to maintain effectiveness.
For example, a sediment catch basin requires periodic
inspection to ensure structural integrity and regular cleaning to remove and properly dispose
of collected  sediments.  In addition, activities or conditions may change on-site affecting the
efficiency of installed BMPs. For example,  a vegetated buffer strip designed to filter sediment
from a 5-acre crop field may be overwhelmed and become ineffective if the operator decided
to increase the field size to 8 acres.

The permitting authority should specify in the  permit the approved BMPs and associated
expected life spans established by the trading program. Continued credit generation may
require periodic certification that a nonpoint source continues to implement a practice, that
the nonpoint source is taking specified operation and maintenance actions, and that the BMP
design and specification are still appropriate for the site. The trading program should account
for the life span of a credit source and determine when credits are deemed permanently
expired and thus unavailable for any future allocation. Permits implementing nonpoint
source trading can contain or reference provisions to require certification of BMP perfor-
mance and define when a BMP generating credits expires (see Reporting Requirements and
Special Conditions).


         Lower Boise River, Idaho
            The Lower Boise trading framework addresses the issue of certifying BMP performance
            by having the NPDES point sources purchasing credits sign a Reduction Credit Cer-
            tificate at the end of each month,  certifying that the BMP is still in place and that it
            produced a specific reduction amount during the month that just occurred. The NPDES
            buyer certifies that they are aware of the penalties for false certification by signing that
            Reduction  Credit Certificate, which then establishes the credit that they can then trans-
            fer into their own account and use to cover their discharge. EPA and Idaho Department
            of Environmental Quality (Idaho DEQ) conduct random audits of some BMPs to deter-
            mine if the certification was valid.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Non point
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers
                                    Accountability  Trade      Components
                                            Agreements   ofaNPDfiS
                                                    Permit     Permit   Effluent
                                                           Cover Page Limitations  Monitoring
                                                                                Reporting   Special
                                                                                Requirements Conditions

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Water Quality Trading Toolkit for Permit Writers


          BMP Failure
          To address the potential inadequacy of generated credits (i.e., treatment control failure),
          credit exchanges should consider reserving credits that would be available to credit purchas-
          ers if the primary credit source is insufficient. Entities administering credit  exchanges can
          reserve credits in a number of ways. One option is for the credit exchange  to overbuy avail-
          able credits from nonpoint source BMPs approved to generate credits. Another option is to
          require point source dischargers that want the ability to purchase credits from the credit
          exchange—now or in the future—to pay a user fee to the credit exchange that will in turn
          finance additional nonpoint source BMPs approved to generate credits.

          Uncertainty
          EPA's Trading Policy recommends that states and tribes establish methods to account for
          greater uncertainties in estimates of nonpoint source loads and reductions (see Appendix B).
          There are three types of uncertainty related to nonpoint source BMPs:
              •  Measurement uncertainty, which addresses the level of confidence in the field testing
                 of a nonpoint source BMP
              •  Implementation uncertainty, which addresses the level of confidence that a nonpoint
                 source  BMP is properly designed, installed, maintained, and operated
              •  Performance uncertainty, which addresses the risk of a BMP failing to produce the
                 expected results

          Options for Addressing Uncertainty
          Uncertainty  Ratios
          The application of an uncertainty ratio helps ensure that actual loads resulting from a trade
          do not violate the water quality standards despite the inability to accurately measure them
          (Jones et al. 2005). An uncertainty ratio should be applied to estimated nonpoint source load
          reductions to account for any potential inaccuracies in the methodology or assumptions used
          in the estimation. Uncertainty ratios are particularly important to account  for potential inac-
          curacies in the  estimation methodology when credits from nonpoint source BMPs are esti-
          mated or calculated.

          Uncertainty, and therefore the uncertainty ratio, can be reduced by enhancing the level of
          confidence in BMP effectiveness values through employing one or more of the following
          three practices.

          Monitoring BMP Effectiveness
          Monitoring BMPs installed for generating credits is the most effective method  for reducing
          uncertainty. Two types of monitoring are possible. In some instances it is possible to conduct
          edge-of-field monitoring to determine BMP performance. Another type of monitoring  is
          ambient monitoring. Placing monitoring gauges in the stream at strategic  locations between
          the buyer and the seller would allow for gauging water quality impacts of BMPs. EPA's Moni-
          toring Guidance for Determining Effectiveness of Nonpoint Source Controls (EPA/841-B-96-004)
          provides guidance on the design of water quality monitoring programs to assess both impacts
          from nonpoint sources and effectiveness of control practices and management measures.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying  Establishing
Nonpoint    Baselines
Source Loads  for Nonpoint
and Credits  Source Sellers
Accountability Trade     Components
        Agreements  ofaNPDES
                Permit     Permit    Effluent
                        Cover Page Limitations  Monitoring
                                                                                  Reporting    Special
                                                                                  Requirements  Conditions

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


Modeling BMP Effectiveness
Modeling that uses local data to calculate nonpoint source pollutant loadings and BMP effec-
tiveness is also an important tool. For instance, estimates of pollutant reductions (e.g., total
phosphorus (TP)  and sediment) might be based on soil erosion reductions using the standard-
ized or revised Universal Soil Loss Equation (USLE). This method incorporates soil type, plant
cover, rainfall, slope, and agricultural conservation practice factors to calculate the soil loss
from an area. The soil loss information may then  be translated to estimate loadings of sedi-
ment-bound phosphorus. An uncertainty ratio should be applied to modeled estimates. All
modeling should be ground truthed by local monitoring data, which could lead to a reduc-
tion in uncertainty.

Estimating BMP Effectiveness
Where monitoring and modeling are impracticable, BMP effectiveness can be estimated
through other means. For example, it might  be possible to identify a set of tested BMPs with
performance data that have been well established through field testing or under controlled
conditions. These data may be used to estimate the reductions achieved at a nonpoint source
that installs one or more of the tested BMPs. The trading program, with input from local
soil and conservation experts, might identify a list of local BMPs that meet minimum design,
construction,  maintenance, and monitoring requirements. Preestablished performance data
can be used to estimate loading reductions for local nonpoint sources. Potential uncertainty
ratio reduction is an advantage of implementing  local BMPs with high levels of measurement
precision and accuracy.
  South Nation River Watershed, Ontario, Canada
    The trading program established formulae that are used to calculate the amount of phosphorus
    that is controlled annually from various agricultural practices. For example, the formula used to
    calculate the amount of phosphorus controlled through proper manure storage is:
          Kg ofP per year controlled = # of animals x animal phosphorus factor x days x 0.04
    where:
       • # of animals = the number of animals contributing manure to the area,
       * Animal phosphorus factor = U.S. Department of Agriculture's (USDA) estimates of the
        amount of phosphorus excreted per animal,
       • Days = the number of days that the animals are contributing manure to the area, and
       • 0.04 represents the assumption that approximately 4 percent of the total amount of manure
        excreted would have been transported in runoff from improperly stored manure.
    In addition to manure storage, formulae have also been established to calculate the amount of
    phosphorus controlled through use of clean water diversions, proper storage and handling of
    milkhouse washwater, preventing livestock access to watercourses, various cropping practices,
    and buffer strips (O'Grady and Wilson No date).
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers
                                    Accountability  Trade
                                            Agreements
Components
ofaNPDES
Permit    Permit
       Cover PC
                                                                 Effluent
                                                                 Limitations  Monitoring
Reporting    Special
Requirements  Conditions

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Water Quality Trading Toolkit for Permit Writers
  The Idaho Department of Environmental Quality's draft Pollutant
           Trading Guidance
    Idaho DEQ's November 2003 draft Pollutant Trading Guidance provides a list of approved
    agricultural BMPs that can be used to generate TP reduction credits for trading in the
    Lower Boise River watershed. The draft guidance document includes estimates of BMP
    effectiveness and uncertainty discounts for specific watersheds (the uncertainty discount
    is subtracted from the effectiveness estimate). The guidance also lists the procedures for
    determining the amount of credits and associated monitoring and maintenance require-
    ments for each BMP. Table 1 lists selected BMPs approved by Idaho DEQfor use in
    nutrient trading in the Lower Boise River watershed. A separate list of watershed-specific
    BMPs, along with effectiveness estimates and uncertainty ratios, will be generated for
    each watershed that would like to develop a trading program consistent with the Idaho
    Pollutant Trading Guidance. For more information on trading in Idaho, see Appendix A.
          Table 1. Selected BMPs approved for trading in the Lower Boise River watershed
BMP
Sediment Basins (farm scale)
Constructed Wetland
Microirrigation
Crop Sequencing
Filter Strips
Life span
20 years
15 years
10 years
1 season
1 season
Effectiveness
75%
90%
100%
90%
55%
Uncertainty
10%
5%
2%
10%
15%
          Establishing Baselines for Nonpoint Source Sellers
          As stated in the Essential Trading Information for Permit Writers section, a nonpoint source
          should meet the specified baseline before entering the trading market as a credit seller.
          Baseline is defined as the pollutant control requirements that apply to a buyer and seller in
          the absence of trading. After a seller meets its baseline, it can generate credits.1 A baseline
          for a nonpoint can be derived from a load allocation (LA) established under a total maximum
          daily load (TMDL). Where an LA does not exist, EPA's Trading Policy states that state and
          local requirements or existing practices should determine a nonpoint source's baseline (see
          Figure 2). The trading program provisions could also specify some additional minimum level
          of control that nonpoint sources would have to achieve before they could generate credits.
          The baseline level of control should never be less than existing practice. There are difficulties
          associated with establishing baselines for nonpoint sources and, although permitting authori-
          ties may not have direct involvement in establishing these  baselines, a  permit writer should
          be aware of these issues and how they might affect the trading provisions in permits.

          To be reliable, trading programs establishing baselines for nonpoint source sellers should use
          the maximum amount of verifiable information on loadings in a watershed, such as a TMDL
          1 Some trading programs may require a seller to implement controls beyond the baseline before generating credits.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange

Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
                                    Accountability  Trade
                                            Agreements
Components
ofaNPDES
Permit
                                                           Permit   Effluent
                                                           Cover Page Limitations  Monitoring
                             Reporting    Special
                             Requirements  Conditions

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                                              Water Quality Trading Scenario: Nonpoint Source Credit Exchange
                                                                        NFS Seller
                                                                       With TMDL
                                                                     Load allocation
or other watershed loading analysis. Where a TMDL establishes a
reliable LA for nonpoint sources, an individual nonpoint source's
portion of the LA can be used to set its trading baseline. Where
a TMDL or similar analysis is not available or does not represent
the most accurate information on nonpoint source loading in the
watershed, the trading program or state policy can establish a
set of minimum BMPs that a nonpoint source must install to be
eligible for trading. The pollutant load from the nonpoint source
after installing these BMPs would be considered the baseline
for estimating further reductions that could then be counted  as
credits. The permit should reference any state trading program
or other document that contains the model used for estimating
credits. It  is important to note that nonpoint source baselines
established using less-verifiable information on pollutant loading
are likely to have less public support and, more relevant to permit writers, may be challenged
as inconsistent with water quality standards.
                                                                        Nonpoint Source Seller
                                                                          Baseline for Trading
  NFS Seller
Without TMDL

State and local
 requirements
and/or existing
    practice
                                                                 Figure 2. Nonpoint source seller
                                                                          baseline for trading.
Nonpoint Source Baseline Derived from
TMDL Load Allocations
An LA established under a TMDL defines the nonpoint
source load reductions necessary to achieve water quality
standards. EPA would not support a trading program that
allows nonpoint sources to sell credits if the discharge
is contributing to water quality impairment; therefore,
nonpoint sources should  meet their portion of the LA
before generating credits to sell on the trading market.

TMDLs might specify an LA for an individual nonpoint
source or for a category of nonpoint source dischargers
in  a watershed. If established for an individual nonpoint
source (e.g., a single farm), the individual nonpoint
source should use the LA as its baseline for generating
credits. However, if the TMDL establishes an aggregate
LA for a category of nonpoint sources (e.g., all farms
in  a watershed) or all  nonpoint sources on a particular
tributary, the watershed  stakeholders, including the
permitting authority or trading program,  need to decide
how to equitably distribute that aggregate LA among the
individual nonpoint source dischargers in a scientifically
valid manner. For example, if the LA is expressed as an
overall load reduction percentage (e.g., 25 percent reduction in total nitrogen (TN) loading
watershed-wide), the  trading program might require each nonpoint source discharger to
reduce its individual loading  by that percentage before generating credits. Alternatively,
where the LA is expressed as a total aggregate loading  reduction (i.e., total pounds per
day), the trading program would distribute the LA among the individual nonpoint sources
                                                          EPA's Trading Policy states that where
                                                          a TMDL is in place, the LA or other
                                                          appropriate baseline serves as the threshold
                                                          for' nonpoint sources to generate credits.
                                                          This does not mean that EPA requires all
                                                          nonpoint sources in a watershed to meet
                                                          an aggregate LA for a single nonpoint
                                                          source to participate in trading. The Trading
                                                          Policy's intent is that each nonpoint source
                                                          participating in trading under a TMDL
                                                          make reductions consistent with the LA
                                                          before they can generate credits (additional
                                                          reductions) for sale. This approach ensures
                                                          that progress is made toward water quality
                                                          standards with each trade. States  have
                                                          flexibility to set other appropriate  baselines
                                                          and can, in fact, decide to require all
                                                          nonpoint sources to meet the baseline
                                                          before participating in trading.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange


The Function of a
Nonpoint Source
Credit Exchange

Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
                                    Accountability Trade
                                            Agreements
                                                    Components
                                                    ofaNPDES
                                                    Permit
                                                            Permit   Effluent
                                                            Cover Page Limitations  Monitoring
                                                                                  Reporting    Special
                                                                                  Requirements  Conditions

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Water Quality Trading Toolkit for Permit Writers


          to define the baseline for each nonpoint source. The trading program might use land cover,
          total production, proximity to the waterbody of concern, or some other variable to determine
          the appropriate distribution of the aggregate LA among individual nonpoint sources. The
          best method of distributing an aggregate LA among nonpoint source dischargers will vary;
          watershed stakeholders should work together to determine the most appropriate method for
          establishing the nonpoint source baseline.

          Once the LA is equitably distributed among  nonpoint sources in the watershed, an individual
          nonpoint source should reduce its load by its portion of the LA before it generates credits.
          To verify the required load reduction and quantify the credits generated after the baseline
          is met requires quantification of the nonpoint source load, either through direct monitoring
          or estimation. For more information, see the Quantifying Nonpoint Source Loads and Credits
          section  above.


          Nonpoint Source Baseline Set at a Minimum Level of BMP
          Implementation
          In watersheds where a TMDL has not been developed, the nonpoint source baseline is
          derived from state, tribal, and local requirements. The nonpoint source should  meet this
          baseline before generating credits. A trading program can choose to require a  more strin-
          gent level of BMP control before credits can  be generated. In any case, the level of control
          required to generate credits should never be less than  existing practice.

          In any watershed, it is likely that different nonpoint sources will be at different levels or.
          stages of BMP implementation. For example, in a watershed where animal feeding opera-
          tions (AFOs) are the primary nonpoint source pollutant contributors, some AFOs might be
          actively working with the Natural Resources  Conservation Service (NRCS) to implement
          comprehensive nutrient management plans that minimize nutrient and sediment runoff.
          Other AFOs might not have installed any BMPs either because they do not participate in any
          NRCS programs or because they are in the early stages of planning and implementation.
          These nonpoint source facilities might contribute a much greater pollutant load than those
          who have proactively reduced nonpoint source pollutants. A trading  program can choose  to
          require  nonpoint sources to implement a minimum level of BMPs before trading to provide
          some level of equity among nonpoint source credit generators in the watershed. In addi-
          tion, implementing a minimum level of BMPs demonstrates a commitment on the part of the
          credit generators participating in the trading program.

          Trading programs should consider baseline equity issues among nonpoint source participants.
          EPA encourages states or trading programs to set a minimum level of BMP requirements for
          nonpoint sources before they can generate credits.

          Where the nonpoint source baseline is set at a minimum level of BMP implementation,
          credits can be generated after meeting the minimum level of control. Quantifying the credits
          generated will generally require quantification of the nonpoint source load after implement-
          ing the  minimum required BMPs, either through direct monitoring or estimation. For more
          information, see the Quantifying Nonpoint Source Loads and Credits section above. In certain
          instances, it is impossible or impracticable to quantify a baseline by measuring  or estimating

Water Quality Trading Scenarios                                                                         _ _
 Nonpoint Source
 Credit Exchange  The Function of a  Quantifying
          Nonpoint Source  Nonpoint
          Credit Exchange  Source Loads
                   and Credits
Establishing  Accountability Trade     Components
Baselines           Agreements  of a NPDES
for Nonpoint                  Permit    Permit    Effluent            Reporting    Special
Source Sellers                        Cover Page  Limitations Monitoring    Requirements  Conditions

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                                              Water Quality Trading Scenario: Nonpoint Source Credit Exchange
  Lower Boise River, Idaho
    In Idaho, DEQ. designates the nonpoint source baseline year (currently 1996 for the Lower Boise, but
    this may be amended based on the technical outcome of a pending TMDL) for each trading market-
    place in the state. Each nonpoint source then calculates the baseline load for the baseline year and
    uses it to determine the eligibility of reductions to serve as credits for trading. In other words, in
    the Lower Boise River watershed, if a nonpoint source installed a BMP in 1999, the farm would have
    already created eligible credits. However, pollutant reductions from a BMP installed in 1994 would
    not be eligible. Nonpoint sources in Idaho are required to use the BMP List's estimating equation
    for particular BMPs (which incorporates the USDA Surface Irrigation Soil Loss (SISL) equation) to
    calculate baseline loads. For more information about this trading program, see Appendix A.
the nonpoint source pollutant load. In these cases, a trading program could allow nonpoint
sources to generate credits for estimated reductions from BMPs. For example, if sufficient
data are available to establish that a particular BMP, installed under specified conditions, will
achieve a loading reduction of X Ibs/day, the nonpoint source might be allowed to generate
credits equivalent to X Ibs/day without actually having quantified the pollutant load before
installing the BMP. Trading programs should use this approach only where sufficient data on
the efficacy of the BMPs are available to develop a reliable estimate of the expected reduc-
tions. The baseline pollutant load should always be quantified where possible.


         Red Cedar River, Wisconsin
            TP reduction credits associated with a BMP were estimated using TP loading models to
            estimate reductions from well-established and well-understood practices. Soil testing of
            each field was done to calculate the TP delivery to the stream from the field where the
            BMP was used (Breetz et al. 2004). For more information about this trading program,
            see Appendix A.
Determining Maximum Feasible Nonpoint Source Load
Reductions
It is not feasible for a nonpoint source to control 100 percent of its pollutant runoff to a
waterbody. Therefore, it is important that some analysis be done to estimate the maximum
amount of pollutant runoff that can be controlled from the nonpoint sources in a watershed.
The difference  between this estimate and the nonpoint source's baseline equals the maxi-
mum nonpoint source load reductions available for trading.2 This is a way to ensure that
credits being purchased result in actual reductions. This increases the surety that the trading
program can meet its goal of achieving water quality standards.
 The maximum tradable nonpoint source load reduction is not equal to the maximum number of credits available
 for trading in a watershed because of the impact of trading ratios. Because trading ratios can vary depending on
 many factors (as described in the Developing Trade Ratios section), determining the maximum number of credits
 is not as useful as determining the maximum tradable nonpoint source load reduction for the purpose of ensuring
 that every trade results in a reduction of total load to the waterbody.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange The Function of a  Quantifying
          Nonpoint Source  Nonpoint
          Credit Exchange  Source Loads
                    and Credits
Establishing  Accountability  Trade      Components
Baselines            Agreements   of a NPDtS
for Nonpoint                   Permit    Permit    Effluent           Reporting    Special
Source Sellers                         Cover Page  Limitations  Monitoring   Requirements  Conditions

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      Water Quality Trading Toolkit for Permit Writers


               A trading program can directly calculate the maximum tradable nonpoint source load reduc-
               tion for a watershed. A watershed's maximum tradable nonpoint source load reduction can
               be calculated by first determining the maximum feasible implementation of BMPs; second,
               estimating the reduction from that level of BMP implementation based on watershed model-
               ing, published BMP efficiency information, or best professional judgment; and finally, taking
               the difference between the maximum loadings reduction and the aggregate baseline for all
               sellers. In addition, this calculation could be done for an individual farm.

               The trading program may want to include  a mechanism for ensuring that this maximum trad-
               able nonpoint source load reductions is not exceeded. This could be done, for example, by
               specifying the maximum tradable nonpoint source load reductions in the program documen-
               tation and then tracking credit sales, and therefore load reductions, by nonpoint sources to
               ensure that this maximum is not exceeded.
Pennsylvania's Tradable Loads for Addressing the Chesapeake Bay's Tributary
Strategies
  In 2003 EPA developed a document titled, The Technical Support Document for the Identification of Chesa-
  peake Bay Designated Uses and Attainability to help states develop and adopt refined water quality stan-
  dards to address nutrient- and sediment-based pollution in the Chesapeake Bay and its tidal tributaries.
  As part of this analysis, the Chesapeake Bay Program developed four nutrient reduction scenarios on the
  basis of different levels of BMP and control technology implementation by 2010. The levels ranged from
  current implementation to "everything, everywhere, by everybody" (E3), which approximates the maxi-
  mum nutrient and sediment load reductions available in the watershed. To create the most objective
  and uniform maximum implementation level possible, the E3 scenario was developed without consider-
  ing site-specific constraints and program participation levels. If these factors were considered, certain
  aspects of the E3 scenario may not be feasible. Nutrient and sediment loads resulting from each nutrient
  reduction scenario were estimated using the Chesapeake Bay Program's Phase 4.3 Watershed Model. For
  example, the estimated loadings for the E3 scenario for Pennsylvania agriculture were 21,153,000 Ibs
  TN/yr and 1,896,000 Ibs TP/yr. (More information on the development of the E3 scenario is available in
  Appendix A of the Technical Support Document at www.chesapeakebay.net/uaasupport.htm)
  Recognizing that model estimates based on the E3 scenario likely overestimated the maximum feasible
  nutrient and sediment load reductions, Pennsylvania made adjustments to the estimates to better repre-
  sent a feasible effort. One adjustment was reducing by 10 percent the level of nonpoint source reductions
  estimated in the E3 scenario. The selection of a 10 percent reduction is subjective, because estimates of
  the feasible level of implementation for nonpoint source BMP implementation vary widely. Additionally,
  Pennsylvania estimated the reductions for those BMPs in Pennsylvania's Tributary Strategy that were not
  included in the E3 scenario. These additional reductions were included in the revised E3 scenario. The
  estimated loadings for the revised scenario for agriculture were 21,819,000 Ibs TN/yr and 1,726,000
  Ibs TP/yr. After adjusting the E3 scenario estimates, Pennsylvania estimated the maximum allowable
  credits as the difference between the load estimates from the revised E3 scenario and the Pennsylvania
  Tributary Strategy loadings goal. The Tributary Strategy loads for agriculture were  27,580,000 Ibs TN/yr
  and 2,123,000 Ibs TP/yr yielding final tradable loads of 5,760,000 Ibs TN/yr and 397,000 Ibs TP/yr. The
  scenario values and the tradable load values will change as new BMPs are developed or the efficiencies of
  existing BMPs are revised.
      Water Quality Trading Scenarios
                                                                                    Reporting    Special
                                                                                    Requirements  Conditions
Nonpoint Source
Credit Exchange


The Function of 3
Nonpoint Source
Credit Exchange

Quantifying
Nonpoint
Source Loads
and Credits
Establishing Accountability
Baselines
for Nonpoint
Source Sellers
Trade
Agreements


Components
ofaNPDES
Permit


Permit
Cover Page

Effluent
Limitations


Monitoring

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


Accountability

Mechanisms Under the NPDES Program
EPA's Trading Policy notes that "States and tribes should establish clear enforceable mecha-
nisms consistent with NPDES regulations that ensure legal accountability for the generation
of credits that are traded,"

Such enforceable mechanisms might include, among other things, requirements for water
quality or effluent monitoring, credit purchase and sale accounting, and assessment of BMP
effectiveness. These mechanisms might be contained in state regulations, the project trade
agreement, or both. By incorporating such accountability provisions of the trade agreement
(or the entire trade agreement) into a NPDES permit, the state or tribe makes the point
source legally responsible for their performance.

EPA's Trading Policy also states that "In the event of default by another source generating
credits, an NPDES permittee using those credits is responsible for complying with the effluent
limitations that would apply if the trade had not occurred."

To account for the possibility of a failed trade (e.g., insufficient generation of necessary cred-
its by the seller), EPA recommends that the permit (and any accompanying trade agreement)
clearly describe the respective responsibilities and legal liability (if any) of the buyer and the
seller (see Special Conditions),


Mechanisms Outside of the NPDES Program
To further clarify and protect their interests, the trading parties may choose to enter into a
contract or other agreement separate from any applicable NPDES permit. Such a contract or
agreement could, where appropriate, address a variety of financial or  legal considerations
and contingencies among the trading parties, including what happens in the case of default
by any party. For example, the point source buyer might use such a contract to memorialize
an agreement that the credits it  needs are available; the nonpoint source seller might use
such a contract to guarantee payment for its services; a credit exchange might use such a
contract for both of these reasons. Where a credit exchange is  involved, the exchange might
enter into separate contracts with the buyer and seller, all parties could enter into one con-
tract, or the  buyer and seller could enter into a contract without the exchange.

         Great Miami River Watershed, Ohio
            After a soil and water conservation district's proposal is approved, the Miami Con-
            servancy District (MCD, the broker of the program) enters into a contract with the
            successful soil and water conservation district for project implementation. The soil and
            water conservation  district then enters into a project agreement with the nonpoint
            source responsible for implementing the BMPs. MCD tracks the credits generated and
            allocates them to the buyers. A separate Load Reduction Workgroup will evaluate the
            accuracy of reduction estimates every two years. For more information on this program,
            see Appendix A.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange  The Function of a  Quantifying   Establishing
          Nonpoint Source  Nonpoint    Baselines
          Credit Exchange   Source Loads   for Nonpoint
                    and Credits   Source Sellers
Accountability Trade     Components
        Agreements  of a NPDES
                Permit    Permit    Effluent           Reporting   Special
                       Cover Page  Limitations  Monitoring   Requirements Conditions

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Water Quality Trading Toolkit for Permit Writers
          Trade Agreements
          Typically, the terms that govern a trading program will be developed outside the NPDES per-
          mit process and can be incorporated or reflected in the permit (see Appendix C). The Trading
          Policy describes several mechanisms for implementing trading through NPDES permits (see
          Appendix B). NPDES permits authorizing water quality trading should reference any existing
          trade agreement in the permit and fact sheet.

          All trade agreements referenced in NPDES fact sheets and permits should meet certain
          minimum standards to help ensure the trades authorized by the permit are consistent with
          water quality standards. At a minimum, the trade agreement should be a written agreement
          that is signed and dated by authorized representatives of all trading partners. Verbal trade
          agreements should not be referenced in NPDES permits. The written trade agreement should
          contain sufficient detail to allow the permitting authority to determine with some degree of
          certainty that the terms of the agreement will result in loading reductions and generation
          of sufficient credits to satisfy water quality requirements. If there is no formal, outside trade
          agreement, trading can still occur; however, the permit writer will need to more explicitly
          describe the trading program in the fact sheet and authorize specific aspects of the trad-
          ing program as permit conditions. Trading partners can specify the details pertaining to the
          negotiated terms of the trade (e.g., credit price, payment schedule, consequences for failure
          to fulfill negotiated terms) in a separate, written and signed contract.


          Trade Agreements with Nonpoint Source Credit Exchanges
          A nonpoint source credit exchange is a pool of nonpoint source credits managed by a third
          party that facilitates trades. As a result, point sources purchasing credits from a nonpoint
          source credit exchange do not trade directly with nonpoint sources. The nonpoint source
          generates pollutant load reductions and sells the pollutant  load reductions as credits to the
          entity administering the nonpoint source credit exchange. Point sources may then purchase
          credits from the credit exchange rather than directly from the nonpoint sources. Point source
          purchasers, therefore, will enter into trade agreements with the nonpoint source credit
          exchange.

          As described above, the entity administering the nonpoint source credit exchange can estab-
          lish standards for trading, set credit prices,  determine eligible credits, verify the operation
          and maintenance of BMPs, account for delivery, location, and uncertainty ratios and track
          important trade information for all participants. A trade agreement established between
          a  point source and the nonpoint source credit exchange should outline all these issues, and
          the permitting  authority should consider the information contained in the trade agreement
          when developing permits for participating  point sources.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange  The Function of a  Quantifying   Establishing   Accountability
          Nonpomt Source  Nonpoint    Baselines
          Credit Exchange   Source Loads  for Nonpoint
                    and Credits   Source Sellers
Trade     Components
Ajreements  of a NPDES
        Permit    Permit    Effluent            Reporting    Special
               Cover Page  Limitations Monitoring    Requirements  Conditions

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange
   Maize Creek Example: Trade Agreements
      What You Need to Know...
       Pollutant:  Biochemical Oxygen Demand
           Driver:  Maize Creek Watershed Management Plan nutrient reduction goals (pre-TMDL) for
                   point and nonpoint sources
   Nonpoint Source Credit Exchange: Maize Creek Producers' Nutrient Exchange (MCPN Exchange)—
   Nitrogen and Phosphorus
     • Credit Sellers: Ten farms in the Maize Creek Watershed

     • Agricultural Nutrient Reduction Goals (baseline): 10 percent reduction in TP and TN load-
       ing from current estimated loads to reduce in-stream biochemical oxygen demand (BOD).

     • Estimated Load Reduction: The Niblet County Soil and Water Conservation District estab-
       lished the MCPN Exchange to facilitate trading between local farms and point source discharg-
       ers in the Maize Creek Watershed. The MCPN Exchange has developed a list of BMPs eligible for
       trading along with estimated loading reductions. The BMP loading reductions  estimates, as well
       as applicable ratios, have been reviewed and approved by the state NPDES permitting authority.
       Ten farms implemented conservation tillage to achieve the baseline of a 10 percent reduction in
       TP and TN loads from current estimated loads. These 10 farms are eligible to participate in the
       MCPN Exchange and have signed the required trade agreement. The farms have agreed to install
       and maintain additional BMPs to reduce in-stream BOD by reducing TP and TN loads. Collec-
       tively, participants in the  MCPN Exchange will meet the BOD load reduction needs of the point
       sources in the watershed.  The loading reductions are based on an average loading reduction per
       month over a typical 12-month period for the watershed.  The MCPN Exchange will monitor
       BMP installation and maintenance to verify availability and continued generation of credits, as
       well as track and report all trades to all participants.

   Credit Buyer: City ofEarington POTW
     m Existing TBELb: 1,000 Ibs/day (average monthly) of BOD

     • Current Loading: 1,000 Ibs/day (average monthly) of BOD

     • Approved Watershed Management Plan Total BOD Reduction Goal: 15 percent reduction
       from current BOD loading (reduction of 150 Ibs/day (average monthly) to 850 Ibs/day)

     • WWTPC Treatment Capabilities: Treatment to 1,000 Ibs/day of BOD (average monthly)

   Location: All the farms participating in the MCPN Exchange are upstream of potential point source
   buyers, including the Earington POTW. All point and nonpoint sources discharge directly to Maize
   Creek.

   Notes: a POTW = publicly owned treatment works; b TBEL = technology-based effluent limitations;
         c WWTP = wastewater treatment plant
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability
                                            Agreements
Components
otaNPDLS
Permit
                                                           Permit
                                                                  Effluent
                                                           Cover Page  Limitations  Monitoring
                             Reporting
                             Requirements
                                                                                         Special
                                                                                         Conditions

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Water Quality Trading Toolkit for Permit Writers
                         Maize Creek Example: Trade Agreements (continued)


  Applicable Trade Ratios:
    • Delivery: The MCPN Exchange has developed a set of ratios that account for the location of the
       farms in relation to each potential buyer.

    • Uncertainty: The MCPN Exchange developed a set of uncertainty ratios to account for uncer-
       tainties associated with BMP efficiencies, implementation, maintenance and monitoring.

    • Equivalency: The MCPN Exchange has worked with the NPDES permitting authority to develop
       a ratio to relate the in-stream effects of nitrogen and phosphorus loading reductions by the
       farms to required BOD reductions by point source buyers.

  The NPDES permitting authority has reviewed and approves of all ratios developed by the MCPN
  Exchange. These ratios will be applied to the loading reductions achieved by the member farms to
  determine the number of credits generated.

  Multiple point sources within the Maize Creek Watershed, including the city of Earington POTW,
  wish to participate in the MCPN Exchange and have asked the permitting authority to authorize
  them to trade to meet the BOD load-reduction goals in the approved Maize Creek Watershed Manage-
  ment Plan. The NPDES permitting authority worked with the MCPN Exchange, potential point source
  buyers, and other key stakeholders to craft the provisions of the trade agreement  and provided the
  necessary information (e.g., baseline, minimum control levels) to facilitate the trade between the city
  of Earington POTW and the MCPN Exchange. The city of Earington POTW's permit is scheduled for
  renewal in 3 years, and at that time, the NPDES permit writer will incorporate provisions to allow
  the city of Earington POTW to purchase from the MCPN Exchange the equivalent of 150 Ibs/day of
  total BOD necessary to achieve the 15 percent load reduction required under the approved watershed
  management plan.

  As required, the permitting authority receives a  copy of the trade agreement that is signed and
  dated by authorized representatives of the city of Earington POTW and the MCPN  Exchange. The
  permit writer reviews the trade agreement to verify that the information is accurate and consis-
  tent with water quality standards. The permit writer develops permit requirements for the city of
  Earington POTW that are consistent with the provisions in the trade agreement and incorporates
  those requirements in the effluent limitations (i.e., baseline and minimum control level), reporting,
  and monitoring provisions  of the permit.

  The basic terms of the trade agreement between the city of Earington POTW and the MCPN Exchange
  are as follows:
    • The city of Earington POTW will purchase the necessary amount of equivalent total BOD credits
       to compensate for a discharge of 150 Ibs/day of BOD (average monthly) for a period of 5 years to
       correspond with the NPDES permit term.

    • The delivery, uncertainty, and equivalency ratios approved by the NPDES permitting author-
       ity will be applied to the nitrogen- and phosphorus-loading reductions achieved by the member
       farms to determine the number of BOD credits generated. Nutrient load reductions will be con-
       verted to BOD credits by the exchange using the applicable ratios.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange The Function of a  Quantifying   Establishing  Accountability
          Nonpoint Source  Nonpoint    Baselines
          Credit Exchange   Source Loads  for Nonpoint
                    and Credits   Source Sellers
Trade     Components
Agreements  of a NPDES
        Permit    Permit    Effluent           Reporting    Special
               Cover Page  Limitations  Monitoring   Requirements  Conditions

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                                               Water Quality Trading Scenario: Nonpoint Source Credit Exchange
                          Maize Creek Example: Trade Agreements (continued)

     •  Member farms must continue to meet their baseline requirement of 10 percent nutrient reduc-
        tion (either through continuation of conservation tillage, or through alternate approved BMPs)
        to maintain eligibility to participate in the MCPN Exchange.

     •  Credit buyers must meet applicable minimum control levels before purchasing credits to meet
        the baseline established in the Maize Creek Watershed Management Plan.

     •  The MCPN Exchange will conduct the necessary BMP monitoring and inspections to verify and
        certify credit generation.

     •  The MCPN exchange will provide the city of Earington POTW with the necessary BOD Analysis
        Reports to submit to the NPDES permitting authority to verify and certify the generation of
        credits by agricultural operations participating in the exchange.

     •  Trades occur monthly and credits may not be applied in any month other than the one in which
        the credits are generated.

   In a separate contract, the city of Earington POTW and the MCPN Exchange articulate the financial
   and liability conditions for the trade. The terms of the separate contract, which the permit writer does
   not ask to see because it has no bearing on the NPDES permit requirements for the city of Earington
   POTW, are as follows:
     •  The city of Earington POTW will pay the MCPN Exchange $22.50 per credit of BOD on a
        monthly basis. All payments for a calendar month are due to the MCPN Exchange by the 15th of
        the following calendar month.

     •  The city of Earington POTW will pay the MCPN Exchange an administration fee of $15 per
        month during the 5-year permit term. This fee will help defray the cost of BMP inspection,
        monitoring, reporting, and other administrative functions  of the exchange.

     •  Failure to fulfill the terms of this agreement on behalf of the city of Earington POTW will result
        in a breach of the trade agreement and terminate participation in the purchase of TP credits
        through the MCPN Exchange.

   The city of Earington POTW's renewed NPDES permit will not include any provisions of the city of
   Earington POTW's contract with the MCPN Exchange; however, the NPDES permit writer receives a
   copy of the trade agreement that is signed and dated by authorized representatives of the city of Ear-
   ington POTW and the MCPN Exchange. The permit writer reviews the trade agreement to verify that
   the information related to baselines and estimated pollutant load reductions is accurate and does not
   conflict with any of the city of Earington POTW's existing NPDES permit requirements. At the time
   of permit renewal, the NPDES permit writer will incorporate provisions to authorize the purchase
   of BOD credits  from the MCPN Exchange and ensure that the permit effluent limitations, monitor-
   ing, reporting,  and special conditions requirements reflect the purchase of BOD credits to achieve
   compliance with the facility's water quality-based effluent limitation (WQBEL). The permit writer
   will incorporate provisions as necessary from the signed trade agreement in the permit and reference
   the agreement  in the fact sheet. A copy of the trade agreement is  also attached as part of the permit's
   administrative record.
Water Quality Trading Scenarios
 Nonpoint Source
 Credit Exchange The Function of a  Quantifying   Establishing   Accountability
          Nonpoint Source  Nonpoint     Baselines
          Credit Exchange  Source Loads   for Nonpoint
                    and Credits   Source Sellers
Trade     Components
Agreements  of a NPDES
        Permit     Permit   Effluent            Reporting    Special
                Cover Page Limitations  Monitoring    Requirements  Conditions

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Water Quality Trading Toolkit for Permit Writers
          Components of a NPDES Permit
          NPDES permits that authorize water quality trading are no different than typical NPDES per-
          mits in many respects—they require the same structure, analyses, and justification. All per-
          mits have five basic components: (1) cover page; (2) effluent limitations; (3) monitoring and
          reporting requirements; (4) special conditions; and (5) standard conditions. Standard condi-
          tions are the same for all NPDES permits and will not be addressed in this Toolkit. In addition,
          consistent with Title 40 of the Code of Federal Regulations (CFR) section 124.6, all permits are
          subject to public notice and comment. This process provides all interested parties an opportu-
          nity to comment on the trading provisions in the permit.

          Each  NPDES permit is accompanied by a permit fact sheet. The information in these fact
          sheets is not enforceable. The purpose of the fact sheet is to explain to the public the require-
          ments in the permit. Thus, at a  minimum, the fact sheet should explain to the public any
          trading provisions in the permit. There is a wide variety of options for including trading
          information in the fact sheet that ranges from explaining the minimum control level (buyer)
          or trading limit (seller) to including the entire trading program.

          There are a variety of issues, however, that may require special consideration when develop-
          ing a permit to implement water quality trading with a nonpoint source credit exchange.
          Appendix E  provides the permit writer with a list of fundamental questions that should be
          addressed during the permit development process.


          Permit Cover Page
          The cover page of a NPDES permit typically contains the name and -location of the
          permittee(s), a statement authorizing the discharge, the specific locations for which a dis-
          charge is authorized (including  the name of the receiving water), and the effective period
          of the permit (not to exceed 5 years).  In addition, the cover page may list the pollutants
          regulated by the permit. For instance, the cover page of an overlay permit for TP may state
          that the overlay permit addresses only TP and that other parameters are addressed in each
          facility's individual permit.

          The cover page also could specifically authorize trading between the permitted point source
          and the nonpoint source(s) generating credits. However, whereas the cover page for a permit
          that includes trading between point sources would include the specific authorized discharge
          locations for each point source, because a nonpoint source is a diffuse pollutant source (e.g.,
          farms, ski areas, golf courses), a permit that implements a trade with a nonpoint source trad-
          ing partner  might not reference a specific discharge location for the nonpoint source involved
          in the trade. The cover page could, however, simply name the nonpoint source either by
          category (e.g., farms, golf courses) or  by the name of the specific nonpoint source (e.g.. Rock
          Creek Dairy, Rolling Hills Country Club) and provide a general description of nonpoint source
          location (e.g., Hudson River at West Point). Further, if the point source purchased credits
          from  a nonpoint source credit exchange, the cover page should name the nonpoint source
          credit exchange or managing party.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements



Components
of a NPDES
Permit

                                                          Permit    Effluent
                                                          Cover Page  Limitations  Monitoring
Reporting    Special
Requirements  Conditions

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


The cover page also should address the regulation, legal authority, policy statements, plan-
ning documents and the trade agreement that support trading between point and nonpoint
sources in the Authority section of the cover page. If the state has issued regulations or policy
documents authorizing water quality trading, the permit writer should reference these. For
example, if trading is considered a water-quality management tool in the state's Water Qual-
ity Management Plan, this may establish authority for integrating trading into NPDES permits
and can be referenced on the cover page (Jones et al. 2005).


Effluent Limitations
Effluent limitations are the primary mechanism for controlling the discharge of pollutants
from point sources into receiving waters. When developing a permit, the permitting author-
ity focuses much of its effort on deriving appropriate effluent limitations. As in all NPDES
permits, permits that include trading must include any applicable TBELs and, where neces-
sary, WQBELs, that are derived from and comply with all applicable technology and water
quality standards. Furthermore, limits must be enforceable, and the process for deriving the
limits should be scientifically valid and transparent.

EPA's Trading Policy does not support trading to meet TBELs unless trading is specifically
authorized in the categorical effluent limitation guidelines on which the TBELs are based.
Applicable TBELs thus serve as the minimum control level below which the  buyer's treatment
levels cannot fall. This section discusses the overarching principles of how to express all appli-
cable effluent limitations in permits for dischargers participating in water quality trades.

Credit Buyers
Permits for credit buyers should include both the baseline, which  is the WQBEL that defines
the level of discharge the buyer would have to meet through treatment when not trading,
and a minimum control level that must be achieved through treatment when trading. The
permit should also include the amount of pollutant load to be offset (minimum control level
- baseline) through credit purchases when trading. Most often, the applicable TBEL will serve
as the minimum control level. A permitting authority can choose to impose  a more-strin-
gent minimum control level than the TBEL to prevent localized exceedances of water quality
standards near the point of discharge but not one that is less stringent the TBEL. In a NPDES
permit or fact sheet, the effluent limitations for a credit buyer could  be described as follows:
    •  The Discharger must meet, through treatment or trading, a mass-based effluent limi-
       tation for Pollutant A of . If this effluent limitation is met through
       trading, the Discharger must purchase credits from authorized Sellers in an amount
       sufficient to  compensate for the discharge of Pollutant A from Outfall 001 in excess
       of , but at no time shall the maximum mass discharge of Pollutant A
       during  exceed the minimum control level of 
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Water Quality Trading Toolkit for Permit Writers
   Maize Creek Example: Effluent Limitations

   Applicable Trade Ratios:
    •  Delivery: The MCPN Exchange has developed a set of ratios that account for the location of the
       farms in relation to each potential buyer.

    »  Uncertainty: The MCPN Exchange developed a set of uncertainty ratios to account for uncer-
       tainties associated with BMP efficiencies, implementation, maintenance and monitoring.

    •  Equivalency: The MCPN Exchange has worked with the NPDES permitting authority to develop
       a ratio to relate the in-stream effects of nitrogen- and phosphorus-loading reductions by the
       farms to required BOD reductions by point source buyers.

   Multiple point sources within the watershed, including the city of Earington POTW, wish to partici-
   pate in the exchange and have asked the permitting authority to authorize them to trade to meet the
   BOD loading reduction requirements in the approved watershed management plan. The permitting
   authority has chosen to modify individual permits to authorize trading with the exchange.

   The POTW's existing permit includes state required TBELs the permittee currently meets.

   The permit writer will include the calculated WQBELs and trading provisions in the renewed permit
   for the city of Earington POTW. The permit will also include the minimum control level (i.e., TBEL or
   existing discharge) that chooses to trade with the exchange.

   Permit Language:
   Table 2. Monthly average mass loading effluent limitations for BOD
Facility
City of Earington POTW
Units
Ibs/day
Existing TBEL
1,000
WQBEL
850 (Baseline)
Effluent limitation
with trading
1,000 (Minimum Control
Level/TBEL)
    A. The permittee is authorized to discharge BOD from permitted outfalls to Maize Creek
       provided the discharge meets the limitations set forth herein. Provision X of this permit
       authorizes the permittee to purchase BOD credits generated by nonpoint source phosphorus
       load reductions from Maize Creek Producers Nutrient Exchange (MCPN  Exchange).

    B. The discharge from Outfall 001 shall comply with the monthly mass loading of BOD
       established by either a or b:
       a. The WQBEL set forth in Table 2; or,

       b. The Effluent Limitation With Trading set forth in Table 2 provided the permittee has
          secured BOD credits generated by nonpoint source phosphorus load reductions from the
          Exchange sufficient to compensate for any discharge in excess of the WQBEL set forth in
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability Trade Components
Agreements of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations  Monitoring
Reporting
Requirements
                                                                                        Special
                                                                                        Conditions

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                                            Water Quality Trading Scenario: Nonpoint Source Credit Exchange
                      Maize Creek Example: Effluent Limitations (continued)

          Table 2. The number of pounds of nonpoint source phosphorus load reductions required
          to be purchased shall be calculated as follows:

          Pounds phosphorus required = (Actual Discharge - WQBEL) x Trade ratio

       Where:

          Actual  discharge = the BOD load, expressed in Ibs/day as a monthly average,

          Trade ratio = Ratios established in the trade agreement between the permittee and the
          MCPN Exchange and incorporated by reference herein

    C. Credits purchased by the permittee may be applied only for the calendar month(s) during
       which they were generated by the exchange.
Pollutant Form, Units of Measure, and Timing Considerations
The permit should explicitly identify the pollutant or pollutants being traded. The permitting
authority should ensure that the trading program or agreement and the calculated WQBELs
are consistent in terms of the form of the pollutant, units of measure, and timing.

For example, if the pollutant specified in the WQBEL is nitrate-nitrogen, credits generated
under the trade agreement should be for nitrate-nitrogen and not for total Kjeldahl nitro-
gen (TKN) or some other form. If, on the other hand, the WQBEL is for TN, buyers and sellers
should trade TN credits. In this case, a discharger may be required to measure TN. If there
are concerns about localized impacts, and WQBELs are also specified for a particular form or
forms of nitrogen, the discharger may be required to monitor TKN, nitrite, and nitrate (all
expressed as N) and then calculate its TN discharge.

Also an equivalency ratio may be needed when two sources are trading pollutants such as
TN or TP, but are actually discharging different forms  of nitrogen or phosphorus (e.g., one
discharger's phosphorus discharge is made up primarily of biologically available phospho-
rus while its trading partner's discharger is primarily bound phosphorus). An equivalency
ratio may also be needed in cross-pollutant trading of oxygen demanding pollutants (e.g.,
phosphorus and BOD). In this case, the equivalency ratio would  equal the ratio  between
the two pollutants impacts on oxygen demand. Where possible, the nonpoint source credit
exchange or trading program should account for any necessary equivalency ratios with
regard to pollutant form or type; the permit writer simply needs to be aware of the pollut-
ant form or type addressed in the trade agreement to ensure that the permit is consistent.
Note, however, that under most circumstances it will be difficult to account for  equiva-
lency ratios in a nonpoint source credit exchange model. The equivalency ratio is calcu-
lated on the basis of the ratios of different forms or types of a pollutant in the discharges
of both the credit generator and the credit purchaser. Therefore, unless all the nonpoint
source credit generators are discharging pollutant forms or types with the same ratio,  the
credit exchange would have to track individual transactions from generators to  sellers to
determine how much each credit would be worth.

Water Quality Trading Scenarios
                                                                              Reporting    Special
                                                               Limitations Monitoring   Requirements  Conditions
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


-r 	
Components
ofaNPDES
Permit



Permit
Cover Page

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Water Quality Trading Toolkit for Permit Writers


          For example, a point source purchaser needs to purchase credits from the credit exchange
          equivalent to 100 Ibs/day for the ratio of pollutant forms being discharged at the point
          source. The credit exchange has credits deposited by 5 different nonpoint sources (Source A,
          Source B, Source C, Source D, and Source E), each discharging the pollutant forms at a dif-
          ferent ratio. The credit exchange may have to sell credits to the point source from one, two,
          three, four, or all five of the nonpoint sources. The credit exchange would have to make sure
          that the correct equivalency ratio is applied to the credits deposited by Source A, based on
          which point source is buying the credits that Source A deposited. The exchange has to apply a
          different set of ratios for the credits from Sources B, C, D, and E. The situation becomes more
          complicated if the credits from  one or more of the nonpoint sources are split between mul-
          tiple point source buyers. Finally, it is possible that, depending  on the ratios, there may not
          be enough credits to meet all of the buyers' needs,  but that would  not be known until the
          credit exchange determines how many  credits each  nonpoint source deposits and how many
          credits each point source needs and begins to optimize the distribution of credits based on
          all of the possible combinations of buyers, sellers, and ratios. In complicated credit exchange
          situations like this, an extended period  of monitoring before trading may be necessary to
          better determine the expected BMP performance from each potential nonpoint source credit
          seller and, thus, whether the exchange will have enough credits to satisfy the needs of all the
          potential buyers.
  Maize Creek Example: Pollutant Form, Units of Measure,
  and Timing
     What You Need to Know...
       Pollutant: Biochemical Oxygen Demand
          Driver: Maize Creek Watershed Management Plan nutrient reduction goals (pre-TMDL) for
                  point and nonpoint sources
  Nonpoint Source Credit Exchange: Maize Creek Producers' Nutrient Exchange—Nitrogen and
  Phosphorus
   Credit Sellers: Ten farms in the Maize Creek Watershed
    Credit Buyer: City ofEarington POTW

  Location: All the farms participating in the MCPN Exchange are upstream of all potential point
  source buyers. All point and nonpoint sources discharge directly to Maize Creek.

  Pollutant Form
  The watershed management plan indicates a need for the city of Earington POTW, the credit buyer,
  to control BOD discharges. The plan includes loading reduction recommendations for the members
  of MCPN Exchange (credit seller) as well. Each member farm will install one or more BMPs from an
  approved list established in the trade agreement to reduce phosphorus and nitrogen loads 10 per-
  cent as indicated in the watershed management plan. Because controlling nutrients reduces oxygen
  demand, the credit exchange was able to work with the permitting authority to establish an equiva-
  lency ratio that accounts for the relationship between nutrients and BOD load reductions. This will
  enable the MCPN Exchange to sell the nutrient reductions in the form of BOD credits to the POTW.
Water Quality Trading Scenarios
                                                                               Reporting    Special
                                                                       Monitoring   Requirements  Conditions
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability Trade
Agreements
W
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations

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                                            Water Quality Trading Scenario: Nonpoint Source Credit Exchange
                 Maize Creek Example: Pollutant Form, Units of Measure,
                                                               and Timing (continued)

   Units of Measure
   The BOD WQBELs based on the reduction recommendations in the watershed management plan are
   expressed in Ibs/day as a monthly average to correspond with the units and averaging period in the
   plan. The BOD limits in the POTW's existing permit are also expressed in Ibs/day as a monthly aver-
   age. The trade agreement also specifies these units for trading. The nutrient load reductions for the
   credit exchange will be calculated and expressed in Ibs/day as a monthly average over a typical 12-
   month period to determine the number of credits they can generate to sell the POTW.

   Timing of Credits
   Credits are available beginning at the time of permit issuance. This allows 24 months for the MCPN
   Exchange member farms' BMPs to be fully implemented and 12 months for the credit exchange to
   gather monitoring data to verify that the BMPs are achieving the expected nutrient removal efficiency
   and will generate credits as expected. These data are necessary to better understand how loading
   and reduction may vary over time and to develop monthly credit generation data to correspond with
   monthly average effluent limitations. Trades will occur monthly to correspond with monthly average
   effluent limitations. The MCPN Exchange member farms will be able to continue to generate credits
   as long as the controls are properly operated and maintained, the credit exchange is able to demon-
   strate reductions, and the nonpoint source baseline does not change in a way that would reduce or
   eliminate the credits (e.g., based on a new TMDL that includes WLAs for the permittee or LAs for the
   MCPN Exchange member farms). The ability of MCPN Exchange to continue to generate credits will be
   assessed during the renewal of the city of Earington's POTW NPDES permit every 5 years.
Anti-backsliding, Antidegradation, and New Discharges Special
Considerations
EPA's Trading Policy discusses anti-backsliding and antidegradation and how these provisions
can be met through trading.

Anti-backsliding
The term anti-backsliding refers to a statutory provision (CWA section 402(o)) that, in gen-
eral, prohibits the renewal, reissuance, or modification of an existing NPDES permit that con-
tains WQBELs, permit conditions, or standards that are less stringent than those established
in the previous permit (USEPA 1996b). The CWA establishes exceptions to this general anti-
backsliding prohibition. EPA has consistently interpreted section 402(o)(1) to allow for less
stringent effluent limitations if either an exception under section 402(o)(2) or, for WQBELs,
the requirements of section 303(d)(4) are met (USEPA 1996b). Section 402(o)(2) and 40 CFR
122.44(1) provide exceptions for circumstances such as material and substantial alterations
to the facility, new information, events beyond the permittee's control, and permit modifi-
cations under other sections of the CWA. Section 303(d)(4), which applies only to WQBELs,
allows a less-stringent WQBEL in a reissued permit when the facility is discharging to a water-
body attaining water quality standards as long as the waterbody continues to attain water
quality standards even after the WQBEL is relaxed.  In addition, revising the limitation must

Water Quality Trading Scenarios
                                                                               Reporting    Special
                                                                               Requirements  Conditions

Nonpoint Source
Credit Exchange




The Function of 3
Nonpoint Source
Credit Exchange



Quantifying
Nonpoint
Source Loads
and Credits


Establishing
Baselines
for Nonpoint
Source Sellers


Accountability Trade
Agreements




Components
of a NPDES
Permit




Permit
Cover Page
Hi


Effluent
Limitations




Monitorm

-------
Water Quality Trading Toolkit for Permit Writers


          be consistent with the state's antidegradation policy. If the discharge is to a waterbody that
          is not attaining water quality standards, a less-stringent WQBEL is allowed only when the
          cumulative effect of all revised effluent limitations results in progress towards attainment of
          water quality standards.  For a detailed discussion of the anti-backsliding exceptions, see EPA's
          NPDES Permit Writers'Manual (EPA-833-B-96-003). EPA's Trading Policy states:
                EPA believes that the anti-backsliding provisions of Section 303 (d) (4) of the
                CWA will generally be satisfied where a point source increases its discharge
                through the use of credits in accordance with alternate or variable water quality
                based effluent limitations contained in an NPDES permit, in a manner consistent
                with provisions for trading under a TMDL, or consistent with the provisions for
               pre-TMDL trading included in a watershed plan.

          A permit writer should simply explain in the fact sheet of the permit how the limitations in the
          permit, after accounting for any trading provisions, are at least as stringent as the limits in
          the previous permit or, alternatively, how  anti-backsliding provisions of the CWA are satisfied.

          Antidegradation
          As repeated throughout  this document, NPDES permits may not facilitate trades that would
          result in nonattainment of an  applicable  water quality standard, including the applicable
          antidegradation provisions of  water quality standards. Permitting authorities should ensure
          that WQBELs developed to facilitate trade agreements accord with antidegradation provi-
          sions and that antidegradation reviews are performed when required.  Nothing in the Trad-
          ing Policy per se changes how  states apply their antidegradation policies, though states may
          modify their antidegradation policies to recognize trading.

          The Trading Policy states:
                EPA does not believe that trades and trading programs will result in "lower
                water quality"... or that antidegradation  review would be required under EPA's
                regulations when  the trades or trading programs achieve a no net increase of
                the pollutant traded and do not result in any impairment of designated uses.

          Special  considerations for antidegradation relative to water quality trading depend on the
          tier of protection applied to the waterbody as described below.

          Tier 1 is the minimum level of  protection  under antidegradation policies. For Tier 1 waters,
          the antidegradation policy mandates protection of existing in-stream uses. Because EPA
          neither supports trading activities nor allows issuance  of permits that violate applicable water
          quality standards, which  should  protect existing uses at a minimum, any supported trading
          activities incorporated into a NPDES permit should not violate antidegradation policies appli-
          cable to Tier 1 waters.

          Tier 2 protects waters where the existing water  quality is higher than required to support
          aquatic life and  recreational uses. Water quality in Tier 2 waters may be lowered (only to the
          level  that would continue to support existing and designated uses), but  only if an antidegrada-
          tion review finds that (1)  it is necessary to  lower water quality to accommodate important social
          or economic development, (2) all intergovernmental and public participation provisions have

Water duality Trading Scenarios
Nonpoint Source
Credit Exchange




The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


—p 	
Components
of a NPDES
Permit




Permit
Cover Page



Effluent
Limitations
                                                                                 Reporting    Special
                                                                         Monitoring   Requirements  Conditions

-------
                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


been satisfied, and (3) the highest statutory and regulatory requirements for point sources and
BMPs for nonpoint sources have been achieved. The Trading Policy supports trading to main-
tain high water quality when trading is used to compensate for new or increased discharges.
Thus, the Trading Policy supports reductions of existing pollutant loadings to compensate for
the new or increased load so that the result is no lowering of water quality. A state, in applying
its antidegradation policy, may decide to authorize a new or increased discharge to high-
quality water and may decide to use trading to completely or partially compensate for that
increased load. If the increased load to Tier 2 waters is only partially compensated for by trad-
ing, an antidegradation-review would be required to address the increased load.

Tier 3 protects the quality of outstanding national resource waters and waters of exceptional
recreational or ecological significance. In general, antidegradation policies do not allow any
increase in  loading to Tier 3 waters that  would result in lower water quality. EPA supports
trading in Tier 3 waters to maintain water quality.
Monitoring
Permitting authorities may want to consider developing monitoring and reporting require-
ments to characterize waste streams and receiving waters, evaluate wastewater treatment
efficiency, and determine compliance with permit conditions in the trade agreement. Moni-
toring and reporting conditions of a NPDES permit may contain specific requirements for
sampling location, sample collection method,  monitoring frequencies, analytical methods,
recordkeeping, and  reporting. If the permit conditions include compliance with provisions in
a trade agreement, the permitting authority should include monitoring, record-keeping, and
reporting requirements that facilitate compliance evaluations and, where necessary, enforce-
ment actions related to the trading requirements. Discharge monitoring requirements should
be consistent with the provisions of the trade  agreement in terms of pollutants and forms of
pollutants monitored, reporting units, and timing. The permit provisions should ensure that
the results of discharge monitoring will be useful to the permittee, the permitting author-
ity, and the general  public in determining whether the provisions of the trade agreement
are being met. Permits that authorize point source-nonpoint sources trades via a nonpoint
source credit exchange should also address the unique considerations for monitoring and
reporting that will facilitate evaluating the effectiveness of BMPs used to generate pollutant
reduction credits.

Sample Collection and Analysis
The same discharge  sampling location used for compliance  in any existing NPDES permits
should be used for determining compliance with effluent limitations developed for traded
parameters. Samples collected as part of a self-monitoring program required by a NPDES per-
mit must be performed in accordance with EPA-approved analytical methods specified in 40
CFR Part 136 (Guidelines for Establishing Test Procedures for the Analysis of Pollutants Under
the Clean Water Act) where Part 136 contains  methods for the pollutant of concern. Where
no Part 136 methods are available, the permit writer should specify which method the point
source should use for compliance monitoring.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability Trade
Agreements
— w 	
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations
Monitoring
                                                                                Reporting
                                                                                Requirements
Special
Conditions

-------
Water Quality Trading Toolkit for Permit Writers


          Parties Responsible for Monitoring
          In a permit that authorizes trading between a point source(s) and a nonpoint source credit
          exchange, the permittee(s) will be responsible for all the monitoring activities that would
          normally be required in any NPDES permit. If the permit is an overlay permit covering mul-
          tiple point sources and is used to incorporate water quality trading for specific pollutants,
          the permitting authority may establish monitoring requirements by reference to the facility's
          individual NPDES permit for consistency. Alternatively, the overlay permit could specifically
          list the monitoring location and requirements.

          Ambient Monitoring
          Ambient monitoring is one way to show whether a trade agreement meets or improves water
          quality. In addition to traditional discharge monitoring requirements, ambient water quality
          monitoring may be appropriate at strategic locations to ensure that the trade is not creating
          localized exceedances of water quality standards and to document the performance of the
          overall trading program. Permits with mixing zones may include monitoring requirements as
          appropriate to ensure that water quality criteria are not exceeded at the edge of the appli-
          cable mixing zone.

          BMP Monitoring and Trade Tracking
          To assure that nonpoint source BMPs are performing properly, the permitting authority
          should add permit conditions specifying that a BMP be monitored and inspected on a regular
          basis. For permits that authorize trading with a nonpoint source credit exchange, however,
          such provisions may not be necessary. In general, the credit exchange will likely have the
          responsibility for monitoring BMPs and verifying pollutant reductions. In some cases, the
          trading program itself might establish these responsibilities.  The permit writer should deter-
          mine whether and how the nonpoint source credit exchange verifies pollutant reductions.
          In some cases, monitoring and inspections might be required of point sources if the credit
          exchange does not adequately monitor BMPs.  In other cases, a third party assumes responsi-
          bility for BMP monitoring.

          Under any of these scenarios, the  permitting authority should be aware of the monitor-
          ing and reporting responsibilities established in the trading program or through the credit
          exchange and should ensure that the permit conditions do not contradict these requirements.
          Where the trading program provides that the point source conduct inspections and monitor-
          ing of nonpoint source BMPs, the  permit should incorporate  or reference those requirements.
          Where the trading program provides that a third party conduct  inspections and monitoring,
          the  permit should also reference those requirements and clarify the permittee's responsibili-
          ties, if any, for reporting or using the information and data gathered through the inspections
          and monitoring activities or conducting these activities itself should the third party fail to
          fulfill its responsibilities.

          Permitting authorities should consider developing trade tracking forms and establishing dis-
          charger trade  reporting requirements to monitor trading activities and any alternative com-
          pliance activities implemented if a BMP fails to perform as expected (see Special Conditions).
          In addition, credit exchanges should consider holding surplus credits in reserve to be used to
          compensate for point source pollutant loads in the event of a failed trade.

Water Quality Trading Scenarios
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                'fa  Quantifying  Establishing   Accountability Trade     Components
                ce  Nonooint   Baselines           Aareements  of a NPDES
                                                                                Repotting    Special
                                                                                Requirements  Conditions
Nonpoint Source
Credit Exchange
The Function of a
Nonpoint Source
Credit Exchange
Quantifying
Nonpoint
Source Loads
and Credits
Establishing
Baselines
for Nonpoint
Source Sellers
Accountability Trade
Agreements
— w
Components
of a NPDES
Permit
Permit
Cover Page
Effluent
Limitations
Monitoring

-------
                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange
   Maize Creek Example: Monitoring
      What You Need to Know...
       Pollutant: Biochemical Oxygen Demand
          Driver: Maize Creek Watershed Management Plan nutrient reduction goals (pre-TMDL) for
                  point and nonpoint sources
   Nonpoint Source Credit Exchange: Maize Creek Producers'Nutrient Exchange—Nitrogen and
   Phosphorus
   Credit Sellers: Ten farms in the Maize Creek Watershed
   Credit Buyer: City ofEarington POTW

   Location: All the farms participating in the MCPN Exchange are upstream of potential point source
   buyers, including the city of Earington POTW. All point and nonpoint sources discharge directly to
   Maize Creek.

   The facility's existing permit includes TBELs based on state treatment standards for BOD and moni-
   toring requirements to sample the effluent monthly for BOD to determine compliance. The renewed
   permit will incorporate new effluent limits (based on the approved watershed management plan) as
   well as the necessary provisions and effluent limits to authorize trading.

   In the renewed permit, the POTW will be required to monitor for BOD weekly. The discharger will
   be required to submit monthly discharge monitoring reports (DMRs) year-round by the 15th of the
   month following monitoring to the permitting authority to gauge compliance. Ambient receiving
   water monitoring requirements  are included in the existing NPDES permits and are adequate to
   ensure that localized exceedances of water quality standards do not develop as a result of trades.

   Permit Language:
    • The permittee shall monitor effluent BOD a minimum of one time per week. The permittee
       shall determine the average monthly mass loading based on actual monthly average flow.
       Flow monitoring shall be continuous.
Reporting Requirements
The permitting authority should establish reporting requirements to support the evaluation
of water quality trading programs. For example, in addition to reporting discharge monitor-
ing results, permitting authorities might require a permittee to report the number of credits
purchased. Permitting authorities  might also require an annual monitoring report specific to
the pollutants involved in the trade, to provide information on annual loading in accordance
with the requirements of the trading program. Permits incorporating water quality trades
should require reporting at a frequency appropriate to determine compliance with the trading
provisions. Permitting authorities should consider any requirements of the trading programs
related to monitoring and reporting and ensure that the permits are consistent with these
requirements. Permits may require reporting of monitoring results at a frequency established
through the permit on a case-by-case basis but in no case may that frequency be less than
once per year.


Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange




The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


*
Components
of a NPDES
Permit




Permit
Cover Page



Effluent
Limitations Monitoring



Reporting
Requirements



Special
Conditions

-------
Water Quality Trading Toolkit for Permit Writers


          In addition to reporting of discharge monitoring results, trading programs may establish
          other reporting and tracking requirements. It is essential that there is a mechanism for track-
          ing trades. The nonpoint source credit exchange should conduct trade tracking and reporting
          for credit generation. If the credit exchange does not report trades to the permitting author-
          ity, the permitting authority might require the permittee to submit an additional form such
          as a reduction credit certificate form (see Appendix C). The permitting authority can hold
          point sources liable if they violate any trading provision included in the permit or any trade
          agreement incorporated by reference into the permit, and point sources are certainly liable if
          they do not meet their permit limits.

          If not provided by the nonpoint source credit exchange, the permitting authority might also
          want to require verification of project installation and performance specifications before
          allowing the permittee to use credits. The permit could include provisions requiring the point
          source purchaser to provide the required verification.

          Data Reporting  to EPA
          EPA administers two systems to store NPDES permit data and track compliance, the Permit
          Compliance System (PCS) and the new Integrated Compliance Information  System (ICIS). PCS is
          the old, computerized management information system that contains data on NPDES permit-
          holding facilities to track the permit, compliance,  and enforcement status  of these facilities.

          The new system, ICIS, was deployed in June 2006 to approximately 20 states. ICIS contains
          integrated enforcement and compliance information across most of EPA's  programs including
          all federal administrative and judicial enforcement actions.  In  addition, ICIS has the capability
          to track other activities occurring in an EPA Region that support enforcement and compliance
          programs. These include Incident Tracking, Compliance Assistance, and Compliance Monitor-
          ing. In the future, ICIS will be deployed to all states, and PCS will no longer be used.

          Neither PCS nor ICIS is structured to actually track trades.

          PCS is designed to compare actual discharge monitoring data against required effluent limita-
          tions to determine a facility's compliance with its NPDES permit. To determine compliance
          under a trading scenario, it is necessary for the NPDES permitting authority to compare actual
          discharge monitoring data and the quantity of credits purchased against required effluent lim-
          itations. For credit buyers, compliance is actually tracked against two effluent limitations—the
          minimum control level and the baseline. The challenge in using PCS to determine compliance
          under a trading scenario is that the system does not automatically make adjustments to the
          reported actual discharge—it will not subtract the quantity of credits purchased. Therefore,
          this type of adjustment must be done before entering information into PCS so that the sys-
          tem has only one reported number to compare against an effluent limitation.

          Point source credit buyers have a baseline and a minimum control level (the facility's TBEL or
          current discharge, whichever is most stringent). To determine  compliance for a credit buyer,
          the NPDES permitting authority will need to know that (1) the facility's actual discharge is
          less than or equal to its minimum control level, and (2) that the number of credits purchased
          results in the facility achieving its baseline. Therefore, point source credit buyers could report
Water Quality Trading Scenarios

Credit Exchange



The Function of 3
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


>
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations



Monitoring
                                                                                Reporting   Special
                                                                                Requirements Conditions

-------
                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange
   Maize Creek Example: Reporting
      What You Need to Know...
       Pollutant: Biochemical Oxygen Demand
          Driver: Maize Creek Watershed Management Plan nutrient reduction goals (pre-TMDL) for
                  point and nonpoint sources
   Nonpoint Source Credit Exchange: Maize Creek Producers' Nutrient Exchange—Nitrogen and
   Phosphorus
   Credit Sellers: Ten farms located in the Maize Creek Watershed
   Credit Buyer: City ofEarington POTW

   Location: All the farms participating in the MCPN Exchange are upstream of potential point source
   buyers, including the city of Earington POTW. All point and nonpoint sources discharge directly to
   Maize Creek.

   The city of Earington POTW's renewed permit authorizes trading for BOD with the MCPN Exchange.
   The permit requires, in addition to monitoring reports, regular reporting of any changes to the trade
   agreement and reports for tracking trades. The facility's permit will contain monthly average effluent
   limitations for BOD; therefore, monthly trade transactions will be necessary to maintain compliance.
   The trade agreement between the permittee and the MCPN Exchange indicates that trades will be
   tracked by the exchange. The trade tracking system generates trading notification forms and monthly
   trading summaries for the entire program. Credits must be used in the same month they are gener-
   ated and trading notification forms must be submitted to the regulatory agency by the 15th of the
   month following the trade.

   In addition, the permit requires biannual reporting to summarize year-to-date transactions and
   actual reductions and loading reflected by monitoring. According to the trade agreement, this is to be
   compiled by the MCPN Exchange but must be reported on a facility-specific basis to the permitting
   authority.

   Permit Language:
   No trade is valid unless it is recorded in the Maize Creek Producers Nutrient Exchange electronic
   trade tracking system or equivalent system that records all trades and generates trading notifica-
   tion forms and a monthly summary of all trades valid  for each calendar month. The recordkeeping
   system must be capable of ensuring that a particular credit is not sold to more than one trading
   participant. The trading notification forms and trading summary may be compiled by the MCPN
   Exchange, but each permittee is responsible for the submittal of all documentation and reports.
   Trading notification forms for each monthly trade must be submitted to  by the 15th day of the month following the trade.
two types of information: (1) the facility's actual discharge, and (2) the difference between
the actual discharge and the quantity of credits purchased. Both numbers would be entered
into PCS to determine compliance. PCS would compare the actual discharge against the
minimum control level to determine permit compliance and eligibility as a credit buyer. PCS
would also compare the difference between  the actual discharge and the quantity of credits


Water Quality Trading Scenarios
                                                                                        Special
                                                                                        Conditions
Nonpoint Source
Credit Exchange




The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


*
Components
ofaNPDES
Permit




Permit
Cover Page



Effluent
Limitations Monitoring



Reporting
Requirements

-------
Water Quality Trading Toolkit for Permit Writers


          purchased against the facility's baseline; the difference should be less than or equal to the
          WQBEL to indicate that the facility has purchased enough credits to meet its baseline and
          remain in compliance with its WQBEL. PCS can accommodate two different effluent limits for
          the same  parameter; therefore, it has the capability to determine compliance with both the
          minimum control level and the baseline for a credit buyer.

          ICIS also allows the NPDES permitting authority to report two limits; therefore, this system
          can also accommodate both the baseline and the minimum control level for credit buyers.
          New DMR forms will also have two lines to report both the baseline and the minimum control
          level. Like PCS, ICIS does not actually adjust actual discharges with the number of credits
          bought. Under the current design, ICIS will allow a facility with an existing NPDES permit to
          also have a trading partner entered into the system. Once a trading partner is entered for
          a facility,  ICIS will allow the entry of an adjusted value for the buyer—this is the reported
          actual discharge adjusted by the number of credits bought. If an adjusted value is entered,
          this value is used to determine  permit violations and percent exceedances (USEPA 2006).

          In addition to challenges related to limits and the type of information to report, NPDES per-
          mits with trading provisions might also raise issues related to reporting periods and auto-
          mated compliance tracking. PCS will not support a reporting extension beyond 30 days. This
          type of reporting extension might be necessary in some instances to allow adequate time for
          the administrative activities necessary for trading partners to coordinate and reconcile trades.
          ICIS, however, will support a 45-day reporting period. In rare instances when a permitting
          authority uses annual  limits, both PCS and ICIS will allow for one limit to be monthly and one
          to be annual. However, the permitting authority will have to manually flag annual limit efflu-
          ent violations for reportable noncompliance (RNC) and significant noncompliance  (SNC) to
          track  compliance.


          Special Conditions
          Special conditions are  developed to supplement effluent limitations and may include addi-
          tional monitoring activities, management  practices, pollution prevention requirements, ambi-
          ent stream surveys, compliance schedules (if authorized by the permitting authority), and
          toxicity reduction evaluations (TREs). Special conditions also include permit modification and
          reopener conditions and can be used to address water quality trading. Special conditions of
          a NPDES permit will be very important in incorporating the terms of a trade agreement. Even
          where the specific terms of the agreement are not directly incorporated into the permit, the
          special conditions will  be used to refer to,  and require compliance with, the trade agreement
          housed in a separate document.

          The special conditions included in a NPDES permit to implement trading will depend on
          provisions of the trade agreement and the effluent limitations and monitoring and reporting
          requirements established in the permit. However, the permitting authority should consider
          incorporating special conditions that support the trading conditions. For example, the special
          conditions of the permit may specify conditions for purchasing credits, additional monitoring
          and special reporting requirements, and special conditions for failed trades.
Water Quality Trading Scenarios
                                                                                        Special
                                                                                        Conditions

Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


>
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations Monitoring


Reporting
Requirements

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


Specifying Conditions for Purchasing Credits
Permits that implement trades between point sources and a nonpoint source credit exchange
should specify the practices or approaches used to generate credits, if possible. The permitting
authority might choose to include these conditions as part of the effluent limitations section of
the permit, or as a special condition. While the permit cannot require a nonpoint source to use
a particular BMP to generate credits, it can prohibit a point source from purchasing credits that
were not generated through use of approved BMPs.  Specificity in the permit will depend on the
nonpoint source credit exchange's mechanisms for tracking the nonpoint source practices and
approaches used to generate credits and distributing credits to point sources. A nonpoint source
credit exchange might obtain credits from a nonpoint source and, in  some instances, will have
no mechanism in place to link the exact origin of specific credits purchased by a point source.
Depending on the structure of the  nonpoint source  credit exchange,  the permitting authority
or entity managing the trade might determine the appropriate BMPs external to the permit.

The special conditions specific to point source-nonpoint source trading via a nonpoint source
credit exchange should also address the timing of when credits are available and when the
practice or approach generating credits expires as an eligible source of credits. If not ade-
quately addressed through the nonpoint source credit exchange, the permit might stipulate
that continued credit generation requires periodic certification that a practice is still in place
and that the nonpoint source is taking specified operation and maintenance actions. As
discussed above, permitting authorities may consider establishing monitoring and  reporting
requirements to ensure that nonpoint sources generating credits are properly installing and
maintaining BMPs to continue generating credits. This is especially important if a trade relies
on calculated credits and neither the permit nor the nonpoint source credit exchange requires
monitoring data to verify pollutant reductions.

Special conditions also could be used to specify the  reconciliation period for credits or when
credits may be used relative to when they are generated. Effluent limitations will dictate the
reconciliation period, as discussed above, but special conditions can clarify the reconciliation
period and ensure that credits are not based on future reductions that cannot be verified,
thus reducing the risk of noncompliance.

Special conditions addressing liability, provisional requirements that apply when credits are
unavailable or when a limit is exceeded, and outlining the specific requirements for estab-
lishing trade agreements among permittees can be  important in issuing acceptable permits
that will not require modification each time circumstances change for one of the dischargers
covered under the permit.

  Lower Boise River, Idaho
    The Lower Boise model uses pounds of TP as its unit of measurement and reconciles trade
    account balances monthly against the reported discharge amounts. The point source must sign
    and submit new Reduction Credit Certificates at the end of each month to establish the credit for
    that month that they can transfer to their own account using the Trade Notification Form. The
    credits can be used to offset only pollutant discharge for the same month in which they were cre-
    ated. The trades are monitored through the automated Trade Tracking System. For more infor-
    mation about this trading program, see Appendix A.

Water Quality Trading Scenarios
Nonpoint Soured
Credit Exchange




The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agteements


— f 	
Components
ofaNPDES
Permit




Permit
Cover Page



Effluent
Limitations Monitoring



Reporting
Requirements



Special
Conditio

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Water Quality Trading Toolkit for Permit Writers


         Additional Monitoring and Special Reporting
         The permitting authority might articulate special  monitoring requirements as special condi-
         tions, as described above. If not adequately addressed through the nonpoint source credit
         exchange, the permitting authority might require additional monitoring to assess the effec-
         tiveness of BMPs or to verify BMP installation, implementation, and maintenance. Any special
         conditions established to determine BMP effectiveness should specify the party responsible
         for conducting monitoring and inspections to verify BMP effectiveness and accuracy of the
         trade ratios assumed in the permit.

         Tracking trading activities is particularly important in point source-nonpoint source trades.
         Because the permittee is the only trading partner regulated, the permitting authority gener-
         ally will not be able to require tracking information to be reported by the credit exchange.
         Where permitting authorities will not  receive adequate credit tracking reports from the credit
         exchange, they should consider establishing special conditions in the permit that facilitate
         tracking. For point source-nonpoint source trades via nonpoint source credit exchanges, the
         permitting authority might require the point source to provide additional information on the
         nonpoint source(s) generating the credits or the nonpoint source credit exchange selling the
         credits reported  in the tracking report. For instance, the permit might require the permittee
         to provide or obtain tracking information via the  nonpoint source credit exchange, such as
             •   Identification of nonpoint source (name, address, phone number)
             •   Type and location of BMP
             •   Monitoring method and frequency
             •   Monitoring results  (actual measured quantities, or observations regarding installation
                 and maintenance, at nonpoint source)
             •   Subtraction of a portion of the reported reduction amount (in pounds) to meet any
                 retirement ratio requirement as specified  in the trade agreement
             •   Conversion of reduction quantity to normalized measure of loading (multiply by
                 trade ratio, including location  or delivery  ratio, equivalency ratio, and uncertainty
                 ratio, where applicable)
             •   Time period  for which credit is verified, per monitoring requirements for that BMP
             •   Certifying statement signed by the point source that the information provided is true,
                 accurate, and complete, and that the installation, maintenance, and monitoring of
                 the BMP meets the requirements for that  BMP as specified in the trade agreement
                 (Idaho DEQ 2000)

         This information may be provided to the permittee by the nonpoint source credit exchange
         or another entity (e.g., a soil and water conservation district) through a mechanism such as a
         memorandum of understanding (MOD) or a trade agreement.

         Special Conditions for Failed  Trades
         The success of a trade depends on credit sellers fulfilling trade obligations. Where a  point
         source-nonpoint source trade involves a nonpoint source credit exchange, the nonpoint
         source credit exchange or trading program might include mechanisms to ensure that the
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange




The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Estabiishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


_f 	
Components
of a NPDES
Permit




Permit
Cover Page



Effluent
Limitations Monitoring



Reporting
Requirements



Sp
Co
                                                                                       Special
                                                                                       Conditions

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                                             Water Quality Trading Scenario: Nonpoint Source Credit Exchange


trade obligations are met by participating nonpoint sources. In addition, credit exchanges
should consider holding surplus credits in reserve to be used to compensate for point source
pollutant loads in the event of a failed trade. The permitting authority might use special
conditions to establish provisional requirements that apply if the credits a point source buyer
needs are unavailable from either the credit exchange or surplus credits held in reserve and
a point source  is unable to comply with calculated WQBELs. The permitting authority would
include these special conditions in addition to any enforcement provisions. The trading pro-
gram should address what degree of risk the permittee bears from purchasing credits that
nonpoint sources do not deliver or are proven invalid at a later point in time. The trading
program or trade agreement might also describe the respective responsibilities of the buyer
and the seller in the case of a failed trade. In any case, the burden of compliance falls on the
permittee. The permittee can address the risk of trade failure in a private contract with the
seller. The permit might require the perrnittee notify the permitting authority when a trade
fails or how and when it will either secure credits from an alternate source or comply with the
calculated WQBELs established in the permit.  Monthly reconciliation minimizes risk by requir-
ing certification from buyers and sellers on a monthly basis.

Finally, the permitting authority may reference a reserve of surplus credits held by the
nonpoint source credit exchange as a means of managing uncertainty of nonpoint source
trading. All such reserved credits would be generated in the same time period they are used
or traded. Special conditions could establish the availability of credits held in reserve to the
permittee and any conditions placed on the permittee if it desires to use reserved credits.

Accountability
Permits that cover one or more point sources buying credits from a nonpoint source credit
exchange should state that the permitted point sources are responsible for meeting effluent
limitations derived from water quality standards regardless of whether the nonpoint source
trading partners or credit exchange comply with the terms of a trade agreement.
   Maize Creek Example: Special Conditions
      What You Need to Know...
       Pollutant: Biochemical Oxygen Demand
          Driver: Maize Creek Watershed Management Plan nutrient reduction goals (pre-TMDL) for
                  point and nonpoint sources
   Nonpoint Source Credit Exchange: Maize Creek Producers'Nutrient Exchange—Nitrogen and
   Phosphorus
   Credit Sellers: Ten farms in the Maize Creek Watershed
   Credit Buyer: City ofEarington POTW

   Location: All the farms participating in the MCPN Exchange are upstream of potential point source
   buyers, including the city of Earington POTW. All point and nonpoint sources discharge directly to
   Maize Creek.
Water Quality Trading Scenarios
*— 	 •- 	 • 	 	 	 •—- 	 -,--™v,-_,-.. 	 ...„,.,,...,,.„, 	 ..„ 	 . .„.
Nonpoint Source
Credit Exchange The Function of a Quantifying
Nonpoint Source Nonpoint
Credit Exchange Source Loads
and Credits


Establishing Accountability
Baselines
for Nonpoint
Source Sellers


Trade Components
Agreements ofaNPDES
Permit Permit
Cover Page
............................... ....... „„ — 	 	 	 	


Effluent
Limitations Monitoring
---'-•-™--™ 	


Reporting
Requirements
                                                                                        Special
                                                                                        Conditions

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Water Quality Trading Toolkit for Permit Writers
                        Maize Creek Example: Special Conditions (continued)

  The NPDES permit writer has reviewed the signed trade agreement for trading between Earington
  POTW and the MCPN Exchange. The agreement describes how the POTW will meet its new WQBEL
  through trading with the MCPN Exchange. The NPDES permit writer has developed the appropriate
  effluent limitations, monitoring, and reporting requirements for the POTW. The special conditions in
  the POTW NPDES permit focus on general authority, credit definition, notification of amendment to
  the trade agreement, notification of unavailability of credits, BMP certification, permit reopeners and
  modification provisions, and enforcement liability.

  Permit Language:
  General Authority
  The permittee is authorized to participate in water quality trading with the Maize Creek Producers
  Nutrient Exchange, as specified in the Maize Creek Producers Nutrient Exchange Trade agreement,
  for the purposes of complying with the BOD effluent limitations and the watershed management
  plan goals required in this permit (Table 2). The authority to use trading for compliance with these
  limits is derived from:  and section 402 of the federal Clean
  Water Act 33 United States Code (U.S.C.) section 1342. EPA's policies on Water Quality Trading
  (1/13/03) and Watershed-Based NPDES Permitting (1/7/03) endorse water quality credit trading.
  Additionally the Maize Creek Watershed Management Plan  authorizes water quality trading as a
  means of achieving the allocations established.

  Credit Definition
  Credits will be measured in pounds of BOD per day on a monthly average basis. One trading credit
  shall be defined as one (1) unit of pollutant reduction (pound of BOD) to Maize Creek. All pol-
  lutant load reductions purchased and sold by the Maize Creek Nutrient Exchange as equivalent
  BOD credits represent pollutant load  reductions with the appropriate delivery, uncertainty, and
  equivalency trading ratios applied as detailed in the Maize Creek Producers Nutrient Exchange
  Trade agreement. All valid credits are tradable. The permittee may purchase credits from the Maize
  Creek Producers Nutrient Exchange so long as the BMPs utilized to generate credits are docu-
  mented as providing pollutant reductions beyond the load reduction indicated in the Maize Creek
  Watershed Management Plan.

  Notification of Amendment to the Trade Agreement
  The permittee is required to notify the permitting authority in writing within 7 days of the Maize
  Creek Producers Nutrient Exchange Trade Agreement being amended, modified, or revoked. This
  notification must include the details of any amendment or modification in addition to the justifica-
  tion for the change(s).

  Notification of Unavailability of Credits
  The permittee is required to notify the permitting authority in writing within 7 days of becom-
  ing aware that credits used or intended for use by the permittee to comply with  the terms of this
  permit are unavailable or determined to be invalid. This notification must include an explanation
  of how the permittee will ensure compliance with the WQBELs established in this permit, either
Water Quality Trading Scenarios
                                                                                      Special
                                                                                      Conditions
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


r
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations Monitoring


Reporting
Requirements

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                                            Water Quality Trading Scenario: Nonpoint Source Credit Exchange



                        Maize Creek Example: Special Conditions (continued)

   Permit Language (continued):

   through implementation of on-site controls or by conducting an approved emergency phosphorus
   offset project approved by the NPDES permit writer.

   BMP Certification
   The Maize Creek Producers Nutrient Exchange Trade Agreement specifies that each member will
   install BMPs beginning in January 2008. The Trade Agreement also includes a requirement that the
   BMPs be maintained in accordance with NRCS Conservation Practice Standard 350 for sediment basins
   and NRCS Conservation Practice Standard 656 for constructed wetlands. The permittee is required
   to inspect BMPs to verify the BMPs have been installed and are being maintained as required under
   the trade agreement. This permit authorizes the Niblet County SWCD to conduct these inspections
   on behalf of the permittee, per the terms of the signed MOD with the permittee. The permittee is
   required to submit a certification each year with the annual report, required by section X of this
   permit, that the permittee or the Niblet County SWCD has performed these inspections.

   Permit Reopeners, Modification Provisions
   The permitting authority may, for any reason provided by law, summary proceedings or otherwise,
   revoke or suspend this permit or modify it to establish any appropriate conditions, schedules of
   compliance, or other provisions which may be necessary to protect human health or the environ-
   ment or to implement a new Maize Creek BOD TMDL  should one be developed. The permitting
   authority may also reopen and modify the permit to suspend the ability to trade credits to comply
   with the total BOD waste discharge limitations in Table 2.

   Enforcement Liability
   The permittee is liable for meeting its most stringent  effluent limitation. No liability clauses
   contained in other legal documents (e.g., trade agreements, contracts) established between the
   permittee and other authorized buyers and sellers are enforceable under this permit.
Water Quality Trading Scenarios
Nonpoint Source
Credit Exchange



The Function of a
Nonpoint Source
Credit Exchange


Quantifying
Nonpoint
Source Loads
and Credits

Establishing
Baselines
for Nonpoint
Source Sellers

Accountability Trade
Agreements


*"""" 	 ~~
Components
of a NPDES
Permit



Permit
Cover Page


Effluent
Limitations Monitoring


Reporting
Requirements


Special
Conditions

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\Qfater Quality Trading Toolkit for Permit Writers

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                                                         Water Quality Trading Toolkit for Permit Writers
Glossary
The sources for these definitions vary. Some are unique to water quality trading and are
defined here by EPA for purposes of this Toolkit. Other definitions are based on federal
regulations,  as well as EPA policy and guidance. If the definition has a source, it is noted by
number (1-6). For the list of sources, see the bottom of this section.

Average Monthly Effluent Limitation: The  highest allowable average of daily discharges
over a calendar month, calculated as the sum of all daily discharges measured during that
month divided by the number of daily discharges measured during that month. 40 CFR 122.2.

Animal Feeding Operation (AFO): Lot or facility (other than an aquatic animal production
facility) where the following conditions are met:
     •  Animals (other than aquatic animals) have been, are, or will be stabled or confined
       and fed or maintained for a total of 45  days or more in any  12-month period, and
     •  Crops, vegetation, forage growth, or post-harvest residues are not sustained in  the
       normal growing season over any portion of the lot or facility. 40 CFR 122.23(b)(1).

Anti-backsliding: A provision in the Clean Water Act (CWA) and NPDES regulations (CWA
section 303(d)(4); CWA section 402(c); 40 CFR 122.44(1)) that requires a reissued permit  to be
as stringent as the previous permit with some exceptions. (1)

Antidegradation: Policies that ensure protection of existing uses and of water quality for
a particular waterbody where the water quality exceeds levels necessary to protect fish  and
wildlife propagation and recreation on and in the water. Antidegradation also includes  spe-
cial protection of waters designated as outstanding national resource waters. Antidegrada-
tion  plans are adopted by each state to minimize adverse effects on water. 40 CFR 131.12. (1)

Baseline: 1.) The pollutant control requirements that apply to  buyers and sellers in the
absence of trading. Sellers must first achieve their applicable baselines before they can enter
the trading market and sell credits. Buyers can purchase credits to achieve their applicable
baselines once they have met their minimum  control levels. 2.) Some programs use baseline
to define loads in a specific year, which usually  represents the starting point of the program.

Best Available Technology Economically Achievable (BAT): Technology-based standard
established by the Clean Water Act as the most appropriate means available on a national
basis for controlling the direct discharge of toxic and nonconventional pollutants to
navigable waters. BAT effluent limitations guidelines,  in general, represent the best existing
                                                                                            Glossary-1

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          Water Quality Trading Toolkit for Permit Writers


                   performance of treatment technologies that are economically achievable within an industrial
                   point source category or subcategory. (6)

                   Best Conventional Pollutant Control Technology (BCT): Technology based standard
                   for the discharge from existing industrial point sources of conventional pollutants including
                   biochemical oxygen demand, total suspended solids, fecal coliform, pH, oil and grease. The
                   BCT is established in light of a two-part cost reasonableness test, which compares the cost
                   for an industry to reduce its pollutant discharge with the cost to a POTW for similar levels
                   of reduction of a pollutant loading. The second test examines the cost-effectiveness of
                   additional industrial treatment beyond BPT. EPA must find limits that are reasonable under
                   both tests before establishing them as BCT. (6)

                   Best Management Practice (BMP): For point sources, 40 CFR 122.2 defines BMPs as sched-
                   ules of activities, prohibitions of practices, maintenance procedures, and other treatment
                   controls and pollutant removal devices (structural and nonstructural) to prevent or reduce
                   the discharge of pollutants to waters of the United States. BMPs also include treatment
                   requirements, operating procedures, and activities to control plant site runoff, spillage or
                   leaks, sludge or waste disposal, or drainage from raw material storage. For nonpoint sources,
                   BMPs are defined in 40 CFR  130.2 as methods, measures or practices selected by an agency
                   to meet its nonpoint source control needs. BMPs include, but are not limited to, structural
                   and nonstructural controls and operation and maintenance procedures. BMPs can be applied
                   before, during, and after pollution-producing activities to reduce or eliminate the introduc-
                   tion of pollutants into receiving waters.

                   Best Practicable Control Technology Currently Available (BPT): The first level of tech-
                   nology-based standards established by the Clean Water Act to control pollutants discharged
                   to waters of the  United States. BPT effluent limitations guidelines are generally based on the
                   average of the best existing performance by  plants within an industrial category or subcat-
                   egory. (6)

                   Compliance Schedule: A schedule of remedial measures included in a permit or an enforce-
                   ment order, including a sequence of interim requirements (e.g., actions, operations, or mile-
                   stone events) that lead to compliance with the Clean Water Act and regulations. (1)

                   Contract: Written agreement between the trading parties, separate from any applicable
                   NPDES permit, in which the parties may address a variety of financial or legal considerations
                  - and contingencies, including what happens in the case of default by any party.

                   Credit, or Pollutant Reduction Credit: A measured or estimated unit of pollutant reduc-
                   tion per unit of time at the discharge location of the buyer or user of the credit. A seller gen-
                   erates excess load reductions by controlling its discharge beyond what is needed to meet its
                   baseline. A buyer compensates a seller for creating the excess load reductions that are then
                   converted into credits by using trade ratios. Where  appropriate, the buyer can use the credits
                   to meet a regulatory obligation.
Glossary-2

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                                                          Water Quality Trading Toolkit for Permit Writers


Credit Exchange: A centralized reserve of pollutant reduction credits administered by a
third party who buys credits from point or nonpoint sources to sell to point sources in need of
credits to comply with calculated WQBELs.

Cross-Pollutant Trading: Trading across two different pollutant parameters when equiva-
lent mass loads of the different parameters can be calculated and the water quality effects of
those equivalent mass loads are similar (e.g., meeting an effluent limitation for biochemical
oxygen demand by purchasing credits generated for reduction of a phosphorus load).

Daily Discharge: The discharge of a pollutant measured during a calendar day or any
24-hour period that reasonably represents the calendar day for purposes of sampling. For
pollutants with limitations expressed in units of mass, the daily discharge is calculated as the
total mass of the pollutant discharged over the day. For pollutants with limitations expressed
in other units of measurement, the daily discharge is calculated as the average measurement
of the  pollutant over the day.

Delivery Ratio: Factor applied to pollutant reduction credits when sources are directly
discharging to a waterbody of concern that accounts for the distance and unique watershed
features (e.g.,  hydrologic conditions) that will affect pollutant fate and transport between
trading partners.

Designated Uses: Those uses specified in water quality standards for each waterbody or
segment whether or not they are being attained. 40 CFR 131.3. Examples of designated uses
include cold and warm water fisheries, public water supply, and irrigation.  (1, 4)

Effluent Limitation: Any restriction imposed on quantities, discharge rates, and concentra-
tions of pollutants that are discharged from point sources into waters of the United States,
the waters  of the contiguous zone,  or the ocean. 40 CFR 122.2.

Effluent Limitation Guidelines and Standards (ELGs): A regulation published by EPA
under section 304(b) of the Clean Water Act that establishes national technology-based
effluent requirements for a specific industrial category.

Equivalency Ratio: Factor applied to pollutant reduction credits to adjust for trading differ-
ent pollutants  or different forms of the same pollutant.

Load Allocation (LA): The portion of a receiving water's loading capacity that is attributed
either to  one of its existing or future nonpoint sources of pollution or to natural background
sources. LAs are best estimates of the loading,  which may range from reasonably  accurate
estimates to gross allotments, depending on the availability of data and appropriate tech-
niques for predicting the loading. Wherever possible, natural and nonpoint source loads
should be distinguished. 40 CFR 130.2.

Location Ratio: Factor applied to pollutant reduction credits when sources are upstream
of a waterbody of concern that accounts for the distance and unique watershed features
between a  pollutant source and the downstream waterbody (e.g., bay, estuary, lake, reser-
voir) or area of interest (e.g., a hypoxic zone in a waterbody).
                                                                                            Glossary-3

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          Water Quality Trading Toolkit for Permit Writers
                   Maximum Daily Effluent Limitation: The highest allowable daily discharge of a pollutant.
                   40CFR122.2.

                   Minimum Control Level: The pollutant load that a point source buyer must first meet
                   before buying credits to meet the facility's baseline. This pollutant load is either the TBEL
                   specified in a permit or the current discharge level, depending on which is more stringent.

                   National Pollutant Discharge Elimination System (NPDES): The national program for
                   issuing, modifying, revoking and reissuing, terminating, monitoring and enforcing permits,
                   and imposing and enforcing pretreatment requirements, under sections 307, 402 , 318, and
                   405 of the Clean Water Act. 40 CFR 122.2, NPDES permits regulate discharges of pollutants
                   from point sources to waters of the United States. Such discharges are illegal unless autho-
                   rized by a NPDES permit. (1)

                   Nonpoint Sources (NFS): Diffuse pollution sources (i.e., without a single point of origin or
                   not introduced into a receiving stream from a specific outlet). The pollutants are generally
                   carried off the land by stormwater. Common nonpoint sources include runoff from agricul-
                   ture, forestry, urban environments, land disposal, and saltwater intrusion, (2, 4)

                   Offset: 1.) n. Offsite treatment implemented by a regulated point source on upstream  land
                   not owned by the point source for the purposes of meeting its permit limit. 2.) n. Load reduc-
                   tions that are purchased by a new or expanding point source to offset its increased discharge
                   to an impaired waterbody. (Note: EPA considers both types of offsets to be trading programs)
                   3.) v. to compensate for.

                   Overlay Permit: A NPDES permit issued to a group of point source dischargers that supple-
                   ments individual permits by establishing permit limits and other requirements for one or
                   more pollutant of concern that are not addressed in the existing individual permits.

                   Permitting  Authority: EPA (an EPA Regional Administrator) or an authorized state, territo-
                   ry, or tribe. Under the Clean Water Act, most states are authorized to implement the NPDES
                   permit program. (1)

                   Point Source: Any discernible, confined, and discrete conveyance, including but not limited
                   to, any pipe, ditch, channel, tunnel, conduit, well, discrete fissure, container, rolling stock,
                   concentrated animal feeding operation,  landfill leachate collection system, vessel or other
                   floating craft from which pollutants are or may be discharged. This term does not include
                   return flows from irrigated agriculture or agricultural stormwater runoff. 40 CFR 122.2.

                   Publicly Owned Treatment Works (POTW): A treatment works as defined by section 212
                   of the Clean Water Act (CWA), which is owned  by a state or municipality (as defined by sec-
                   tion 502(4) of the CWA). This definition includes any devices and systems used in the storage,
                   treatment, recycling and reclamation of municipal sewage or industrial wastes of a liquid
                   nature. It also includes sewers, pipes and other conveyances only if they convey wastewater
                   to a POTW. The term also means the municipality as defined in section 502(4) of the CWA,
                   which has jurisdiction over the Indirect Discharges to and the discharges from such a treat-
                   ment works. 40  CFR 403.3.
Glossary-4

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                                                          Water Quality Trading Toolkit for Permit Writers


 Reconciliation Period: The period of time during which a seller generates water quality
 credits and a buyer purchases and uses those credits to compensate for a pollutant load that
 it discharges during that same time period.

 Retirement Ratio: Factor applied to pollutant reduction credits to accelerate water quality
 improvement. The ratio indicates the proportion of credits that must be purchased in addi-
 tion to the credits needed to meet regulatory obligations. These excess credits are taken out
 of circulation (retired) to accelerate water quality improvement.

 Single-Pollutant Trading: Trading a single pollutant parameter or different forms of the
 same pollutant parameter when equivalent mass loads of the different forms can be calcu-
 lated and the water quality effects of those equivalent mass loads are similar (i.e., meeting
 an effluent limitation for total nitrogen by purchasing credits generated for  reduction of
 another source's total nitrogen load or by purchasing credits generated for reduction of
 another source's nitrate load).

 Technology-Based Effluent Limitation (TBEL): A permit limit for a pollutant that is based
 on the capability of a treatment method to reduce the pollutant to a certain concentration.
 TBELs for POTWs are derived from the secondary treatment regulations (40 CFR Part 133) or
 state treatment standards. TBELs for non-POTWs are derived from national ELGs, state treat-
 ment standards, or on a case-by-case basis from the best professional judgment of the permit
 writer. (1)

 Third party: Any entity that is not a buyer or seller in the trade. A third party can be a state
 agency, conservation district, private entity, or other organization or person. Third parties
 could assist in facilitating  credit exchanges and verifying  BMPs.

 Total Maximum Daily Load (TMDL): A calculation of the maximum amount of a pollutant
 a waterbody can receive and still meet applicable water quality standards (accounting for
 seasonal  variations and a margin of safety), including an  allocation of pollutant loadings to
 point sources (wasteload allocations) and nonpoint sources (load allocations).

 Trade Agreement: Document that specifies the overall trading policies that trading parties
 must follow  to participate in trading. The NPDES permitting authority would approve the
 trade agreement and could either reference the terms of the trade agreement in the NPDES
 permit or include the trade agreement as part of the permit for each point source participat-
 ing in a trade.

Trading  Limit: Level of control on the pollutant discharge the point source seller chooses to
achieve, through technology or BMPs, beyond that facility's baseline.

Trading: A market-based approach to achieving water quality standards in which a point
source purchases pollutant reduction credits from another point source or a nonpoint source
in the same watershed that are then used to meet the point source's pollutant discharge
obligations. To be creditable to the point source purchaser, the credits must reflect actual,
achieved  pollutant reductions in excess of the credit seller's baseline. Under certain circum-
stances, a point source buyer may have to purchase more than one pound of  upstream pollut-
ant reduction to equal a pound discharged at its outfall.
                                                                                            Glossary-5

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          Water Quality Trading Toolkit for Permit Writers


                   Uncertainty Ratio: Factor applied to pollutant reduction credits generated by nonpoint
                   sources that accounts for lack of information and risk associated with best management prac-
                   tice measurement, implementation and performance.

                   Waste Load Allocation (WLA): The portion of a receiving water's loading capacity (TMDL)
                   that is allocated to one of its existing or future point sources of pollution. 40 CFR 130.2.

                   Water Quality Criteria (WQC): Elements of state water quality standards, expressed as
                   constituent concentrations, levels, or narrative statements, representing a quality of water
                   that supports a particular use. When criteria are met, water quality will generally protect the
                   designated use. 40 CFR 131.3.

                   Water Quality Standard (WQS): Provisions of state or federal law that consist of a desig-
                   nated use or uses for the waters of the United States, water quality criteria for such waters
                   based on such uses, and an antidegradation policy. Water quality standards are to protect the
                   public health or welfare, enhance the quality of water, and serve the purposes of the Clean
                   Water Act. 40 CFR 131.3.

                   Water Quality Based-Effluent Limitation (WQBEL): An effluent limitation determined by
                   selecting the most stringent of the effluent limits calculated using all applicable water quality
                   criteria (e.g., aquatic life, human health, wildlife, translation of narrative criteria) for a spe-
                   cific point source to a specific receiving water for a given pollutant or based on the facility's
                   wasteload allocation from a TMDL. (1)
                   EPA sources of definitions
                       1. EPA. 1996. NPDE5 Permit Writers'Manual. EPA 833-B-96-003. U.S. Environmental
                          Protection Agency, Office of Water. December.
                       2. EPA. 2004. Water Quality Trading Assessment Handbook: Can Water Quality Trading
                          Advance Your Watershed's Goals? EPA 841-B-04-001. U.S. Environmental Protection
                          Agency, Office of Water. November.
                       3. EPA Region 10. 2003. Water Quality Trading Assessment Handbook: EPA Region 10's
                          Guide to Analyzing your Watershed. EPA 910-B-03-003. U.S. Environmental Protection
                          Agency, Region 10, Seattle, Washington. July.
                       4. EPA. Terms of Environment: Glossary, Abbreviations, Acronyms.
                          .
                       5. EPA. National Water Quality Trading Policy, January 13, 2003.
                       6. EPA. NPDES Glossary, .
Glossary-6

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                                                         Water Quality Trading Toolkit for Permit Writers
References
Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth
    College, Hanover, NH. .
    Accessed July 11, 2007.

Chesapeake Bay Commission. 2004. Cost-Effective Strategies for the Bay. Chesapeake Bay
    Commission . Accessed
    July 11,2007.

Idaho Division of Environmental Quality (Idaho DEQ). 2000. Lower Boise River Effluent
    Trading Demonstration Project: Summary of Participant Recommendations For a Trading
    Framework. Available online . Accessed July 11, 2007.

Jones, C, L. Bacon, M.S. Kieser, and D. Sheridan. 2005. Water Quality Trading: A Guide for the
    Wastewater Community. Water Environment Federation Press, Alexandria, VA.

Moffett, L. 2005. Water Quality Trading: Approaches to Deal with Scientific and Institutional
    Uncertainty. Senior Thesis. Dartmouth College, Hanover, NH.

O'Grady, D., and M.A. Wilson. No date. Phosphorus Trading in the South Nation River
    Wastershed, Ontario, Canada. . Accessed
    March 31, 2006.

USEPA (U.S. Environmental Protection Agency). 1996a. Draft Framework for Watershed Based
    Trading. EPA-800-R-96-001. U.S. Environmental Protection Agency, Office of Water,
    Washington, DC. Available online . Accessed July 11, 2007.

USEPA (U.S. Environmental Protection Agency). 1996b. U.S. EPA NPDES Permit Writers'
    Manual. EPA-833-B-96-003. U.S. Environmental Protection Agency, Office of Water,
    Washington, DC.

USEPA (U.S. Environmental Protection Agency). 1997. Monitoring Guidance for Determining
    Effectiveness of Nonpoint Source Controls. EPA 841-B-96-004. U.S. Environmental
    Protection Agency, Office of Water, Washington, DC.
                                                                                        Re fe rentes-1

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         Water Quality Trading Toolkit for Permit Writers


                   USEPA (U.S. Environmental Protection Agency). 2001. Chesapeake Bay Program Nutrient
                      Trading Fundamental Principles and Guidelines. EPA-903-B-01-001. U.S. Environmental
                      Protection Agency, Chesapeake Bay Program, Annapolis, MD.
                      . Accessed
                      July 11,2007.

                   USEPA (U.S. Environmental Protection Agency). 2003a. Water Quality Trading Policy. U.S.
                      Environmental Protection Agency, Office of Water. Washington, DC.
                      . Accessed July 11, 2007.

                   USEPA (U.S. Environmental Protection Agency). 2003b. Watershed-Based National Pollutant
                      Discharge Elimination System (NPDES) Permitting Implementation Guidance. EPA-833-B-
                      03-004. U.S. Environmental Protection Agency, Office of Water, Washington, DC.
                      . Accessed
                      July 11,2007.

                   USEPA (U.S. Environmental Protection Agency). 2004. Water Quality Trading Assessment
                      Handbook. EPA-841-B-4-001. U.S. Environmental Protection Agency, Office of Water,
                      Washington, DC. . Accessed
                      July 11, 2007.

                   USEPA (U.S. Environmental Protection Agency). 2006. Integrated Compliance Information
                      System Users' Guide. U.S. Environmental Protection Agency, Office of Enforcement and
                      Compliance Assurance, Washington, DC.

                   Vermont Department of Environmental Conservation (VTDEC). 2005. Chapter 18: Stormwater
                      Management Rule in Environmental Protection Rules, . Accessed July 11,  2007.

                   World Resources Institute. 2004. NutrientNet. . Accessed July 11, 2007.
References-2

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                                         Water Quality Trading Toolkit for Permit Writers
Appendix A

Water Quality Trading Program Fact Sheets
Including Applicable NPDES Permit Conditions and Limits
Contents

Introduction	A-1
Grassland Area Farmers Tradable Loads Program, Lower San Joaquin
    River, California	A-3
Long Island Sound Nitrogen General Permit and Nitrogen Credit
    Exchange Program, Connecticut	A-11
Lower Boise Effluent Trading Demonstration Project, Idaho	A-23
Rahr Malting Company Permit, Minnesota	A-31
Southern Minnesota Beet Sugar Cooperative Permit, Minnesota	A-43
Truckee River, Nevada	A-55
Passaic Valley Sewerage Commissioners Pretreatment Trading,
    New Jersey	A-61
Neuse River Basin Nutrient Sensitive Waters Management Strategy,
    North Carolina	A-69
Great Miami River Watershed Trading Pilot Program, Ohio	A-79
Clean Water Services, Oregon	A-85
Water Quality Trading in the Chesapeake Bay Watershed: Virginia's
    Nutrient Credit Exchange Program	A-97
Red Cedar River Nutrient Trading Pilot Program, Wisconsin	A-109
                                                                        A-i

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A-ii

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                                                        Water Quality Trading Toolkit for Permit Writers
Introduction

     Appendix A to the U.S. Environmental Protection Agency's (EPA) Water Quality Trading
     Toolkit for Permit Writers contains a series of fact sheets on water quality trading pro-
grams nationwide. Water quality trading programs selected for this analysis are geographically
representative and, on the basis of recent research, are likely to have (1) actual or proposed
National Pollutant Discharge Elimination System (NPDES) permit language to facilitate trades
and (2) actual trades. The  programs selected for review and analysis are intended to be used
to compare and contrast different approaches in water quality trading programs; the Office of
Wastewater Management does not intend to highlight these  programs as model programs.

The fact sheets are intended to document the relevant technical details on which each trad-
ing program is predicated. The fact sheets also contain some background information to help
the reader establish a basic understanding of the context and functionality of each water
quality trading program. As a result, some of the contextual information contained in the
fact sheets might seem similar to the types of information collected and compiled through
existing research on water quality trading. The primary difference between the collection of
fact sheets researched and assembled for this report is the focus on the methodologies and
technical rationale used in developing water quality trading programs and the associated
NPDES permits.

The fact sheets summarize information from the following water quality trading  programs:
    1.  Grassland Area Farmers Tradable Loads Program (California)
    2.  Long Island Sound Nitrogen Credit Exchange Program (Connecticut)
    3.  Lower Boise River Effluent Trading Demonstration Project (Idaho)
    4.  Rahr Malting Company Permit (Minnesota)
    5.  Southern Minnesota  Beet Sugar Cooperative Permit (Minnesota)
    6.  Truckee River (Nevada)
    7.  Passaic Valley Sewerage Commission Pretreatment Trading Program (New Jersey)
    8.  Neuse River Basin Nutrient Sensitive Waters Management Strategy (North Carolina)
    9.  Great Miami  River  Watershed Trading Pilot (Ohio)
    10. Clean Water Services (Oregon)
    11.  Virginia Nutrient Credit Exchange Program (Virginia)
    12. Red Cedar River Watershed Nutrient Trading Pilot Program (Wisconsin).

Several fact sheets are followed by one or more flow charts that illustrate the connections
among various programs, plans, and strategies integrated through water quality  trading
                                                                                                  A-l

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          Water Quality Trading Toolkit for Permit Writers


                   programs, as well as the basic process used to administer trades. All fact sheets and
                   associated flow charts are a work in progress, and they will be updated as new information is
                   obtained.

                   The NPDES permits referenced in the fact sheets are part of EPA's inventory of NPDES permits
                   containing water quality trading provisions. The inventory also contains additional NPDES
                   permits not discussed in the water quality trading program fact sheets. For more informa-
                   tion on the inventory of NPDES permit containing water quality trading provisions, contact
                   Virginia Kibler in EPA's Office of Wastewater Management at kibler.virginia@epa.gov or by
                   phone at 202-564-0596.
A-2

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                                                     Water Quality Trading Toolkit for Permit Writers


Grassland Area Farmers Tradable Loads Program

Lower San Joaquin River, California                                4


Overview
Seven irrigation and drainage districts that are members of the San Luis & Delta-Mendota
Water Authority have the discharges with the greatest impact on the San Joaquin River Basin.                :>
Referred to as the Grassland Area Farmers, the seven authority members are subject to a
regional cap on selenium discharges set through the Grassland Bypass Project. If the regional
authority exceeds the regional cap, it must pay an incentive fee that is a flat  price based on
five exceedance ranges (i.e., percent exceedance over the regional cap) that increase over
time. Each of the seven members of the regional authority has an allocation of the regional
cap referred to as a selenium load allocation. If a member of the regional authority exceeds
its selenium  load allocation, it may either pay its portion of the incentive fee or purchase sele-
nium load allocations from another member.

Type of Trading              Pollutant(s) Traded                                    f
                                                                                              (f,
                                                                                              ET
Nonpoint Source-Nonpoint Source*    Selenium                                                    §__
                                                                                              >
* Selenium loading from irrigated agriculture is accurately measured at drainage pumps and is                        s
regulated by state permits; therefore, the trading program is similar to a point source-to-point                        SJ,
source trading program. Since irrigated agriculture is not regulated under the Clean Water Act,                        *
NPDES permits are not applicable.                                                                     ™
Number of Trades to Date
                                                                                              n.
                                                                                              g;
Thirty-nine formalized trades                                                                      r1
Unknown number of informal trades                                                                |L
                                                                                              t*
                                                                                              3
                                                                                             ttq
Who Is Eligible to Participate?                                                         |

Seven of the irrigation and drainage districts that are members of the San Luis & Delta-Men-                  *
dota Water Authority are in a sensitive grassland area and are therefore known as the Grass-                  |
land Area Farmers. The individual farmers in each of the seven districts do not participate in                   J,
trading; all trades are conducted at the district level among members of the Grassland Area                   ^
Farmers. Other members of the San Luis & Delta-Mendota Water Authority are not eligible to                J
participate.                                                                                     3-
                                                                                              58
What Generated the Need for Trading?                                               £
Agricultural activity in the Grassland Drainage Area depends on irrigation, which leaches                     °
salts and trace metals in soils and affects growing conditions. Installation of the San Luis                      s'
drain helped to remove irrigation drainage, but it affected sensitive areas in the San Joaquin
River watershed. The Grassland Bypass Project diverted irrigation drainage around sensitive
grassland areas into the San Luis drain and eventually to the San Joaquin River. Under the
Grassland Bypass Project, an agreement for use of the drain (Use Agreement), signed by the
U.S. Bureau of Reclamation and the San Luis & Delta-Mendota Water Authority in 1995, set a
district-level selenium cap (i.e., aggregate monthly and annual selenium discharge limits).                   .  ~

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         Water Quality Trading Toolkit for Permit Writers


                  What Serves as the Basis for Trading?
                  Actions taken through the Grassland Bypass Project established the regional cap for selenium,
                  which serves as the basis for the Grassland Area Farmers Tradable Loads Program. The 1995
                  Use Agreement signed by the Bureau of Reclamation (i.e., the owner of the section of the
                  San Luis Drain used by the Grassland Area Farmers through the Grassland Bypass Project) and
                  the San Luis & Delta Mendota Authority established the Grassland Bypass Project. The formal
                  agreement contained the initial regional cap for selenium, which decreases over time; estab-
                  lished an  incentive fee system that increases over time; and stated that if the Grassland Area
                  Farmers' discharges exceed the regional cap by more than 20 percent, the authority's use
                  of the drain would terminate. The initial regional cap contained in the 1995 Use Agreement
                  was developed using a consensus-based stakeholder approach and presented in the form of
                  interim monthly and  annual load limits for the first 5 years of the Grassland Bypass  Project,
                  (CRWQCB-CVR 2001a). The two parties signed on to the 2001 Use Agreement, which extends
                  through December 2009.

                  At the time the 1995  Use Agreement was signed, the California Regional Water Quality Con-
                  trol Board (Regional  Board) was developing an amendment to the existing basin plan for the
                  San Joaquin River Basin. The 1996 Basin Plan Amendment contained a draft Total Maximum
                  Daily Load (TMDL). The Regional Board set the load limits in the TMDL on a monthly and
                  annual basis. In August  2001 the Regional Board published the Total Maximum Daily Load for
                  Selenium in the Lower San Joaquin River, which establishes monthly load allocations for sele-
                  nium depending on the type of water year (see  Determining Water Year Types on the next
                  page for more information).

                  In 1998 the Regional  Board issued Waste Discharge Requirements for San Luis and Delta-
                  Mendota Water Authority and United States Department of the Interior, Bureau of Recla-
                  mation, Grassland Bypass Project Fresno and Merced Counties, Order Number 98-171, which
                  reflected  the interim  monthly and annual selenium load limits developed using a consensus-
                  based approach under the 1996 Basin Plan Amendment. In September 2001 the  Regional
                  Board issued a new Waste Discharge Requirements Order Number 5-01-234, which uses the
                  load limits contained in the 2001  Use Agreement. The load limits are designed to meet spe-
                  cific TMDL limits under the 2001 TMDL (CRWQCB-CVR 2001b).

                  At this point in time,  the 2001 TMDL and the 2001  Waste Discharge Requirements Order
                  Number 5-01-234 provide the current regional monthly and annual load limits for selenium
                  and serve as the basis for water quality trading.


                  What Types of Data and Methodologies Were Used to Calculate
                  the Basis for Trading?
                  2007  Total Maximum Daily Load for Selenium
                  The 2001  TMDL builds on previous load allocations calculated for the San Joaquin River. A
                  simple  spreadsheet model calculates monthly  selenium load allocations based on critical flow.
                  The model uses historical flow records, grouped by season and water year type to calculate
                  design flow (low-flow) conditions for each flow regime. The 2001 TMDL uses the following
                  water year type classifications: Critical, Dry/Below Normal, Above Normal, and Wet. Four sea-
                  sonal groups used in  the TMDL model represent the seasonality of flows in the San  Joaquin
A-4

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                                                         Water Quality Trading Toolkit for Permit Writers


River Basin and the Grassland Area. The seasonal groups are September through November,
December and January, February through May, and June through August. This approach
resulted in 16 flow regimes, which allows dischargers to make adjustments to meet a season's
load allocation. The design flows that correspond to a water year type and a season are key
to calculating the TMDL monthly limits and the corresponding load allocations.


  Determining Water Year Types
     Water year type, as used in the San Joaquin TMDL model, is based on a classification scheme
     called the San Joaquin River Index of Unimpaired Flows. The index is a calculation of the
     percentage of the unimpaired runoff from the four major rivers in the basin during specific
     months of the year, as well as a percentage of the previous year's index.
The TMDL is the assimilative capacity of the waterbody. To calculate the TMDL, the design flow
for a particular water year type and month is multiplied by the water quality objective and a
conversion factor that converts acre-feet x micrograms per liter (ug/L) to pounds. A monthly
load limit is established, rather than a daily limit, because most agricultural water districts lack
the facilities needed to manage drainage on a daily basis.
Water Quality Objective (pg/L) x Design flow (acre-feet) x 0.0027197 (conversion
factor) - TMDL (pounds)

Table 1.  Example: Calculating the TMDL for Water Year Types in September
Time
Period
September
September
September
September
Year Type
Critical
Dry/Below Normal
Above Normal
Wet
Water Quality
Objective (pg/L)
5
5
5
5
Design
Flow (ac-ft)
5,016
20,298
22,667
27,850
Conversion
Factor
0.0027197
0.0027197
0.0027197
0.0027197
TMDL
(«>)
68
276
308
378
Source: CRWQCB-CVR, 2001b
                                                                                                     O.
                                                                                                     Ct>
                                                                                                     cr
                                                                                                     t-
                                                                                                     o
                                                                                                     u
                                                                                                     a.
                                                                                                     o
                                                                                                    (TO
The TMDL must be distributed as a wasteload allocation for point sources, a load allocation
for nonpoint sources, a margin of safety, and a background load. Because there are no point
sources of selenium in the lower San Joaquin River Basin, there is no wasteload allocation.
The margin of safety is 10 percent of the TMDL. The Grassland Bypass Project Area is the only
nonpoint source in this TMDL and will receive the only load allocation. The load allocation is
the TMDL minus the background load and the margin of safety. Similar to the TMDL, the load
allocation and the background load vary according to season and water year type.
 '
S3
                                                                                                  A-5

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         TMDL - (Background Load + Margin of Safety) = Load Allocation

            Example: Calculating the TMDL and the Associated Load Allocation

            The TMDL for the month of September during a wet year is determined by multiplying the water
            quality objective by the design flow for a wet year in September and the conversion factor of
            0.0027197.

              Water Quality Objective = 5 ug/L

              Design Flow (September, Wet year) = 27,850 acre-feet (ac-ft)

              Conversion Factor = 0.0027197

              5 ug/L x 27,850 ac-ft x 0.0027197 = TMDL = 378 Ib

            The load allocation associated with a TMDL of 378 pounds for a wet year in September is the
            TMDL minus the background load and the margin of safety.

              TMDL = 378 Ib

              Background Load = Loads produced at two upstream points and from wetlands during a Wet
              year in September (flow x concentration) = 8 Ib

              Margin of Safety = 10% of TMDL = 378 Ib (TMDL) x 0.10 = 37.8 Ib

              378 Ib - (8 Ib + 37.8 Ib) = LA = 332.2 Ib
                                                                     -i
A-6
                  Waste Discharge Requirements Order No. 5-01-234 (2001)
                  The permit limits in the 2001 Waste Discharge Requirement Order reflect the load alloca-
                  tions by month and water year type in the 2001 TMDL adjusted by the selenium reduction
                  goals in the 1996 Basin Plan Amendments, as well as stakeholder negotiations. As a result, no
                  straightforward calculation is available to demonstrate how the 2001 TMDL load allocations
                  translate to permit limits.


                  Are Permits Used to Facilitate Trades?
                  In California, the  Regional Boards issue Waste  Discharge Requirement Orders that serve the
                  same function as  permits issued under the National Pollutant Discharge Elimination System
                  (NPDES) program. The Regional Board issued Waste Discharge Requirements for San Luis
                  & Delta — Mendota Water Authority and United Sates Department of the Interior Bureau
                  of Reclamation Grassland Bypass Project, Fresno and Merced Counties, Order No. 98-171,
                  in 1998. The order contained the enforceable regional cap for selenium for the Grassland
                  Area Farmers. In 2001 the Regional Board issued a new Waste Discharge Requirement

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                                                          Water Quality Trading Toolkit for Permit Writers


Order (No. 5-01-234) and rescinded the previous order. The 2001 Waste Discharge Require-
ment Order does not contain language that addresses trading. Trading is an internal tool                    -
that the Grassland Area Farmers use to comply with the regional cap for selenium.                          „"

                                                                                                       ' /^
How Are Credits Generated for Trading?
Formalized trading under the Grassland Area Farmers Tradable Loads Program occurred only                    ;
during 1998 and 1999. To facilitate trading, a Steering Committee allocated the regional cap
for selenium among the seven districts that compose the Grassland Area Farmers. The district-
level allocations are referred to as selenium load allocations. Selenium load allocations for
each district were calculated based on tilled acreage, total acreage, and historical selenium
loads from each district (Anderson 2000). However, there is no precise formula for calculating
the selenium load allocations because a consensus-based process involving the participating
districts ultimately determined the final selenium load allocations (Linnemann 2004).

The Steering Committee, in conjunction with a project director and the seven drainage
districts, developed draft rules to implement the trading program. Rules were developed for
each water year (i.e., October 1 through September 30 of the following year). They specified                    o
the district-level selenium load allocations, the role of a regional drainage coordinator, and                     gj
                                                                                                       t/i
other requirements for reducing selenium loading (Anderson 2000).                                         ST
                                                                                                       o.
                                                                                                       >
Because credits are based on actual monthly selenium loads, the trades that have occurred                      g
have been retroactive in nature (Breetz et al. 2004). Trades can involve direct purchases of                       31
selenium load allocations or an exchange of allocations between districts (Anderson 2000). Dis-                  |
tricts that discharge below their selenium load allocation  generate credits eligible for trading.                    ^
Districts with discharges that exceed their selenium load allocation must trade with another                     ^
                                                                                                       ju
district or pay their percentage of the regional incentive fee established through the rules for                    £
a particular water year. The percentage of the incentive fee owed by a district that exceeds its                    £*
                                                                                                       &>
selenium load allocation is calculated by dividing the pounds of selenium above that district's                    £•
selenium load allocation by the total exceedances of all districts (Anderson 2000).                               •?
                                                                                                       B>
  Selenium load above selenium load allocation (pounds) / Total selenium load of all
  districts above regional selenium cap (pounds) = Incentive fee percentage                                  |
t-
o
                                                                                                       S/J
                                                                                                       a
                                                                                                       3
The monthly limit during October for the regional cap in water year 1999 was 348 pounds of                     *
selenium, with an annual limit of 6,327 pounds. In this example, the Grassland Area Farmers                      s'
collectively exceeded the monthly regional selenium cap by 9 percent. The 1995 Use Agreement                   jjf
Performance Incentive System sets the monthly fee for exceeding the monthly regional selenium                  n
cap at between 0.1 and 10 percent for Year 2 of the program at $1,200. Therefore, the amount                   §
of incentive fee owed by each district to the Incentive Fee Account is as shown in Table 2.                         2.
                                                                                                    A-7

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         Water Quality Trading Toolkit for Permit Writers
         Table 2. Example: Calculating District-Level Incentive Fees




District
1

2
3
4
5
6
7
Total
October
1998
Monthly
Selenium
Load
Allocation
(lb)®
169

69
46
28
18
14
4
348

October
1998
Monitored
Selenium
Load
(lb)©
180

71
48
30
26
20
6
381

Selenium
Load
Allocation
Exceedance
(lb)
CD ©-© = ©
11

2
2
2
8
6
2
33®



Incentive Fee
Percentage ©
®/® = ®
11 lb/33 lb = 33
percent
2 lb/33 lb = 6 percent
2 lb/33 lb = 6 percent
2 lb/33 lb = 6 percent
8 lb/33 lb = 24 percent
6 lb/33 lb = 18 percent
2 lb/33 lb = 6 percent
9 percent over
monthly regional cap




Portion of Monthly
Incentive Fee ($1,200)
$1,200 x 0.333 = $399.60

$1,200 x 0.061 = $73.20
$1,200x0.061 = $73.20
$1,200 x 0.061 = $73.20
$1,200 x 0.242 = $290.40
$1,200 x 0.182 = $218.40
$1,200 x 0.061 = $73.20
$1,201.20
         In water year 1999, the cost per pound of selenium was approximately $40.00.
                  One method used to reduce selenium loads was drainage recycling, where drainage water
                  was applied to salt-tolerant crops (Breetz et al. 2004).


                  What Are the Trading Mechanisms?
                  When the program formally executed trades, participating districts signed bilateral trade
                  agreements that named the parties involved and specified the month and year of the sele-
                  nium load allocation being traded (Anderson 2000). Trades no longer occur using formal
                  mechanisms such as trade agreements; instead, districts make informal agreements when
                  trades occur that do not require any type of written documentation (Linneman 2004).


                  What Is the Pollutant Trading Ratio?
                  No trading ratio is used. Credits are based on actual monthly selenium loads measured by
                  each irrigation district not on estimates of best management practice effectiveness (Breetz et
                  al. 2004).
A-8
What Type of Monitoring Is Performed?
The drainage districts monitor selenium loads at the 62 sumps where water is pumped into
the drain. A combination of flow measurements and analytical sampling is used to determine
selenium loading, although farmers and districts can estimate weekly updates on loading.
Selenium loading  data generated by the districts' monitoring activities were processed
over 1 to 2 months to calculate retroactive credits under the formalized trading procedures
(Anderson 2000).

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                                                      Water Quality Trading Toolkit for Permit Writers


What Are the Incentives for Trading?
The districts are subject to incentive fees if they exceed their aggregate cap, and their use of                  -
the irrigation drain is cut off after a 20 percent exceedance. The selenium cap is lowered each                 "'"'•
year, and the incentive fee for exceedances is raised each year, providing a strong incentive                   ^
for the districts to control their discharges. Rather than paying a portion of the incentive fee,                 1,
                                                                                                ''••~~j
a district may participate in trading to achieve the monthly and annual regional selenium
caps for each water year.                                                                           ""•'


What Water Quality Improvements Have Been Achieved?
Selenium loading has decreased every water year from 1995 to 2001, except the wet year
in 1998, and regional selenium load targets have been met nearly every month through
February 2004 (Breetz et al. 2004).


What Are the Potential Challenges in Using This Trading
Approach?
                                                                                                £\
Potential challenges associated with the approach used in the Grassland Area Farmers                       %
Tradable Loads Program include the following (Breetz et al. 2004):                                        |.
                                                                                                3
    •  Time for processing the data necessary to calculate credits using actual loading data                  j£
       as opposed to estimated load reductions                                                       <»
                                                                                                *n
    •  Resources for conducting continuous monitoring (e.g., irrigation monitoring)                        Si
                                                                                                3
    •  Negotiations to determine reasonable pricing                                                   I
                                                                                                tf
                                                                                                w
                                                                                                C-
What Are the Potential Benefits?                                                       I
                                                                                                f
Benefits associated with the Grassland Area Farmers Tradable Loads Program include the                     2
following (Breetz etal. 2004):                                                                       £
                                                                                                ^
    •  High degree of certainty because trades are based on actual monitoring data                        »
                                                                                                BJ
    •  No need to adjust credits for relative environmental impacts because there is a single                  °
       discharge point                                                                             tr<
    •  No danger of noncompliance with trade agreements because trades are retroactive                   ^
                                                                                                C/l
       based on actual pollutant loads                                                               §
Applicable NPDES Permit Language
                                                                                                 '
                                                                                                5
As mentioned above, the Waste Discharge Requirement Orders issued by the Regional Board                  <»
contain the applicable effluent limits to achieve the water quality objective for selenium.                     £
However, neither of the Waste Discharge Requirement Orders contains language that specifi-                 "?
cally references water quality trading to achieve the regional selenium cap set for the Grass-
land Bypass Project participants.
                                                                                              A-9

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         Water Quality Trading Toolkit for Permit Writers


                   Contact Information
                   Rudy Schnagl
                   Senior Land and Water Use Scientist
                   Central Valley Regional Water Quality Control Board
                   (916)464-4701
                   schnagr@rb5s.swrcb.ca.gov


                   References
                   Anderson, SJ. 2000. A Companion to Research Paper Number 6, Nine Case Studies:
                      Appendices A-l. Appendix B: San Joaquin River Basin, CA: The Grassland Bypass Project
                      and Tradable Loads Program. In R.L. Kerr, S.J. Anderson, and J. Jaksch. Crosscutting
                      Analysis of Trading Programs: Case Studies in Air, Water, and Wetland Mitigation Trading
                      Systems. Prepared for the National Academy of Public Administration, Washington, D.C.

                   Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water
                      Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth
                      College, Hanover, NH.

                   Linnemann, Chris. 2004. Personal communication. August,

                   CRWQCB-CVR (California Regional Water Quality Control Board, Central Valley Region).
                      2001a. Total Maximum Daily Load for Selenium in the Lower San Joaquin River. California
                      Environmental Protection Agency. August.
                      .

                   CRWQCB-CVR (California Regional Water Quality Control Board, Central Valley Region).
                      2001 b. Waste Discharge Requirements: 5-01-234 for San Luis & Delta-Mendota  Water
                      Authority and United States Department of the Interior, Bureau of Reclamation,
                      Grassland Bypass Channel Project (Phase H), Fresno and Merced Counties. September 7.


                   Resources
                   Grassland Bypass Compliance Monitoring Program. Summary of Selenium Loads at Station
                      B (Discharge from  San Luis Drain). San Francisco Estuary Institute, San  Francisco, CA.
                      .

                   U.S. Department of the Interior, Bureau of Reclamation, Central Valley Project, California
                      and San Luis & Delta-Mendota Water Authority. 2001. Agreement for Use of the San Luis
                      Drain for the Period October 1, 2001 through December 31, 2009. Agreement No. 01-WC-
                      20-2075. September 28.
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                                                  Water Quality Trading Toolkit for Permit Writers


Long Island  Sound Nitrogen  General Permit and

Nitrogen Credit Exchange Program

Connecticut                                                                     ^

                                                                                        "'^.
Overview
The Connecticut portion of the Long Island Sound watershed encompasses approximately 79
publicly owned treatment works (POTWs) that contribute to the problem of seasonal hypox-
ia. The Connecticut Department of Environmental Protection (CTDEP) developed its water-
shed-based NPDES General Permit for Nitrogen Discharges (General Permit) and Nitrogen
Credit Exchange Program to help POTWs achieve nitrogen reductions called for in the Total
Maximum Daily Load (TMDL). POTWs must meet the annual  average discharge limits in the
permit or purchase the necessary credits to achieve their individual limits through the Nitro-
gen Credit Exchange Program administered by an advisory board and CTDEP. If the POTWs
generate more credits than purchasing POTWs need, the state is obligated to purchase the
remaining credits to ensure that the POTWs that made nitrogen reductions are appropriately                §
awarded for their efforts.                                                                     sr
Type of Trading                   Pollutant(s) Traded
                                                                                         3
                                                                                         a.
                                                                                         C/J
                                                                                         o
                                                                                         C
Point Source-Point Source                Total nitrogen                                         °-


Number of Trades to Date                                                           |

In 2002, 38 municipalities purchased credits and 39 municipalities sold credits (CTDEP 2003).                 r?
In 2003, 40 municipalities purchased credits and 37 municipalities sold credits (Stacey 2004c).                 jj
In 2004, 44 municipalities purchased credits and 35 municipalities sold credits (CTDEP 2006).                 %
In 2005, 50 municipalities purchased credits and 28 municipalities sold credits (CTDEP 2006).                 3
                                                                                         rt


Who Is Eligible to Participate?                                                      |

Seventy-nine municipal sewage treatment plants scattered throughout the state of Connecti-                «
cut participate in the Nitrogen Credit Exchange Program.                                            n
What Generated the Need for Trading?
Seasonal hypoxia affects the bottom waters of the western half of the Long Island Sound
during the summer. Monitoring, modeling, and research spanning 15 years indicated the
need for Connecticut and New York to significantly reduce nitrogen loads. Connecticut and
New York developed a bistate TMDL for nitrogen that EPA approved in 2001. The TMDL is
based on the states' dissolved oxygen (DO) criteria.


What Serves as the Basis for Trading?
The TMDL's wasteload allocation developed for the Long Island Sound serves as the driver for
trading among the 79 POTWs in Connecticut.
                                                                                         tn
                                                                                         x
                                                                                     A-ll

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         Water Quality Trading Toolkit for Permit Writers


                   In 2001 EPA approved the CTDEP and New York State Department of Environmental Conser-
                   vation (NYSDEC) TMDL calling for nitrogen reductions of 58.5 percent from their combined
                   point and non-point sources from 2001 levels by 2014. The TMDL contains an uneven distri-
                   bution between the wasteload and load allocations: Connecticut has a 10 percent reduction
                   requirement from urban and agricultural land cover and a 64 percent reduction from point
                   sources, which combined equal the 58.5 percent reduction in the TMDL (Stacey 2004c).

                   The TMDL was developed to attain DO criteria for Long Island Sound of 5 to 6 milligrams
                   per liter (mg/L). Since TMDL adoption, Connecticut has revised its DO criteria establishing a
                   minimum concentration of 3.5 mg/L with allowable exposure days within incremental ranges
                   to 4.8 mg/L,  based on EPA DO criteria. New York is in the process of revising its criteria along
                   similar lines.  The revised DO criterion, however,  have not yet affected the wasteload or load
                   allocations in the TMDL.

                    58.5 percent nitrogen reduction from in-basin sources + reductions in nitrogen and
                    carbon from out-basin sources + non-treatment alternatives + margin of safety = TMDL
                    for Long Island Sound
                  What Types of Data and Methodologies Were Used to Calculate
                  the Basis for Trading?
                  Ambient Monitoring
                  Year-round monitoring of the Long Island Sound began in 1988 and continues to date.
                  Parameters include water temperature, salinity, all nutrient species for phosphorus and nitro-
                  gen, silicon, dissolved oxygen, chlorophyll a, and total suspended solids.

                  US 3.0 Hydrodynamic/Water Quality Model
                  Federal funding facilitated the development of a coupled, three-dimensional, time-variable
                  hydrodynamic/water quality model called LIS 3.0. The LIS 3.0 model defined the unique trans-
                  port mechanisms that distribute nitrogen throughout the Long Island Sound. The transport
                  efficiencies identified through LIS 3.0 were key in understanding the relative importance of
                  nitrogen sources from various locations around the sound in oxygen depletion (Stacey and
                  Tedesco 2004). Information generated through the LIS 3.0 model also assisted in the develop-
                  ing of planned and completed DO criteria revisions relevant to Long Island Sound,

                  The model has been calibrated using ambient monitoring data collected over the  18-month
                  period from April 1988  through September 1989 described earlier. The 18-month calibration
                  period covers all seasons of the year; actual hydrological and meteorological conditions for that
                  time period were input  into the model. Tributary loadings and combined sewer overflows were
                  also determined using time-variable rainfall and river flow data. Other factors that influence
                  external boundary conditions and internal circulation within the Sound, such as hydrological
                  and meteorological conditions (seasonal  variations, such as wet and dry weather conditions),
                  have been considered and  are included in the model as well (CTDEP and NYSDEC 2000).

                  Nitrogen Management Zones  and Equivalency Factors
                  In-basin loads of nitrogen (i.e., nitrogen  originating within the Connecticut and New York
A-12             portions of the Long Island Sound drainage basin, including those deposited directly on the
                  sound's surface) were partitioned by location into 12 nitrogen management zones. Eleven of

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                                                        Water Quality Trading Toolkit for Permit Writers
the management zones surround the sound in Connecticut and New York, and the 12th zone
is the surface of Long Island Sound. Zones 1 to 11 are considered terrestrial management
zones that follow the natural river basin boundaries in Connecticut. Connecticut manage-
ment zones (Zones 1 to 6) were further divided into tiers to account for nitrogen attenuation
during transport from one tier to the next (CTDEP and NYSDEC 2000).

By using the LIS 3.0 model  and U.S. Geological Survey monitoring data for major tributaries,
CTDEP gained information on attenuation factors in Long Island Sound and during riverine
transport, respectively, which are important for quantifying relationships between discharge
points and actual delivery of nitrogen to Long Island Sound (CTDEP and NYSDEC 2000). These
factors combined account for relative nitrogen impact on DO depletion in Long Island Sound
from geographically distributed sources. They are used as trading ratios or equalization fac-
tors to put the 79 POTWs involved in trading on an equal basis, which is a critical component
of the Nitrogen Credit Exchange Program (Stacey 2004b).

To calculate the overall equivalency factors, CTDEP multiplied the river delivery factor for a
tier within a particular management zone by the Long Island Sound transport efficiency from
Connecticut's six management zones once the nitrogen reached the edge of the sound to
the area of hypoxia. Table  1, taken from the Long Island  Sound TMDL, illustrates how CTDEP
calculated the equivalency factor for two tiers within two management zones.
                                                                                                    o
                                                                                                    3
                                                                                                   era
Table 1.  Example: Calculating the TMDL for Water Year Types in September
Zone - Tier
1-1 (Eastern Long Island
Sound, along the shore)
2-3 (Northern tier of
Connecticut River)
River Delivery
Factor
1.00
0.87
LIS Transport
Factor
0.17
0.20
Combined
Equivalency Factor
0.17
0.17
                                                                                                   c-
                                                                                                   o
                                                                                                   OS
                                                                                                   rt>
                                                                                                   3
                                                                                                   O
                                                                                                   re
                                                                                                   3
                                                                                                   re
CTDEP expresses the factors as the decimal fraction of the nitrogen load delivered (CTDEP
and NYSDEC 2000). CTDEP made the assumption that the tiers closest to the Long Island
Sound have no nitrogen attenuation (i.e., they deliver 100 percent of the nitrogen load as
shown for Zone-Tier 1-1 above) and assigned the value of 1 as the river delivery factor.

Aggregate and Individual Facility Nitrogen Load Baselines
During the TMDL development process, CTDEP had to come to agreement on the nitrogen
loading from the 79 POTWs to establish a baseline and set reduction targets. Some facilities
had 10 years of discharge volume data, but other facilities had not conducted nutrient moni-
toring until 1993 or later. For facilities that did not have nutrient monitoring in place, CTDEP
applied estimated nitrogen and  total organic carbon (TOC) concentrations (usually 15 mg/L
for nitrogen and 20 mg/L for TOC) to 1990 measured flow to develop each zone's aggregate
baseline load estimates (CTDEP and NYSDEC 2000). A facility was given a baseline nitrogen
load by calculating the relative proportion of flow each individual facility contributed to the
statewide total flow over a consistent time period for all facilities. The period 1997 to 1999
was selected for this purpose as  representative of the current situation, and it was the start-
ing point for implementing the wasteload allocation in the TMDL (CTDEP 2000).
                                                                                                   o
                                                                                                   (TO
                                                                                                   re
                                                                                                   3
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                                                                                                   era
                                                                                                A-13

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         Water Quality Trading Toolkit for Permit Writers


                   Are Permits Used to Facilitate Trades?
                   The General Permit contains annual end-of-pipe (i.e., attenuation not applied) discharge
                   limits for nitrogen for 79 POTWs in the Connecticut portion of the Long Island Sound. Permit
                   limits are ramped down each year of the 5-year permit cycle, reflecting anticipated nitrogen
                   removal projects coming on line among all 79 permittees. This approach helps ensure consis-
                   tent and steady progress toward the nitrogen removal goals prescribed in the TMDL. Section
                   4 of the General Permit sets forth the conditions of the general permit, referencing annual
                   discharge limits (listed in Appendix 1). Credits used on the exchange are equivalent credits,
                   and attenuation factors are applied to each permittee's surplus or deficit below or above the
                   end-of-pipe limit. Each permittee can meet its annual discharge limits through treatment or
                   purchase of state-owned equivalent nitrogen credits in accordance with the Nitrogen Credit
                   Exchange Program. Permittees that do better than their permit limit have credits to sell to
                   the Nitrogen Credit Exchange Program.


                   How Are  Credits Generated for Trading?
                   Each facility is responsible for monitoring its effluent discharge according to the General
                   Permit's monitoring requirements as well as for reporting its monthly mass loading of total
                   nitrogen (along with other required monitoring information). CTDEP compiles and ana-
                   lyzes monthly mass loading  information for each facility, in conjunction with other required
                   information,  to determine the facility's annual mass loading of total nitrogen (i.e., the sum
                   of monthly mass loading of  total nitrogen for each month from January through December
                   divided by 12 and rounded to the nearest whole number).

                   CTDEP then compares a facility's annual mass loading of total nitrogen to the facility's annual
                   average discharge limit for that year, applies the appropriate equivalency factor or trading
                   ratio, and determines the number of equivalent credits each facility must buy to achieve per-
                   mit compliance. A facility has generated credits to sell through the Nitrogen Credit Exchange
                   Program if it  has performed better than its permit limit requires. All permittees are in compli-
                   ance with the General Permit if they (1) meet the permit limit, (2) do better than the permit
                   limit, or (3) purchase adequate equivalent credits to meet their permit limit.

                   Therefore, the number of credits a facility has to sell—or that a facility must purchase to
                   remain in compliance—is the average annual loading above or below the annual discharge
                   limit multiplied by the equivalency factor. Under the Nitrogen Credit Exchange Program, an
                   equivalent pound of  nitrogen is also referred to as an equalized nitrogen credit.

                   CTDEP works with the Nitrogen Credit Advisory Board to set prices and administer the Nitro-
                   gen Credit Exchange each year. Prices are based on the cost of the nitrogen removal projects
                   implemented, the number of pounds of nitrogen removed by those projects, plus the cost of
                   operating and maintaining those facilities where projects have been implemented. CTDEP
                   and the Nitrogen Credit Advisory Board ensure that reporting and accounting are accurate
                   and that bills and credits are disbursed  in a timely manner, according to the schedule set
                   forth in the Connecticut General Statutes.
A-14

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                                                         Water Quality Trading Toolkit for Permit Writers


 End-of-pipe nitrogen loads x Facility's equivalency factor = Equivalent pounds of nitrogen

   Example: Converting End-of-Pipe Nitrogen Discharges to Equivalent Pounds of
   Nitrogen for Trading in the Nitrogen Credit Exchange Program

   In January 2002, Facility X discharged a monthly average of 2,594 Ib/day of nitrogen. The
   equivalency factor for Facility X is 0.20. To convert the monthly mass loading into equivalent
   pounds of nitrogen generated, Facility X would perform the following calculation:

     Total nitrogen loading (Ib/day) x equivalency factor = equivalent pounds of nitrogen

     2,594 Ib/day x 0.20 = 518.8 equivalent pounds of nitrogen

   During January 2002, Facility X's monthly mass loading of total nitrogen was 2,594 Ib/day, which
   translates to 518.8 equivalent pounds of nitrogen.
(Annual discharge limit - Annual average mass loading of total nitrogen) x (Facility
equivalency factor) = Amount of equalized nitrogen credits to buy or sell
o
TO
ua
ET
a.
c
3
   Example: Calculating the Number of Equalized Nitrogen Credits Necessary to Achieve           z
   Permit Compliance                                                                              3
   In 2002 Facility X had an annual average mass loading of 2120 Ib/day of total nitrogen. Appendix           ?
   1 of the General Permit for Nitrogen sets an annual discharge limit for Facility X in 2002 at 1665            ™
   Ib/day. The equivalency factor for Facility X is 0.20.                                                    ^
                                                                                                    *"t
                                                                                                    3
     (Annual discharge limit - Annual average mass loading of total nitrogen) x (Facility                    £
     equivalency factor) = Amount of equivalent nitrogen credits to buy or sell                              ^
                                                                                                    rt
                                                                                                    Hf
                                                                                                    O
     (1665 Ib/day - 2120 Ib/day) x (0.20) = -91 equivalent pounds of nitrogen (or equivalent                  §
     nitrogen credits)                                                                                Q
                                                                                                    &
                                                                                                    rt'
   Facility X's annual average mass loading exceeded its annual discharge limit by 455 Ib/day of total           *
   nitrogen. Multiplied by the facility's equivalency factor of 0.20, the 455 Ib/day of total nitrogen             §
   that exceeds the annual discharge limit translates to 91 equivalent pounds of nitrogen credits
   that Facility X must purchase to comply with its annual discharge limit under the General Permit
   for Nitrogen for 2002.
The Nitrogen Credit Advisory Board establishes credit prices based on equivalent pounds                      a.
using final data from a particular year. For example, the Nitrogen Credit Advisory Board wait-                  *
ed until monitoring data for January through December 2002 became available to calculate
the value of credit. In March 2003 the Nitrogen Credit Advisory Board sent each facility a final
invoice that itemized the facility's annual mass loading,  its annual average discharge limit                   A-15
contained in the General Permit for Nitrogen, and the established value of a credit for 2002.


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          Water Quality Trading Toolkit for Permit Writers


                   Therefore, facilities do not buy or sell credits for a calendar year until the following calendar
                   year upon notification from CTDEP.

                   The Nitrogen Credit Advisory Board derives an annual value for equalized nitrogen credits by
                   dividing the total annual cost of all implemented nitrogen removal projects, plus the annual
                   operation and maintenance costs of operating the denitrification systems, by the reduction in
                   equalized pounds of nitrogen. The total annual project cost is composed of two components:
                   (1) total annualized capital costs to construct treatment facilities for nitrogen removal and (2)
                   total eligible annual operation and maintenance costs for nitrogen removal treatment (CTDEP
                   2003). Total annualized capital costs are defined as the total amount of each project facility's
                   loan from the Clean Water Fund attributable to the total eligible capital cost (i.e., 100 percent
                   of the eligible capital costs, based on a 30 percent grant provided to the facility and the loan
                   to finance the remaining 70 percent of the eligible capital costs) divided by a 20-year loan
                   repayment  period. Eligible capital costs are all costs associated with improvements for the
                   planning, design, and construction costs for  a nitrogen removal facility, excluding costs related
                   to the modification of a facility for purposes other than the enhancement of the nitrogen
                   treatment process (e.g., secondary treatment upgrades), and the costs of equipment and
                   land necessary for nitrogen treatment. Total eligible annual operation and maintenance costs
                   means the incremental increase in the cost of labor, administration, electricity, and chemicals
                   to remove nitrogen. Operation and maintenance (O&M) costs are estimated  using a survey
                   sent to all facilities conducting nitrogen removal projects (project facilities). The reduction
                   in equalized pounds of nitrogen is calculated by first subtracting the baseline loading estab-
                   lished for the facility in the TMDL for Long Island Sound from the actual end-of-pipe pounds
                   of nitrogen discharged by each of the project facilities to quantify the reduction from project
                   implementation and multiplying by the appropriate equivalency factor, as shown above.


          Total annual Nitrogen Removal Project cost/Total reduction in equalized pounds of nitrogen =
          Cost per equalized nitrogen credit

          Capital costs (i.e., annual Clean Water Fund repayment amount for nitrogen treatment facilities)
          + O&M estimated costs (i.e.,  estimates of O&M costs associated with nitrogen treatment facilities
          from a survey of Project Facilities) = Total annual Nitrogen Removal Project cost

          (Actual end-of-pipe pounds of nitrogen discharged by each Project Facility - baseline nitrogen
          loading for a Project Facility from the TMDL) (Project Facility's equalization factor) = Reduction in
          equalized pounds of nitrogen

           Example: Calculating the Annual Value of Nitrogen Credits and
           Reductions in Equalized Pounds of Nitrogen

           In 2003 the Nitrogen Credit Advisory Board established the value of an equalized nitrogen credit
           for FY 2002 at $1.65.

              $1,765,432 Capital Costs + $2,944,013 O&M estimated costs = $4,709,445 Total
              Project Cost
A-16

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                                                         Water Quality Trading Toolkit for Permit Writers
  Example: Calculating the Annual Value of Nitrogen Credits and
  Reductions in Equalized Pounds of Nitrogen (continued)

  To find the total reduction in equalized pounds of nitrogen, it is necessary to look at each of the
  Project Facilities financing nitrogen removal projects. In 2002 a total of 23 Project Facilities
  achieved a reduction of 2,861,852 equalized pounds of nitrogen.

     $4,709,445 Total Project Cost/2,861,852 total pounds of equalized nitrogen
     removed = $1.65 per equalized nitrogen credit
Each year CTDEP audits the performance of plants operating for the full calendar
year (January 1 to December 31) to establish the value of nitrogen credits, taking into
consideration increased capital costs of nitrogen removal for projects implemented
the prior year (i.e., operational as of January 1 for each trading year), as well as added
operation and maintenance costs of reduction methods. At the end of March each year,                    ,_
                                                                                                      6
CTDEP determines the total number of credits to be bought and sold, publishes the                       d
annual value of nitrogen credits, and notifies each plant of its nitrogen credit balance.                     £-
Plants have until the end of July to purchase credits from CTDEP to meet their discharge                    £•
limit. By the middle of August, CTDEP must purchase all available credits and send                         c
payments to the facilities that generated the credits.                                                     2
                                                                                                      r+*
In 2002, 38 facilities generated approximately 1,671,105 equalized nitrogen credits to sell at                    £
                                                                                                      fb
$1.65 per credit for a total value of $2,757,323. In 2002, 38 facilities were required to pur-                       **
                                                                                                      Q
chase a total of 798,317 equalized nitrogen credits to remain in compliance with the General                    §
Permit; at $1.65  per credit, the total amount of purchased credits was $1,317,223. As a result,                    2.
approximately 872,788 equalized nitrogen credits were not needed by facilities to achieve                      «?
permit compliance  in 2002. The Nitrogen Credit Exchange Program required CTDEP to pur-                     B.
chase the remaining 872,788 equalized nitrogen credits at a total cost of $1,440,100.                           §
                                                                                                      O.
In 2003, 37 facilities generated approximately 1,134,876 equalized nitrogen credits to sell at                    g
$2.14 per credit for a total value of $2,428,636. To remain in compliance with the General Per-                  g
mit, 40 facilities purchased equalized nitrogen credits; at $2.14 per credit, the total amount                     Q
                                                                                                      n>
of purchased credits was $2,116,875. CTDEP purchased the excess 145,682 equalized nitrogen                   &
credits for a total cost of $311,761.                                                                        I?
                                                                                                      3-
                                                                                                      V
In 2004, 35 facilities generated approximately 1,399,896 equalized nitrogen credits to sell at
$1.90 per credit for a total value of $2,659,804. To remain in compliance with the General Per-        .          g3
mit, 44 facilities purchased equalized nitrogen credits; at $1.90 per credit, the total amount                     5
of purchased credits was $1,786,736. CTDEP purchased the excess 459,509 equalized nitrogen                   3
credits for a total cost of $873,068.                                                                       n
In 2005, 28 facilities generated approximately 623,408 equalized nitrogen credits to sell at                      §
                                                                                                      r,'
$2.11 per credit for a total value of $1,315,392. To remain in compliance with the General Per-                   S
mit, 50 facilities purchased equalized nitrogen credits; at $2.11 per credit, the total amount of
purchased credits was 1,169,553 for a total cost of $2,467,757.
                                                                                                  A-17

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         Water Quality Trading Toolkit for Permit Writers
         Number of equalized nitrogen credits (equivalent Ib/day) x 365 days = Annual total of
         equalized nitrogen credits

         Total cost of annual equalized nitrogen credits to achieve permit compliance = Annual total of
         equalized nitrogen credits x Annual value of equalized nitrogen credits

           Example: Calculating the Cost of Equalized Nitrogen Credits Necessary to Achieve
           Permit Compliance

           In the previous example, Facility X was required to purchase 91 equalized nitrogen credits to
           comply with its annual discharge limit under the General Permit for 2002.

           CTDEP will send Facility X a letter that indicates the facility's annual average mass loading for
           2002, the annual discharge limit for 2002 under the General Permit, the number of equalized
           nitrogen credits that the facility must purchase to achieve permit compliance and the value of
           an equalized nitrogen credit for 2002. To calculate the total number of credits and the total cost,
           CTDEP will make the following calculations:

              Number of equalized nitrogen credits (equivalent Ib/day) x 365 days = Annual total of equalized
              nitrogen credits

              Total cost of annual equalized nitrogen credits to achieve permit compliance = Annual total of
              equalized nitrogen credits x Annual value of equalized nitrogen credits

           Therefore, the letter from CTDEP to Facility X will indicate that the facility must purchase 91
           equalized nitrogen credits (equivalent Ib/day) for 365 days, for a total of 33,215 equalized nitrogen
           credits. At a cost of $1.65 per credit, Facility X will spend a total of $54,804.75 to achieve permit
           compliance in 2002.
                  What Are the Trading Mechanisms?
                  CTDEP sends a final invoice to each POTW at the end of March each year. The final invoice
                  indicates the total number of credits to be bought or sold and the annual value of equalized
                  nitrogen credits.


                  What Is the Pollutant Trading Ratio?
                  CTDEP considers a trading ratio to be a factor that adjusts for variability among sources.
                  Using this definition, CTDEP considers the equivalency factors for each of the management
                  zones to be the trading ratios of the Long Island Sound Nitrogen Credit Exchange Program
                  (Stacey 2004b). The equivalency factors were published in the TMDL and in Connecticut's
                  enabling legislation.
A-18

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                                                       Water Quality Trading Toolkit for Permit Writers


What Type of Monitoring Is Performed?
Since 2002 treatment plants have been required to monitor flow and total nitrogen, report-                    :
ing to the state on a monthly basis. All treatment facilities must monitor daily flow continu-                  ""•-•
                                                                                                 **?"'•
ously to calculate their average daily flow volume. Depending on the facility's flow rate, it                    :';,'
must monitor the final effluent either once per week (if its flow rate is less than 10,000,000                  ^
gallons per day) or twice per week (if its flow rate is greater than or equal to 10,000,000                     •>••->•
gallons per day). Each month, municipalities must enter the results of analyses for the total                   ""•
nitrogen and the average daily flow volume of the effluent on Monthly Operating Reports                   '>-
and Nitrogen Analysis Reports, which they present to the CTDEP. Plants are also subject to
annual inspections. CTDEP inspects each of the 79 municipal facilities regulated under the
General Permit at least once during each year of the program, evaluating all aspects of the
facility's operation and monitoring procedures.


What Are the Incentives for Trading?
CTDEP is authorized to conduct compliance audits of the annual operating data for plants
that participate  in the program. Any plant that fails to meet its individual wasteload alloca-
tions and does not purchase the appropriate amount of credits is subject to existing statu-                     °
tory water pollution control enforcement provisions. Within 5 days of learning of a violation                  "S.
under the General Permit, a point source must determine the cause of the violation, institute                  £J
                                                                                                  CL
plans to correct the violation, mitigate its effects, and prevent further forms of it. The per-                    c/j
mittee is also required to report the violation and subsequent corrective action to the state.                   §
                                                                                                  a.
The state reserves the right to revoke or modify a  point source's authorization under the                      z
General Permit.                                                                                     5
                                                                                                 era
                                                                                                  n
What Are the Potential Challenges in Using This Trading
Approach?

What Water Quality Improvements Have Been Achieved?                          i
Actual nitrogen removal has been ahead of the reduction targets established in the TMDL for
nitrogen.
                                                                                                  fu
                                                                                                  B.
                                                                                                  O
                                                                                                 1
Upgrades to municipal treatment plants require stable, multiyear funding. The single factor                   n
                                                                                                  >-j
most critical factor to the continued progress of the program is the continued availability of                   eL
Clean Water Fund dollars to support the infrastructure of nitrogen removal.                                 m
                                                                                                  n
                                                                                                  ET
                                                                                                  B>
What Are the Potential Benefits?                                                        ;
                                                                                                  t-t
CTDEP's approach to the Nitrogen Credit Exchange Program establishes a well-defined trad-                  era
ing structure supported and regulated by limits mandated in state law. Equivalency factors                    g
and all accounting  methodologies were specified in the state enabling legislation to formal-                   •
                                                                                                  n
ize all calculations used in trading. This might help reduce technical challenges to the pro-                     §
gram as opposed to, for example, just including equivalency factors in the TMDL and the                      S
General Permit (Stacey 2004a).                                                                        S'
                                                                                              A-19

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         Water Quality Trading Toolkit for Permit Writers


                  Applicable NPDES Permit Language
                  CTDEP initially issued the General Permit for Nitrogen Discharges in January 2002. The permit
                  was reissued in December 2005. The following excerpts contain trading provisions found in
                  the 2005 permit.

                  Section 4.(b) Compliance During Term of Permit
                      (1) A permittee shall be in compliance with its annual discharge limits of this general
                          permit if:
                          (A)  the POTW's annual mass loading of total nitrogen is less than or equal to the
                              discharge limit set forth in Appendix 1; or,
                          (B)  the permittee has secured state-owned equivalent nitrogen credits equal to the
                              amount the POTW exceeded the annual discharge limit set forth in Appendix 1
                              in accordance with the Nitrogen Credit Exchange Program and Sections 22a-521
                              through 527 of the Connecticut General Statutes.
                      (2) A permittee shall be out of compliance with the annual discharge limits of the gen-
                          eral permit and subject to the enforcement provisions of chapter 446k of the Con-
                          necticut General Statues if:
                          (A)  the POTW's annual mass loading of total nitrogen is greater than the discharge
                              limit set forth in Appendix 1; and
                      (B) the permittee fails to secure sufficient state-owned equivalent nitrogen credits in a
                          timely manner in accordance with the Nitrogen Credit Exchange Program and Sec-
                          tions 22a-521 through 527 of the Connecticut General Statutes.

                  Section 4. (m) Other Applicable Law
                  Nothing in this general permit shall relieve the permittee of the obligation to comply with
                  any applicable federal, state and local  law, including but not limited to the obligation to
                  obtain and comply with any authorizations required by such law. In the event a POTW is
                  subject to a more stringent nitrogen limitation than set forth  in this general permit, the
                  Permittee shall comply with that more stringent limitation and may not purchase or transfer
                  nitrogen credits to comply with that additional limitation.


                  Contact Information
                  Paul E. Stacey
                  Director, Planning and Standards Division
                  Bureau of Water Protection and Land Reuse
                  (860) 424-3704
                  paul.stacey@po.state.ct.us
A-20

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                                                        Water Quality Trading Toolkit for Permit Writers


References and Resources
CTDEP (Connecticut Department of Environmental Protection). 2000. Response to Public                     -•<•<
    Comments on the Draft Nitrogen Wasteload Allocation for Point Source Discharges in                     '
    Connecticut. December.                                                                          '..',

CTDEP (Connecticut Department of Environmental Protection). 2001. General Permit for                     Jl
    Nitrogen Discharges: Permit Fact Sheet. September.                                                  X

CTDEP (Connecticut Department of Environmental Protection). 2002. General Permit for
    Nitrogen Discharges. January 2.

CTDEP (Connecticut Department of Environmental Protection). 2003. Second Annual Report
    of the Nitrogen Credit Advisory Board to the Joint Standing Committee of the General
    Assembly Concerning the Nitrogen Credit Exchange Program. September.

CTDEP (Connecticut Department of Environmental Protection). 2005. General Permit for
    Nitrogen Discharges. December 21.
                                                                                                  b
CTDEP and NYSDEC (Connecticut Department of Environmental Protection and New York                     $
    State Department of Environmental Conservation). 2000. A Total Maximum Daily Load                    ~
    Analysis to Achieve Water Quality Standards for Dissolved Oxygen in Long Island Sound.                  a.
Connecticut Department of Environmental Protection's Nitrogen Control Program for Long
    Island Sound Web site.
    
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             Water Quality Trading Toolkit for Permit Writers
A-22

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                                                    Water Quality Trading Toolkit for Permit Writers
Lower Boise Effluent Trading Demonstration
Project
Idaho
Overview
The Lower Boise Effluent Trading Project will allow point and nonpoint sources to trade
phosphorus credits generated by approved nonpoint source best management practices
(BMPs). These BMPs have been assigned an effectiveness ratio and an uncertainty discount.
Trades will be coordinated through contracts and specified forms and tracked in a statewide
database.

Type of Trading                   Pollutant(s) Traded

Point Source-Point Source                 Total phosphorus
Point Source-Nonpoint Source                                                                   <-~
                                                                                            1
                                                                                            n>
                                                                                            "s
Number of Trades to Date                                                             I
                                                                                            en
None                                                                                        »
                                                                                            8
                                                                                            e
                                                                                            n>
Who Is Eligible to Participate?                                                        |
Point source NPDES permit holders (e.g., wastewater treatment plants, industrial dischargers)                 ^
and nonpoint sources (e.g., farmers and irrigation districts) are eligible to participate.                       o
What Generated the Need for Trading?                                              jj
                                                                                            rt
The states of Idaho, Oregon, and Washington worked with EPA Region 10 to explore water                   §
quality trading as a tool for managing water resources prior to developing and implementing                 I?
total maximum daily loads (TMDLs).                                                               "S
                                                                                            •
                                                                                            £
What Serves as the Basis for Trading?                                               |
Nutrient reductions in the Lower Boise River TMDL were deferred until the completion and
approval of the Snake River-Hells Canyon TMDL (Idaho DEQ and Oregon DEQ 2004). The
TMDL for Snake River-Hells Canyon addresses nutrients and sets nutrient reduction goals for
the Lower Boise River because loading to the river has a significant impact on nutrient load-
ing and nuisance aquatic growth in downstream portions of the Snake River-Hells Canyon
watershed. In the interim, the Lower Boise River TMDL called for no net increase of total
phosphorus (Breetz et al. 2004). Trading has been delayed until the completion and approval
of the Snake River-Hells Canyon TMDL.

In September 2004, EPA approved the Snake River-Hells Canyon TMDL. The final TMDL
provides an allocable phosphorus load for three segments. The final TMDL provides only
phosphorus wasteload allocations for point sources that discharge directly to the Snake River.
Tributaries to the Snake River, including the Lower Boise River, must set wasteload alloca-
tions for point sources through separate tributary TMDL processes. Therefore,  point sources              A-23

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         Water Quality Trading Toolkit for Permit Writers


                   in the Lower Boise River Basin do not yet have specific wasteload allocations as a result of the
                   Snake River-Hells Canyon TMDL. A Watershed Advisory Group (WAG) is developing the Lower
                   Boise TMDL. After the WAG completes the TMDL, the Idaho DEQ will review and revise it and
                   submit it for EPA approval. The current target is to complete the TMDL process by the end of
                   2007 (Schary 2007).


                   What Types of Data and Methodologies Were Used to Calculate
                   the Basis for Trading?
                   After it is complete, the  Lower Boise River Nutrient TMDL, which will reflect allocations based
                   on the Snake River-Hells Canyon TMDL, is likely to serve as the basis for trading.

                   Phosphorus Load Baseline
                   Appendix J of the 1999 report Lower Boise River TMDL Subbasin Assessment, Total Maximum
                   Daily Loads contains an overview of Idaho Department of Environmental Quality's (DEQ)
                   methodology for establishing the proposed no net increase total phosphorus loads. The
                   methodology describes the steps as follows (Idaho DEQ 1999):
                      1.   Create a best-fit model to predict the total phosphorus concentration, using the
                          FLUX model or non-linear model. Use seasonal or flow stratification, if necessary, to
                          minimize error.
                      2.   Use daily 1996 flow data and the model from step 1 to predict daily total phosphorus
                          concentrations.
                      3.   Calculate daily total phosphorus loads for the entire 1996 calendar year.
                      4.   Summarize the daily loads seasonally, annually, by averages, and by mass totals.

                   The FLUX model used in step 1 is a U.S. Army Corps of Engineers program that predicts nutri-
                   ent loads on the basis of sample data and daily flow information. The FLUX model uses three
                   averaging and three linear regression techniques (Idaho DEQ 1999). Idaho DEQ will reassess
                   the 1996 phosphorus baseline load because of land use changes in the Lower Boise River; the
                   reassessment process will use the same methodology described in Appendix J (Horsburgh
                   2004).

                   Phosphorus Allocations
                   Although Idaho DEQ has not yet completed the process of determining phosphorus load and
                   wasteload allocations, it has developed a work plan that outlines the tasks involved in gener-
                   ating the Lower Boise River Nutrient TMDL. According to the work plan, the technical analysis
                   related to developing the phosphorus load and wasteload allocations will involve updating
                   the phosphorus mass-balance spreadsheet for the Lower Boise River with recent hydrologic
                   and phosphorus concentration data; developing four phosphorus allocation scenarios and
                   associated cost-estimates for each scenario; and addressing other technical issues related to
                   the TMDL, such as evaluating methods to add a margin of safety to phosphorus allocations
                   (Idaho  DEQ 2004).


                   Are Permits Used to Facilitate Trades?
                   Point sources have discharge limits in their NPDES permits that serve as the basis for their
A-24              trading. The future wasteload allocations established to reflect the phosphorus  reduction
                   targets identified under the approved Snake River-Hells Canyon TMDL will eventually be

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                                                         Water Quality Trading Toolkit for Permit Writers


translated into new permit limits for point source dischargers in the Lower Boise River. EPA
Region 10, the NPDES permitting authority in Idaho, is responsible for updating NPDES per-                  •-'"
mits to reflect the new wasteload allocations.                                                            ,_1


How Are Credits Generated for Trading?                                                J^
In the Lower Boise River Pollutant Trading Program, credits are defined as "reductions of a                    ^""
pollutant below a level set by a TMDL" (Idaho DEQ 2003). If a TMDL requires a reduction of                   '
100 pounds per day, a source would need to  reduce its  pollutant load by 101 pounds per day
to satisfy the requirements of the TMDL and  to generate one credit eligible for trading.

For point source-nonpoint source trading, there are two approaches to determine the credits
generated by nonpoint sources: (1) the calculated approach and (2) the measured approach.
The calculated approach estimates an average reduction for a specific BMP using existing
data and management factors or trade ratios. For measured credits, actual grab samples tak-
en during a BMP's operation are used to determine reductions (ISSC 2002). A more detailed
description of each approach is provided below.
                                                                                                     r-
The calculated credit approach  is taken from  the Idaho  Soil Conservation Commission's (ISSC)                  |
                                                                                                     (T
BMP List document (ISSC 2002), which describes the methodology for determining BMP effec-
tiveness and calculating credits. The first step is to identify the BMP to be used to generate
phosphorus reductions and the associated effectiveness discount (i.e., the percent of esti-                     5
                                                                                                     33
mated efficiency of the BMP) and the uncertainty discount (i.e., a multiplier that reduces the                  £
number of credits generated by a nonpoint source because of variability in the effectiveness                   ^
of the practice). The next step  is to determine the estimated  phosphorus losses, also referred                  £,
to as the nonpoint source's baseline load. This is done by using the Surface Irrigation Soil Loss                  cS
(SISL) tool to calculate the amount of soil loss in tons and then multiplying the soil loss by 2                    n>
pounds of phosphorus per ton of soil loss to calculate the equivalent pounds of phosphorus.                   °
The estimated phosphorus reduction generated by a BMP is the nonpoint source's baseline                    3
load multiplied by the BMP effectiveness discount minus the  uncertainty discount.                            3-
  Soil loss (tons) x 2 (Ib/ton) = Estimated phosphorus loss (or the nonpoint source's
  baseline load)
w
o
                                                                                                     3
  Nonpoint source's baseline load x (BMP Effectiveness discount - BMP Uncertainty                         °
  discount) = Estimated BMP Phosphorus Reduction


Credits are generated only after the TMDL reduction is met. Therefore, it is also important to
calculate the nonpoint source's share of the reduction needed to achieve the TMDL load allo-
cation. To  calculate this, the nonpoint source's baseline load is multiplied by a water quality
contribution percentage that represents the individual nonpoint source's share of the reduc-
tion amount needed to achieve the load allocation assigned in the TMDL. For example, if the
load allocation specified  in the TMDL is 100 pounds of phosphorus per day and the nonpoint
source must make a phosphorus reduction of 50 pounds per day to achieve that load alloca-
tion, the nonpoint source's water quality contribution is 50 percent. Therefore, the nonpoint
source's phosphorus reductions must exceed its 50 percent water quality contribution before
generating any credits to sell. To determine the reductions that are eligible to become trad-
able credits, the nonpoint source's water quality contribution reduction is subtracted from                 A-25

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          Water Quality Trading Toolkit for Permit Writers


                   the amount of reduction generated by a BMP. The phosphorus reduction eligible for sale as
                   credits is calculated as the difference between the estimated phosphorus reduction gener-
                   ated by the BMP and the phosphorus reduction required to achieve the TMDL load allocation
                   (Breetzetal.2004).

                     Nonpoint Source Baseline Load x Water Quality Contribution Percentage =
                     Phosphorus reduction required to achieve the TMDL load allocation

                     Estimated BMP Phosphorus Reduction - Phosphorus reduction required to achieve
                     the TMDL load allocation = Phosphorus reduction eligible for trading

                   After determining the estimated phosphorus reduction eligible for trading/final credits are cal-
                   culated by applying three other factors that adjust credits according to location. The geograph-
                   ic factors are referred to as the (1) river location ratio, (2) site location factor, and (3) drainage
                   delivery ratio. The three factors are essentially categories of transport factors that take into
                   consideration losses of phosphorus as it travels from the point of discharge through the Lower
                   Boise River to the mouth of the drainage (referred to as Parma for the town at the mouth of
                   the Lower Boise River). For more on these factors see What Is the Pollutant Trading Ratio?

          Estimated Phosphorus Reduction Eligible for Trading x Site Location Factor x Drainage
          Delivery Ratio x River Location Ratio = Phosphorus Credits (Parma Pounds)
          for sale

          Credits are generated and used on a monthly basis. Nonpoint source credits are created at the end of
          the month, and point sources must use those credits to offset nutrient loading during the same month
          (Idaho DEQ 2003).

           Example: Estimating Phosphorus Reductions and Calculating Phosphorus Credits

           Adapted from Pollutant Trading Guidance (Idaho DEQ 2003).

           A nonpoint source wants to generate phosphorus credits for trading by converting a 30 acre surface
           irrigated field to a sprinkler system capable of eliminating all sedimentation loss (100 percent
           effectiveness) but with a 10 percent uncertainty discount. The average annual Surface Irrigation Soil
           Loss (SISL) load is determined to be 7.3  tons per acre for the 30 acres of field, for a total of 219 tons
           of soil loss per irrigation season.

           The TMDL requires a 78 percent phosphorus reduction from all sources, and therefore the nonpoint
           source's water quality contribution is equal to the 78 percent required reduction.

           The nonpoint source used Idaho's Pollutant. Trading Guidance to determine the applicable trading ratios.
           The Site Location Factor is 0.8, because there is potential reuse, but not through a canal. The distance
           from the river to the entry point at the channel is 2.5 miles, which gives a 0.975 Drainage Delivery
           Ratio. The River Location Ratio is 0.75, which will convert the pounds reduced into Parma Pounds or
           tradeable credits.
A-26

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                                                        Water Quality Trading Toolkit for Permit Writers
  Example: Estimating Phosphorus Reductions and Calculating Phosphorus Credits                ;
  (continued)                                                                                      ~

  To calculate the tradeable credits, the nonpoint source works through the following calculations:            , -/

   Soil loss (tons) x 2 (Ib/ton) = Estimated phosphorus loss (or the nonpoint source's                         -,'
   baseline load)                                                                                     
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          Water Quality Trading Toolkit for Permit Writers


                   Phosphorus reductions that are eligible to generate credits for trading (i.e., reductions that
                   exceed those required by a TMDL) are calculated using three geographic ratios that function
                   as transport factors because they are intended to account for phosphorus losses from the site
                   of the BMP, through the Lower Boise River, to the mouth. The three ratios are as follows:
                       •  River Location Ratio. This ratio accounts for phosphorus losses due to irrigation diver-
                          sions that remove flow from the river at many points. A mass-balance model that
                          accounts for phosphorus inputs, withdrawals and groundwater is used to calculate
                          the river location ratio. The river location ratio is calculated from each source relative
                          to Parma; therefore, phosphorus credits are measured in Parma Pounds (Idaho DEQ
                          2003).
                       •  Site Location Factor. This ratio takes into account phosphorus losses due to wastewa-
                          ter reuse and natural sediment-phosphorus relationships. Total phosphorus lost at
                          the field is less likely to reach the subwatershed's channel due to travel distance and
                          the chance of reuse. Three site location factors take these variables into consideration
                          (Idaho DEQ 2003).
                       •  Drainage Delivery Ratio. This ratio also takes into account phosphorus losses in the
                          subwatershed's main channels by using the linear calculation:
                          (100 - distance in miles to mouth of the drain from the project's point of discharge on
                          the drain) /100 (Idaho DEQ 2003).

                   Idaho DEQ will review the ratios at least every 5 years using trading information from the
                   trading database. Revisions will be made if Idaho DEQ determines that there is a 30 percent
                   discrepancy from the published ratios (Idaho DEQ 2003).


                   What Type of Monitoring Is Performed?
                   Point sources must submit a monthly DMR, and purchased credits will be checked against the
                   DMRs in audits of NPDES permits. A Trade Summary Report from the Trade Trading System
                   must accompany the DMR.  For measurable nonpoint reductions, water quality monitoring of
                   inflow and outflow verifies the exact amount of reduction. For calculated nonpoint sources
                   reductions, BMP installation is monitored by the point source before the creation of credit,
                   and maintenance inspections are conducted by the point source to document monthly cred-
                   its. The point source inspects the nonpoint source projects at least once a year after installa-
                   tion and before seasonal operation (Idaho  DEQ 2003).


                   What Are the Incentives for Trading?
                   The incentive for point sources to participate in trading is that trading offers a flexible
                   approach to meeting the NPDES permit limits, which will soon reflect the phosphorus waste-
                   load allocation in the Snake River-Hells Canyon TMDL. Although nonpoint sources will have
                   a load allocation under the Snake River-Hells Canyon TMDL, mechanisms to achieve the load
                   allocation are largely voluntary. Therefore, the primary incentive for farmers to participate is
                   the partial financial compensation for BMP installation and maintenance (Breetz et al. 2004).


                   What Water Quality Improvements Have Been Achieved?
                   No trading has occurred in the Lower Boise River to date; therefore, no water quality
A-28              improvements are associated with trading in the Lower Boise River.

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                                                        Water Quality Trading Toolkit for Permit Writers


What Are the Potential Challenges in Using This Trading
Approach?                                                                                    ^
The Lower Boise River Pollutant Trading Program might face a few challenges. The need                      ^
to have the Lower Boise River Trading Framework revised to reflect the recently approved                     »-•
Snake River-Hells Canyon TMDL will delay the trading program. Many of the BMP verification                  ^
requirements and much of the  paperwork associated with completing the required trading                   ~
documents appear to be the responsibility of participating point sources. Another challenge
                                                                                                  **>--,
associated with the approach used in the  Lower Boise River, and possibly throughout Idaho, is
the fact that EPA Region 10 is the NPDES permitting authority for the state of Idaho. The fact
that the NPDES permits that will facilitate point source trades are not developed by Idaho
DEQ might necessitate an additional layer of coordination and facilitation between the state
and EPA Region 10.


What Are the Potential Benefits?
Potential benefits of the approach used by the Lower Boise River Pollutant Trading Program
include a comprehensive trading tracking database that allows Idaho DEQ and other stakehold-
ers to easily assess progress and trends in trading activities. In addition, this approach appears                   |
                                                                                                  (D
to have a thorough process for incorporating BMP uncertainties into trades by using effec-                     ^
tiveness ratios and uncertainty discounts for each BMP, rather than a blanket trade ratio that                   1-
                                                                                                  f$
applies to all point source-nonpoint source trades. The plan to conduct a 5-year review of all                   "
                                                                                                  ^
ratios is also beneficial, ensuring that trade ratios reflect actual watershed conditions.                          g
Applicable NPDES Permit Language                                                     \
No trades have occurred at this time; therefore, no NPDES permits contain trading language.                  c
However, the Lower Boise Effluent Trading Demonstration Project did produce permit                        |
outlines for three types of trades: (1) point source-point source upstream trades, (2) point                    S.
source-point source downstream trades, and (3) point source-nonpoint source trades. The                    a
                                                                                                  o
permit outline available for point source-nonpoint source trades does not have the support                   s
of EPA Region 10, the NPDES permitting authority for the state of Idaho. Ideally, Idaho DEQ                   3..
would like to have permit language developed for point source-nonpoint source trades that                  £
is dynamic and will allow this type of trade without having to reopen or rewrite  permits. EPA
Region 10, however, has concerns regarding the most effective mechanism for demonstrating
the pollutant reductions achieved by participating nonpoint sources.
                                                                                                  §•
                                                                                                  3-
Contact Information
Claire Schary
Water Quality Trading Coordinator
U.S. Environmental Protection Agency, Region 10
(206)553-8514

Susan Burke
Compliance and Special Projects Coordinator
Water Quality Division
Idaho Department of Environmental Quality
(208)373-0574
susan.burke@deq.idaho.gov

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          Water Quality Trading Toolkit for Permit Writers


                   References and Resources
                   Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water
                      Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth
                      College, Hanover, NH.

                   Horsburgh, Bryan. 2004. Personal communication. September 23.

                   Idaho DEQ (Idaho Department of Environmental Quality). 2006. Pollutant Trading Overview.
                      .

                   Idaho DEQ (Idaho Department of Environmental Quality). 1999. Lower Boise River TMDL:
                      Subbasin Assessment, Total Maximum Daily Loads. December 18, 1998; revised September
                      29, 1999. Idaho Department of Environmental Quality, .

                   Idaho DEQ and Oregon DEQ (Idaho Department of Environmental Quality and Oregon
                      Department of Environmental Quality). 2004. Snake River-Hells Canyon Total Maximum
                      Daily Load (TMDL). Submitted July 2003 and Revised June 2004. Prepared by Idaho
                      Department of Environmental Quality and Oregon Department of Environmental Quality.
                      .

                   Idaho DEQ (Idaho Department of Environmental Quality). Lower Boise River Effluent
                      Trading Demonstration Project: Summary of Participant Recommendations For a
                      Trading Framework. Prepared for the Idaho Division of Environmental Quality by Ross &
                      Associates Environmental Consulting, Ltd. September 2000.
                      .

                   ISCC (Idaho Soil Conservation Commission). 2002. Best Management Practice (BMP) List for
                      the Lower Boise River Pollution Trading Program. May 1, 2002.

                   Schary, Claire. 2007. Personal communication via e-mail. March  14.
A-30

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                                                      Water Quality Trading Toolkit for Permit Writers
Rahr Malting Company Permit
Minnesota
Overview                                                                                   -
To expand production and reduce costs, the Rahr Malting Company (Rahr) wanted to con-
struct its own wastewater treatment plant (WWTP) instead of discharging to a regional                     ••s>
WWTP; however, a 1985 wasteload allocation (WLA) for 5-day carbonaceous biochemical
oxygen demand (CBOD5) in the lower Minnesota River prohibited any new discharges to
the river that added to the pollutant loading levels (MPCA 1997c; Breetz et al. 2004). In an
effort to find a solution, Rahr negotiated an agreement with the Minnesota Pollution Control
Agency (MPCA) to offset CBOD5 discharge from its new wastewater treatment plant by fund-
ing upstream nonpoint source pollutant reductions.

Rahr was issued a NPDES permit incorporating trading in 1997. The permit allowed Rahr to
discharge approximately the same amount it currently discharged to the regional WWTP but
                                                                                                ^
imposed concentration-based effluent limits as well as nonpoint source trading requirements                 £•
                                                                                                •^
to offset the pollutant loading. Rahr was required to establish a $250,000 trust fund to pay                   S
                                                                                                &>
for its nonpoint source offsets.                                                                      a
                                                                                               (TO
                                                                                                n
In 5 years, Rahr achieved the needed nonpoint source loading reductions through four                       2
nonpoint source offsets (Fang and Easter 2003). Over the course of the  permit cycle, MPCA                  "§
observed opportunities for further refinement of the program and crediting process. This                    "^
                                                                                                (T)
fact sheet describes the initial permit and best management practices (BMPs); however,                      g
future permits may incorporate adjustments to the trade ratios and potentially remove the                   "
use of nitrogen reduction for CBOD5  credits  (Klang 2006c).                                               §;
Type of Trading                    Pollutant(s) Traded
Point Source-Nonpoint Source              Phosphorus
                                        Nitrogen
                                        CBOD5
                                        Sediment

Number of Trades to Date
Rahr has implemented four nonpoint source BMP implementation projects to offset load-
ings from the facility. Two projects at the junction of the Cottonwood and Minnesota Rivers
involved riparian vegetation restoration on sites that were then donated to the city of New
Ulm. They resulted in reductions of 28.8 and 71.1 Ibs/day CBOD5 respectively (Sparks and Wal-
lace 2006). The other two, on  8-Mile Creek and Rush River, stabilized eroding banks (Klang
2006a; Sparks and Wallace 2006). 8-Mile Creek's project involved the planting of a bank
stabilization area as well as  livestock exclusion and reduced 13.4 Ibs/day CBOD5 (Sparks and
Wallace 2006). To protect the  Rush River site's eroding cliff face, a bench terrace was con-
structed and the channel was  diverted. This project reduced 98.6 Ibs/day CBOD5 (Sparks and
Wallace 2006).
                                                                                            A-31

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         Water Quality Trading Toolkit for Permit Writers


                  Who Is Eligible to Participate?
                  Rahr is the only point source eligible to trade under the permit. The only limitation placed on
                  nonpoint source BMP sites were that they must be upstream of Shakopee in the Minnesota
                  River Basin.


                  What Generated the Need for Trading?
                  By constructing and operating its own WWTP, Rahr could increase production by 20 percent
                  and still reduce costs. Rahr's increased production and discharge would have cost an addition-
                  al one million dollars if Rahr continued to have its discharge treated at the regional WWTP
                  facility (Breetz et al. 2004). However,  because of the lower Minnesota River's WLA for CBOD5,
                  all the pollutant load was already allocated to existing sources and Rahr could not obtain
                  the allocation necessary to construct a WWTP. Though the regional WWTP possessed the
                  necessary wasteload allocation for Rahr's discharge, Rahr could not get the discharge rights
                  transferred, therefore  Rahr came up with a strategy of offsetting its load through nonpoint
                  source trading (Breetz et al. 2004).


                  What Serves as the Basis for Trading?
                  In 1985 EPA, MPCA and the Metropolitan Council (the regional planning agency for the
                  Twin Cities area) negotiated a wasteload allocation, described in the Lower Minnesota River
                  Wasteload Allocation Study, for the lower 26 miles of the Minnesota River. The WLA required
                  a 40 percent reduction of upstream and sediment CBOD5 concentrations. Most of the  CBOD5
                  came from loading from WWTPs and  manure from feedlots. The Minnesota River Assessment
                  Project (MRAP), completed in 1992, identified that the eutrophication in the river supplied a
                  significant amount of CBOD5 load as dead algae.


                  What Types of Data and Methodologies Were Used to Calculate
                  the Basis  for Trading?
                  A RMA-12 model was used in the development of the 1985 Waste Allocation Study for point
                  sources on the Minnesota River. This is a version of the QUAL-II model, which is a one  dimen-
                  sion model for stream  quality. The RMA-12 model differs from the QUAL-II model by chang-
                  ing the growth equation for algal biomass and redefining the nitrogen  cycle. While the
                  QUAL-II model considers nitrogen as Kjeldahl nitrogen, the RMA-12 model allows for organic-
                  and ammonia-nitrogen to be considered separately. The RMA-12 also allows for uptake of
                  ammonia-nitrogen by  algae as opposed to only allowing nitrate-nitrogen uptake by algae as
                  in the QUAL-II model (MPCA 1985).

                  The RMA-12 model is a one-dimensional model and simulates the effects of wasteloads, nitri-
                  fication, sediment  oxygen demand, and algal photosynthesis (USEPA 1992). It uses an advec-
                  tive-dispersive equation to solve for 11 water quality constituents numerically (MPCA 1985).
                  The constituents include
                       1. Phytoplankton algae                     7. Organic nitrogen
                       2. Chlorophyll a                           8. Ammonia nitrogen
                       3. CBOD                                 9. Nitrite nitrogen
                       4. Dissolved Oxygen                       10. Nitrate nitrogen
A-32                  5. Benthic oxygen demand                  11. Orthophosphate
                       6. Atmospheric reaeration

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                                                        Water Quality Trading Toolkit for Permit Writers


The model considers 30 different transformation pathways for the above constituents includ-
ing sources/sinks for CBOD5 by settling or resuspension, loss of ammonia nitrogen to the                     ^'
atmosphere, and uptake of phosphorus into phytoplankton biomass. It also uses a finite-dif-                  ,_1
ference technique to solve the mass balance equations taking into account various stream                    r-
effects. Since the critical period  of concern for low dissolved oxygen was the summer low-                    "Z,
flow period, the RMA-12 model  was used in steady-state mode for the study (MPCA 1985).                   C

While water quality calibration data existed from an intensive river survey in 1965 and a
summer low flow survey in 1974, the existing data lacked sufficient measurements of algal
productivity and  benthic demands. Therefore another intensive river survey was conducted
during a seasonally warm and low-flow period in August 1980, and the resulting data was
used to calibrate the RMA-12 model (MPCA 1985). Though data existed for nine days, only
four days were used for calibration because unsteady flow and rainfall conditions prevailed
during the latter part of the study period. A period of 4 days was sufficient because it cap-
tured one complete flow through of the study reach. The model was verified by simulating
water quality responses observed in the 1974 survey (MPCA 1985).

The Wasteload Allocation Study assumed that no additional load would be added to the                      ^
                                                                                                    P
Minnesota River. The two existing WWTPs, Blue Lake and Seneca, operated at secondary                      •="
treatment requirements which resulted in effluent averaging 25 mg/L CBOD5. In the spring                    |-
and fall, the WWTPs did not need additional treatment to ensure the river met the 5 mg/L                    g-
                                                                                                   tf3
dissolved oxygen minimum requirement (MPCA 1985). In the summer, additional treatment                    n
as well as a reduction in the  headwater and sediment oxygen demand was required to main-                  J
tain the 5 mg/L dissolved oxygen minimum requirement. The model predicted that additional      .            s
treatment to 10 mg/L CBOD5 by  the WWTPs and a 40 percent reduction in headwater and                     ?
sediment CBOD,. concentrations would be required to meet the dissolved oxygen require-                      3
              ^                                                                                      rr
ment during critical summer conditions (MPCA 1985). The model also predicted  that addi-                     •
tional treatment may also be required in the winter due to limited atmospheric reaeration                     §
caused by ice cover; however, it  is difficult to quantify the amount of ice cover on the river.                    |
Under complete ice cover, a reduction to 10 mg/L CBOD5 would be required by the WWTPs.                    5
If a 6 percent reduction in ice cover was possible, no additional treatment (beyond 25 mg/L
CBOD5) would be necessary to maintain the dissolved oxygen requirement (MPCA 1985).


Are Permits Used to Facilitate  Trades?
Rahr's permit required the company to install and maintain limits-of-technology controls
at the wastewater treatment facility, in addition to the trading requirements included. The
permit contains a BOD effluent limit of 12-mg/L year round and a phosphorus monthly aver-
age limit of 2 mg/L in addition to the  requirement to offset 150 Ibs/day of CBOD5. The permit
authorized trading of several pollutants that negatively impact water quality: nitrogen, phos-
phorus, and sediment to create CBOD5 credits.

Section II.A.2.a of the permit outlines the effluent limitations for the facility. In addition to
these limitations, the permit requires  Rahr to reduce CBOD5 mass loadings in accordance with
Section II.A.2.b or "obtain CBOD5 nonpoint load reduction [units] equal to or greater than its
actual CBOD5discharge." This section specifies that one nonpoint source load reduction unit
is the equivalent of one pound per day of CBOD5 discharge. In addition, this section requires
that Rahr obtain 20 units of reduction before start up of the wastewater treatment facility (if
start up is after December 31, 1997).                                                      ,          A-33

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          Water Quality Trading Toolkit for Permit Writers


                   The permit specifies that the permittee must spend a $250,000 trust fund within the 5-year
                   permit term by implementing projects approved by MPCA, and if 150 units can be obtained
                   for less than this amount, the permittee is required to extend the time period of project
                   expenditure to 10 years.

                   This section also outlines the types of projects that the MPCA would approve. Provision
                   II.A.2.b.4 states that "the Permittee shall submit proposed projects for review in accordance
                   with two referenced documents: the Point-Nonpoint Source Trading Summary and the
                   Nonpoint Source Crediting Calculations" (both dated January 8, 1997). These documents are
                   included in full as a separate PDF file on the Toolkit Web site. This section also states that the
                   "Commissioner is solely responsible for determining the amount of creditable CBOD5 non-
                   point source load reduction to be credited to the project."

                   It was uncertain whether agreements for nonpoint source reductions were likely to be made
                   because this was the first permit of its kind. Therefore, to provide an alternate method of
                   earning credits, Rahr accepted a phosphorus limit of 2 mg/L even though MPCA did not have
                   numeric standards for rivers. MPCA had proposed a limit of 3 mg/L limit and by  accepting
                   the more stringent limit, Rahr could earn a credit of 30 units of phosphorus to be applied to
                   the cumulative load reduction for every year the facility maintained this level of discharge. In
                   addition, MPCA allowed the facility to use up to 10 units of this credit in either 1998, 1999, or
                   2000 to satisfy any shortfalls that year in nonpoint source load  reductions to maintain compli-
                   ance with permit requirements.

                   In addition, the facility accepted a year-round CBOD5 limit of 12 mg/L instead of the seasonal
                   limit of 12 mg/L (June-September) and 25 mg/L at other times not covered under the TMDL
                   requirements (October-May) as proposed by MPCA. For this reason, MPCA allowed a 30 unit
                   credit to be applied to the cumulative value for 2001 and subsequent years provided the
                   permittee's discharge remained at 12 mg/L.

                   Point-Nonpoint Source Trading Summary
                   The Point-Nonpoint Source Trading Summary is incorporated  by reference into the permit and
                   basically explains the premise for Rahr's point-nonpoint source trading  process and the con-
                   cepts involved in developing the trading program. The summary document explains how the
                   ratios were developed to assess the impact of phosphorus and nitrogen loading on CBOD5 in
                   the river and outlines the basic concept of point-nonpoint trading in the watershed. In addi-
                   tion, the summary document highlights methods that will be used to minimize associated risks
                   such as pollutant equivalency ratios, safety factors for estimating phosphorus content in load-
                   ing from soil erosion, calculation of a field loss factor for nitrogen to account for volatilization
                   of ammonia and the assimilation of nitrogen prior to entering a surface water, and delivery
                   ratios to account for the distance a nonpoint source site is from the stream. Trading-eligible
                   BMPs are also described in this document. And finally, the summary document explains how
                   the trading agreement and administration of the trades were to occur during the permit term.
                   This document also references the Nonpoint Source Trade Crediting Calculations  document
                   and requires that all pollutant reduction estimation follow the formulas  included  therein.

                   Nonpoint Source Trade  Crediting Calculations
                   The Nonpoint Source Trade Crediting Calculations document details the various  trade calcula-
                   tions necessary to determine nonpoint source loading reduction units for all nonpoint source
                   trades required in Rahr's permit. Pollutant Equivalency Credits are  detailed to determine how
A-34              many pounds/day of reduction of phosphorus, CBOD5, nitrogen and how many tons/ day of
                   sediment are necessary to equate to a specified number of units in each of two areas of the

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                                                        Water Quality Trading Toolkit for Permit Writers


 river. A more detailed explanation is included under What Is the Pollutant Trading Ratio? and
 in the full version of the document.

 The document also details a list of conditions the permittee must use when selecting appro-                   r"
 priate BMPs. The conditions are based on a set of assumptions regarding physical process                      >-•
 constraints inherent in assessing nonpoint source loading and BMP removal effectiveness.                     fj

 For each type of BMP identified for point-nonpoint source trading in the watershed, this
 document details the calculation procedures necessary to estimate pollutant reductions. As                    > -
 previously stated, the discharger's permit requires that these calculations be used and submit-
 ted to the MPCA for approval by the Commissioner.


 How Are Credits Generated for Trading?
 According to the discharge permit, Rahr  can generate credits by implementing nonpoint source
 BMPs that reduce gully erosion (not including high-residue tillage), stabilize gully and bank
 erosion, exclude livestock from stream or river riparian zones, rotate grazing with livestock
 exclusion from riparian zones, or treat stormwater runoff with constructed wetlands (Riggs and
 Hartwell 2000). MPCA justified its BMP selection in the permit's fact sheet. The BMPs selected                  |
 provide equivalent water quality improvement to downstream point source reductions, can be                   2
 visually tracked or monitored, and promote additional nonpoint source reduction opportunities                 S"
 that are not widely used (Riggs and Hartwell 2000). The phosphorus, nitrogen, and sediment                   w
 loading reduction resulting from the implementation of the nonpoint source BMPs were then                   2
 converted into CBOD5 credits through the use of trading ratios. The  permit's supporting docu-                  "2
 mentation details how reductions were calculated for the different types of approved BMPs.                    ^
                                                                                                    re
                                                                                                    3
                                                                                                    ft"
 What Are the Trading Mechanisms?                                                      •
 The permit required that a trust fund be established to fund nonpoint source projects. Rahr                   5'
 was required to spend $250,000 to implement BMPs to reduce  loading by 150 Ibs/day of                       «
 CBOD5. In addition, the permit specifies that if the reductions can be achieved for less than                     *>
 $250,000, "the time period for full expenditure of the $250,000 will be extended to ten years
 from the date of the permit issuance."

 A board of citizens concerned with water quality conservation  including people from grass
 roots organizations, state offices, and Rahr representatives oversaw the final selection of
 BMP sites, but the process of initial trade identification was very network-driven and depend-
 ed on local environmental organizations and agency personnel (MPCA 1997c; Breetz et al.
 2004). The Commissioner of the MPCA gave final approval for each nonpoint source project
 and determined the amount of CBOD5 credits generated (MPCA 1997a).

 For two of its BMP sites, Rahr contracted with the landowner while in the other two, Rahr
 bought the land from the landowner, the city of New Ulm, and then sold the land for a dol-
 lar, with provisions and restrictions needed for preservation and upkeep, back to the city of
 New Ulm as a wildlife park under a permanent easement (Klang 2006a).

The credits were granted in a schedule to give the  point source greater flexibility in meeting
the permit requirements: 45 percent were granted when the contractual agreements were
 reached, 45 percent when the nonpoint source controls have been implemented, and 10 per-
cent when vegetation establishment criteria were reached (Breetz et al. 2004).                           A-35

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          Water Quality Trading Toolkit for Permit Writers


                   What Is the Pollutant Trading Ratio?
                   The unit of trade is one pound of CBOD5. Phosphorus, nitrogen, and sediment can all be
                   traded for CBOD5 but require the use of trading ratios, because of the varying degrees of per-
                   sistence in the river and mechanisms for exerting oxygen demand (MPCA 1997b). The trading
                   ratios estimate how much CBOD5 would be reduced in the TMDL zone by a related amount of
                   nutrient or sediment reduction upstream.

                   For phosphorus, the CBOD5 conversion ratio was 1:8, meaning that an upstream reduction
                   of  one pound of phosphorus results in a reduction of 8 pounds of CBOD5 in the TMDL zone.
                   This ratio  varies depending on the nutrient needs  of the biological life forms, flows, turbidity
                   impacts on photosynthetic activity and the bio-availability of phosphorus. The ratio of 1:8 is
                   conservative; the ecoregion  mean estimate of the ratio is closer to 1:17.

                   For nitrogen, the CBOD5 ratio was 1:4. By balancing the applicable chemical equation, one
                   pound of  total Kjeldahl nitrogen requires 4.6 pounds  of oxygen;  however, it is less persistent
                   in the river because of atmospheric loss, and it exerts  its demand more rapidly than phospho-
                   rus. So a ratio of 1:4 is used in the Metro Reach, and a 1:1 ratio is used for upstream reaches
                   (MPCA 1997c). Calculation of load reductions from livestock management BMPs include a 50
                   percent field loss factor to account for atmospheric nitrogen losses prior to transport into the
                   water column (MPCA 1997b).

                   Controlling sediment loss reduces oxygen demand associated with turbidity. The program
                   required one ton of sediment loss reduction for 0.5 CBOD5 credits.

                   The previously described trading ratios are the only ratios required in the TMDL zone. Beyond
                   the TMDL zone exists a BOD trading zone that extends up to river mile 107. Additional ratios
                   are applied in the BOD trading zone and described by Table 2 in the Point-Nonpoint Source
                   Trading Summary supporting permit documentation (MPCA 1997c). Beyond river mile 107,
                   one percent of the pounds removed are credited (MPCA 1997c).

                   For more information on the trade ratios, refer to  the Nonpoint Source Trade Crediting Cal-
                   culations and Point-Nonpoint Source Trading Summary supporting documents to the permit
                   (MPCA 1997b; MPCA 1997c).

           Example: Calculating CBOD5 Credits Achieved through a Critical Area Set-Aside of a
           River Flood Scoured Area

           A landowner near river mile 29 has 40 acres of land that are susceptible to flooding. Long term
           records from the U.S. Army Corps of Engineers were used to indicate an annual average rate of
           500 cubic feet of silt loam soil per acre are swept into the river. The landowner is interested in
           establishing woody vegetative cover with structural BMPs to reduce the sediment runoff and in
           turn the CBOD5 loading to the stream. The Nonpoint Source Trade Crediting Calculations document
           was used to calculate the number of credits generated by this  BMP as follows.

           1.  Calculate the annual sediment loading (SED):
              SED = AREA x VOL x Dry Density x FREQ

              The dry density is found in a table on p. 10 of the Nonpoint Source Trade Crediting Calculations
A-36         document. A silt loam soil has a dry density of 0.0425 tons/ft3.

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                                                      Water Quality Trading Toolkit for Permit Writers
Example: Calculating CBOD5 Credits Achieved through a Critical Area Set-Aside of a
River Flood Scoured Area (continued)

    c™  xm       500 ftVacre  0.0425 tons       tons
    SED = 40 acres x - x - — - = 850 -
                       yr          ft'             yr

2.  Calculate the amount of sediment reduced by the BMPs.
   According to the Nonpoint Source Trade Crediting Calculations document, the Scott County SWCD
   locally demonstrated that a site with scour erosion rates of 75 tons/acre/yr could, by establishing
   woody vegetative cover and installing some structural BMPs, reduce its erosion rate to 3 tons/
   acre/yr, which is  a 96 percent reduction. Applying the same reduction ratio to this site, it is
   found that:
    SEDReduced = 850     x 0.96 = 816
                      yr               yr

3.  Calculate the amount of phosphorus and nitrogen present in the annual sediment loading.
   The table on p. 17 of the Nonpoint Source Trade Crediting Calculations document provides the
   phosphorus and nitrogen contents based on soil type. Silt soil contains 1.00 Ibs P/ton and
   2.00 Ibs N/ton.
    r,  816 tons   1.00 Ibs   0,_ Ibs    M  816 tons   2.00 Ibs   -c,,0lbs
    P = - x - = 816 -    N = - . x -  = 16,32
          yr        ton         yr           yr       ton         yr

                                                                                                 oq

4.  Calculate the total CBOD5 credits.                                                                 j?
   The Pollutant Equivalency Credits table on p. 2 of the Nonpoint Source Trade Crediting Calculations
   document provides conversions from the trade parameter to CBOD5 credits based on whether
   the nonpoint source reduction takes place in the TMDL zone or upstream. For upstream
   reductions, the CBOD5 percent remaining is given in the GBOD. Percent Crediting Table on p,
   3 based on river mile. One pound of phosphorus reduced upstream is equivalent to 8 units of
   CBODS credit and one pound of nitrogen reduced upstream is equivalent to one unit of CBOD5.
   One ton of sediment reduced upstream is equivalent to 0.5 units of CBOD,- credit. 89 percent of
   CBOD5 reduced at mile 29 remains when it reaches Rahr Malting Co.

             816 Ibs P   8 units CBOD,        units CBODe
   P credits = - x - ^ = 6528 - - -
                 yr          1 Ib P                 yr

             1632 Ibs N   lunitCBODr         units CBOD
   N credits = - x - ^ = 1632
                 yr          1 Ib N                yr
                    816 tons   0.5 unit CBOD,       units CBODC
   Sediment credits = - x  - - - - = 408 - -
                       yr      1 ton sediment           yr
   Finally, the CBOD. units are summed and converted to daily credits.

   „    ,    ,.     8568 units     1 year    __ _ credits
   Total credits = 	x  O^T-  = 23.5 —j	                                            __
                     yr        365 days          day                                           A-37

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         Water Quality Trading Toolkit for Permit Writers


                  What Type of Monitoring is Performed?
                  Rahr monitors its wastewater outfall but does not conduct water quality monitoring at the
                  BMPs. The estimated reductions from the BMPs are determined by calculation as described
                  in the permit's supporting documentation. Some data were collected on initial phospho-
                  rus concentrations in the soil and used in the reduction calculations (Klang 2006a). Rahr is
                  responsible for submitting technical and engineering reports detailing the design and instal-
                  lation of the BMPs, including structural specification, operation plans, and detailed photo-
                  graphs, to MPCA before and after each trade (Breetz et al. 2004). The permit also requires
                  annual reports accounting for nonpoint source credits. MPCA monitors the implementation
                  of BMPs with periodic site inspections; however, MPCA does not verify pollution reduction
                  with systematic monitoring, which would be very expensive and would have to be long term
                  to generate conclusive results (Breetz et al. 2004).

                  What Are the Incentives for Trading?
                  Engaging in trading allowed Rahr to build its own WWTP which reduced costs and provided
                  the ability to expand production.

                  The BMPs installed improved water quality and improved or protected property. In the cases
                  of the Cottonwood and Minnesota River sites, the landowners were financially compensated
                  for their land by Rahr who restored then donated the land to the city of New Dim. In the
                  cases of the Rush River and 8-Mile Creek projects, the  landowners were worried about the
                  effects of bank erosion on their land and homes and were eager to participate in the trading
                  arrangement with  Rahr. Bluff/channel stabilization BMPs were installed on one landowner's
                  property in return for the landowner excluding livestock and maintaining the BMP, while
                  another landowner was responsible for the bioengineering maintenance required for the
                  BMP on his site (Klang 2006a; Sparks and Wallace 2006).

                  What Water Quality Improvements Have Been Achieved?
                  Rahr offset its pollutant loading beyond the necessary amount. Rahr obtained nonpoint
                  source credits for 212 Ibs/day of CBOD5, which exceeded the permit requirement of 150 Ibs/
                  day of CBOD5 traded (Breetz et al. 2004).

                  What Are  the Potential Challenges in Using This Trading Approach?
                  One significant challenge was defining the appropriate trade ratio between upstream
                  nonpoint source phosphorus loadings and CBOD5 discharges from Rahr's WWTP (Riggs and
                  Hartwell 2000; Fang and Easter 2003). The MPCA was able to determine a 1:8 trading ratio by
                  conducting studies relating phosphorus to chlorophyll-a and chlorophyll-a to CBOD5 (Breetz
                  etal.2004).

                  Local environmentalists initially objected to the trading program, but Rahr gained their sup-
                  port by cooperatively working with and accepting input from environmental organizations.

                  The permit required approximately 0.25-0.50 full-time equivalency of MPCA staff for permit
                  trade calculation development.  Immediately after permit completion, some critical time, on
                  the order of weeks, was spent setting up the trades. Now MPCA spends only a few days a
                  year managing the program (Klang 2006b).
A-38

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                                                        Water Quality Trading Toolkit for Permit Writers


What Are the Potential Benefits?
Rahr achieves cost savings through trading. Cost per credit, as determined by Fang and Easter,
is approximately $8.56/lb phosphorus when including engineering, construction, materials,
design, and transaction costs. Because costs cannot be estimated for getting to zero phos-
phorus discharge, which would have been required of Rahr if they had discharged without
trading, Rahr's costs were compared to that of WWTPs with comparable design flow that
have to reduce to one mg/L of phosphorus. These costs ranged between $4 and $18/lb/day
phosphorus reduced (Fang and Easter 2003). Therefore, implementing nonpoint source
reductions was very likely cost effective for Rahr.

Ancillary environmental benefits are created by implementing nonpoint source BMPs. For
example, riparian buffers can reduce sediment loss as well as remove nitrogen  and phospho-
rus from surface water. At two of the sites, the bank stabilization BMPs provided benefits
to the landowners, who were already experiencing property loss, by improving land stabil-
ity. The other two sites were sold to the city of New Dim at virtually no cost creating wildlife
parks for the city (Klang 2006a).

The trading program raised watershed awareness and provides a good example of both
community cooperation and allowing for growth on impaired waters (Klang 2006b).
DATE NONPOINT LOAD REDUCTION CUMULATIVE
December 31, 1997
December 31, 1998
December 31, 1999
December 31, 2000
Permit Expiration Date
0 units
30 units
30 units
30 units
60 units*
0 units
30 units
60 units*
90 units
150 units
Applicable NPDES Permit Language                                                     J'
  b.   The Permittee is authorized to discharge CBOD5 in accordance with the following                      §
       effluent limitations in addition to those in Part II.A.2.a. One unit of trading credit is                   "§
       the equivalent of 1 pound per day of CBOD5 discharged.                                           ^

       1. The Permittee shall comply with the cumulative CBOD5 nonpoint load reduction                     2.
         specified in the table below or obtain CBOD5 nonpoint load reduction equal to or                   •
         greater than its actual CBOD, discharge. The actual CBOD, discharge shall be mea-                   3-
                                                                                                   3
         sured as the annual average or the highest monthly average when the river flow                    £
         at the Jordan USGS gauging station is less than 500 cfs as a monthly mean during                    »
         June through September, whichever is greater.
       * The Permittee has accepted a phosphorus limit of 2 mg/l instead of the 3 mg/l
       limit MPCA would otherwise propose at this time. Due to this, a 30 unit credit may
       be applied to the cumulative load reduction during the year 2001 and subsequent
       years provided the Permittee's phosphorus limit remains 2 mg/l or less. In addition,
       up to 10 units of the phosphorus credit may be used in either 1998, 1999 or, 2000
       for permit compliance purposes to satisfy any shortfall in the year's nonpoint source
       load reduction requirement. The Permittee  has accepted a year-round CBOD5 limit of
       12 mg/l instead of the limit MPCA would otherwise propose at this time of 12 mg/l
       CBOD5 from June through September and 25 mg/l CBOD5 from October through
       May. Due to this, a 30-unit credit may be applied to the cumulative value for the
       year 2001 and subsequent years provided the Permittee's year-round CBOD5 limit
       remains 12 mg/l or less.

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          Water Quality Trading Toolkit for Permit Writers


                          2. The Permittee shall obtain 20 units of nonpoint load reduction prior to start-up of
                            their wastewater treatment facility if start-up is after December 31, 1997;

                          3. The Permittee shall spend all of the $250,000.00 dedicated to CBOD5 nonpoint
                            source load reduction within 5 years of permit issuance to obtain CBOD5 non-
                            point source load reduction by implementing projects approved by the MPCA.
                            If 150 units of actual nonpoint source  load reduction are obtained for less than
                            $250,000.00 during the five-year period, the time period for full expenditure of the
                            $250,000.00 will be extended to ten years from the date of  permit issuance.

                          4. The Permittee shall achieve the nonpoint source load reduction units specified
                            above by undertaking projects subject to (1) land purchase or (2) easement(s)
                            or other contractual obligation(s) in place for the duration of CBOD5 discharge.
                            Projects shall be Soil Erosion BMP's, Livestock Exclusion, Rotational Grazing With
                            Livestock Exclusion, Critical Area Set Aside or Wetland Treatment Systems. The
                            Permittee shall submit such proposed  projects to the MPCA for review in accor-
                            dance with the Point-Nonpoint Source Trading Summary dated January 8,  1997,
                            and the Nonpoint Source Crediting Calculations dated January 8, 1997. The permit
                            language shall control if any inconsistency arises from the referenced pollutant
                            trading documents: The Commissioner is solely responsible for determining the
                            amount of creditable CBOD5 nonpoint source load reduction to be credited for

                          5. If the Permittee has not obtained  150  nonpoint source load reduction units within
                            the term of this permit because of the Permittee's actual CBOD,. discharge, in
                            accordance with Part II.A.2.b.1, is less than 150 pounds per day  and if the Permittee
                            is authorized to continue to discharge 150 pounds per day CBOD5, the Permittee
                            shall obtain the remainder of the  150  nonpoint source load  reduction units within
                            10 years of the issuance of this permit.

                          6. The Permittee may request the Commissioner to modify Part II.A.2.b.1. of this
                            permit for schedule revisions in the event that the Permittee does not commence
                            construction of its wastewater treatment facility by September 1, 1999.

                   Contact Information
                   Bruce Henningsgaard
                   Minnesota Pollution Control Agency
                   (651) 296-7756
                   bruce.henningsgaard@pca. state, mn. us
A-40

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                                                         Water Quality Trading Toolkit for Permit Writers


References and Resources
Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water                        ^
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth                    *™/
    College, Hanover, NH.                                                                             1*J
                                                                                                    *r
Fang, F., and K.W. Easter. 2003. Pollution Trading of Offset New Pollutant Loadings—A                        Z,
    Case Study in the Minnesota River  Basin. In Proceedings of the American Agricultural                     >"
    Economics Association Annual Meeting. Montreal, Canada. July.                                        j>

Klang, James. 2006a. Personal communication. May 5.

Klang, James. 2006b. Personal communication via e-mail. September 1.

Klang, James. 2006c. Personal communication via e-mail. September 29.

MPCA (Minnesota Pollution Control Agency). 1997a. National Pollutant Discharge Elimination
    System (NPDES) and State Disposal System (SDS) Permit MN 0031917.  January.
                                                                                                     v
MPCA (Minnesota Pollution Control Agency). 1997b. Nonpoint Source  Trade Crediting                         |-
    Calculations. January.                                                                              2
                                                                                                     rl-
                                                                                                     5'
MPCA (Minnesota Pollution Control Agency). 1997c. Point-Nonpoint Source Trading                           ^
    Summary. January.                                                                                 |
                                                                                                    T3
                                                                                                     B>
Riggs, David W. and  Christopher A. Hartwell.  2000. Environmental flexibility in action: a                      ^
                                                                                                     fD
    Minnesota case study. Reason Public Policy Institute, Policy Study #265.                                   3
    .                                                                "
                                                                                                     §
Sparks, C, and S. Wallace. 2006. Pollutant Trading to Improve Riparian Habitats. Stormwater                    |'
    Magazine. January/February. .                     •§
                                                                                                     a
USEPA (U.S. Environmental Protection Agency). 1992. TMDL Case Study: Lower Minnesota
    River. December. .
                                                                                                 A-41

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              Water Quality Trading Toolkit for Permit Writers
A-42

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                                                     Water Quality Trading Toolkit for Permit Writers
Southern Minnesota  Beet Sugar Cooperative
Permit
Minnesota
Overview
The Southern Minnesota Beet Sugar Cooperative (SMBSC) is a farmer-owned cooperative
with a beet-processing facility located in southern Minnesota (MPCA 1999). The processing
facility treated process wastewater by storing it in lagoons during the processing season and
spray-irrigating it over 500 acres of alfalfa and grassland during the growing season; how-
ever, the SMBSC wanted to build a wastewater treatment  plant (WWTP) to serve the facility.
This would allow SMBSC to expand sugar production and resolve odor problems.

A carbonaceous biochemical oxygen demand (CBOD5) wasteload allocation (WLA) had been
developed and approved on the lower Minnesota River in  1988, however, which prohib-
ited the additional loading (MPCA 1997). The Minnesota Pollution Control Agency (MPCA)                   
                                                                                              o
and Water Conservation District official, the Hawk Creek watershed coordinator, and an envi-                £
ronmental advocacy representative (Breetz et al. 2004).

SMBSC's permit requires that the needed nonpoint source reduction be based on the actual                  "g
discharge. To accomplish this, the actual discharge is grouped into categories that create                     £>
thresholds for the actual nonpoint source reduction needed and that requirement reflects                   *a
the 2.6 to 1 trade ratio. The largest category or tier of nonpoint source trade offsets requires                 £
13,000 Ibs total  phosphorus/yr. To date, the facility is achieving nearly 2.5 times the permit's                  «
required nonpoint source reductions (Klang 2006b).                                                   ™
                                                                                              (-*•*
Type of Trading                   Pollutant(s) Traded                               g
                                                                                              3
Point Source-Nonpoint Source              Total phosphorus                                         g
                                                                                              rt
                                                                                              a

Number of Trades to Date
SMBSC contracts for spring sugar beet cover cropping best management practices (BMPs).
In 2005 SMBSC had contracts on 579 sites totaling 58,832 acres yielding 14,292.5 Ibs total
phosphorus reduction/yr. One contract was established for cattle exclusion and bluff/chan-
nel stabilization BMPs yielding 1,475 Ibs total phosphorus reduction/yr. SMBSC also has one
surface tile intake credit as part of a contract with a watershed district; however, because of
to problems with the agreement the contract was broken off and the credit was not included
in their total. SMBSC's total approved  credit count is 15,767.5 Ibs total phosphorus/yr (Klang
2006b).
                                                                                           A-43

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         Water Quality Trading Toolkit for Permit Writers


                  Who Is Eligible to Participate?
                  SMBSC is the sole point source covered by the permit. Landowners, including sugar beet
                  farmers and cattle ranchers, in the lower two-thirds of the Minnesota River Basin are eligible
                  nonpoint sources. Landowners do not have to be members of SMBSC. There are 600 beet
                  growers in this region (Breetz et al. 2004).


                  What Generated the Need for Trading?
                  Before 1999, SMBSC disposed of its sugar beet process wastewater by storing it in lagoons
                  during the processing season and spray-irrigating it over 500 acres of alfalfa and grassland
                  during the growing season. This process resulted in unpleasant hydrogen sulfide odors that
                  brought complaints from neighboring areas. To resolve this problem and accommodate a 40
                  percent production expansion, in 1999 SMBSC proposed building a WWTP to treat the waste-
                  water and discharge into a tributary of the Minnesota River. However, in 1985  a CBOD5 WLA
                  was developed and approved, which prohibited new CBOD5 loading. A permit  was issued
                  by MPCA, which required SMBSC to offset all of the WWTP's CBOD5 loading by funding the
                  installation of nonpoint source BMPs (Breetz et al. 2004).


                  What Serves as the Basis for Trading?
                  In 1985 EPA, MPCA and the Metropolitan Council (the regional planning agency for the
                  Twin Cities area, negotiated a wasteload allocation) described in the Lower Minnesota River
                  Wasteload Allocation Study, for the lower 26 miles of the Minnesota River. The wasteload
                  allocation required a 40 percent reduction of upstream and sediment CBOD5 concentrations.
                  Most of the CBOD5 came from loading from wastewater treatment plants and  manure from
                  feedlots. The Minnesota River Assessment Project (MRAP), completed in 1992,  identified
                  that eutrophication in the river supplied a significant amount of CBOD5 load as dead algae.
                  SMBSC's WWTP would have discharged into Beaver Creek, a tributary to the Minnesota River
                  and so SMBSC's permit was developed using knowledge gained from  these projects (Klang
                  2006a). SMBSC was located far enough upstream that its CBOD5 loading was not of concern;
                  however, since 70 percent of the upstream CBOD5 loading was caused by dead  algae decaying
                  and phosphorus is the limiting nutrient for algal growth in the basin, SMBSC was required to
                  limit phosphorus (Klang 2006d).


                  What Types of Data and Methodologies Were Used to  Calculate
                  the Basis for Trading?
                  A RMA-12 model was used in the development of the 1985 Wasteload Allocation Study for
                  point sources on the Minnesota River. This is a version of the QUAL-II  model, which  is a one-
                  dimension model for stream quality. The RMA-12 model differs from the QUAL-II model by
                  changing the growth equation for algal biomass and redefining the nitrogen cycle. While the
                  QUAL-II model considers nitrogen as Kjeldahl nitrogen, the RMA-12 model allows for organic-
                  and ammonia-nitrogen to be considered separately. The RMA-12 also allows for uptake of
                  ammonia-nitrogen by algae as opposed to only allowing nitrate-nitrogen uptake by algae as
                  in the QUAL-II model (MPCA 1985).

                  The RMA-12 model is a one-dimensional model and simulates the effects of wasteloads,
. **              nitrification, sediment oxygen demand, and algal photosynthesis (USEPA 1992). It uses an

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                                                        Water Quality Trading Toolkit for Permit Writers


advective-dispersive equation to solve for eleven water quality constituents numerically
(MPCA 1985). The constituents include                                                                '$'
     1. Phytoplankton algae                     7. Organic nitrogen                                    »~;
     2. Chlorophyll a                            8. Ammonia nitrogen                                   ^
     3, CBOD                                  9. Nitrite nitrogen                                      *^
     4. Dissolved Oxygen                        10. Nitrate nitrogen                                    2\
     5. Benthic oxygen demand                  11. Orthophosphate                                    X
     6. Atmospheric reaeration                                                                        j>

The model considers 30 different transformation pathways for the above constituents includ-
ing sources/sinks for CBOD5 by settling or resuspension, loss of ammonia nitrogen to the
atmosphere, and uptake of phosphorus into phytoplankton biomass. It also used a finite-dif-
ference technique to solve the mass balance equations taking into account various stream
effects. Since the critical period of concern for low dissolved oxygen was the summer low-
flow period, the RMA-12 model was used in steady-state mode for the study (MPCA 1985).

While water quality calibration data existed from an intensive river survey in 1965 and
summer low-flow survey in 1974, the existing data lacked sufficient measurements of algal                     ^
                                                                                                    o
productivity and benthic demands. Therefore another intensive river survey was conducted                    g
during a seasonally warm and low-flow period in August  1980 and the resulting data was                      3
used to calibrate the RMA-12 model (MPCA 1985). Though data existed for 9 days, only 4 days                  g
were used for calibration because unsteady flow and rainfall conditions prevailed during                       §
                                                                                                    flJ
the latter part of the study period. A period  of 4 days was sufficient because it captured one                   |
complete flow through of the study reach. The model was verified by simulating water qual-                   w
                                                                                                    
ity responses observed in the 1974 survey (MPCA 1985).                                                    £
                                                                                                    tyj
                                                                                                   OQ
The Wasteload Allocation Study assumed that no additional load would be added to the                       *
Minnesota River. The two existing WWTPs, Blue Lake and Seneca, operated at secondary                      §
                                                                                                   *c
treatment requirements which resulted in effluent averaging 25 mg/L CBOD5. In the spring                     3
and fall, the WWTPs did not need additional treatment to ensure the river met the 5 mg/L                     3-
                                                                                                    rt>
dissolved oxygen minimum requirement (MPCA 1985). In the summer, additional treatment                    %
as well as a reduction in the headwater and sediment oxygen demand was required to main-                   3
tain the 5 mg/L dissolved oxygen  minimum requirement. The model predicted that additional                  .
treatment to 10 mg/L CBOD5 by the WWTPs and a 40 percent reduction in headwater and                      §
sediment CBOD5 concentrations would be required to meet the dissolved oxygen requirement                  g
during critical summer conditions (MPCA 1985). The model also predicted that additional                      8-
treatment may also be required in the winter because of limited atmospheric reaeration
caused by ice cover; however, it is difficult to quantify the amount of ice cover on the river.
Under complete ice cover, a reduction to 10 mg/L CBOD5 would be required by the WWTPs.
If a 6 percent reduction in ice cover was possible, no additional treatment (beyond 25 rng/L
CBOD5) would be necessary to maintain the dissolved oxygen requirement (MPCA 1985).


Are Permits Used to Facilitate  Trades?
SMBSC's permit specifies that the  new WWTP must meet effluent limitations and offset
its load through nonpoint source projects. Treated process wastewater and non-contact
cooling water can be discharged to County Ditch (CD) 45 via Surface Discharge Station
(SD) 005 at a rate of 3.5 cfs between September and March. Between April  and August,
no discharge is allowed to CD 45. During this time and when the flow effluent  limitations                A-45
cannot be met between September and March, treated process wastewater is diverted to

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          Water Quality Trading Toolkit for Permit Writers


                   wastewater storage ponds. The pond water is land applied over 11 parcels for treatment.
                   The permit contains effluent limits for the relevant outfalls. SD 001 and SD 005 must meet
                   a 15-mg/L monthly average and a 34-mg/L monthly maximum CBODS concentration. SD 005
                   also has a total phosphorus yearly average limit of 0.75-mg/L year-round and a yearly total
                   of 1,135- kg/yr (approximately 2,500-lbs/yr) between September and March. Outfalls SD 003
                   and 004 must meet a 25-mg/L daily maximum concentration of CBOD5 year-round.

                   Chapter 12.1 of SMBSC's NPDES permit describes the provisions for trading under its Phos-
                   phorus Management Plan. The permit specifies that Soil Erosion Best Management Practices,
                   Cattle Exclusion, Rotational Grazing with Cattle Exclusion, Critical Area Set Aside, Con-
                   structed Wetland Treatment Systems, Alternative Surface Tile Inlets, and Cover Cropping are
                   acceptable nonpoint source practices that can be used to generate credits. Other BMPs must
                   be approved by MPCA. The formulas used to calculate phosphorus credits from each BMP are
                   detailed in the document Phosphorus Trade Crediting Calculations that is incorporated into
                   the permit (MPCA 2004b). The permit goes on to describe the project eligibility criteria, the
                   membership and role of the phosphorus trade board, the schedule for granting credits, the
                   project and credit approval processes, and requirements for annual reporting.

                   Also according to the permit, SMBSC is liable for ensuring nonpoint source phosphorus
                   reductions take place (Breetz et al. 2004). SMBSC is responsible for retaining an independent
                   auditor to certify project completion as  described in section 12.1.22 of the permit (MPCA
                   2004a). If BMPs are not properly implemented or maintained, the SMBSC will be responsible
                   for identifying another project  (Breetz et al. 2004).

                   The permit includes a document entitled Phosphorus Trade Crediting Calculations which
                   provides a brief explanation of the trade ratios and expands upon the requirements for the
                   approved BMPs. The document largely focuses on how to calculate the number of phos-
                   phorus credits that each BMP generates; however, it also provides some information on the
                   purpose of the BMP and how it should be implemented (MPCA 2004b). The entire document
                   is attached to the end  of the permit fact sheet.


                   How Are Credits Generated for Trading?
                   MPCA specified that acceptable BMPs to reduce phosphorus included cattle exclusions, buffer
                   strips, constructed wetlands, set-asides,  alternative surface tile inlets and cover cropping, all
                   of which are designed to reduce the runoff of phosphorus to surface waters.

                   According to the discharge permit, SMBSC must propose a BMP site to MPCA for approval.
                   Some specifics the proposal must include are documentation of the use and condition of
                   the site over the previous 5 years, the BMP(s) to be implemented and specifics on the imple-.
                   mentation process, operation and maintenance, and the detailed calculations justifying the
                   phosphorus credits applied for. The permit specifies the formulas used to calculate phospho-
                   rus credits generated by the phosphorus loading reduction assumed for each type of BMP.
                   After the project is implemented, SMBSC must submit an implementation report to MPCA
                   and a third-party auditor. The auditor will inspect and certify the project implementation. If
                   the project is implemented according to MPCA's approval, the auditor will recommend the
                   issuance of credits. MPCA will then approve or deny the credits (MPCA 2004a).
A-46

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                                                        Water Quality Trading Toolkit for Permit Writers


What Are the Trading Mechanisms?
A nonpoint source BMP must first be approved by the trade board and then by MPCA.                        ^
SMBSC's permit prescribes how to document BMPs in order to submit for approval. SMBSC has                 '~3
annual contracts for cover crops with the sugar beet farms that are participating and a 9-year                 J.1J
contract for cattle exclusion and bluff/channel stabilization site (Klang 2006a). The land man-                 ',„,.,
agers are paid through these contracts based on annual credits.                                           »—•

For each project, SMBSC will receive credits on the basis of the ratio of its financial contribu-                   ;>
tions to that of public sources. It will not receive credits for the portion funded by public
sources (MPCA 2004a). The credits are granted in a schedule to give the  point source greater
flexibility in meeting the permit requirements: 45 percent are granted when the contractual
agreements are reached, 45 percent when the nonpoint source controls  have been imple-
mented, and 10 percent when vegetation establishment criteria are reached (Breetz et al.
2004). SMBSC is required to obtain credits amounting to 2.6 times its annual phosphorus mass
discharge limit.


What Is the Pollutant Trading Ratio?                                                   -
The trade ratio specified in the SMBSC permit is 2.6:1. This means that for every 2.6 pounds                    s-
of total phosphorus reduced through nonpoint source BMPs, one pound is reduced at the                     3
wastewater treatment plant. Therefore, one credit is given for every 2.6  pounds of total                      -•
phosphorus reduced by a nonpoint source BMP.                                                          5>
                                                                                                   o
                                                                                                   rt
The trade ratio includes three different components: a base of 1:1 to offset the discharge,                     i?
+0.6 as an explicit engineering safety factor which, in addition to conservative assumptions                    £
implicit in the calculations, accounts for variations among sites, and +1 to allow for water                     
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         Water Quality Trading Toolkit for Permit Writers


                  Site Annual Report that the BMP sites remain active. The report is to include photographs
                  of each site taken during the previous year or the landowner's written certification that the
                  project remains in-place and effective (MPCA 2004a).


                  What Are the Incentives for Trading?
                  The trading program allowed SMBSC to construct and operate its own WWTP which allevi-
                  ated the land application problems and allowed it to expand the processing operation. In
                  addition, SMBSC pays members to plant cover crop BMPs, and they also receive the ancillary
                  benefit of protecting young sugar beet plants (Klang 2006a).


                  What Water Quality Improvements Have Been Achieved?
                  SMBSC has exceeded its offset requirements by implementing sugar beet spring cover crops,
                  cattle exclusion, and bluff/channel stabilization. Because SMBSC's total phosphorus limit is
                  2,500 Ibs/yr, the permit requires that the wastewater treatment plant offset 6,500 Ibs of total
                  phosphorus/year and to date, the nonpoint source BMPs generated reduction credits for
                  15,767.5 Ibs total phosphorus/year (Klang 2006b). In addition, the new WWTP has solved the
                  land application odor problem that was a significant community nuisance.


                  What Are the Potential Challenges in Using This Trading
                  Approach?
                  The environmental community was initially hesitant to support the trading arrangement due
                  to past permit compliance issues at SMBSC. To remedy these concerns, MPCA required SMBSC
                 • to develop a plan and compliance schedule before the permit was issued (Breetz et al. 2004).

                  Another concern of the environmental community was that not enough documentation was
                  required by the previously issued Rahr Malting Co. trading permit. SMBSC's permit contains
                  many more detailed documentation requirements such as a site-proposal package with
                  specific components detailed in the permit, an implementation report and certification  by a
                  third-party auditor, as well as the specifics regarding what should be included in the Phos-
                  phorus Trading Site Annual Report (Breetz et al. 2004; MPCA 2004a). A remaining concern
                  from some of the local conservationists is that the permit is not restrictive enough regarding
                  the crediting program set up for sugar beet spring cover crop nonpoint source reductions
                  even though the NRCS standard equations are used for the erosion estimates.

                  A concern of the SMBSC representatives is the equity issue of offering one shareholder a cost
                  incentive that the other shareholders may not have available to them because they live out-
                  side of the watershed. SMBSC was able to resolve this issue after the 2004 Summer Low  Flow
                  Dissolved Oxygen TMDL, which manages the upstream requirements of the 1985 Wasteload
                  Allocation Study, was completed. The TMDL required no discharge during the summer critical
                  flow months. SMBSC accepted this by spray irrigating its wastewater during this time. Even
                  though SMBSC was no longer required to trade because it did not directly discharge during
                  the critical flow months, it chose to continue trading and negotiated an agreement in the
                  permit to require 80 percent of the trades to take place  inside the Minnesota River basin and
                  allow the other 20 percent to be in the adjacent Crow River watershed, resolving the equity
                  issue.
A-48

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                                                        Water Quality Trading Toolkit for Permit Writers


Historically there have been tensions between some ranchers and sugar beet farmers which
have made it difficult for SMBSC to obtain ranchers as trading partners (Breetz et al. 2004;
Klang 2006c).                                                                                       Z

The permit required approximately 0.25-0.50 full-time equivalency of MPCA staff for permit                  "'
trade calculation development. Immediately after permit completion, some critical time, on                   '"'.
the order of weeks, was spent setting up the trades. Now MPCA spends only a few days a                       '
year  managing the program (Klang 2006c).


What Are the Potential Benefits?
This approach allowed SMBSC to expand its processing operation and alleviate the problems
associated with land application by building a wastewater treatment plant.

Fang and Easter (2003) found that in 2000-2001, it cost farmers $18.65/lb phosphorus reduc-
tion, which is comparable to the cost for a 1-2 mgd WWTP to treat its effluent to meet a
1 mg/L phosphorus limit. However, SMBSC was required to completely offset its discharge,
meaning that in the absence of trading, it would have to meet a 0.0 mg/L phosphorus limit.                   ^
Therefore, SMBSC believes that trading provided cost savings over  treatment (Breetz et al.                    c
2004). The representatives from SMBSC also believe the cost estimate  does not  include the                    
production costs saved by avoiding the occasional replanting that may be necessary if the                     ^
young sugar beet plants are not protected by cover crop BMPs.                                            |
                                                                                                   C/l
                                                                                                   O
The trading program raised watershed awareness and provides a good example of both com-                  *
                                                                                                   cc
munity cooperation and allowing for growth on impaired waters (Klang 2006c).                             S
Applicable NPDES Permit Language
                                                                                                   09
                                                                                                   n
                                                                                                   o
                                                                                                   o
Permit MN0040665                                                                                  S
                                                                                                   &j
                                                                                                   rf
Chapter 12. Total Facility Requirements                                                                 %
                                                                                                   *o
                                                                                                   ft!
1. Phosphorus Management Plan                                                                      g

  General Requirements for Phosphorus Trading                                                        •
                                                                                                   g;
  1.1   The Permittee shall achieve the phosphorus trade reduction credits by implementing                  5-
       projects subject to contractual arrangements. Projects shall be Soil Erosion Best Man-                  |
       agement Practices (BMPs), Cattle Exclusion, Rotational Grazing With Cattle Exclusion,                  °
       Critical Area Set Aside, Constructed Wetland Treatment Systems, Alternative Surface
       Tile Inlets, or Cover Cropping. The Permittee shall calculate the proposed trade cred-
       its for these projects according to the terms of this permit and the "Phosphorus Trade
       Crediting Calculations" appended to and incorporated into this permit. The MPCA is
       responsible for approving the number of phosphorus trade credits for the proposed
       projects.

  1.2   BMPs, other than those specified above, cannot be employed without MPCA
       approval.

  1.3   A contractual arrangement that the Permittee enters into for trade sites shall require
       the performance of what the MPCA has approved for the sites. However, the Per-
       mittee retains responsibility for the proper construction, installation, operation and               A-49
       maintenance of the projects the MPCA has approved for phosphorus trade credits

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          Water Quality Trading Toolkit for Permit Writers


                           under this permit notwithstanding the contractual arrangements that the Permittee
                           may have entered into regarding the projects.

                      1.4   Credits generated from this program, in excess of those required by this permit, can
                           be transferred to other Permittees, if approved in writing by the MPCA.

                      1.5   It is the intent of this permit that the Permittee shall achieve and maintain MPCA-
                           approved phosphorus trade reduction active credits for the life of the wastewater
                           treatment plant discharge to surface waters.

                      General Project Eligibility Criteria
                      1.6   The Permittee shall achieve and maintain MPCA-approved phosphorus trade reduc-
                           tion credits in the amount of 2.6 times the annual phosphorus mass discharge limit
                           (1,130 kg/yr or 2,500 Ibs/yr) for SD009 (2.6 x 2,500 Ibs P per year = 6,500 credits).

                      1.7   Phosphorus trade credit projects shall not include activities required to be permitted
                           by the MPCA and/or by other entities according to MPCA rules.

                      1.8   Phosphorus trade credits shall not be proposed or approved for sites which simulta-
                           neously track benefits for other environmental programs, including but not limited
                           to wetland mitigation under the Wetland Conservation Act. If a site for which trade
                           credits already have been approved or granted under this permit is entered into
                           another environmental program, the Permittee shall immediately inform the MPCA
                           to revoke the trade credits for that site.

                      1.9   Phosphorus trade credit project best management practices shall be additional to
                           those occurring prior to1999 for existing trade projects and for cover crop BMP in
                           general and during at least the previous five years for  new sites proposed for trade
                           credits.

                      1.10  At least eighty percent (80%) of the required credits shall be located in the Minneso-
                           ta River drainage basin, excluding landlocked areas, lakes, or reservoirs with signifi-
                           cant phosphorous assimilative capacity.

                      Phosphorus Trade Board
                      1.11   The Permittee shall establish and maintain a Phosphorus Trading Board. The Board
                           shall consist of no more than seven members. At least  one of these members shall be
                           a  local, watershed manager, at least one shall be a non-MPCA government repre-
                           sentative knowledgeable in the field of agriculture, and at least one shall be the
                           leader of a locally based water resources organization. The Phosphorus Trading Board
                           shall review and approve the sites proposed by the Permittee before these sites are
                           proposed for approval  to the MPCA. The MPCA shall provide copies to the Phospho-
                           rus Trading Board of its correspondence regarding  its review of these proposed sites,
                           including  MPCA approval and denial decisions on these sites.

                      Granting Phosphorus Trade Credits
                      1.12  Forty-five percent of the project's potential  phosphorus credits for a site shall be
                           granted when the MPCA approves a proposed project

                      1.13  Forty-five percent of the project's potential  phosphorus credits for a site shall be
A-50                      granted when construction is  complete, according to the MPCA-approved plans and
                           specifications, and the  MPCA's requirement  for review has been satisfied.

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                                                       Water Quality Trading Toolkit for Permit Writers


1.14  Ten percent of the project's potential phosphorus credits for a site shall be granted
     when vegetation establishment criteria have been achieved at the site, the Permittee                  •'•'"
     submits required documentation, and the MPCA's requirement for review has been                    J'
     satisfied.                                                                                       ,;:

1.15  Credits shall not be considered active until they have been granted as described                       <™i
     above.                                                                                         '""",

1.16  The MPCA may at any time revoke previously approved phosphorus trade credits. In                   >,
     order to revoke credits, the MPCA shall make the following findings:
     1. The project as credited by the MPCA was not constructed or installed as approved;
       or
     2. The project as credited by the MPCA was not operated or maintained as approved;
       or
     3. The project contractual arrangement(s) have not been honored.

 Project Submittal and Review
1.17  To propose a site for phosphorus trade credit approval by the MPCA, the Permittee                     v>
     shall provide to the MPCA,  at least 90 days before the Permittee expects to receive an                  §,
     approval response from the MPCA, the following information for the site:                             |
     1. Site name and  location, as detailed on a USGS 7.5-minute quad map with lat/long                    §
       location identified to the nearest second.  Identification of the major and minor                      S
                                                                  '                                  w
       watersheds, and  HUC reach codes,  in which the site is located. The extent to which                   r
                                                                                                    &
       lakes or reservoirs are downstream of the site.                                                    %
                                                                                                    re
     2. Landowner name and mailing address.                                                          y
                                                                                                   era
     3. Documentation, including photos as needed, of the vegetation species, land use                     *
       and specific drainage practices at the site over the  previous 5 years.                                 §
                                                                                                   v
     4. Type of BMPs proposed to be implemented at the site.                                            %
                                                                                                   • (-*•
     5. Copy of the signed contractual arrangement that stipulates future management                     i
       requirements and length of term and that stipulates that the construction will not                   »
       begin until MPCA approves the project.                                                          |-
     6. Plan view of the project,  and engineering plans, specifications and, for structural                     ,,,
                                                                                                    ^
       practices, the professional engineer's certification, for the project, if needed.                        |"
       Operation and maintenance plans.                                                               |
                                                                                                    rt
                                                                                                    a
     7. Vegetation establishment and  maintenance criteria and plans to achieve 100 pet
       active crediting for the project.
     8. The total annual  pounds  (kg) of phosphorus credit applied for, and the  basis for
       this value, including the detailed calculations.
     9. Those projects with vegetative components shall include establishment and main-
       tenance criteria and  plans to ensure a dense stand, including the dates of seeding.

1.18  Those projects that treat sediment by filtering or settling shall include operation and
     maintenance plans that include, but are not  limited to, procedures to:
     1. Ensure sheet flow conditions are maintained in upland flow areas;
     2. Remove accumulated sediment that may hinder the operation of the BMP;
     3. Inspect and, if needed, reestablish a structure or vegetation after major storm                   A-51
       events or fire; and

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          Water Quality Trading Toolkit for Permit Writers


                           A. Remove harmful infestations, including carp from treatment wetlands, destructive
                             insects from vegetation, and beavers from bioengineering sites.
                      1.19  The MPCA shall in writing approve, or deny with comments, the proposed project.
                           The MPCA shall, in its approval of proposed project, certify that appropriate con-
                           tractual arrangements are in place for the site, confirm the project's potential trade
                           credits, and shall specify the information required to document construction comple-
                           tion and clarify the auditor's responsibilities.

                      1.20  The credit value for a project shall be based upon the ratio of the Permittee's finan-
                           cial contributions to the contributions from public sources. The Permittee shall not
                           receive credits for those portions of a project financed by public funding sources.

                      Project Construction/Implementation, Documentation, Auditing, and Credit Approval
                      1.21  Project Construction shall not begin until MPCA written approval for the project is
                           received.

                      1.22  The Permittee shall retain an independent auditor to certify project completion:
                           1. For engineered  projects designed by a registered professional engineer, the audi-
                             tor shall be a registered professional engineer. The professional engineer shall
                             provide a construction documentation report for the project and the engineer
                             shall certify that the project was completed in substantial conformance with the
                             approved plans and specifications. The MPCA may require that photographs
                             and/or record drawings be included in the report, depending upon the project
                             complexity.
                           2. For cover crop, the auditor can be a registered professional engineer, a certified
                             crop advisor, or a representative of a local watershed interest. The Permittee
                             shall provide the list of MPCA approved cover crop contracts and the auditor shall
                             select10% at random for a site inspection. The Permittee shall submit its imple-
                             mentation report to the MPCA and the auditor. The auditor will compare audit site
                             information to Permittee's report, noting any inconsistencies in the auditors report
                             submitted.
                           3. For other projects, or for portions of projects not designed  by the registered
                             professional engineer,  the auditor can be a  registered professional engineer, a
                             certified crop advisor, or a representative of a local watershed interest. The audi-
                             tor shall inspect the construction site as needed to confirm  and document that the
                             project was completed in accordance with the approved project.
                           4. For projects where vegetation establishment is required, the auditor shall provide
                             written verification that the vegetation establishment criteria have been achieved.
                           5. The auditor will prepare a report to submit to the MPCA and the Permittee, the
                             report will provide documentation  required for that project. If the project was
                             completed as approved, the report will recommend issuance of construction
                             credits.
                      1.23  The MPCA shall respond to the Permittee's documentation reports  and auditor's
                           certification reports and either issue or deny construction credits or vegetation estab-
                           lishment credits.

                      Annual Reporting
A-52                 1 24  The Permittee shall submit a Phosphorus Trading Site Annual  Report: due on Novem-
                           ber 30 of each year following permit issuance.

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                                                        Water Quality Trading Toolkit for Permit Writers


   1.25 The Permittee shall certify in the Phosphorus Trading Site Annual Report that the
       active sites approved by the MPCA for phosphorus trade credits, remain active                       "-,'•""
       according to the plans and specifications approved by the MPCA                                    _
                                                                                                   I™!"*
   1.26 The Report covering a site shall include photographs of each site taken during the                    'I'
       previous year (these photographs shall correspond in view and detail to the initial                    «—,
       photographs provided to the MPCA for that site) or landowner's written certification                 *—.
       that the project remains in-place and effective,                                                   /"'

Contact Information
Bruce Henningsgaard
Minnesota Pollution  Control AgenCy
(651)296-7756
bruce.henningsgaard@pca.state.mn.us


References and Resources
Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz,  and R. Terry. 2004. Water                        «
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth                     §.
    College, Hanover, NH.                                                                             5
                                                                                                    2
Fang, F., and K.W. Easter.  2003. Pollution Trading of Offset New Pollutant Loadings—A                        3
    Case Study in the Minnesota River Basin. In Proceedings of the American Agricultural                      °
                                                                                                    a>
    Economics Association Annual Meeting. Montreal, Canada. July.                                        w
                                                                                                    re
                                                                                                    rt
                                                                                                    C/5
Klang, James. 2006a. Personal communication. May 5.                                                    £
                                                                                                    BJ
                                                                                                    t^
                                                                                                    n
Klang, James. 2006b. Personal communication via e-mail. May 5.                                            §
                                                                                                   13
                                                                                                    re
                                                                                                    *-!
                                                                                                    pj
Klang, James. 2006c. Personal communication via e-mail. September 1.                                      d
                                                                                                    ro
                                                                                                    13
Klang, James. 2006d. Personal communication via e-mail. November 15.                                     |
                                                                                                    rt-
MPCA (Minnesota Pollution Control Agency). 1997. Point-Nonpoint Source Trading Summary.                   *^
    January.                                                                                         |'
                                                                                                    a
                                                                                                    w
                                                                                                    o
MPCA (Minnesota Pollution Control Agency). 1999. MPCA, Beet Sugar Cooperative,                           »

MPCA (Minnesota Pollution Control Agency). 2004a. National Pollutant Discharge  Elimination
    System (NPDES) and State Disposal System (SDS) Permit MN 0040665. December.

MPCA (Minnesota Pollution Control Agency). 2004b. Phosphorus Trade Crediting
    Calculations. December.

State and Local Groups Craft Innovative Watershed Protections in Southwestern Minnesota.
    News Release, May 12. .

USEPA (U.S. Environmental Protection Agency). 1992. TMDL Case Study: Lower Minnesota
    River. December.  .
                                                                                                A-53

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                                                      Water Quality Trading Toolkit for Permit Writers
Truckee River
Nevada
Overview
The Truckee Meadows Water Reclamation Facility (TMWRF) provides wastewater treatment
for the cities of Reno and Sparks in Nevada and is subject to wasteload allocations from a
1994 TMDL developed to address total nitrogen, total phosphorus, and total dissolved solids.
TMWRF's permit, issued by the Nevada Division of Environmental Protection (NDEP), contains
effluent limits that reflect the wasteload allocations for parameters covered by the TMDL. In
addition, the permit identifies individual wasteload allocations and contains language that
allows temporary trading of individual wasteload allocations. The permit also allows NDEP to
modify the permit to allow water quality trading (or offset) projects that allow permittees to
generate credits toward their wasteload allocations.

Type of Trading                    Pollutant(s) Traded

Point Source-Point Source                  Total nitrogen
Point Source-Nonpoint Source              Total phosphorus
                                        Total dissolved solids

Number of Trades to Date
None


Who Is Eligible to Participate?
Under its permit, TMWRF is authorized to participate in water quality trading projects that
could generate credits toward its wasteload allocation. Temporary trading of individual was-
teioad allocations is an activity authorized under the permit to take place between TMWRF
and two other dischargers—(1) Vista Canyon Group, LLC, and (2) the city of Sparks-Sparks
Marina Park.


What  Generated the Need for Trading?
Impairments in the Truckee River are associated with low flows and heavy pollutant loading.
According to TMWRF's Web site, the Truckee Meadows is one of the fastest growing metro-
politan areas in the country. To accommodate growth, TMWRF needs to expand capacity, but
it faces stringent nitrogen discharge limits as a result of the TMDL (Breetz et al. 2004).


What  Serves as the Basis for Trading?
The wasteload allocations derived as part of the 1994 TMDL for total nitrogen, total
phosphorus, and total dissolved solids serve as the basis for trading.
                                                                                           A-55

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         Water Quality Trading Toolkit for Permit Writers


                  What Types of Data and Methodologies Were Used to Calculate
                  the Basis for Trading?
                  The TMDL report for the Truckee River, adopted by NDEP in February 1994, contains a
                  description of the data and methodologies used to calculate the wasteload allocations for
                  total phosphorus, total dissolved solids, and total nitrogen.

                  TMDLs and Wasteload Allocations for Total Phosphorus and Total
                  Dissolved Solids
                  NDEP used simple dilution calculations for total phosphorus and total dissolved solids. To
                  calculate the TMDLs in pounds per day using flow data and pollutant concentration, NDEP
                  calculated the value of a constant to use in the TMDL calculation. The TMDL in pounds per
                  day (Ib/day) is calculated by multiplying the average flow in cubic feet per second (ftVsec),
                  the average concentration  in milligrams per liter (mg/L) and the constant 5.394 Ib-L-sec/mg-
                  ft3-day (NDEP 1994).

         TMDL (Ib/day) = (average flow in ft3/sec) x (average concentration in mg/L) x
         (5.394 lb-L-sec/mg-ft3-day)
           Example: Calculating the TMDL for Total Phosphorus and Total Dissolved Solids

           NDEP used simple dilution calculations to develop TMDLs for total phosphorus and total dissolved
           solids, assuming the system is represented by average conditions over time (NDEP, 1994). Using
           average flow data from the U.S. Geological Survey, NDEP selected the time period 1973 to 1992
           to calculate the average flow of 795 ft3/sec; 1973 represented the last significant modification to
           flow control structures in the Truckee River Basin (NDEP 1994). The average concentration of
           phosphorus used by NDEP was 0.05 mg/L, and the average concentration of total dissolved solids
           was 210 mg/L.

              (Average flow in ftVsec) x (Average concentration in mg/L) x
              (5.394 lb-L-sec/mg-ft3-day) = TMDL (Ibs/day)

              For total phosphorus:
              (795 ftVsec) x (0.05 mg/L) x (5.394 lb-L-sec/mg-ft3-day) = 214 Ib/day

              For total dissolved solids:
              (795 ftVsec) x (210 mg/L) x (5.394 lb-L-sec/mg-ft3-day) = 900,528 Ib/day
                  NDEP determined that of the 214 Ib/day calculated as the total phosphorus TMDL, 80 Ib/day
                  was associated with nonpoint sources and background; therefore, the wasteload allocation
                  for TMWRF is 134 Ib/day of total phosphorus. TMWRF's wasteload allocation for total dis-
                  solved solids is a 30-day average load of 120,168 Ib/day.
A-56

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                                                        Water Quality Trading Toolkit for Permit Writers


TMDL and Wasteload Allocation for Total Nitrogen
                                                                                                  ;>"
To calculate the TMDL for total nitrogen, NDEP used a different approach because it assumed
total nitrogen to be a nonconservative pollutant (NDEP 1994). NDEP used the Dynamic                       """•>
Stream Simulation and Assessment Model (DSSAM III) to calculate the TMDL. Intensive sam-                  ;j,;
pling from September 1989 provided a snapshot of nutrient loading to the Truckee River;                    , \
therefore, NDEP used those data to calibrate the DSSAM III model. NDEP used the model to                  ^
run a series of simulations involving differing nutrient loadings to determine the appropriate                 s-y-
TMDL. Simulation results indicated that nitrogen loads in excess of 1,000 Ib/day may result                   5>
in excessive growth of aquatic plants (NDEP 1994). Therefore, NDEP set the TMDL at 1,000
Ib/day during summer low flows.

NDEP stated that existing data indicated that the average nonpoint source contribution of
total nitrogen is approximately 500 Ib/day (NDEP 1994). Therefore, TMWRF received a was-
teload allocation of 500 Ib/day as an average annual load from  November 1 through April 30
and as a 30-day average load from May 1 through  October 31.

TMWRF is using other modeling tools to revisit the TMDL for total nitrogen in a third-party
TMDL development process. The results from this process could change the facility's waste-                    3
load allocation and the basis for future trading activities (Pahl 2007),                                       *•
                                                                                                   n>
                                                                                                   <'
Are Permits Used to Facilitate  Trades?                                                  \
The NPDES permit issued to TMWRF by NDEP contains language that allows temporary                        i?
trading of individual wasteload allocations and water quality trading projects, such as river                    H
restoration and septic system conversion, to offset wasteload allocations. However, individual
wasteload allocation trading requires submission of a notification to NDEP. Water quality
trading projects might require permit modifications to increase the permittee's wasteload
allocation.


How Are Credits Generated for Trading?
To date, TMWRF has not developed a proposal to conduct trading. Such a trading proposal
would contain information about the water quality trading project that would result  in cred-
its to offset a pollutant discharge load. It is likely that credits would be based on the Water-
shed Analysis Risk Management  Framework (WARMF) model being developed for the Truckee
River. The WARMF watershed model, completed in late 2004, would be used to estimate the
predicted nutrient and sediment loading reductions from nonpoint source projects (Breetz et
al. 2004).


What Are the Trading Mechanisms?
Temporary trading of individual  wasteload allocations requires the submission of a notifica-
tion signed by the transferring and the receiving dischargers. The notification must describe
the amount of individual wasteload allocation to be transferred, the length of time of the
transfer, and the basis for the transfer (i.e., last monthly flows and wasteload discharged for
both dischargers). Water quality trading projects will most likely require TMWRF to submit a
project proposal to NDEP for review. The permit does not specify requirements but does men-
tion that NDEP will evaluate the  effectiveness of projects as to their effectiveness through
modeling simulations, pilot studies, and monitoring (NDEP 2003).                                      A-57

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         Water Quality Trading Toolkit for Permit Writers


                  What Is the Pollutant Trading Ratio?
                  Not yet determined.


                  What Type of Monitoring Is Performed?
                  Not yet determined.


                  What Are the Incentives for Trading?
                  The language contained in the NPDES permit for TMWRF provides flexibility in how the per-
                  mittee can achieve its wasteload allocation.


                  What Water Quality Improvements Have Been Achieved?
                  Not applicable.


                  What Are the Potential Challenges in Using This Trading
                  Approach?
                  Potential challenges include negotiating terms of proposed water quality projects that
                  involve nonpoint source offsets of TMWRF's pollutant load, particularly in defining the
                  appropriate trade ratio and determining effectiveness.


                  What Are the Potential Benefits?
                  Potential benefits of the trading provisions integrated into TMWRF's NPDES permit include
                  cost-effective solutions for achieving wasteload allocations and improving overall water qual-
                  ity conditions, as well as consideration of overall watershed conditions when evaluating the
                  merits of proposed water quality trading projects.


                  Applicable NPDES Permit Language
                     c. Temporary Trading of IWLA: The Permittee may temporarily trade IWLA upon submit-
                        tal of a notification signed by the transferring and the receiving dischargers describ-
                        ing the amount of IWLA transferred, the length of time the transfer is effective and
                        the basis for the transfer. The basis for the transfer shall include the last  monthly
                        flows and wasteload discharged for both dischargers. The wasteload transfer shall be
                        effective on the date of the submittal to the Division.
                        Any designated transfer is binding on the dischargers and cannot be revoked with-
                        out a notification signed by the transferring and the receiving dischargers. The
                        transferred IWLA shall revert back to the original holder of the IWLA at the end of
                        the time specified on the notification. A copy of the latest IWLA agreement and any
                        agreements made during the reporting period shall be submitted with each quarterly
                        report required by I.B.2.
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                                                         Water Quality Trading Toolkit for Permit Writers


     I.A.5. Water Quality Trading: The Division may modify the permit to include specific
       water quality trading, or offset, projects based upon review of the results of scientific                 ^
       studies, as a major modification. Water quality trading entails the reduction in a pol-                  ^
       lutant load through implementation of a water quality management project that is                   rr:
       credited towards the Permittee's wasteload allocation (WLA), thereby increasing the                  ',^:,
       Permittee's allowable discharge load for a specific pollutant. Potential water qual-                    v-*'
       ity trading opportunities include, but are not limited to, water augmentation, river                   »x;;
       restoration, septic system conversion, and stormwater management practices. These
       potential water quality management projects will be evaluated as to their effec-
       tiveness through watershed/water quality modeling simulations, field pilot studies
       and on-going water quality monitoring. Based on the results of the model simula-
       tions and pilot projects, the permit may be modified to incorporate the Permittee's
       increased WLA(s).

Contact Information
Randy Pahl
Nevada Division of Environmental Protection
Bureau of Water Quality Planning                                                                       2
(775) 687-9453                                                                                        %
                                                                                                     re
rpahl@ndep.nv.gov                                                                                   •»
                                                                                                     <'
                                                                                                     n>
                                                                                                     >-<
Bruce Holmgren                                                                                      •
Nevada Division of Environmental Protection                                                             «f
Bureau of Water Pollution Control                                                                       §•
(775) 687-9423
bholmgre@ndep.nv.gov


References and Resources
Breetz, H., K. Fisher-Vanden, L. Garzon,  H. Jacobs, K. Kroetz, and R. Terry. 2004. Water
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth
    College, Hanover, NH.

NDEP (Nevada Division of Environmental Protection). 1994. Truckee River TMDLs and WLAs.
    Nevada Division of Environmental Protection, Bureau of Water Quality Planning.
    February, .

NDEP (Nevada Division of Environmental Protection). 2003. Authorization to Discharge.
    Permit NV0020150. Effective October 15, 2003.

Pahl, Randy. 2007. Personal  communication. January 24.
                                                                                                 A-59

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                                                   Water Quality Trading Toolkit for Permit Writers


Passaic Valley Sewerage Commissioners

Pretreatment Trading

New Jersey                                                                      2


Overview
The Passaic Valley Sewerage Commissioners (PVSC) operates a large publicly owned treat-
ment works (POTW) that treats wastewater for northern New Jersey. PVSC participated with
EPA and other partners in a pilot project for indirect dischargers to the POTW that would
allow water quality trading to meet pretreatment local limits.


Number of Trades to Date
Two

The first trade was for copper between two organic chemical manufacturers; the buyer                     j
eventually went out of business. The second trade involved a pharmaceutical company that                  £
purchased zinc and copper credits from an organic chemical manufacturer (the seller in the                  <
initial trade).                                                                                %
                                                                                          V.
Type of Trading                   Pollutant(s) Traded                              1
                                                                                          01
                                                                                         era
Point Source-Point Source                 Heavy metals regulated through local pre-                   £
                                     treatment limits (cadmium, copper, lead,                     g
                                      mercury, nickel, zinc)                                     5
Who Is Eligible to Participate?
Approximately 260 indirect dischargers within the PVSC service area, which encompasses 48
municipalities in 4 counties, can participate.


What Generated the Need for Trading?
PVSC established more stringent local pretreatment limits for certain heavy metals to meet
exceptional quality standards for beneficial reuse of biosolids. Indirect dischargers raised con-
cerns about more stringent local limits because many already had to meet federal categorical
pretreatment standards.


What Serves as the Basis for Trading?
Trading to meet uniform local pretreatment limits by industrial facilities is allowed by PVSC
in rules and regulations regarding indirect discharges that became effective in 1994, in
accordance with state and federal pretreatment and residual management regulations. PVSC
established stringent local pretreatment limits in 1994 for certain heavy metals to meet
exceptional quality standards for the beneficial reuse of biosolids. PVSC required industrial
users to comply with the local limits by June 1997.
                                                                                          (
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Water Quality Trading Toolkit for Permit Writers


         What Types of Data and Methodologies Were Used to Calculate
         the Basis for Trading?
         PVSC's technology-based local limits for certain heavy metals served as the basis for trad-
         ing. Local limits are conditional discharge limits imposed by municipalities on industrial and
         commercial facilities that discharge to a POTW to prevent site-specific (e.g., POTW or envi-
         ronmental) problems. The methodology for calculating local limits depends on two factors:
         the maximum allowable headworks loading (MAHL) and the maximum allowable industrial
         loadings (MAIL). A MAHL is an estimate of the upper limit of pollutant loading to a  POTW
         intended to prevent pass-through or interference and serve as the basis for local limits. The
         MAIL developed by the POTW represents the amount of pollutant loading the POTW may
         receive from industrial users and other controlled sources. After calculating the MAIL, the
         POTW assigns local limits to dischargers. To assign local limits, PVSC used what they  refer to
         as a hybrid uniform allocation method that took into account reductions from the two larg-
         est dischargers to the POTW.

         Data typically needed to develop local limits include pollutant concentration data from the
         POTW (influent, effluent, primary effluent, sludge), collection system, receiving stream,  and
         industrial users, as well as flow data, including total POTW flow, POTW sludge flow  to the
         digester, POTW sludge flow to disposal, industrial user flows, receiving stream, hauled waste,
         domestic flows, and commercial flows (USEPA 2004).


         Are Permits Used to Facilitate Trades?
         PVSC administers a pretreatment program according to NPDES regulations. Through its pre-
         treatment program, PVSC issues sewer use permits to indirect dischargers. The sewer use per-
         mits contain adjusted permit limits that reflect the terms of an approved trade contained in
         a trading agreement (see What Are the Trading Mechanisms? below). PVSC approves trades
         using a set of criteria that requires the traded amount to be greater than 0.1 pound  per day
         and traded in increments of no less than 0.05 pound per day. The 0.1  pound per day incre-
         ment was selected because it was relatively large and would limit the number of potential
         participants (Caltagirone 2004).


         How Are Credits Generated for Trading?
         The seller is an industrial facility that demonstrates,  using monitoring data and compliance
         records, a positive reduction in a heavy metal through control measures or pollution preven-
         tion techniques (i.e.,  pretreatment). The buyer is an  industrial facility that cannot meet its
         local limits for a heavy metal and wants to negotiate with a seller to purchase credits through
         a contract. A seller may sell credits for a particular metal to a maximum of 10 buyers. A buyer
         may purchase credits for more than one metal, but it must purchase all credits for a  particular
         metal from one seller.

         Credits are traded on a mass basis, rather than a concentration basis; therefore, facilities
         participating in a trade must convert the discharge concentration in milligrams per liter
         (mg/L) to a mass-based unit in pounds per day (Ib/day). The buyer may use only 80 percent of
         the purchased quantity because PVSC requires the buyer to retire or reserve 20 percent of the
         reductions for environmental benefit or future needs (Breetz et al. 2004). Therefore, facilities
         purchasing credits must take this retired/reserved percentage into account when calculating
         credits.

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                                                         Water Quality Trading Toolkit for Permit Writers
Current discharge concentration of a specific heavy metal-Local limit of a specific heavy
metal = Concentration exceeding local limit for a heavy metal

Concentration exceeding local limit for a heavy metal (mg/L)  x volume (mgd) x 8.344 (conversion
factor) - Mass (Ib/day) of pollutant exceeded

Mass (Ib/day) of pollutant exceeded 10.80 (percentage of purchased quantity that may be used) =
Total credits that need to be purchased (Ib/day)

  Example: Calculating Copper Credits a Facility Must Buy to Comply with
  Local Limits

  The PVSC local limit for copper is 3.02 mg/L. A chemical facility discharges 5.20 mg/L copper and
  has an average annual effluent discharge rate of 0.150 mgd.

     Current discharge concentration of a specific heavy metal-Local limit of a specific heavy metal =
     Concentration exceeding local limit for a heavy metal
     5.20 mg/L-3.02 mg/L = 2.18 mg/L

     Concentration exceeding local limit for a heavy metal (mg/L) x Volume (mgd) x 8.344
     (conversion factor) = Amount over local limit on a mass basis (Ib/day)
     2.18 mg/L x 0.150 mgd x 8.344 = 2.73 Ib/day

     Mass (Ib/day) of pollutant exceeded / 0.80 (percentage of purchased quantity that can be used) =
     Total credits  that need to be purchased (Ib/day)
     2.73 Ib/day /  0.80 = 3.41 Ib/day

  PVSC's regulations require a buyer to purchase credits in minimum increments of 0.05 Ib/day. As a
  result, the chemical facility would need to round 3.41 Ib/day to 3.45 Ib/day to determine the total
  amount of credits that it needs to purchase to comply with the local limits for copper.

  Example taken from Sharing the Load: Effluent Trading for Indirect Dischargers. Lessons from the New
  Jersey Chemical Industry Project—Effluent Trading Team (USEPA 1998),
The seller would use a similar procedure to determine the amount of credits on a mass basis
it has available to sell. If a facility plans to sell credits, it needs to determine what its adjusted
permit limit will be after selling credits. PVSC modifies existing permits using the adjusted
permit limit. The first step in calculating the adjusted permit limit is to determine the allow-
able discharge on a mass basis, which involves multiplying the local limit by the facility's
volume and the conversion factor. The difference between the allowable discharge and the
credits available for sale equals the adjusted discharge limit on a mass basis. Converting the
adjusted discharge limit from a mass-based limit to a concentration-based limit requires divid-
ing the mass-based limit by the product of the facility's volume and the conversion factor.
                                                                                                    era
                                                                                                 A-63

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          Water Quality Trading Toolkit for Permit Writers
          Local limit (mg/L) x Volume (mgd) x 8.344 (conversion factor) = Allowable discharge on a mass
          basis (Ib/day)

          Allowable discharge on a mass basis (Ibfday)-Amount of credits available for sale (Ibs/day) =
          Mass-based adjusted discharge limit (Ib/day)

          Mass-based adjusted discharge limit (Ib/day) / (Volume (mgd) x 8.344 (conversion factor)) =
          Concentration-based adjusted discharge limit (mg/L)

            Example: Calculating a Seller's Concentration-Based Adjusted Discharge Limit After
            Selling Credits

            A facility has an average annual discharge rate of 0.20 mgd, and the local limit for copper is 3.02
            mg/L. The facility wants to sell credits equaling 3.45 Ib/day to a neighboring facility, but it first
            wants to calculate what its adjusted permit limit would be as a result of the sale.

            The facility must first convert its allowable discharge to a mass-based limit.

              Local limit (mg/L) x Volume (mgd) x 8.344 (conversion factor) = Allowable discharge on a mass
              basis (Ib/day) 3.02 mg/L x 0.20 mgd x 8.344 = 5.04 Ibs/day

            The facility is able to discharge 5.04 Ib/day of copper and meet the local limit for copper. A sale of
            3.45 Ib/day to a neighboring facility would provide some additional discharge capacity.

              Allowable discharge on a mass basis (Ib/day)-Amount of credits available for sale (Ib/day) =
              Mass-based adjusted discharge limit (Ib/day) 5.04 lb/day-3.45 Ib/day = 1.59 Ib/day

            With the sale of 3.45 Ib/day, the facility could still discharge 1.59 Ib/day. Discharge limits in
            permits are concentration-based limits; therefore, the facility will have to convert the 1.59 Ib/day to
            a concentration to determine the final adjusted discharge limit that will appear in its permit.

              Mass-based adjusted discharge limit (Ib/day) / (Volume (mgd) x 8.344 (conversion factor)) =
              Concentration-based adjusted discharge limit (mg/L) 1.59 Ib/day / (0.20 mgd) x (8.344) = 1.59
              Ib/day / 1.6688 = 0.95 mg/L

            After the sale of credits, the facility's new permit would require an adjusted discharge limit of 0.95
            mg/L of copper instead of the 3.02 mg/L local limit for copper in the original permit.

            Example taken from'Sharing the Load: Effluent Trading for Indirect Dischargers. Lessons from the New
            Jersey Chemical Industry Project—Effluent Trading Team (USEPA 1998).
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                                                      Water Quality Trading Toolkit for Permit Writers

What Are the Trading Mechanisms?
                                                                                               ,},^
PVSC's rules and regulations state that buyers and sellers must submit documentation accept-                 —
able to PVSC that commits buyers and sellers to complying with regulations; PVSC does not                   "2
require a standardized form. PVSC reviews documentation submitted as a contract to deter-                  ';^
mine whether the contract fulfills the criteria contained in the rules and regulations for trad-                 ',,...
ing. Criteria include the following (USEPA 1998):                                                       —
                                                                                               '-,/>•*••
    •  Demonstrated compliance with al! other POTW requirements
    •  Demonstrated ability to comply with adjusted discharge limits
    •  Traded amount is greater than 0.1 pound per day
    •  Traded amount is in increments of no less than 0.05 pound per day
    •  Defined price of credit and terms of payment (buyer and seller negotiate this
       amount)
    •  Established time frame of agreement, including timing of renewals  and adjustments

What Is the Pollutant Trading Ratio?
The trading ratio is 10:8. The buyer may use only 80 percent of the purchased quantity; 20                   £
                                                                                               u*
percent of the reductions are retired or reserved for environmental benefit or future needs                   £_
                                                                                               O
(Breetz et al. 2004). The determination that 20 percent of the reductions should be retired/                   <;
reserved was arbitrary and not based on any specific analysis (Caltagirone 2004).                           ST
                                                                                               VI
                                                                                               g
What Type of Monitoring Is Performed?                                             |
Facilities must  perform monthly sampling, as specified in their permits, and  PVSC compiles                   £>
discharge monitoring data.                                                                        |
What Are the Incentives for Trading?
The primary incentive for participating in PVSC's pretreatment trading program is flexibility
in complying with more stringent local limits. In addition, sellers are able to defray pretreat-
ment costs through revenue gained from the sale of excess reductions (Breetz et al. 2004).

What Water Quality Improvements Have Been Achieved?
PVSC has demonstrated an improvement in the trend of metals concentrations and loads in
the influent, effluent, and sludge upon establishing the local limits (PVSC 2003). However,
the water quality improvements resulting from the two trades that have taken place are
unknown.
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         Water Quality Trading Toolkit for Permit Writers


                  What Are the Potential Challenges in Using This Trading
                  Approach?
                  The case study report on PVSC's pretreatment trading program identifies several potential
                  challenges, including PVSC's indirect dischargers' unfamiliarity with the concept of water
                  quality trading and finding suitable trading partners. The case study report also identifies
                  specific challenges associated with small-volume dischargers in negotiating trades and deter-
                  mining the appropriate price (USEPA 1998). Since the second trade, PVSC has not had any
                  other facilities come forward with a proposed trade agreement; PVSC is uncertain as to why
                  facilities have not shown any interest (Breetz et al. 2004).


                  What Are the Potential Benefits?
                  Administrative costs for PVSC are  negligible, involving only reviewing proposed trade agree-
                  ments and adjusting  permit limits (Breetz et al. 2004). This approach is easily transferable to
                  other pretreatment programs (USEPA 1998).


                  Applicable Permit Language
                  PVSC modifies the sewer use permits issued to indirect dischargers to reflect the adjusted dis-
                  charge limit resulting from a trade. The permit shows the adjusted limits; and the parameters
                  have asterisks. The explanation of the asterisks state that more information is available on a
                  subsequent page. The other page contains three short paragraphs alluding to the adjusted
                  limits. One paragraph states that the limits are adjusted pursuant to a signed contract on a
                  specified date between the two parties (both named). One paragraph denotes the permittee
                  as a buyer and the other facility as a seller, and it adds that the limits were calculated using
                  the permittee's regulated volume. The last paragraph states that PVSC reserves the right to
                  change the limit if the contract is terminated (Caltagirone 2004.)


                  Contact Information
                  Andy Caltagirone
                  Manager of Industrial & Pollution Control
                  Passaic Valley Sewerage Commissioners
                  (973)817-5710
                  acaltagirone@PVSC.com
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References and Resources
Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water                        r;;
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth                    "3
    College, Hanover, NH.                                                                             ',1^,

Caltagirone, Andy. 2004. Personal communication. September 10.                                          ,1^

PVSC (Passaic Valley Sewerage Commissioners). 2003. "2003 National Pretreatment Program                   -.,,
    Excellence Award Application." June 6, 2003.

Passaic Valley Sewerage Commissioners (Home) .

Passaic Valley Sewerage Commissioners (Industrial Rules and Regulations)
    .

USEPA (U.S. Environmental Protection Agency). National Pollutant Discharge Elimination
    System (NPDES), Pretreatment Standards and Limits Web site
    .                                     ^
                                                                                                    VI
                                                                                                    tft
                                                                                                    tu
USEPA (U.S. Environmental Protection Agency). 1998. Sharing the Load: Effluent Trading for                   n'
    Indirect Dischargers. Lessons from the New Jersey Chemical Industry Project-Effluent                     K.
                                                                                                    re
    Trading Team. May 1. .                          ^
                                                                                                    re
                                                                                                    5
                                                                                                    re
USEPA (U.S. Environmental Protection Agency). 2004. Local Limits Development Guidance.                    5
                                                                                                    GQ
    U.S. Environmental Protection Agency, Office of Wastewater Management. July.                          J^
    EPA 833-R-04-002A.                                                                               |
                                                                                                    3
                                                                                                    VI
                                                                                                    w
                                                                                                    S'
                                                                                                    re
                                                                                                 A-67

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Neuse River Basin Nutrient Sensitive Waters

Management Strategy

North Carolina
                                                                                            ''-"""\


Overview
Dischargers in the Neuse River Basin are subject to a wasteload allocation set through the
Neuse River Basin Nutrient Sensitive Waters Management Strategy (Strategy). The rules devel-
oped to support implementation of the Strategy allow dischargers to participate in trading
activities and establish group compliance associations to meet a collective allocation under a
single NPDES permit. To date, approximately 23 facilities participate in one  group compliance
association referred to as the Neuse River Compliance Association (Compliance Association)
and have coverage under a group compliance permit. Point-point transactions can occur
between members of the Compliance Association or between members and non-members
within the Neuse River Basin. If the Compliance Association does not meet  its limit, the terms
of the permit require the association to make an offset payment to the Wetland Restoration                  g
Fund to pay for nonpoint source controls. New or expanding dischargers that require addi-                   <»
tional allocation must also make a payment to the Wetland Restoration Fund.                              <'
                                                                                             03
                                                                                             61
Type of Trading                   Pollutant(s) Traded
                                                                                             z
Point Source-Point Source                • Total nitrogen                                           %
Point Source-Nonpoint Source                                                                    s
                                                                                             fD
Number of Trades to Date                                                              I
Trading has occurred; however, the number of trades is unknown because trading occurs                     ^
within the Compliance Association.                                                                £
                                                                                             Vt

Who Is Eligible to Participate?                                                        J
Approximately 100 active facilities in the Neuse River Basin have a total nitrogen (TN) waste-                  I
load allocation and are therefore eligible to participate in trading. However, the 32 largest                   £,
                                                                                             rt
facilities have TN effluent limits and are the most likely to participate.                                    3


What Generated the Need for Trading?                                              .*-
The Neuse River is  classified as a Nutrient Sensitive Water (NSW) because of nutrient impacts                  3-
on the river's estuary. Major fish kills in 1995 provided the impetus for updating the 1988                     o
Nutrient Management Strategy for the Neuse River Basin. The 1997 Strategy established a                    ^
goal that required  sources to reduce TN loads to the estuary by 30 percent from 1995 levels
by the year 2005. Subsequently the North Carolina Environmental Management Commis-
sion (EMC) adopted a rules package in 1998 to support the Strategy. The rules were aimed at
reducing nitrogen  impacts in the watershed and supporting the Strategy by managing agri-
culture, stormwater, point sources, nutrient management activities and riparian areas. One of
the rules under the Strategy, the Waste Discharge Requirements rule, establishes point source
nitrogen allocations and control requirements and compliance options, including a group                 A-fi9
compliance association option (EMC 2002).

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         Water Quality Trading Toolkit for Permit Writers


                   What Serves as the Basis for Trading?
                   The 1997 Strategy for the Neuse River Basin established a goal for both point and nonpoint
                   sources to reduce TN loads to the estuary by 30 percent from the 1995 estuary level of 2.34
                   million pounds by 2005. Therefore, the Waste Discharge Requirements rule establishes an
                   estuary wasteload  allocation of 1.64 million pounds for dischargers in the Neuse River Basin.
                   The North Carolina Division of Water Quality (NC DWQ) used a phased-approach to develop-
                   ing Total Maximum Daily Loads (TMDLs) for the basin. The Phase I TMDL, approved by EPA
                   in 1999, concluded that the aggregate estuary wasteload allocation in the 1997 Strategy was
                   appropriate. The Phase II TMDL, approved by EPA in 2002, used modeling tools to verify the
                   30 percent reduction target set in the Phase I TMDL.


                   What Types of Data and Methodologies Were Used to Calculate
                   the Basis for Trading?
                   The 1997 Strategy contains the calculations used to determine the estuary wasteload  alloca-
                   tions that serve as the basis for trading. Because of a lack of adequate data and technical
                   tools (i.e., computer model for the Neuse River Basin), NC DWQ relied on best professional
                   judgment when determining the nitrogen reduction target and other factors (e.g., transport
                   factors) that provide a foundation for the estuary wasteload allocations and, therefore, the
                   trading program (Templeton 2004a).

                   7995 Baseline TN Loading
                   To calculate the aggregate estuary wasteload allocation that represented a 30 percent reduc-
                   tion, NC DWQ had  to first determine the 1995  baseline TN load. Determining the baseline TN
                   loading required information about point and nonpoint source discharges to the Neuse River
                   Basin. For larger dischargers and some small dischargers, NC DWQ had the necessary monitor-
                   ing data from 1991 through 1995 to calculate an average concentration for each facility. For
                   the smaller dischargers that did not conduct monitoring, NC DWQ used the average concentra-
                   tion of the smaller dischargers to estimate the  TN concentration. NC DWQ had the necessary
                   flow data from all dischargers during this time frame to calculate the average flow. The 1995
                   baseline TN loading at end-of-pipe was approximately 3 million pounds per year. The 1997
                   Strategy, however,  was focused on nitrogen reductions to the estuary; therefore, the baseline
                   TN loading had to be converted from and end-of-pipe baseline to an estuary baseline using
                   each facility's applicable nitrogen transport factors. After applying transport factors,  NC
                   DWQ calculated the 1995 estuary baseline TN loading to be 1.64 million pounds per year.

                   Transport Factors
                   The Neuse River Basin is divided into 12 nutrient management zones, each with a transport
                   factor of 10, 50, 70, or 100 percent, according to distance from the estuary. According  to the
                   Wastewater Discharge Requirements rule, a transport factor is the fraction of the TN in a
                   discharge that is predicted to reach the estuary. NC DWQ used a first-order decay equation to
                   estimate the loss of nitrogen from the point of discharge to the estuary; this equation estab-
                   lished transport factors used in the 1997 Strategy, the Phase I TMDL, and the group compli-
                   ance permit. Transport factors applied to the end-of-pipe baseline loading and wasteload
                   allocation result in  the estuary baseline loading and wasteload allocation. The Phase II TMDL
                   uses a different transport model, referred to as the SPARROW model, to determine transport
                   factors where decay is a function of the type of stream and not a function of time.

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                                                          Winter Quality Trading Toolkit for Permit Writers


Wasteload Allocations
Determining wasteload allocations for individual facilities required an iterative process that                   ^'
relied on a trial-and-error method. Wasteload allocations were calculated using an equivalent                  <-••
concentration for individual facilities; for example, the mass equivalent of a discharge concen-                  ?"r
tration below approximately 3 mg/L would not be technically feasible for facilities to achieve.
                                                                                                      \r/rff.;
The Wastewater Discharge Requirements rule established annual discharge allocations (as
opposed to estuary allocations) for groups of dischargers on the basis of the dischargers'
location in the basin (i.e., upstream or downstream from Falls Lake Dam) and the size of their
permitted flow. According to the rule, dischargers upstream of Falls Lake Dam with permitted
flows greater than or equal to 0.5 mgd received an annual discharge'allocation of 443,700
pounds of TN. Dischargers downstream of Falls Lake Dam with permitted flows greater than
or equal to 0.5 mgd received an annual discharge allocation of 2,021,400 pounds of TN. NC
DWQ divided dischargers into these groups to ensure that similar dischargers would have
similar requirements.

The rule states that each individual discharger should receive an  individual discharge alloca-
tion and the equivalent estuary allocation. The individual discharge allocation is calculated                     z
as the 1995 permitted flow divided by the total permitted flow of the group, multiplied by                     |
the group discharge allocation. To determine the equivalent estuary allocation, the individual                   5
discharge allocation is then  multiplied by the facility's applicable transport factor. Appendix                    %
                                                                                                       53
B of the group compliance permit contains a list of facilities subject to TN allocations and the                    «
applicable facility transport factor based on location in the Neuse River Basin.                                 2
                                                                                                       c
(1995 permitted flow I total permitted flow of the group) x Group discharge allocation =             n
Individual discharge allocation                                                                          3
                                                                                                       rt
Individual discharge allocation x Facility transport factor = Individual estuary allocation                     ™

  Example: Calculating Individual Discharge and Estuary Allocations for a                           |
  Facility in the Neuse River Basin
                                                                                                       U
                                                                                                      "8

                                                                                                      a-
                                                                                                      s>
Facility X has a 1995 permitted flow of 0.5 mgd and is located upstream of Falls Lake Dam in the
Neuse River Basin. NC DWQ tells Facility X that it is in subbasin NEU2 and has a transport factor
of 50 percent. Because Facility X has a permitted flow of 0.5 mgd and is upstream of Falls Lake
Dam, the Wastewater Discharge Requirements rule places it in the group with an annual discharge          «I5
allocation of 443,700 pounds of TN. Facility X is also told by NC DWQ that the group's total
permitted flow is 26.5 mgd.

Facility X uses the following calculations -to figure out its individual discharge allocation and
estuary allocation:                                                                                    S'

   (1995 permitted flow / total permitted flow of the group) x Group discharge allocation =
   Individual discharge allocation

   Individual discharge allocation x Facility transport factor = Individual estuary allocation
   (0.5 mgd / 26.5 mgd)  x 443,700 Ib = 8,372 Ib
                                                                                                 A-71

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          Water Quality Trading Toolkit for Permit Writers


           Example: Calculating Individual Discharge and Estuary Allocations for a
           Facility in the Neuse River Basin (continued)

           Facility X's individual discharge allocation is 8,372 Ib of TN. To determine its individual estuary
           allocation, Facility X must multiply its individual discharge allocation by its transport factor of 50
           percent.

              8,372 Ibx 0.5 = 4,186 Ib

           Facility X's individual estuary allocation is 4,186 Ib of TN.
                   Are Permits Used to Facilitate Trades?
                   Approximately 32 of the point source dischargers in the Neuse River Basin have TN effluent
                   limits because the Wastewater Discharge Requirements rule states that every facility with a
                   permitted flow equal to or greater than 0.5 mgd is subject to a TN permit limit equal to its
                   individual discharge allocation. Of the 32 point sources with TN effluent limits, approximately
                   23 participate as co-permittees in the Neuse River Compliance Association, sharing one
                   NPDES permit. The group compliance permit issued to the Compliance Association is a mecha-
                   nism that can help to facilitate trading.

                   The Compliance Association's TN limit for a given calendar year is equal to its estuary TN
                   allocation. The overall estuary TN allocation is the sum of all estuary TN allocations for mem-
                   bers of the Compliance  Association, as listed in Appendix A of the permit. TN allocations of
                   co-permittee members  may change because of purchases, sales, trades, leases, and other
                   transactions among Compliance Association members, affecting the Compliance Association's
                   overall TN allocation. All TN transactions are expressed in terms of estuary allocations (i.e.,
                   individual discharge allocations multiplied by a facility's transport factor).

                   For the Compliance Association to remain in compliance, its estuary TN load for a year may
                   not exceed its estuary TN allocation. If the Compliance Association exceeds its estuary TN
                   allocation, co-permittees under the group compliance permit are subject to their individual
                   TN limits (i.e., individual estuary TN allocations). Provisions of the group compliance permit
                   state that when the Compliance Association exceeds its estuary TN allocation, it must make
                   offset payments for the excess TN at a rate of  $11 per pound for that calendar year. When
                   the Compliance Association exceeds its estuary TN allocation, NC DWQ may take enforce-
                   ment actions against  it  and any individual co-permittee that exceeds its individual estuary TN
                   allocation (NC DWQ 2004).

                   Internal point source-point source trades are not subject to NC DWQ oversight except to
                   ensure that allocations  are verified and calculated correctly. The Compliance Association or
                   affected dischargers must obtain  a permit modification from NC DWQ to have the adjusted
                   TN effluent limits reflected in the permit (Breetz et al.  2004).
A-72

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                                                        Water Quality Trading Toolkit for Permit Writers


How Are Credits Generated for Trading?
Members are allowed to purchase, sell, trade, or lease their estuary TN allocation among co-
permittees covered under the group compliance permit; they may not exceed the Compliance                  -
Association's overall estuary TN allocation. A facility that has a TN estuary load less than its
individual estuary TN allocation has credits available to sell, trade, or lease.                                 jl_

If the Compliance Association does not meet its limit, or if a new or expanding discharger                    '!•
needs an additional allocation, an offset payment to the Wetland Restoration Fund is                        •>
required to pay for nonpoint source controls. Members of the Compliance Association must
pay an offset rate of $11 per pound per year if they exceed their individual estuary TN alloca-
tions during a year that the Compliance Association exceeds the overall estuary TN allocation
(EMC 1988). New and expanding  dischargers must attempt to purchase estuary TN allocation
from existing dischargers. If a purchase from existing dischargers is not possible, new and
expanding dischargers must purchase a portion of the nonpoint source load allocation by
making an offset payment to the Wetlands Restoration Fund at 200 percent the normal rate
(i.e., at $22 per pound  per year); however, the purchase must be sufficient to fund 30 years of
nitrogen reduction  (EMC 2002).
                                                                                                   z
                                                                                                   rD
NC DWQ originally used rough cost information from a few offset projects to determine the                   jjj
$11/lb/yr cost of an  offset payment. Since then, NC DWQ has worked with North Carolina                      %•
                                                                                                   n>
State University to develop an updated cost that takes into consideration costs associated                      ^
with land, project administration, and project operation and maintenance. The updated cost                   ».
was estimated at $57/lb/yr. NC DWQ is working to set a final cost that will account for these                    z
additional factors and will not prove overly burdensome for Compliance Association members                  2.
(Templeton 2007).                                                                                   I
What Type of Monitoring Is Performed?
Co-permittees in the Compliance Association submit monthly Discharge Monitoring Reports
to NC DWQ as specified in their individual permits. The Compliance Association compiles and
submits members' TN monitoring information for its own reporting purposes.
What Are the Trading Mechanisms?                                                     |
The group compliance permit, as well as other individual NPDES permits that reflect TN efflu-                  ?
ent limits based on the 1997 Strategy wasteload allocations might help to facilitate trading                    3
because they contain estuary TN allocations and provide a compliance mechanism. However,                   j*
the mechanism for negotiating trades and achieving agreements does not directly involve                     £
                                                                                                   rc
NPDES permits. Trade negotiations and agreements take place between point sources, with-                   3
out the involvement of a third party.
                                                                                                   syi
                                                                                                   rt
                                                                                                   s
What Is the Pollutant Trading Ratio?                                                   "
There is no trade ratio for point source-point source trades and no explicit trade ratio for                     ^
point source-nonpoint source offsets (i.e., offset payments to the Wetlands Restoration                       3.
Fund). However, an analysis of the $11/lb/year cost of an offset payment indicates that a 2:1                    g>
trading ratio may be incorporated into the cost (Breetz et al. 2004).                                        ~
                                                                                               A-73

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                  What Are the Incentives for Trading?
                  Trading is a cost-efficient means to meet an individual estuary TN allocation while achieving
                  the overall nutrient reduction goal for the Neuse River Basin. However, the Compliance
                  Association has not made any offset payments into the Wetland Restoration Fund to
                  date because members are running at approximately 40 percent of their total estuary TN
                  allocation (Templeton 2004b).
                  What Water Quality
                  Improvements Have
                  Been Achieved?
                  Since 1995, the NRCA members have
                  achieved a 69 percent reduction of
                  TN loading at estuary. In addition,
                  the combined estuary loading was
                  approximately 50 percent of the allo-
                  cation in 2004 (NCDWQ 2005).
                                                           1995  1996  1997 1998 1999 2000  2001  2002 2003 2004
                                                     Figure 1. NRCA performance 1999-2004.
                  What Are the Potential
                  Challenges in Using This Trading Approach?
                  One challenge of trading illustrated through the Neuse River Basin is determining the poten-
                  tial for localized water quality impacts due to shifting of wasteload allocations. The proposed
                  trade agreement now under debate would result in an estuary TN load of approximately
                  61,000 pounds of TN per year near the headwaters. Concerned stakeholders initiated the
                  involvement of NC DWQ in the proposed trade agreement; otherwise, the trade might have
                  occurred because it is within the existing parameters for trading in the Neuse River Basin.
                  Another challenge focuses on the potential for a co-permittee under the group compliance
                  permit to attempt to sell some or all of its estuary TN allocation outside the Compliance
                  Association. According to NC DWQ, this type of trade between a member and a nonmember
                  would require the approval of the overall Compliance Association because it would affect the
                  group's overall estuary TN allocation.


                  What Are the Potential Benefits?
                  Benefits of this trading example include minimal administration of the trading program by
                  the regulating authority, although this might change pending the outcome of the proposed
                  trade agreement. Using a Compliance Association approach might facilitate increased com-
                  munication among dischargers in a watershed.
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Applicable NPDES Permit Language
    A.(2.) CO-PERMITTEES AND TN ALLOCATIONS                                                        -j
    (a.) Co-Permittees to this Permit shall be the Neuse River Compliance Association (the                    „;'
        "Association") and each of its Co-Permittee Members. The Co-Permittee Members,                   >~-
        the Transport Factors assigned to each, the Members' individual TN allocations,                      r~j
        and the Association Estuary TN Allocation shall be as listed in Appendix A, which is                   ^
        hereby incorporated into this Permit in its entirety.
    (b.) Upon timely and proper notification by the Association as described elsewhere in
        this Permit, the Division shall revise Appendix A to incorporate changes in Associa-
        tion membership, allowable changes in TN Allocations, or reapportionment by the
        Association.
    (i.) Changes in membership.
    (A) Enrollment. In the event that a discharger joins the Association, the Division shall add
        the discharger and its TN Allocation to Appendix A as a Co-Permittee Member and
        adjust the Association's TN Estuary Allocation accordingly.
    (B) Termination. In the event that a Co-Permittee Member's membership is terminated,                    z
                                                                                                      fll
        the Division shall delete the departing Member and its TN Allocation from Appendix                  £
        A and adjust the Association's TN Estuary Allocation accordingly.                                    2
                                                                                                      n>
    (ii.) For the purposes of this Permit, allowable changes in TN Allocations include those                     &
                                                                                                      PJ
        resulting from purchase of allocation from the Wetlands Restoration Fund; pur-                       ~-
        chase, sale, trade, or lease of allocation among the Association, its members, and                     z
        non-member dischargers;  regionalization; and other transactions approved by the                     B.
        Division.                                                                                       5
                                                                                                      C/5
                                                                                                      IT)
    (iii.) The Association may reapportion its TN Allocation among its Co-Permittee Mem-                     g
        bers; however, the Division shall only incorporate the corresponding changes into                     Z'
                                                                                                      fti
        Appendix A when specifically requested in writing by the Association.                                ^
                                                                                                      &>
                                                                                                      ST
    (c.) Changes in Association  membership and changes in individual or Association TN                       5
        Allocations shall become effective only at the beginning of the following calendar                     S
        year (January 1).                                                                                2
    A.(3.) EFFLUENT LIMITATIONS                                                                        |
                                                                                                      s
    (a.) Beginning on the effective date of this Permit and lasting no later than the expi-                      
        Limitation: For any calendar year,                                                                 £,
                                                                                                      S'
                                                                                                      £)
               Association Estuary TN Load < Association Estuary TN  Allocation
                                           Where
                         Association Estuary TN Load (or Allocation) =
                           Sum of  Estuary TN Loads (or Allocations)
                                for All Co-Permittee Members

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          Water Quality Trading Toolkit for Permit Writers


                       ii.) Co-Permittee Member TN Allocations. In any calendar year, a Co-Permittee Member
                           shall be in compliance with its Estuary TN Allocation in Appendix A if:
                       (A) the Association Estuary TN Load complies with the Association Estuary TN Allocation
                           in Appendix A, or
                       B) in the event that the Association Estuary TN Load exceeds its Estuary TN Allocation,
                           the Co-Permittee Member's Estuary TN Load does not exceed that Member's Estuary
                           TN Allocation  in Appendix A.
                       (b.) Other Individual Limitations. In the event that a Co-Permittee Member's member-
                           ship in the Association is terminated, the  departing Member shall no longer be
                           eligible for coverage  under this Permit and shall become subject to the TN limitation
                           set forth in its individual NPDES permit.
                       (i.) Termination of membership shall become  effective only at the beginning of a calen-
                           dar year (January 1).  Re-imposition of a discharger's individual TN limitation shall
                           become effective only at the beginning of a calendar year (January 1).
                       (ii.) The Association shall  notify the Division if it determines that any Member will
                           depart at the end of  a calendar year and shall provide an accounting of all allowable
                           changes in the Member's TN Allocation since the most  recent issuance of the depart-
                           ing Member's  individual NPDES permit.
                       (iii.) Upon receipt of the notification and accounting described above, the Division
                           shall modify the TN limitation in the departing Member's individual NPDES permit,
                           effective January 1 of the succeeding year, to reflect all allowable changes in the
                           Member's TN Allocation since the most recent issuance of the departing Member's
                           individual NPDES permit.
                       (iii.) Upon receipt of the notification and accounting described above, the Division shall
                           modify the TN limitation in the departing Member's individual NPDES permit, effec-
                           tive January 1  of the  succeeding year, to reflect all allowable changes in the Mem-
                           ber's TN Allocation and shall also modify  Appendix A of this permit accordingly.

                   Contact Information
                   Mike Templeton
                   Point Source Branch
                   North Carolina Division of Water Quality
                   (919) 733-5083 ext. 541
                   mike.templeton@ncmail.net

                   Jason T. Robinson
                   Nonpoint Source Management Program
                   North Carolina Division of Water Quality
                   (919) 733-5083 ext. 537
                   jason.robinson@ncmail.net
A-76

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                                                        Water Quality Trading Toolkit for Permit Writers


References and Resources
Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water                        <-*».
    Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth                    "O
    College, Hanover, NH.                                                                            r'."

City of Raleigh. 2004. Public Works Committee meeting notes from April 27, 2004.                            „'"„

Coleman, P. 2004. Some oppose nutrient trading. New Bern Sun Journal. July 25. New Bern,                    ^
    North Carolina, . Accessed September 13, 2004.

EMC (North Carolina Environmental Management Commission). 1998. Rule T15ANCAC 2B.0240.
    Neuse River Basin - Nutrient Sensitive Waters Management Strategy: Nutrient Offset
    Payments. Effective August 1, 1998. .

EMC (North Carolina Environmental Management Commission). 2002. Rule T15ANCAC 2B.0234.
    Neuse River Basin - Nutrient Sensitive Waters Management Strategy: Wastewater
    Discharge Requirements. Amended rule adopted by EMC October 10, /2002 and, with
    minor revisions, approved by the North Carolina Rules Review Commission December 19,                   z
    2002.                                                                                           I
                                                                                                   5
NC DWQ (North Carolina Division of Water Quality). 2004. Neuse River Compliance                           %
    Association NPDES Permit No. NCC000001. Approved January 1, 2004.                                   g?
    .                                                 *
                                                                                                   e
NC DWQ (North Carolina Division of Water Quality). 2005. Presentation given to the Virginia                   |"
    Department of Environmental Quality's VPDES Technical Advisory Committee. Presented                   £>
    by Mike Templeton. August 31, 2005.  Richmond, Virginia.                                              S

Templeton,  Mike. 2004a.  Persona! communication. September 10.                                          §
                                                                                                   • rt
                                                                                                   fO
Templeton,  Mike. 2004b. Personal communication. September 13.                                          ~
                                                                                                   a.
                                                                                                   3
                                                                                                   £U
Templeton,  Mike. 2007. Personal communication. January 24.                                              w
                                                                                                   S
                                                                                                   n>
                                                                                                   3
                                                                                               A-77

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                                                     Water Quality Trading Toolkit for Permit Writers
Great Miami River Watershed Trading Pilot
Program
Ohio
Overview
The nutrient trading program administered by the Miami Conservancy District (MCD) for the
Great Miami River Watershed allows NPDES permitted dischargers to purchase credits from
best management practices (BMPs) installed by upstream nonpoint sources (i.e., agricultural
producers) to offset nutrient loadings.

Type of Trading                   Pollutant(s) Traded
Point Source-Nonpoint Source              Nitrogen
                                       Phosphorus

Number of Trades to Date
What Generated the Need for Trading?
Over 40 percent of the rivers and streams in the Great Miami River Watershed are not meet-
ing state water quality standards and will require Total Maximum Daily Loads (TMDLs). The
watershed is the second largest contributor of nitrogen in the Ohio River Basin (ETN 2004).
Stakeholders in the watershed would like to address water quality concerns before TMDLs are
developed for the Great Miami River Watershed. In addition, more restrictive discharge limits
for nitrogen and phosphorus are scheduled to take effect in the Great Miami River Water-
shed in 2007 as a result of nuisance conditions.


What Serves as the Basis for Trading?
Dischargers will have to eventually meet a total phosphorus discharge limit of 1.0 mg/L and
a total nitrogen discharge limit of 10 mg/L,  per the nutrient criteria under development by
Ohio Environmental Protection Agency (Ohio EPA). The trading program is based on the
premise that dischargers would rather pay upstream nonpoint source dischargers to achieve
nutrient reductions than invest in treatment technology.
Cs
n>
As of 2007, two reverse auctions1 have taken place, resulting in 335,636.5 Ibs of nutrient                      5'
reductions. Five NPDES permits are undergoing modification to allow participation in the                     ";
trading program (Hall 2007).                                                                       |
                                                                                               *t

Who Is Eligible to Participate?                                                          I
Eligible participants include NPDES permitted dischargers and upstream agricultural producers                 ^
within the Great Miami River Watershed. There are approximately 450 point source discharg-                   ^
ers and over 80 percent of the agricultural lands in the watershed are eligible (ETN 2004).                    
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         Water Quality Trading Toolkit for Permit Writers


                   What Types of Data and Methodologies Were Used to Calculate
                   the Basis for Trading?
                   Ohio EPA is developing nutrient criteria for streams and rivers with the expectation of
                   adopting these nutrient criteria in 2007. Ohio EPA is using monitoring data from watersheds
                   around the state, as well as modeling tools, to develop nutrient criteria,


                   Are Permits Used to Facilitate Trades?
                   Ohio EPA, the NPDES permitting authority in Ohio, has participated in the development of
                   the Great Miami River Watershed trading program and will work with permitted discharg-
                   ers to modify their NPDES permits to allow participation in the trading program (MCD 2005).
                   Appendix C of the trading program's operation manual contains model draft language for
                   inclusion in NPDES permits.  Approximately five NPDES permits are undergoing modification
                   to allow participation in trading (Hall 2007).


                   How Are Credits Generated for Trading?
                   Voluntary nutrient reductions made by upstream agricultural producers will serve as cred-
                   its. One pound of total phosphorus removed is equal to one credit for phosphorus, and one
                   pound of total nitrogen removed is equal to one credit for nitrogen (MCD 2005). The num-
                   ber of credits generated by  a specific nonpoint source management practice is determined
                   by a qualified soil and water conservation professional using a Load Reduction Spreadsheet
                   (MCD 2005). In addition, a qualified soil and water conservation professional will also peri-
                   odically inspect the management practice to ensure that it is still generating the allocated
                   credits (MCD 2005). A management practice will generate credits only after it is installed.

                   The cost of each credit is determined by the market; it is likely to equal the sum of expendi-
                   tures for the project (e.g., capital, operating, administrative, and ongoing maintenance costs)
                   divided by the number of credits (MCD 2005).

                   The trading program includes two strategies to ensure NPDES permit compliance if a manage-
                   ment practice should fail and no longer generates credits: (1) a management practice contin-
                   gency plan, and (2) an insurance pool of credits. The insurance pool of credits contains credits
                   generated in part by projects funded by eligible buyers in the contributor category (i.e.,
                   eligible buyers that participate in the trading program but not in advance of their more-strin-
                   gent regulatory requirements) through their increased trade ratio requirements (see What Is
                   the Pollutant Trading Ratio?). Other water quality improvement projects, subsidized by other
                   sources of funds (e.g., Section 319 Nonpoint Source Program), might also generate credits for
                   the insurance pool. Credits in the  insurance pool have a life of 5 years from the date of depos-
                   it; if a credit is not used in that time frame, it is retired (MCD 2005).


                   What Are the Trading Mechanisms?
                   The trading program process involves the eight steps described below (MCD 2005).

                   Step 1. Request for Proposals Issued. MCD issues a request for proposals to announce that
                   funds are available for qualified projects. A soil and water conservation district must be the
                   applicant for the funds.

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                                                          Water Quality Trading Toolkit for Permit Writers


 Step 2: Applicants Submit Proposals. All project proposals must address the criteria specified
 in the request for proposals.                                                                           >•

 Step3: Proposal Review and Selection. The Project Advisory Group, composed of stakeholders                 ?"^.
 (local, state, and federal), will develop criteria for awarding funds paid by eligible buyers to                   '^,
 credit-generating projects. The Project Advisory Group will also review proposals and make                   r" ;
 recommendations for funding.                                                                         ^

 Step 4: Applicants Notified of Projects Selected. MCD notifies all applicants of the selection
 process results.

 Step 5: Project Funds Released. The trading program project funds provide the monies neces-
 sary to generate credits.

 Step 6: Soil and Water Conservation District Contracted to Manage the Projects. MCD serves
 as the broker of the trading program and enters into a contract with the successful soil and
 water conservation district for project implementation. The soil and water conservation dis-
 trict then enters into a project agreement with the agricultural producer responsible for BMP
 implementation.                                                                                       3
                                                                                                      rt
                                                                                                      £
 Step 7: Credit Management. MCD tracks credits generated by projects, allocates credits to                      £'
 eligible buyers, and  prepares and submits an annual  report to buyers, Ohio EPA, and EPA.                      ~
                                                                                                      <'
                                                                                                      cv
 Step 8: Adaptive Management. Ohio EPA and Ohio Department of Natural Resources (DNR)                    ^
                                                                                                      &J
 established a Load Reduction Workgroup to evaluate and enhance the Load Reduction                        £
 Spreadsheet used to determine the amount of  credits generated by a management practice.                    v
 This group will direct and oversee an evaluation of the accuracy of reduction estimates made                   *
 for the trading program every 2 years.                                                                    a,
                                                                                                      '
What Is the Pollutant Trading Ratio?
                                                                                                     era
The trading ratios are based on water quality conditions and programmatic status of the                      
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         Water Quality Trading Toolkit for Permit Writers


                  What Are the Incentives for Trading?
                  Incentives include the following:
                      •  Potential sources of funding for implementing nonpoint source BMPs
                      •  Potential elimination of the need for a TMDL or reduction in the stringency of
                         the TMDL because of water quality improvement before TMDL development and
                         implementation
                      •  Economic incentive to trade using final credits as opposed to predicted credits due to
                         variations in trading ratios and the need for predicted credit insurance


                  What Water Quality Improvements Have Been Achieved?
                  As of 2007, projects funded through two request for proposals have resulted in 335,636.5 Ibs
                  of  nutrient reductions.


                  What Are the Potential Challenges in Using This Trading
                  Approach?
                  Stakeholders involved in the development of the Great Miami River Watershed Trading Pro-
                  gram cite potential challenges such as limitations on dischargers in the headwaters partici-
                  pation because of upstream nonpoint source requirements, the uncertainty associated with
                  calculating nonpoint source reductions, and the cost of overcoming the uncertainty through
                  increased monitoring (Breetz et al. 2004). Other trading programs have cited a lack of incen-
                  tive to participate when relying solely on permit discharge limits (i.e., absence of a TMDL)
                  to  drive the program. Without a TMDL, an overall nutrient reduction goal that also helps
                  dischargers to meet more stringent permit limits might serve as a more effective driver for
                  trading.


                  What Are the Potential Benefits?
                  Potential benefits might include the attainment of water quality standards before TMDL
                  development and implementation, as well as an incentive for nonpoint source involvement to
                  achieve nutrient reductions.


                  Applicable NPDES Permit Language
                  Model draft language for inclusion in NPDES permits is contained  in the trading program's
                  operation manual as Appendix C. This model draft language is presented below.
                                      Issued to (Investor-Status) Eligible Buyers in the
                                 Great Miami River Water Quality Credit Trading Program

                  The City of Dayton (Permittee) is a voluntary participant in the Great Miami River Water-
                  shed  Water Quality Credit Trading Program (Trading  Program) that is managed through the
                  Water Conservation Subdistrict of The Miami Conservancy District, a political subdivision of
                  the State of Ohio. The Ohio Environmental Protection Agency and the Ohio Department of
                  Natural Resources work in cooperation with the Water Conservation Subdistrict  to implement
                  the Trading Program. The Director has reviewed and approved the Operations Manual for the
A-82             Great Miami River Water Quality Credit Trading  Program.

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                                                          Water Quality Trading Toolkit for Permit Writers


Many stream and river miles within the Great Miami River Watershed currently fail to attain
Ohio's water quality standards. Nutrients are frequently cited as a cause for failure to attain
the standards. The Permittee is voluntarily participating in the Trading Program prior to new
permit limits for nutrient discharges or the completion of Total Maximum Daily Load studies.
This voluntary participation generates earlier water quality benefits in the watershed. Fur-
thermore, by beginning the agricultural practices sooner the practices will be more reliable
for subsequent use in generating credits for permit compliance.

The Trading Program has financial incentives for the Permittee to voluntarily fund projects
prior to new permit limits for nutrient discharges. As provided for in the approved Opera-
tions Manual, voluntary early participation in the Program entitles the permittee to favor-
able water quality credit trading ratios as a Trading Program  "Investor". The Director and the
Permittee agree that the Investor ratios apply to the same substance(s) in the same amounts
as the nutrient reductions voluntarily accomplished by the Permittee. In the event the Great
Miami River is deemed by the Director to be impaired at the Permittee's discharge location,
trading ratios will be modified pursuant to the Operations Manual.

If at any time the permittee no longer participates in the Trading Program the accrued ben-
efit of the voluntary participation by the permittee will be used to offset the Permittee's cur-
rent or future regulatory requirements. The  specific offset will be determined in consultation
with the Permittee and subject to the approval of the Director and may include higher dis-                     g
charge limits, delayed compliance schedules, or other actions deemed appropriate to achieve                   5
attainment of water quality standards throughout the Great Miami River Watershed.                          ™
                                                                                                       rt
                                                                                                       ID
                                                                                                       *^
Contact Information                                                                            |
                                                                                                       CL.
Douglas "Dusty" Hall                                                                                    $
                                                                                                       a>
Manager, Watershed Initiatives                                                                           S;
The Miami Conservancy District                                                                          ^
(937) 223-1278, ext. 3210                                                                                 |
dhall@miamiconservancy.org                                                                             7
                                                                                                      ^
                                                                                                       R>
Sarah Hippensteel                                                                                      3
Watershed Coordinator                                                                                  _
The Miami Conservancy District                                                                           f
(937) 223-1278, ext. 3244
shippensteel@miamiconservancy.org

                                                                                                   A-83

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          Water Quality Trading Toolkit for Permit Writers
                   References and Resources
                   Breetz, H., K. Fisher-Vanden, L. Garzon, H. Jacobs, K. Kroetz, and R. Terry. 2004. Water
                      Quality Trading and Offset Initiatives in the U.S.: A Comprehensive Survey. Dartmouth
                      College, Hanover, NH.

                   ETN (Environmental Trading Network). 2004. Environmental Trading Network April 2004
                      Conference Call. Draft conference call meeting summary. April 21.
                      .

                   Hall, Dusty. 2007. Personal communication. February 21.

                   MCD (Miami Conservancy District). 2005. Great Miami River Watershed Water Quality Credit
                      Trading Program Operations Manual, .
                      Downloaded on February 8, 2007.

                   MCD (Miami Conservancy District), .
A-84

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                                                     Water Quality Trading Toolkit for Permit Writers
 Clean Water Services
 Oregon
Overview
Clean Water Services, a public utility in the Tualatin River Basin responsible for wastewater
and stormwater management, received an integrated municipal watershed-based permit that
provides coverage for four publicly owned treatment works (POTWs), one municipal separate
storm sewer system (MS4), and two individual stormwater permits for two of the POTWs. The
permit allows trading for two oxygen demanding parameters, carbonaceous biochemical oxy-
gen demand (CBOD5) and ammonia, between two POTWs and temperature to offset thermal
loads from two of the POTWs. This fact sheet focuses on offsetting thermal load. No trading
of oxygen demanding parameters has occurred to date.

Type of Trading                   Pollutant(s) Traded

Point Source-Point Source                 Oxygen demanding parameters (CBOD5 and
Point Source-Nonpoint Source              ammonia)
                                       Temperature (thermal loads)

Number of Trades To Date
                                                                                              re
                                                                                              *"!
                                                                                              t/J
0 (Point Source-Point Source)                                                                      ™
                                                                                              •
17 landowners enrolled for 2007 to conduct riparian planting to offset thermal load (Point                   o
Source-Nonpoint Source)                                                                         
                                                                                              3

Who Is Eligible to Participate?
Trading for CBOD5 and ammonia takes place between and within the Durham and Rock Creek
Advanced Wastewater Treatment Facilities.

Trading involving thermal loads functions as an offset program to accommodate increased
thermal loads for the Rock Creek and Durham Advanced Wastewater Treatment Facilities.
Trading to offset thermal loads is limited to the area established by the August 2001 Tualatin
Subbasin TMDL. Clean Water Services can trade their thermal load by taking a combination of
the following actions:
    1.  Improving riparian shade along the river and its tributaries
    2.  Augmenting flow to increase base flows in the Tualatin
    3.  Using reclaimed water (effluent) for irrigation


What Generated the Need for Trading?
The 2001 Tualatin Subbasin TMDL developed by Oregon Department of Environmental Qual-
ity (DEQ) requires Clean Water Services to reduce the impact of its POTWs on the Tualatin
River. For temperature, the technological control option available to Clean Water Services
would be both expensive and have other negative impacts on the watershed. The 2001 Tuala-
tin Subbasin TMDL also contains a wasteload allocation for ammonia. The same two waste-                .  „_
water treatment facilities both have NPDES permit limits for CBOD and ammonia; the ability

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         Water Quality Trading Toolkit for Permit Writers


                  to trade these parameters will provide Clean Water Services greater flexibility in plant opera-
                  tions while still protecting water quality.


                  What Serves as the Basis for Trading?
                  Oregon DEQ used the 2001 Tualatin Subbasin TMDL wasteload allocations for temperature
                  and ammonia to determine the permit limits and conditions contained in the Clean Water
                  Services' watershed-based NPDES permit. Temperature trading, however, is also based on
                  information contained in the Temperature Management Plan and the Thermal Load Credit
                  Trading Plan required under the permit.


                  What Types of Data and Methodologies Were Used to Calculate
                  the Basis for Trading?
                  Data and methodologies for trading of oxygen demanding parameters are found in the
                  2001 Tualatin Subbasin TMDL and the permit. Although the 2001 Tualatin Subbasin TMDL
                  does contain wasteload allocations for thermal loads, data and methodologies for trading
                  are found in other documents. The wasteload allocation for temperature, referred to as the
                  allowable thermal load, changed under the permit, and the thermal load to offset changed
                  under the Temperature Management Plan developed by Clean Water Services. All changes
                  are authorized under the TMDL and the permit. Therefore, the data and methodologies for
                  temperature trading are contained in the permit and the most recent version of the Tempera-
                  ture Management Plan. A brief overview of the data and methodologies used in determining
                  the basis for trading is provided below.

                  Temperature
                  Trading of thermal load credits is dependent on several variables including (1) system poten-
                  tial temperatures, (2) allowable thermal loads, and (3) the thermal load to offset.

                  System Potential Temperatures
                  The system potential temperature  is defined as a condition without human activities that
                  disturb or remove vegetation (Clean Water Services 2004). The 2001 Tualatin Subbasin TMDL
                  uses a system potential temperature approach to determine the thermal load allocations that
                  will achieve the temperature water quality standard of 64 degrees Fahrenheit (°F) for the
                  Tualatin River. A complex series of  equations contained in  the TMDL results in a system poten-
                  tial temperature of 58.5° F at the Rock Creek facility and 63.3° F at the Durham  Facility. The
                  TMDL states that the  allowable thermal load (i.e., wasteload allocation) for each treatment
                  facility is a thermal load that will cause no measurable increase in river temperature above
                  system potential temperature, which means no more than a 0.25° F increase at the edge of
                  the mixing zone.

                  Allowable Thermal Loads
                  The TMDL set initial wasteload allocations as allowable thermal loads. However, the permit
                  revises the allowable thermal loads set by the TMDL due to changes in flow data using an
                  equation that varies from the TMDL.
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Allowable Thermal Load = ((Q/OD + QPS) x (1000/35.3) x 86,400 x Max A TZOD x 5/9) kcals/c/ay

Where:
    QR = Upstream River Flow calculated as 7Q10 low flow statistic (cfs)
    QmD = QK/ Dilution Ratio (cfs)
    Opj = Treatment Plant Effluent Flow (cfs)
    Max ATZOD = 0.25° F

  Example: Calculating Allowable Thermal Loads

  Oregon DEQ must calculate the allowable thermal loads for the Durham and Rock Creek facilities.
  The following equation will provide the allowable thermal load values reflected in the final permit:

  Allowable Thermal Load = ((Qzoo + Qps) x (1000/35.3) x 86,400 x MaxATZOD x 5/9) kcals/day

  Where:
  QZOD = 7Q10 River Flow (cfs)/ Dilution Ratio

  Qps  = Treatment plant effluent flow (cfs)

  Max ATZOD = 0.25 "P

  The values that Oregon DEQ uses to calculate the allowable thermal load for each facility are found
  in the table below.

Dilution Ratio
QPS
T,.S
QK
Durham
4.2:1
25.2
71.0
144
Rock Creek
4.0:1
43.8
71.0
110
                                         n
               Kcal \  / 86,400 seconds \
i 264.2 gallons .  / 8.34 Ib \ i K£ \
\    m3    IX I gallon )X12.203 I
                                                                                                 A-87

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           Example: Calculating Allowable Thermal Loads (continued)

           For Durham:

                  QR=144cfs

                  QZOD = QR / Dilution Ratio (cfs) = 144/4.2 = 34.29 cfs

                  Qps = 25.2 cfs

                  Max&TZOD = 0.25 degrees F

                  Allowable Thermal Load (kcals/day) = (59.49) x (0.25) x (1,359,652.378)
                                       = 20,221,430 kcals/day
                                       = 2.0 xlOA7 kcals/day

           For Rock Creek:

                  Qfi=110cfs

                  QZOD = OR / Dilution Ratio (cfs) = 110/4.0 = 27.5 cfs

                  Qps. = 43.8 cfs

                  Max & TZQD = 0.25 degrees F

                  Allowable Thermal Load (kcals/day) = (71.3) x (0.25) x (1,359,652.378)
                                       = 24,235,803.64 kcals/day
                                       = 2.4 xlOA7 kcals/day
                           *•                        -„
                   Thermal Load to Offset
                   The thermal load to offset is the amount of thermal load that exceeds the Allowable Thermal
                   Load. This is the thermal load that Clean Water Services must reduce using selected tempera-
                   ture reduction methods, including trading through flow augmentation and shading. The
                   2001 Tualatin  Subbasin TMDL and the permit contain the equations used to calculate the
                   thermal load to offset at each wastewater treatment facility.
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  Current Excess Point Source Load Above System Potential (kcallday) - Allowable Point
  Source Thermal Load (kcal/day) = Thermal Load to Offset (kcal/day)

  Where:
  Current Excess Point Source Load Above System Potential = &TZQD x (QZQD + Qps) x (1,000/35.3) x
  (86,400 x 5/9) kcal/day

     Allowable Point Source Thermal Load = ((QZOD + QPS) x (1,000/35.3) x 86,400 x Max

     &TZOD x 5/9) kcals/day

     ^T   - f(O  Y T  } +- (n  * T  Yl / ((Ci    4- O  } - T } °F
      1 ZOD ~ W
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                   How are Credits Generated for Trading?
                   The permit defines water quality trading credits as one unit of pollutant reduction or other
                   defined environmental improvement, multiplied by any applicable trading ratio detailed in
                   the permit or in plans covered by the permit. The permit states the terms of credit use by
                   requiring its application at the location where compliance with the baseline is measured for
                   the applicable time period. Valid credits are those generated before or during the period they
                   are applied to the permittee's baselines, except thermal credits generated by  stream surface
                   area shading in the Thermal Load Credit Trading Plan. Credits are pollutant reductions that
                   exceed the reductions required by the permittee's baseline or other applicable requirements
                   in the permit (Oregon DEQ 2004).

                   Clean Water Services' watershed-based NPDES permit and fact sheet provides a description of
                   the process for trading oxygen-demanding parameters. Appendix B  of the Revised Tempera-
                   ture Management Plan describes the methodologies for calculating the thermal load credits;
                   Clean Water Services will soon make the Revised Temperature Management Plan available for
                   public review and comment.

                   Oxygen Demanding Parameters
                   The process for generating credits for oxygen demanding parameters described in the permit
                   is  provided below.
                       (4) Water Quality Trading Plan for Oxygen Demanding Parameters
                          Water Quality Trading Credits for oxygen demanding parameters (CBOD5 and
                          ammonia) between the Durham and Rock Creek Advanced Wastewater Treatment
                          Facilities (AWTF) are authorized by Schedule D of this permit provided that the
                          permittee uses the following equations to define the available assimilative capacity.
                          Whenever the combined load as calculated by the  equation in Schedule A, 1.a.(4)(b)
                          is less than or equal to the combined load limitation as calculated by the equation in
                          Schedule A, 1.a.(4)(a), (the baseline for purposes of water quality trading) the per-
                          mittee shall be deemed to be in compliance with the CBOD5 and ammonia-nitrogen
                          effluent limitations of this permit.
                          (a) Oxygen Demand Load Limitation
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                                                         Water Quality Trading Toolkit for Permit Writers
    Outfall
    Number
  D001,R001
                Parameter
               CBOD_and
               NBOD
  Combined Rock Creek and Durham Oxygen Demand Load
           Limitation at Oswego Dam (Ib/day)
R001 NBOD Limit (Ib/day) + R001 CBOD5 Limit (Ib/day) +
D001 NBOD Limit (Ib/day) + D001 CBOD, Limit (Ib/day)

Where,
R001 NBOD Limit =
Weekly R001 NH^-N Load Limit, Ib/day (see Schedule A.l.a.(3)) x
4.33 x Fraction R001 ammonia decayed at dam (see Table 2)

R001 CBOD5 Limit =
Weekly R001 CBODS concentration, mg/L, (see Table 1) x Actual
Weekly Median Rock Creek Effluent Flow, mgd x 8.34 x 4.9 x
Fraction R001 CBODiiltmia|ii decayed at dam (see Table 2)

D001 NBOD Limit =
Weekly D001 NHu-N Load Limit, Ib/day (see Schedule A.l.a.(3)) x
4.33 x Fraction D001 ammonia decayed at dam (see Table 2)

D001 CBODS Limit =
Weekly D001 CBODC concentration, mg/L, (see Table 1) x Actual
Weekly Median Durham Effluent Flow, mgd x 8.34 x 4.9 x
Fraction D001 CBODiil(.mitr. decayed at dam (see Table 2)
 Note: 4.33 * NBODiNH, ratio
       4.9 = CBODuU 1M_;CBODC ratio
       8.34 = pound conversion
                                                                                                      o
                                                                                                      ~
                                                                                                      CJ
                                                                                                      3
Where:
Water Quality Trading Credit for oxygen demanding substances authorized under the water
quality trading program in Schedule A, 1 .a.(4) shall not be allowed if the trade results in an
exceedance of the CBOD5mass limitations for outfalls D001 or R001.

    (b) Calculation of Combined Rock Creek and Durham Actual Discharged Oxygen
        Demand Load at Oswego Dam: (applies on a calendar week basis)

        Actual Discharged Oxygen Demand Load at Oswego Dam (Ib/day) =
        R001 NBOD Discharge (Ib/day) + R001 CBOD5 (Ib/day) + D001 NBOD Discharge (Ib/
        day) + D001 CBOD5 Discharge (Ib/day)

        R001 NBOD Discharge -
        Actual Weekly Median R001 NH3-N Concentration, mg/L x Actual Weekly Median
        Rock Creek Effluent Flow, mgd x 8.34 x 4.33 x Fraction Rock Creek ammonia decayed
        at dam (see Table 2)

        R001 CBOD, Discharge =
        Actual Weekly Median R001 CBOD5 Concentration, mg/L x Actual Weekly Median
        Rock Creek Effluent Flow, mgd x 8.34 x 4,9 x Fraction Rock Creek CBODultimate
        decayed at dam (see Table 2)

        D001 NBOD Discharge =
        Actual Weekly Median D001 NH3-N Concentration, mg/L x Actual Weekly Median
        Durham Effluent Flow, mgd x 8.34 x 4.33 x Fraction Durham ammonia decayed at
        dam (see Table 2)
                                                                                                     1
                                                                                                  A-91

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                          D001 CBOD5 Discharge =
                          Actual Weekly Median D001 CBOD5 Concentration, mg/L x Actual Weekly Median
                          Durham Effluent Flow, mgd x 8.34 x 4.9 x Fraction Durham CBODu!tirriate decayed at
                          dam (see Table 2)
                  Table 1. Weekly CBOD Concentrations
Rock Creek
1.4 mg/L
Durham
3.9 mg/L
                  Table 2. Fraction Decayed at Oswego Dam
Farmington
flow, cfs

Izu l/D
>175 - 200

>2(j(J ZDU

>ZDU JUU
>300-350
River
temperature,
°C
<10
>10 to 15
>15 to 20
>20 to 25
<10
>10 to 15
>15 to 20
>20 to 25
<10
>10 to 15
>15 to 20
>20 to 25
<10
>10 to 15
>15 to 20
>20 to 25
<10
>10 to 15
>15 to 20
>20 to 25
Rock Creek
Ammonia
0.61
0.70
0.79
0.86
0.48
0.56
0.65
0.74
0.43
0.52
0.60
0.69
0.37
0.44
0.52
0.61
0.32
0.38
0.46
0.55
CBOD
0.33
0.40
0.48
0.56
0.24
0.29
0.36
0.43
0.21
0.26
0.32
0.39
0.17
0.22
0.27
0.33
0.15
0.18
0.23
0.28
Durham
Ammonia
0.22
0.27
0.33
0.40
0.15
0.19
0.24
0.29
0.14
0.17
0.21
0.26
0.11
0.14
0.17
0.22
0.09
0.12
0.15
0.18
CBOD
0.10
0.12
0.15
0.19
0.07
0.09
0.11
0.14
0.06
0.08
0.10
0.12
0.05
0.06
0.08
0.10
0.04
0.05
0.06
0.08
Values for each range set at low end of range for flow and high end for temperature
A-92
Temperature
Clean Water Services can trade the heat load from the Rock Creek and Durham wastewater
treatment plants through flow augmentation and increased shading. Appendix B of the
Revised Temperature Management Plan contains the process for calculating thermal load
credits using flow augmentation and shade. A brief description of the process for calculating
thermal load credits associated with flow augmentation and shading is provided below.

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Shading
Thermal credits from shading are generated on a project-by-project basis. Credits gener-                       ; "
ated by shading projects initiated in a given year are calculated by multiplying the solar load
blocked for a project by a safety factor and an incentive factor. Solar load blocked is calcu-                     """
lated by determining the potential solar load for a particular stream reach and the effec-                       *':
tive shade, which  is a "fraction of the daily solar thermal energy flux that is prevented by
vegetation from reaching the stream surface" (Clean Water Services 2004). Effective shade                     x
is determined by using a component of Oregon DEQ's Heat Source model, referred to as the                    ;-;>
Shade-A-Lator (Clean Water Services 2004).

    Reach Width (ft) x Reach Length (ft) x 480 kcal/ft2/day = Potential Solar Load for a Reach

    Potential Solar Load for the Reach x Effective Shade = Solar Load Blocked for a Reach

    Solar Load Blocked for Project x Safety  Factor of 0.5 x Incentive Factor = Thermal Credit per
    Project

                                                                                                        n
                                                                                                        n
A safety factor of 0.5 is applied to the solar load blocked for a project because of the uncer-                     3
tainty in using riparian restoration projects to generate shade (Clean Water Services 2004).                      3r
An incentive factor is determined using the priority ranking of a particular stream on which a                   ™
shading project will take place. An incentive factor of 4 is applied to projects that occur along                   ^
high-priority streams, while all  other streams receive an incentive factor of 1 (Clean Water                       S
Services 2004).                                                                                           •
                                                                                                        o
                                                                                                       ^
Flow Augmentation                                                                               §
The thermal energy decrease associated with the temperature change measured just
upstream of each  outfall caused by flow augmentation is the basis for calculating flow aug-
mentation thermal credits (Clean Water Services 2004).

The annual thermal load contributed by each facility is the sum of the thermal load contrib-
uted by the facility, the allowed thermal load (as a  negative value), and the thermal credit for
flow augmentation (Clean Water Services 2004).

    HfiowAug = 1kcal'/1 kg °C x QK.ver x 1 rr,3 / 35.3 ft' x 1,000 kg /1 m3 x 86,400 sec /1 day x &TflomAug

     Where:
          For Rock Creek' AT     = 5 014 (1 — e F|owA"gmentation/FarmFiow-Rc-wwTp\
                       '   FlowAug    '                                  '
          For Durham: &Tfl    = (-0.02636) (Flow Augmentation /1 + e <-°°3941"Farmf™ -1«-«)
                                                                                                   A-93

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                  What are the Trading Mechanisms?
                  Trading of oxygen-demanding parameters occurs between two wastewater treatment plants
                  operated by Clean Water Services. In addition, a single wastewater treatment plant may trade
                  between CBOD and ammonia. Schedule D of the permit requires that Clean Water Services
                  report all trading credit for oxygen-demanding parameters in the monthly Discharge Moni-
                  toring Reporting forms submitted to Oregon DEQ. No other trading mechanisms are used to
                  facilitate trades of oxygen-demanding parameters.

                  The permit contains specific language about trade agreements for thermal load offsets. The
                  language is as follows (Oregon DEQ 2004):
                         The permittee may enter into one or more Thermal Credit Trading Agreements with
                         one or more reputable land or water conservation organizations or governmental
                         entities to implement one or more components of the Temperature Management
                         Plan. The permit specifies that the Thermal Credit Trading Agreements must include
                         the following terms:
                         •  A commitment by the Conservation Entity to fully implement the Trading Agree-
                            ment in accordance with  its terms, including initial planting and long-term mainte-
                            nance, monitoring and reporting;
                         •  A provision that the Credit Trading Agreement is enforceable by Clean Water
                            Services and Oregon DEQ and any successor agency. A breach of the Credit Trad-
                            ing Agreement by the Conservation Entity shall not be deemed a violation of this
                            permit by the permittee. In the event of a breach, the permittee will be required
                            to update its Clean Water Services Temperature  Management Plan to demonstrate
                            that they will still be able to offset the thermal load.


                  What is the Pollutant Trading Ratio?
                  Trading of oxygen-demanding parameters does not use a pollutant trade ratio. However, the
                  calculations used for trading oxygen-demanding parameters include equivalency factors that
                  take into account the different rates at which the river processes CBOD5 versus ammonia and
                  the different amounts of oxygen demand for each pound of material (Oregon DEQ No date).
                  The equivalency factors used  in the calculations might be considered a form of pollutant trade
                  ratio.

                  The pollutant trading ratio used for thermal load offsets from stream surface shading is 2:1.
                  According to the permit fact sheet, "To compensate for the fact that the heat load offset
                  by shading will take years to establish, the Department has decided that at the end of the
                  20 years that the credit for shading is in effect, the offset heat load must be  two times the
                  actual thermal load to be offset"  (Oregon DEQ No date).
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What Type of Monitoring is Performed?
Schedule B of the permit contains an initial watershed monitoring plan. The two facilities
eligible to trade oxygen-demanding parameters are required to monitor CBOD5 and ammonia
three times per week using a 24-hour composite sample. Monitoring for ammonia is required
daily during the ammonia reduction period.

The draft Temperature Management Plan developed by Clean Water Services contains both
in-stream and effluent temperature monitoring requirements. For in-stream temperature
monitoring, Clean Water Services states that either grab samples or continuous monitor-
ing will be used with monitoring sites just upstream from the point of discharge and at the
edge of the mixing zone along the centerline of the plume (Clean Water Services 2003). For
effluent temperature monitoring, Clean Water Services will monitor before discharge using
thermistors in the waste stream at final treatment (Clean Water Services 2003). The Thermal
Load Credit Trading Plan will contain information on temperature monitoring in the context
of trading.


What are the Incentives for Trading?
For Clean Water Services, the incentive for offsetting thermal  loads using shade credits as                     ~
opposed to installing mechanical cooling equipment is the significant potential cost savings.                   %
                                                                                                  ft
It would cost approximately $40 to $50 million to install the necessary refrigeration equip-           ,         £,
ment to comply at both facilities. The cost of riparian planting is estimated at $7 million over                   3
a 5-year period. Therefore, Clean Water Services estimates a cost avoidance of approximately                  S
$42 million over 5 years (Logue 2007).                                                                  •
n
nT
                                                                                                 1
What Water Quality Improvements Have Been Achieved?
In 2006 approximately 30,015 stream feet and seven landowners were enrolled in the ripar-
ian stream planting program. Those totals have gone up for 2007, with approximately 56,420
stream feet and 17 landowners enrolled in the program (Logue 2007). The water quality trad-
ing provision of Clean Water Services' permit has significantly increased the pace and quan-
tity of riparian area restoration in the Tualatin Basin (USEPA 2006). The additional miles of
stream planted will result in the prevention of 101 million/Kcal/day from reaching the Tuala-
tin River tributaries that would otherwise result in additional increases in water temperature
(USEPA 2006).

What Are the Potential Challenges in Using this Approach?
Ensuring that the necessary stream miles are shaded during the permit term may prove
challenging for Clean Water Services. Also, the uncertainty and variability associated with
riparian restoration projects may prove challenging in achieving the desired temperature
reductions over time.

What Are the Potential Benefits?
Trading will allow Clean Water Services to improve the Tualatin River's water quality more
efficiently by using approaches that will provide additional environmental benefits to the
watershed.
                                                                                              A-95

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         Water Quality Trading Toolkit for Permit Writers


                  Applicable NPDES Permit Language
                  The watershed-based permit contains a significant amount of permit language relevant to
                  trading; therefore, it is too cumbersome to insert the relevant permit language in the fact
                  sheet. Copies of the permit are available at .


                  Contact Information
                  Charles Logue, P.E.
                  Director, Technical Services Department
                  Clean Water Services
                  (503)681-3604
                  loguec@cleanwaterservices.org

                  Lyle Christensen
                  NPDES Permit Writer
                  Oregon Department of Environmental Quality
                  (503) 229-5295
                  Christensen.Lyle@deq.state.or.us


                  References and Resources
                  Clean Water Services. 2004. Revised Temperature Management Plan. August 20.

                  Logue, Charles. 2007. Personal communication. January 24.

                  Oregon DEQ (Oregon Department of Environmental Quality). 2004. National Pollutant
                      Discharge Elimination System Watershed-Based Waste Discharge Permit. Issued to Clean
                     Water Services and Washington County Department of Land Use and Transportation.
                     January, .

                  Oregon DEQ (Oregon Department of Environmental Quality). 2001. Tualatin River TMDL
                     .

                  Oregon DEQ (Oregon Department of Environmental Quality). 2004. Fact Sheet and NPDES
                      Wastewater Discharge Permit Evaluation, .

                  Oregon DEQ (Oregon Department of Environmental Quality). Draft Intergovernmental
                     Agreement between Oregon Department of Environmental Quality and Clean Water
                     Services.

                  USEPA (U.S. Environmental Protection Agency). 2006. Watershed-Based Permitting  Case
                     Study: Tualatin River, Oregon, Clean Water Services. Draft Updated 9/29/06.
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                                                       Water Quality Trading Toolkit for Permit Writers


Water Quality Trading in the Chesapeake

Bay Watershed:
                                                                                                 d"T
Virginia's Nutrient Credit Exchange Program                  £


Overview
The Virginia Department of Environmental Quality (DEQ) 2004 Virginia Water Quality
Assessment 305(b)/303(d) Integrated Report (303(d) List of Impaired Waters) showed that
83 percent of the Chesapeake Bay mainstem was impaired and could not adequately sustain
its aquatic communities. Excessive nutrients (nitrogen and phosphorus) were causing algae
blooms, decreases in dissolved oxygen, and a decline in habitat availability. This not only
impaired the aquatic life of the Chesapeake Bay, it also took a toll on the food industry, tour-
ism, and the local residents of the surrounding watershed (DEQ 2006).

In March 2003, the Chesapeake Bay Program (CBP) adopted new nutrient reduction goals
as part of the Chesapeake 2000 Agreement. This agreement was established to protect and                  ? ^
                                                                                                s- ^
restore water quality in the Chesapeake Bay by January 1, 2011. The nutrient reduction goals                 | S
established in this agreement aim to decrease the amount of nitrogen and phosphorus enter-                ^ c
ing the bay by 110 million and 6.3 million pounds per year, respectively. The CBP established                ^ %
nutrient load allocations for each major watershed of the bay, and each state then developed                | S?
tributary strategies to achieve each watershed's nutrient reduction goals.                                   2r
                                                                                                 TO
                                                                                                 5'
The Virginia DEQ, in conjunction with the Virginia Department of Conservation and Recre-                     g,
ation (DCR) and EPA, developed a set of tributary strategies, one for each major watershed                   n
draining to the Chesapeake Bay in Virginia. These include the Rappahannock, York, James,                    »
Shenandoah-Potomac, and the Eastern Shore watersheds. Each tributary strategy establishes                   "S
total nutrient load allocations for the point and nonpoint sources within each watershed and                 JT
                                                                                                 53
outlines implementation plans to meet these allocations.                                                ^
                                                                                                 I
To help point and nonpoint sources meet nutrient load reduction goals in Virginia's tributary                  3
                                                                                                 to
strategies, on March 24, 2005, the Governor of Virginia signed legislation that authorized the                 if
                                                                                                 &
creation of the Chesapeake Bay Watershed Nutrient Credit Exchange Program (Exchange Pro-                 .
gram), which was codified in Article 4.02 of the Code of Virginia. Virginia's Exchange Program                 ~i
                                                                                                 foj
requires Virginia Pollutant Discharge Elimination System (VPDES) permitted facilities on the                   3'
CBP Significant Discharger List (significant dischargers) as well as new and expanding facili-                   w
ties to register for coverage under the associated general permit to collectively meet annual                  $
nutrient load allocations established in the watershed. If point sources cannot achieve nutri-                  §'
                                                                                                 t>
ent load reductions through facility upgrades, the Exchange Program authorizes nutrient                     C?
                                                                                                 t
credit exchanges or payment into the Water Quality Improvement Fund2 (WQIF). Trades can                   &
be facilitated by the Virginia Nutrient Credit Exchange Association (the Exchange) or occur
directly between trading partners.
* The purpose of Virginia's Water Quality Improvement Fund is, "to provide Water Quality Improvement Grants to
 local governments, soil and water conservation districts, institutions of higher education and individuals for point               A-97
 and nonpoint source pollution prevention, reduction and control programs and efforts" (Virginia Code section
 10.1-2128 2006). The WQIF is established in section 10.1-2128 of the Code of Virginia.

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          Water Quality Trading Toolkit for Permit Writers


                   Type of Trading                     Pollutant(s) Traded

                   Point Source-Point Source (available          Total Nitrogen (TN) and
                   initially)                                   Total Phosphorus (TP)
                   Point Source-Nonpoint Source (anticipated
                   as the program develops further)

                   Number of Trades to Date
                   No trades to date; compliance plans for all significant dischargers are not due to be submit-
                   ted until August 1, 2007. These plans will detail how each facility will meet water quality
                   standards by January 1, 2011, as required by the Chesapeake 2000 Agreement. The DEQ will
                   review the plans and determine when each individual facility can begin nutrient trading.


                   Who Is Eligible to participate?
                   Every significant discharger authorized by a VPDES permit that meets specific discharge crite-
                   ria is required to register for coverage under the General VPDES Watershed Permit Regulation
                   for Total Nitrogen and Total Phosphorus Discharges and Nutrient Trading in the Chesapeake
                   Bay Watershed in Virginia (General Permit - VANOOOOOO). Coverage under the general permit
                   provides these dischargers with the ability to participate in the Exchange Program; however,
                   participation in the Exchange Program is not required. The criteria for coverage under the
                   general permit include any of the following:
                       •  An existing facility that discharges 100,000 gallons or more per day from a wastewa-
                          ter treatment plant, or an equivalent load from an  industrial process, directly into
                          tidal waters
                       •  An existing facility that discharges 500,000 gallons or more per day from a wastewa-
                          ter treatment plant, or an equivalent load from an  industrial process, directly into
                          nontidal waters
                       •  A new or expanding facility that proposes to discharge 40,000 gallons or more per
                          day from a wastewater treatment plant, or an equivalent load from an  industrial  pro-
                          cess, directly into tidal or nontidal waters

                   There are 125  significant dischargers and about 12 new/expanding facilities required to regis-
                   ter for coverage under the permit and are therefore eligible for participation in the Exchange
                   Program. Other facilities can register for coverage under the permit to participate in the
                   Exchange Program; however, they are not expected to do so because they do not have load
                   limits imposed on them by the permit. Only significant dischargers can generate credits by
                   discharging under their permit limit. Other facilities can only purchase credits from significant
                   dischargers except for new/expanding facilities who can purchase credits achieved through
                   nonpoint source BMPs if those credits are used to  offset additional discharge and if no credits
                   are available from existing significant dischargers  in the same tributary watershed.

                   Each facility must complete a compliance plan by August 1, 2007, that explicitly details how
                   each facility will meet nutrient standards by the compliance  date of January 1,  2011, as directed
                   by the Chesapeake 2000 Agreement. If the facility wishes to use nutrient credit trading to meet
                   nutrient standards, the compliance plan will specify how. The DEQ might adjust the tributary-
                   wide compliance dates depending on their review of the individual facility compliance plans.

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                                                        Water Quality Trading Toolkit for Permit Writers


 What Generated the Need for Trading?
 The Chesapeake 2000 Agreement set a deadline of 2010 to correct water quality issues relat-
 ed to excessive nutrients in the Bay and remove it from the 303(d) List of Impaired Waters. To
 achieve this goal, it would cost the discharging facilities in the Chesapeake Bay watershed an
 estimated $1.5 billion to upgrade their wastewater treatment technology (Exchange 2006).
 However, there are limited funds, contractors, and construction resources available.  A bal-
 ance needed to be struck between meeting these new stringent load limits and allowing for
 economic growth in the region and,  as a result, the Exchange Program was developed to ease
 the demands and costs of construction while ensuring compliance with both current VPDES
 regulations and the Chesapeake 2000 Agreement.
What Serves as the Basis for Trading?
The Virginia tributary strategies describe the sources of nutrients in each of the major tribu-
taries and their contributions to the water quality issues in the Chesapeake Bay mainstem.
The CBP modeled the required nutrient load reductions for each major tributary. Table 1
presents the mass and percent reduction in TN and TP loading necessary for each watershed
to meet tributary strategy goals.

Table 1. Loading reductions needed to meet the TN and TP allocations for each
watershed.*
Watershed
Rappahannock
York'1
James1'
Shenandoah-Potomac
Eastern Shore
Mass reduction3
TN
2.66
2.00
10.86
9.96
TP
0.33
0.27
Percent reduction
TN
34%
26%
2.54 | 29%
0.56 | 44%
0.94 0.15 45%
TP
35%
36%
43%
29%
64%
Notes:
' In millions of pounds
l>Allocations are considered interim until further water quality standards are adopted.
 Reductions are based on the 2002 values from each watershed and are derived from the tributary strategies
 (available for download at: http://www.naturalresources.virginia.gov/Initiatives/WaterQuality/).
What Types of Data and Methodologies Were Used to Calculate
the Basis for Trading?
A collaboration of federal and state government agencies, local universities, and the CBP corn-
piled vast amounts of data for the development of the CBP Watershed Model. This model was
used to set wasteload allocations for each major tributary and set the stage for the nutrient
trading program. For more information on the watershed Model and other modeling tech-
niques used, visit the CBP modeling Web site (http://www.chesapeakebay.net/model.htm).

The Chesapeake Bay Monitoring Program has assessed the chemical, physical, and biological
characteristics of various stations throughout the watershed since 1984. The data obtained
has aided in model improvement and helped to determine the need for a trading program.
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          Water Quality Trading Toolkit for Permit Writers


                    Various other monitoring programs exist within the Chesapeake Bay watershed that also pro-
                    vide a wealth of information (http://www.chesapeakebay.net/monprgms.htm).


                    Are Permits Used to Facilitate Trades?
                    The DEQ has proposed the draft General VPDES Watershed Permit Regulation for Total Nitro-
                    gen and Total Phosphorus Discharges and Nutrient Trading in the Chesapeake Bay Water-
                    shed in Virginia (General Permit - VANOOOOOO). The general permit addresses the TN and TP
                    wasteload allocations (annual), compliance schedules, compliance plans, and monitoring/
                    reporting requirements for all significant and new/expanding dischargers in the Chesapeake
                    Bay. The public comment for the draft permit closed June 30, 2006. The Virginia State Water
                    Control Board (SWCB) approved the General Permit Regulation on September 6, 2006, and
                    the final permit was issued January 1, 2007. It will expire on December 31, 2011.

                    The general permit requires that all significant and  new/expanding facilities in the Chesapeake
                    Bay register for coverage. The DEQ maintains registration lists of facilities in each tributary
                    covered by the general permit. These lists contain the load limits for the facilities that are
                    enforceable under the general  permit (http://beta.deq.virginia.gov/vpdes/homepage.html).
                    The general permit supersedes the requirements of the facilities' individual VPDES permits
                    pertaining to TN and TP, except where site-specific conditions (e.g., local water quality stan-
                    dards, TMDLs, or federal effluent guidelines) necessitate more restrictive limits.

                    Covered facilities must meet standardized effluent limitations, conditions, and monitoring
                    requirements. The general permit establishes annual effluent loading limits for nitrogen
                    and phosphorus and establishes the conditions by which credits (the difference in pounds
                    between the facility's limit and the mass actually discharged) may be exchanged, or offsets
                    (an alternate nutrient removal mechanism) may be purchased by existing facilities whose
                    proposed expansion would otherwise cause the facilities to exceed their allocation or by new
                    and expanded facilities that do not have an assigned a wasteload allocation.

                    In addition to point source-point source trading among permitted facilities, covered dis-
                    chargers also have the option of complying with their existing load limits through treatment
                    technology upgrades and payment into the WQIF. Payments to the WQIF for compliance
                    credits are $11.06 for each pound of nitrogen and $5.04 for each pound of phosphorus.3
                    WQIF compliance credits are only available as an option of last resort if there are no credits
                    available through the Exchange.

                    Facilities seeking to offset proposed expansion or new construction have the additional
                    option of purchasing nutrient reductions generated by nonpoint source best management
                    practices (BMPs); the implementation process for this option is still under development. The
                    Exchange will facilitate these and similar trading scenarios for the permitted facilities of each
                    3 In 2002 the Nutrient Reduction Technology Task Force, assembled by the CBP, produced a report on the costs
                     of nutrient reduction technology to point sources in the Chesapeake Bay watershed (NRT report). After the
                     publication of the NRT report, Virginia developed tributary strategies with specific allocations and concentrations
                     for each significant point source discharger. Using cost information from the NRT report as well as the load limits
A-100               significant dischargers would be subject to and inflation since the report was published, the average cost per
                     pound of nitrogen or phosphorus reduction for Virginia POTWs was determined. The WQIF payments for the
                     general permit were set equal to this cost.

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                                                         Water Quality Trading Toolkit for Permit Writers

tributary that apply for voluntary membership. Permitted facilities choosing not to join the
Exchange still have the option of trading, but must seek out trading partners independently.

How Are Credits Generated for Trading?
When a facility discharges less than its annual TP or TN limit, the difference (in pounds)
between the limit and actual discharge will result in excess pounds available for conversion to
saleable nutrient exchange credits using an applicable delivery factor. Credits are expressed
as pounds per year of delivered TN or TP load. If a facility exceeds its TN or TP limit and
chooses to exchange credits, it can purchase nutrient reduction credits from a more efficient
point source facility.

What Are the Trading Mechanisms?
If a facility requests to have its annual load cap activated, that facility will be entitled to trade
and acquire nutrient credits. Each facility is required to generate an annual  report. Due by
February 1 of each year, these reports indicate the number of nitrogen and phosphorus cred-
its to be acquired or exchanged by the facility. Trading partners are then established (by the
Exchange or individually) on the basis of credits generated and offsets required. Credits may
be exchanged only between facilities within the same tributary watershed.
3"
a
Facilities can conduct trading on an individual basis or can voluntarily participate in the                      f| -<
Exchange. The Exchange coordinates and facilitates nutrient credit trading among its mem-                 3 2
                                                                                                     P-
bers. Authorized by the General Assembly, the Exchange is funded through the WQIF. Mem-                   5'
bership in the Exchange is free and open to all significant dischargers, and new/expanding                    5'
facilities interested in participating. A $1,000 membership fee for consultant affiliates applies                  %
(http://www.theexchangeassociation.org/Default.htm).                                                    ?

Owners of multiple facilities have the option of combining the nutrient caps of those facili-                    £
ties, creating an aggregate nutrient cap. This allows the owner to meet the overall aggregate                  £
cap through collectively managing the nutrient loads of each individual facility, essentially                     ^
creating its own trading network.                                                                        o?
                                                                                                     re
                                                                                                     v>

What Is the Pollutant Trading Ratio?                                                    \
The Exchange Program uses a delivery factor for point sources that takes into account dis-                      =;•
charge location within the watershed and nutrient attenuation during riverine transport. These                  5
facility-specific delivery factors are calculated using the CBP Watershed Model. The model fac-
tors in the uptake of phosphorus during delivery caused by the movement of phosphorus-laden                  ™
sediment on river bottoms—in other words,  the model occasionally generates a delivery ratio                   |
of greater than 1.00 (i.e., greater than 100 percent of the phosphorus is delivered to the Chesa-                   P
peake Bay). As a result, the  DEQ decided to cap all ratios at 1.00 to provide a measure of con-                   s?
sistency and equity among dischargers. In addition to the  use of the delivery factor described
above, offsets purchased from nonpoint source BMPs are traded at the ratio of 2 pounds
reduced by  the BMP for every pound the new or expanding facility proposes to discharge.
                                                                                                A-101


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          Water Quality Trading Toolkit for Permit Writers
                   What Type of Monitoring Is Performed?
                   Each facility is required to be in compliance with TN and TP final effluent limits included
                   in the general permit as soon as possible, but no later than January 1, 2011. The dates will
                   be subject to DEQ revisions according to individual compliance plans. The general permit
                   requires that monitoring and recordkeeping be conducted following approved methods.
                   Monitoring frequency is based on design flow and is conducted as shown in Table 2.

                   Table 2. Monitoring requirements for facilities covered under the general
                   permit
Design flow
Parameter
Total nitrogen
Total phosphorus
> 20.00 mgd
1.00-19.99 mgd
0.04-0.99 mgd
Monitoring sample type/frequency
24 HC*/
3 days per week
24 HC/
3 days per week
24 HC/
1 days per week
24 HC/
1 days per week
8HC/
2 per month
(> 7 days apart)
8HC/
2 per month
(> 7 days apart)
                   *HC = hour composite (e.g. 24 HC = 24-hour composite sample)
                   Total monthly and year to date mass loads must be calculated as follows:
                   ML = ML  *d
                          avg
                   ML = total monthly load (Ibs/mo)
                   ML = monthly average load as reported on discharge monitoring report (Ibs/day)
                   d = number of discharge days in sampling month
                   AL-YTD = Z,,           .;ML
                              (January - current month)
                   AL-YTD = calendar year-to-date annual load (Ibs/yr)
                   ML = total monthly load (Ibs/mo) as reported on discharge monitoring report
                   Reporting dates are determined for each facility and are due the same date each month.
                   Annual reports are due to the Exchange on or before February 1 of each year. These reports
                   include the  previous year's annual mass loads of TN and TP, the delivered total loads of nitro-
                   gen and phosphorus, and the number of nitrogen and phosphorus credits to be acquired or
                   exchanged. For more information on the VPDES General Permit program and the Virginia
                   nutrient trading program legislation and regulations, see http://www.deq.state.va.us/vpdes


                   What Are the Incentives for Trading?
                   The Exchange Program provides facilities with a flexible approach to meeting nutrient load
                   allocations set forth in VPDES general permit, taken from the tributary strategies. Upgrading
                   existing treatment systems would be expensive and could hinder growth within the Chesa-
                   peake Bay watershed. The Exchange Program, on the other hand, offers a market-based and
                   cost-effective method for meeting nutrient caps while accommodating continued growth
                   and development. It also allows for new upgrades to be phased in, easing construction and
                   resource dema