Rule Development Process and Status

The State of Michigan began the process of developing rules for a statewide water quality trading program in January 1998. The Surface Water Quality Division developed the framework for a statewide trading program based on the findings of the Market Based Program Feasibility Study (July 1997). The trading framework was adopted by the Governor's Steering Committee for Market-Based Environmental Programs. A Water Quality Trading Workgroup was then established to build consensus, draft rules and provide recommendations to the department.  The draft rules prepared by the Workgroup with revisions approved by the Steering Committee are contained in Draft 20 Rules.

Proposed Rules and a public hearing notice were published in the Michigan Register dated January 31, 2000. The first of two public hearings was held on March 15, 2000. A second hearing was required because the notice of the first hearing was defective. Public notice of a second hearing and the proposed rules were published in the Michigan Register dated June 7, 2000. The second public hearing was held on June 7, 2000. All comments received between January 31, 2000 and June 14, 2000 were included in the public record.

The department received a number of comments during the public comment period. The public comments, the departments response and Rules revised in response to comments are documented and discussed in the Public Hearing Report .

Program Overview

Michigan's Water Quality Trading rules establish clear legal authority for a voluntary statewide program. The rules provide for nutrient trading and other types of trades to occur on a watershed basis among and between point and nonpoint sources in attainment and nonattainment areas throughout the state. The rules require all trading to be consistent with the federal Clean Water Act and federal regulations and include specific provisions to address state water quality standards, antidegradation policy and permit program requirements. To generate credits, a source must make an actual change that results in a pollutant-specific loading reduction beyond that required by the most protective requirement. A percentage of all loading reductions made are retired to provide a direct water quality benefit. Therefore, every trade will result in a net loading reduction. The rules contain prohibitions and restrictions to assure that the use of credits does not result in adverse localized impacts.

The rules include a number of design elements to maintain the levels of control and margins of safety that have been achieved in practice and to improve water quality: trading ratios, actual versus allowed baselines, discount factors and directional and contemporaneous trading.

The rules do not require that permits be issued to nonpoint sources that engage in trading or that nonpoint source requirements be incorporated into point source permits. Nonpoint source accountability is provided directly under the rules. Permits for point sources will need to include special conditions and limitations that would apply if trading occurs.

The rules establish new responsibilities for the Department:
1. Developing notice of generation and use forms and reporting forms for point and nonpoint sources.
2. Reviewing and issuing completeness determinations for notices of proposed trades within 30 days.
3. Creation and maintenance of a trading registry that is updated daily.
4. Conducting comprehensive trading program evaluations, a statewide evaluation 3 years after the rules take effect, and watershed specific evaluations every 5 years in conjunction with permitting and ambient monitoring cycles.
5. Reviewing and approving watershed management plans for the purposes of trading.
6. Providing Internet access to the trading registry.
7. Conducting administrative reviews of citizen petitions.
8. Technical evaluations, including alternate quantification protocols, site-specific discount factors and case-by-case reviews for other types of trades.
9. Delineating Michigan's Major Watersheds. The department is currently developing GIS capabilities to do so and making them electronically available.

The rules include a dual liability scheme for generators and users of credits. Generators of insufficient credits are subject to treble damages. In other words, they would have to obtain three times the number of insufficient credits that they register and that get used. Users of bad or insufficient credits are solely liable for complying with an effluent limitation and would have the burden to show due diligence. A reconciliation and true-up period is provided as an incentive for internal audits and the avoidance of violations. Generators or users of credits that violate the rules would be subject to the administrative, civil and criminal provisions of Part 31 of Act 451.

EPA approval of the trading program is necessary for the program to be successful.  Currently, there are some key issues that are outstanding:
* Can trading occur in impaired waters before a TMDL has been approved by EPA, is so how?
* Do nonpoint source trading requirements have to be incorporated into NPDES permits?
* Does trading under an approved TMDL require a formal TMDL modifications for individual trades between and among point and nonpoint sources?
* Do Coastal Zone Act Reauthorization Amendments have to be fully implemented before a nonpoint source can generate credits?

EPA's Revisions to 40 CFR 122, 123, 124, 130 and 131

On August 23, 1999, the United States Environmental Protection Agency (EPA) in the Code of Federal Register published proposed revisions to NPDES program (40 CFR 122, 123 & 124) federal antidegradation policy (40 CFR 131) and water quality planning regulations (40 CFR 130). The proposed revisions to collectively provide for NPDES permits to be issued to new and increased uses in impaired waters for which a total maximum daily load (TMDL) has not been developed.   To achieve reasonable further progress towards attainment pending the development of a TMDL, significant new and increased discharges must be ‘offset’ at a ratio of 1.5:1. Offset reductions may be obtained from another point or a NPS. Where offsets are provided by another point source, the proposed regulations require that the permit for that source be modified to include revised effluent limits. Where offsets are provided by a NPS, the NPS offset requirements must be incorporated in the new or increased use permit.  The proposed regulations can be found at EPA's web site.  Michigan's Comments focused on the need to include specific provisions for trading to improve water quality in impaired waters pending the development of total maximum daily loads and for the proposed federal regulations to expressly include trading as a means of implementing TMDLs.  Specific recommendations were provided that would integrate federal antidegradation policy, state water quality standards, TMDLs and trading.  These recommendations were not included in EPA's final regulations that can be accessed at EPA's web site.