Rules - Executive Summary

Purpose. The proposed rules provide legal authority for a voluntary statewide Water Quality Trading Program. Nutrient trading among and between point and nonpoint sources may be done by rule. Other types of trades may occur on a case by case basis. All trading is watershed-based.Water Quality Benefit. A percentage of all credits traded are retired to achieve a net loading reduction and water quality improvement. The program will reduce the cost of improving water quality, create incentives for nonpoint source reductions and facilitate implementation of total maximum daily loads (TMDLs) and urban stormwater control programs. Restrictions. Any use of credits that would cause a violation of water quality standards is prohibited. Credits can not be used to comply with a federal technology-based effluent limitation unless allowed under federal regulations. The use of credits to increase the discharge of listed bioaccumulative chemicals of concern is restricted.Eligibility. Reductions to generate credits must occur after the effective date of the rules. All reductions must be real, surplus and quantifiable.

Actual changes must be made to reduce point discharges or nonpoint source loadings. This will maintain the margin of safety achieved in practice by point sources. Agricultural management practices or control structures to eliminate manure runoff or abate a nuisance under the Michigan Right to Farm Act and nonpoint source reductions funded under Section 319 of the federal Clean Water Act (CWA) or the Clean Michigan Initiative (CMI) are not eligible to generate credits.Open and Closed Trading. All trading is water quality-based. Open nutrient trading can occur in any of Michigan' Major Watersheds where water quality standards are being met; and, in impaired waters pending the development of a TMDL.  Open trading has directional and temporal components to be consistent with the states antidegradation regulations.

Closed nutrient trading may occur where a pollutant-specific cap and point and nonpoint source allocations have been established by a TMDL, remedial action plan (RAP), lakewide management plan (LaMP) or a watershed management plan (WSMP) approved by the department for the purposes of trading. Trading areas are delineated in the RAP/LaMPs that have been developed for each area of concern.  Watersheds for which a WSMP has been prepared locally and approved by the department will be established on a case-by-case basis. The cap, point source waste load allocations and nonpoint source loading allocations establish the baseline for closed trading to occur.

Pollutants Traded. Nutrient (total phosphorus and total nitrogen) trading occurs by rule. Point source permit modifications are not required before trading can occur and nonpoint source reduction requirements are not incorporated in point source permits. Trading for pollutants other than nutrients, cross-pollutant trading, the use of banked nutrient credits, intra-plant trading and other types of trades must be approved before they occur. Most of these trades will occur in the context of national pollutant discharge elimination system (NPDES) permits. Discount factors different from and in addition to those specified for nutrients in the rules may be required to protect water quality.Baselines. Baselines are the point source discharge and nonpoint source loading levels below which reductions must be made to generate a credit. They are established using the most accurate information available for a 3-year period representative of source operation. A different time period may be used if approved by the department. Nonpoint source baselines for agricultural, industrial, urban and residential stormwater runoff must use meteorological data for the prior 10-years or period of record, whichever is longer. Quantification procedures established by an applicable requirement must be used if they are available.

The point source baseline is the actual discharge level that complies with the most protective applicable requirement. This prevents credits being created by the issuance of a permit and requires a period of operation to establish the level of control achieved by proper operation and maintenance. The point source baseline equation is B (Baseline)= F (Flow) x C (Concentration) x K (a unit conversion factor of 8.346). The baseline for permitted stormwater sources with numerical limits is calculated using the same equation.

The baseline for permitted stormwater sources for which a numerical limit has not been established is the pollutant-specific loading reduction achieved through complete implementation of the management practices specified by a permit. This baseline is calculated by determining a pollutant-specific loading factor for each land use in a watershed and multiplying it by the average annual surface runoff for each land use times the number of acres for each land use. The baseline is the sum of the pollutant loadings from each area.

Sources of stormwater runoff that are not required to be permitted may subject to other applicable requirements (TMDL, RAP, LaMP or WSMP) or they may be completely unregulated. The baselines for unpermitted sources of stormwater that are not regulated are the pollutant-specific loading associated with existing land uses and any existing management practices. Changes in land use and the implementation of additional management practices can generate credits. The baseline for regulated nonpoint stormwater sources is the level of control required by the most protective applicable requirement. The baselines for all stormwater sources that are not permitted are calculated by using the same equations that are used for permitted stormwater sources that are controlled by management practices.

The baseline for regulated agricultural operations is the pollutant loading achieved after the implementation of management practices specified by a regulation or the cap and loading allocation specified in a TMDL, RAP, LaMP or a WSMP approved for trading by the department. The baseline for unregulated agricultural operations is the pollutant loading associated with existing operations. The baseline must be established in a plan prepared by a certified planner under the United States Department of Agriculture, Natural Resource Conservation Service (NRCS). The plan documents existing operations and management practices, calculates baseline loadings, recommends operational changes and management practices and estimates reduced loadings. Once the plan has been prepared the grower or producer has the option to implement any of the management practices in the plan. The methods and procedures used to quantify sediment, sediment-borne phosphorus, sediment-borne nitrogen and animal feedlot runoff are specified in "Pollutants Controlled Calculation and Documentation" (MDEQ 1999). The department must approve methods and procedures for commercial fertilizer and manure runoff.Credits Generated. Point source discharge reductions or nonpoint source loading reductions that result after controls or management practices have been implemented are subtracted from the point source or nonpoint source baseline to determine the reduced discharge level for point source or the reduced loading level for nonpoint sources. Each point source is required to contribute 10% of its discharge reduction to provide a direct water quality benefit. The total number of credits that are generated and may be registered by the point source is equal to the reduced discharge level minus 10% of the discharge reductions. Nonpoint sources must contribute 50% of all loading reductions made to generate credits. The department does not certify credits that are generated and registered by point or nonpoint sources.Discount Factors. Discount factors are applied to the use of credits to provide an additional margin of safety and water quality benefit. A quantity of credits 10% greater than necessary to meet a water quality-based effluent limitation is required where an impoundment is located between the sources that generate and use credits and where pre-TMDL trading occurs in impaired waters. The department may establish different discount factors to assure that water quality standards are not violated.Banking. Banking of nutrient credits is allowed to encourage early reductions. They have a 5-year credit life from the date of generation. Point and nonpoint source reductions made after the date a regulation is proposed but before the date by which final compliance must be attained can also be banked. They may be used for a period of 5 calendar years after they are generated or 1 year after the final compliance date, whichever occurs first. The use of banked nutrient credits is subject to trade-specific approvals and conditions as necessary to protect water quality. All banked nutrient credits that are not used are retired to provide a water quality benefit. Notice Requirements. Notices of credit generation and use certified by a responsible official are required for all trades. They may be submitted by mail or electronically. The department must review all notices for completeness within 30 days. Administrative reviews for completeness may lead to more detailed technical reviews if the department determines that additional information is needed to verify credit generation or that the proposed use of credits is consistent with the rules and water quality standards. Department determinations are final and subject to judicial review.

The point and nonpoint source operational changes and management practices specified in notices of generation are legally enforceable on the date that the department issues a determination of completeness. For point sources this constitutes a permit modification by rule. For nonpoint sources this establishes direct accountability under the rules. Rule violations are enforceable under Part 31 of Public Act 451 of 1994.

The use of credits specified by notice also becomes legally enforceable when the department determines the notice is complete. For point sources this constitutes a permit modification by rule. The department is prohibited from approving a notice of use that is inconsistent with the rules or water quality standards. Sources that generate and use credits are required to submit compliance reports. Point sources will use discharge monitoring reports. Nonpoint sources may use forms provided by the department.Registry. The department must establish and maintain a water quality trading registry to record and monitor all trading activity. The department must make registry information electronically available to the public. This will allow potential traders and citizens to evaluate trading opportunities and track the generation and use of credits from cradle to grave. The registry will provide real time information and discharge/loading data for all sources that trade, descriptions of how credits are generated and used, and the type and quantity of credits traded and retired in each watershed where trading occurs. The department must enter the information in the notices of generation and use in the registry within 5 days of making a completeness determination, and update it daily. A 10-day period is provided for sources to identify and correct any data entry errors.Watershed Plans. Local watershed management plans approved by the department can be used for trading. The plans would establish where trading may occur, the pollutants to be traded and the baselines (caps and allocations) for point and nonpoint sources that trade. Trading must be consistent with plans that have been approved by the department.

Plans approved by the department for TMDL, RAP or LaMP implementation, Clean Water Act 319 projects, permitted watershed-based stormwater management programs and stormwater pollution prevention initiatives, and nonpoint source watershed management plans developed under the Clean Michigan Initiative, Public Act 287 of 1998 may be used for trading. They must include, or be amended to include a statement of purpose, a delineation of the trading area, a pollutant-specific cap and loading allocations for all sources that may trade; and, a demonstration that the use of credits would be consistent with the state's antidegradation regulations.

In addition to using existing plans, the rules allow any 'person' to develop a comprehensive watershed management plan that would improve water quality, encourage environmentally sound land use practices, create parks and natural areas; or, establish other programs consistent with water quality standards. These plans must include a process for public involvement, written agreement from each person or source included in the plan and all other approvals required by law. The department must public notice each plan prior to approval or disapproval. Action by the department is final and subject to judicial review. Plans approved by the department are effective for a period of up to 5 years and are binding on the department and the parties thereto.Program Evaluations. The department is required to conduct periodic program evaluations every 5 years to assess the environmental and economic performance of the program. The department must conduct ambient monitoring to assess water quality and quantify actual nonpoint source loading reductions. The department must also determine whether trading has been consistent with water quality standards, there has been a net loading reduction between sources that trade, there have been any localized adverse effects, and if the program has achieved a sufficient level of accountability and compliance. Transaction costs and agency costs for administration of the program must be documented and the department may conduct a comparision of the cost of reducing pollutant loadings through trading to achieving equivalent reductions without trading where adequate information is available. A report of the departments findings must be public noticed with an opportunity for a hearing. After public notice, comment and opportunity for hearing, the department may modify the program as necessary to achieve the stated purposes of the program.Compliance and Enforcement. The rules establish a dual liability scheme. A person or source that uses credits is solely responsible for complying with all discharge standards and limitations. A person or source that generates credits is strictly liable for assuring that reductions are real, surplus, quantifiable and equal to the number credits that are registered. This creates an incentive for users of credits to exercise care when purchasing credits, to purchase extra credits as insurance and to obtain credits from more than one source.

Credit generators are subject to 'treble damages' if they register invalid credits that are used and later discovered by the department. The generator must obtain and donate three times the amount of bad or insufficient credits. These credits are retired to benefit water quality. The treble damage provision is supplemental to enforcement remedies established in Part 31 of Public Act 451 of 1994. A reconciliation true-up period of 30 days is provided a person or source that discovers and provides notice of insufficient credits without receiving notice from the department. The rules also establish a 90-day reconciliation true-up period for a source that uses credits that are not to be real, surplus, quantifiable or sufficient.

In any enforcement actions initiated by the department under the rules, a person or source that generates credits will have the burden of proof that the reductions generated and credits registered are real, surplus, quantifiable and sufficient. A person that uses credits will have the burden of proof of due diligence to comply with discharge standards and limits and the trading rules.Citizen Petitions. Citizens may petition the department seeking enforcement action to enjoin, abate or correct a violation of the trading program rules. The petition must be submitted by certified mail and include the name, location and description of the source and alleged violation, a reference to applicable rules and the corrective action desired. The department must acknowledge receipt and provide a copy of the petition to the person or source named in the petition within 10 days. Within 30 days, the department must initiate appropriate enforcement action, provide a schedule for taking enforcement or provide an explanation of why enforcement is not appropriate or has not been taken. The petitioner may file a contested case hearing or initiate a civil action in a court of competent jurisdiction if the department's is not timely or the petitioner is not satisfied by the enforcement action taken or the explanation why enforcement has not been taken.

Related Links:

• Draft 20 Rules
• Rule Index
• Program Description/Rules Reference