[Federal Register: March 28, 2006 (Volume 71, Number 59)]
[Proposed Rules]
[Page 15519-15556]
[DOCID:fr28mr06-16]

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Part II

Department of Defense

Department of the Army, Corps of Engineers

33 CFR Parts 325 and 332

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Environmental Protection Agency

40 CFR Part 230

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Compensatory Mitigation for Losses of Aquatic Resources; Proposed Rule

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DEPARTMENT OF DEFENSE

Department of the Army, Corps of Engineers

33 CFR Parts 325 and 332

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 230

[EPA-HQ-OW-2006-0020]
RIN 0710-AA55

Compensatory Mitigation for Losses of Aquatic Resources

AGENCIES: U.S. Army Corps of Engineers, DoD; and Environmental
Protection Agency.

ACTION: Proposed rule.

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SUMMARY: The U.S. Army Corps of Engineers (the Corps) and the
Environmental Protection Agency (EPA) are proposing to revise
regulations governing compensatory mitigation for activities authorized
by permits issued by the Department of the Army. The proposed
regulations are intended to establish performance standards and
criteria for the use of permittee-responsible compensatory mitigation
and mitigation banks, and to improve the quality and success of
compensatory mitigation projects for activities authorized by
Department of the Army permits. The proposed regulations are also
intended to account for regional variations in aquatic resource types,
functions, and values, and apply equivalent standards to each type of
compensatory mitigation to the maximum extent practicable. The proposed
rule includes a watershed approach to improve the quality and success
of compensatory mitigation projects in replacing losses of aquatic
resource functions, services, and values resulting from activities
authorized by Department of the Army permits. We are proposing to
require in-lieu fee programs, after a five-year transition period, to
meet the same standards as mitigation banks.

DATES: Submit comments on or before May 30, 2006.

ADDRESSES: You may submit comments, identified by docket number EPA-HQ-
OW-2006-0020 and/or RIN 0710-AA55, by any of the following methods:
     Federal eRulemaking Portal (recommended method of comment
submission): http://www.regulations.gov. Follow the on-line

instructions for submitting comments.
     E-mail<EMAIL_ADDRESS>Include the docket
number, EPA-HQ-OW-2006-0020, and/or the RIN number, 0710-AA55, in the
subject line of the message.
     Mail: USEPA Docket Center, Attention Docket Number EPA-HQ-
OW-2006-0020, 1200 Pennsylvania Ave., NW., Washington, DC 20460.
     Hand Delivery: USEPA Docket Center, Room B102, EPA West,
Attention Docket Number EPA-HQ-OW-2006-0020, 1301 Constitution Ave.,
NW., Washington, DC 20460. Such deliveries are only accepted during the
Docket's normal hours of operation, and special arrangements should be
made for deliveries of boxed information.
    Instructions: Direct your comments to docket number EPA-HQ-OW-2006-
0020 and/or RIN 0710-AA55. All comments received will be included in
the public docket without change and may be made available on-line at
http://www.regulations.gov, including any personal information

provided, unless the commenter indicates that the comment includes
information claimed to be Confidential Business Information (CBI) or
other information whose disclosure is restricted by statute. Do not
submit information that you consider to be CBI, or otherwise protected,
through http://www.regulations.gov or e-mail. The www.regulations.gov Web site

is an anonymous access system, which means we will not know your
identity or contact information unless you provide it in the body of
your comment. If you send an e-mail directly to EPA without going
through http://www.regulations.gov, your e-mail address will be automatically

captured and included as part of the comment that is placed in the
public docket and made available on the Internet. If you submit an
electronic comment, we recommend that you include your name and other
contact information in the body of your comment and with any disk or
CD-ROM you submit. If we cannot read your comment because of technical
difficulties and cannot contact you for clarification, we may not be
able to consider your comment. Electronic comments should avoid the use
of any special characters, any form of encryption, and be free of any
defects or viruses. For additional information about EPA's public
docket visit the EPA Docket Center homepage at http://www.epa.gov/epahome/dockets.htm
.

    Docket: For access to the docket to read background documents or
comments received, go to http://www.regulations.gov. All documents in the

docket are listed. Although listed in the index, some information is
not publicly available, such as CBI or other information whose
disclosure is restricted by statute. Certain other material, such as
copyrighted material, is not placed on the Internet and will be
publicly available only in hard copy form. Publicly available docket
materials are available either electronically in http://www.regulations.gov or

in hard copy at the Water Docket, EPA/DC, EPA West, Room B102, 1301
Constitution Ave., NW., Washington, DC. The Public Reading Room is open
from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal
holidays. The telephone number for the Public Reading Room is (202)
566-1744, and the telephone number for the Water Docket is (202) 566-
2426.
    Consideration will be given to all comments received within 60 days
of the date of publication of this notice.

FOR FURTHER INFORMATION CONTACT: Mr. David Olson at<PHONE_NUMBER> or by
e-mail at<EMAIL_ADDRESS>or Mr. Palmer Hough at 202-566-
8323 or by e-mail at<EMAIL_ADDRESS>Information can also be
found at the EPA compensatory mitigation webpage at: http://www.epa.gov/wetlandsmitigation
.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 314 of the National Defense Authorization Act for Fiscal
Year 2004 (Pub. L. 108-136) requires the Secretary of the Army, acting
through the Chief of Engineers, to issue regulations ``establishing
performance standards and criteria for the use, consistent with section
404 of the Federal Water Pollution Control Act (33 U.S.C. 1344), of on-
site, off-site, and in-lieu fee mitigation and mitigation banking as
compensation for lost wetlands functions in permits issued by the
Secretary of the Army under such section.''
    The statute states that the regulation should address wetlands
compensatory mitigation. However, we believe that this regulation
should apply to compensatory mitigation for all types of aquatic
resources that can be impacted by activities authorized by Department
of the Army permits, including streams and other open waters. We also
believe that this regulation should apply to compensatory mitigation
required for activities in navigable waters of the United States that
are subject to regulatory jurisdiction under Sections 9 and 10 of the
Rivers and Harbors Act of 1899. We believe this approach does not
conflict with the intent of the statute, and will provide the regulated
public with clear national standards and requirements for all aquatic
resource compensatory mitigation required by Department of the Army
permits, while

allowing district engineers flexibility to address permit-specific
situations. We also believe this approach will enhance regulatory
efficiency and improve protection of the aquatic environment.
    The statute states that the regulation should be developed by the
Department of the Army, with the provision that the standards and
criteria developed be consistent with Section 404 of the Clean Water
Act. We believe that the goals of the Clean Water Act and the Defense
Authorization Act will be more effectively met if this proposed rule is
issued jointly by the Corps and EPA. A jointly-issued proposed rule
reflects the important roles played by both agencies in the Section 404
program, in which the permit program is administered by the Corps,
while the responsibility for developing the regulations providing the
environmental criteria for permit issuance is given to EPA. Since the
proposed rule is in part a clarification of EPA regulations concerning
Section 404 mitigation, a joint rule helps to ensure maximum
consistency in the implementation of the section 404 regulatory
program. Furthermore, CWA Section 501(a) authorizes EPA to conduct any
rulemaking necessary to carry out EPA's functions under the Clean Water
Act.
    Joint issuance also provides basic regulatory consistency.
Environmental criteria for the selection of disposal sites for
discharges of dredged or fill material are set by EPA regulations at 40
CFR part 230, and referenced by Corps regulations at 33 CFR part 320.
Since the proposed rule is in part a clarification of EPA's regulations
at 40 CFR part 230, EPA must add the proposed rule text to its existing
regulations in order to maintain consistency between the two linked
Parts of the CFR. Making the two agencies' additions concurrent will
avoid any confusion on the part of the regulated community and the
public. Moreover, the history of a joint EPA/Corps relationship on
mitigation issues is long. All national guidance on compensatory
mitigation has been developed and issued jointly by the Corps and EPA,
including Regulatory Guidance Letter 02-02 (issued on December 24,
2002); the ``Federal Guidance for the Establishment, Use, and Operation
of Mitigation Banks'' (as published in the November 27, 1995, issue of
the Federal Register, 60 FR 58605); the ``Federal Guidance on the Use
of In-Lieu Fee Arrangements for Compensatory Mitigation Under Section
404 of the Clean Water Act and Section 10 of the Rivers and Harbors
Act'' (as published in the November 7, 2000, issue of the Federal
Register, 65 FR 66914); and the ``Memorandum of Agreement Between the
Environmental Protection Agency and the Department of the Army
Concerning the Determination of Mitigation Under the Clean Water Act
Section 404(b)(1) Guidelines'' (issued on February 6, 1990).
    We also believe the proposed rule establishes, to an extent that is
feasible and practical, equivalent standards for all forms of
compensatory mitigation, given the basic differences between the
current mechanisms for providing compensatory mitigation (i.e.,
permittee-responsible mitigation, mitigation banks, and in-lieu fee
programs). In many cases, it is not practical to impose all the same
requirements on permittee-responsible mitigation projects as on
mitigation banks, so some differences in the requirements for these
types of mitigation remain. However, we are proposing to require in-
lieu fee program sponsors to modify their programs within five years to
comply with the same standards and requirements as mitigation banks, to
provide greater assurances that compensatory mitigation projects
undertaken by in-lieu fee programs will successfully replace lost
aquatic resource functions and services. We are also seeking comment on
alternative approaches that would retain in-lieu fee programs as a
separate category of mitigation with somewhat different requirements.
These alternatives are explained in further detail in Section VI of
this preamble.
    By establishing, to the maximum extent practicable, equivalent
standards for all forms of compensatory mitigation, we believe success
rates of compensatory mitigation projects will improve, and
entrepreneurs and others will be encouraged to develop mitigation
banks. Improving the processes applicable to the development and
approval of mitigation banks is expected to result in more mitigation
banking proposals, which would provide more compensatory mitigation in
advance of authorized impacts to waters of the United States.
    The proposed rule does not apply to compensatory mitigation that
may be required for impacts other than to aquatic resources resulting
from activities authorized by DA permits, such as impacts to historic
properties. Under appropriate circumstances, a DA permit may require
compensatory mitigation measures to ensure compliance with the
Endangered Species Act or the National Historic Preservation Act, or to
address some other public interest requirement. Those compensatory
mitigation requirements are addressed through other regulations and
authorities.
    During the development of the proposed rule, we considered the
following compensatory mitigation guidance documents and lessons
learned from their implementation: Regulatory Guidance Letter 02-02
(issued on December 24, 2002); the ``Federal Guidance for the
Establishment, Use, and Operation of Mitigation Banks'' (as published
in the November 27, 1995, issue of the Federal Register, 60 FR 58605);
the ``Federal Guidance on the Use of In-Lieu Fee Arrangements for
Compensatory Mitigation Under Section 404 of the Clean Water Act and
Section 10 of the Rivers and Harbors Act'' (as published in the
November 7, 2000, issue of the Federal Register, 65 FR 66914); and the
``Memorandum of Agreement Between the Environmental Protection Agency
and the Department of the Army Concerning the Determination of
Mitigation Under the Clean Water Act Section 404(b)(1) Guidelines''
(issued on February 6, 1990).
    In preparing the proposed rule, we considered the findings and
recommendations in the National Research Council's report issued in
2001 entitled ``Compensating for Wetland Losses Under the Clean Water
Act'' (NRC Report). We also contemplated other studies and documents
cited in the draft Environmental Assessment/Regulatory Analysis that
was prepared by the Corps for this proposed rule. The Environmental
Assessment/Regulatory Analysis is available at the Corps Headquarters
Regulatory Home page at: http://www.usace.army.mil/inet/functions/cw/cecwo/reg/citizen.htm.
 Hard copies of this document can be obtained by

contacting Corps Headquarters at the phone number provided in the FOR
FURTHER INFORMATION CONTACT section, above.
    The proposed rule incorporates many of the recommendations
suggested in the NRC Report to improve the ecological success and
sustainability of wetland compensatory mitigation projects. Through the
standards and requirements in this proposed rule, we intend to improve
the quality and success of aquatic resource restoration, establishment,
enhancement, and preservation activities used to provide compensatory
mitigation for DA permits, and to help maintain and improve the aquatic
environment within watersheds.
    In the NRC Report, the committee concluded that a watershed
approach would improve permit decision making, and stated that wetland
functions must

be understood from a watershed perspective to fulfill the objectives of
the Clean Water Act. The committee noted that an automatic preference
for in-kind and on-site compensatory mitigation is inconsistent with a
watershed approach since there are circumstances in which on-site or
in-kind mitigation is neither practicable nor environmentally
preferable. In addition, the committee suggested using an analytical
process for assessing wetland needs within a watershed and the
potential for compensatory mitigation projects to persist over time.
    In the proposed rule, we revise compensatory mitigation policies
and procedures to conform with current principles of ecological
restoration and landscape ecology. The proposed rule also aims to
reduce regulatory burdens on mitigation bank sponsors by making the
mitigation bank approval process more efficient through changes in the
review and approval process.
    The proposed rule also complements the Corps' and EPA's ongoing
efforts to implement the National Wetlands Mitigation Action Plan
(NWMAP). In response to the NRC report and other independent critiques
of the effectiveness of compensatory mitigation for authorized losses
of wetlands and other aquatic resources under Section 404 of the Clean
Water Act, the Corps, EPA, and the Departments of Agriculture,
Commerce, Interior, and Transportation released the NWMAP on December
26, 2002. The NWMAP includes 17 tasks designed to improve the
ecological performance and results of compensatory mitigation. Thus
far, eight of the tasks called for in the NWMAP have been completed and
work continues on efforts to improve wetland impact and mitigation data
collection and tracking. However, work on the remaining guidance
documents called for in the NWMAP awaits finalization of this proposed
rule.
    The proposed rule is consistent with Executive Order 13352,
Facilitation of Cooperative Conservation. The proposed rule includes
collaborative approaches to decision-making for compensatory mitigation
required by DA permits consistent with the definition of cooperative
conservation in the Order. The provisions of the rule will ensure that
determinations regarding compensatory mitigation requirements take into
account the interests of landowners and other legally recognized
interests in land and other natural resources, and accommodate agency
and local participation in federal decision-making.

II. General Principles in the Proposed Rule

    For the purposes of the Corps Regulatory Program, compensatory
mitigation is used to replace aquatic resource functions, services, and
values that are lost to permitted impacts. Compensatory mitigation for
losses of aquatic resources can help sustain or improve watershed
functioning, and support the objective of the Clean Water Act, which is
to ``restore and maintain the chemical, physical, and biological
integrity of the Nation's waters'' (33 U.S.C. 1251(a)). One intent of
the proposed rule is to improve the quality of compensatory mitigation
for DA permits, to satisfy the objective of the Clean Water Act by
improving the performance of compensatory mitigation projects in
replacing aquatic resource functions, services, and values. Another
intent of the proposed rule is to improve regulatory efficiency,
especially for the review, approval, and implementation of mitigation
banks. Finally, the proposed rule fulfills the mandate to ensure
opportunities for federal agency participation in mitigation banking.
    In addition to supporting the objective of the Clean Water Act, the
proposed rule will support the ``no overall net loss'' goal for wetland
acreage and functions, through appropriate site selection for wetlands
compensatory mitigation projects. Locating compensatory mitigation
projects where they will provide the desired habitat type and functions
to appropriately offset impacts will support the ``no overall net
loss'' goal for wetland acreage and function.
    The proposed rule does not alter Corps regulations which address
the general mitigation requirements for DA permits. In particular, it
does not alter the circumstances under which compensatory mitigation is
required. Also, the proposed rule does not alter Corps or EPA
enforcement authorities for the section 404 program, as specified in
sections 301(a), 308, 309, 404(n), and 404(s) of the Clean Water Act.
    Site selection is a critical planning step for compensatory
mitigation projects, and the watershed approach in the proposed rule is
intended to focus on choosing appropriate locations for compensatory
mitigation activities. Restoring or establishing a specific aquatic
habitat type, such as a wetland, requires careful site selection for
two primary reasons. First, development activities may alter the
interaction between hydrology, soils, and organisms within a landscape,
affecting the type of habitat that can be supported by the project
site. For example, forested wetlands require narrow hydrologic regimes
because many tree species cannot tolerate long periods of inundation.
Development activities may change local hydrology, resulting in new
patterns of inundation and saturation that cannot support forested
wetlands. Therefore, it is important to find a compensatory mitigation
project site that will support the appropriate hydrology for the
desired type of wetland habitat. Second, even if the desired habitat
type can be restored or established at that site, surrounding
development may result in an isolated or fragmented habitat that is
less capable of supporting viable populations of species of import.
Motile species require corridors to move between different habitats in
the landscape, and if the surrounding area is occupied by roads and
buildings, the ability of many species to move between habitats and
interact with each other is restricted. Therefore, compensatory
mitigation projects, especially those that are intended to replace
wetland habitat, need to be planned within larger landscape contexts,
such as watersheds. In its report on wetland compensatory mitigation,
the NRC stated that ``[l]andscape position, hydrologic variability,
species richness, biological dynamics, and hydrologic regime are all
important factors that affect wetland restoration.''
    For activities authorized by DA permits in coastal and urban areas,
compensatory mitigation required by district engineers will be located
in areas where it is appropriate and practicable to conduct aquatic
resource restoration, establishment, and enhancement activities. It is
important that coastal and other urban areas do not become devoid of
aquatic resources simply because it is more difficult to successfully
restore or establish aquatic habitat in developing areas. In some
cases, however, preservation may be the most appropriate form of
compensatory mitigation in coastal and urban areas. In addition to
providing important ecological functions, wetlands and other aquatic
resources also perform important services, such as wildlife viewing and
education, that can only be accomplished when people have opportunities
to interact with those aquatic resources. The functions and services
that aquatic resources perform in turn provide the basis for the values
that society derives from them. These include use values, such as
recreation, and non-use values such as biodiversity and stewardship for
future generations. Aquatic resource functions, services, and values
should be considered when

evaluating sites in developed areas as options for providing
compensatory mitigation. Mitigation projects for impacts authorized by
DA permits should compensate for lost functions and services. While
values are also considered as part of the public interest review, it is
not always possible to fully compensate for lost values, as these are
often dependent on proximity to population centers. Replacing aquatic
resources at more remote locations may enhance some values (e.g.,
preservation of species) while decreasing others (e.g., recreational
enjoyment).
    Within a watershed context, it may be more appropriate to replace
certain aquatic resource functions on-site, whereas it may be more
appropriate to replace other functions off-site. For example, it may be
environmentally preferable, to replace hydrologic and water quality
functions at the impact site with a mitigation project that performs
these functions, and to replace habitat functions at an off-site
location, such as a mitigation bank or a compensatory mitigation
project site near a park or nature reserve.
    Through the watershed approach in the proposed rule, we intend to
improve environmental outcomes of compensatory mitigation required for
DA permits, including the effectiveness of compensatory mitigation in
replacing impacted aquatic resource functions. The watershed approach
uses a landscape perspective that places primary emphasis on site
selection, through consideration of landscape attributes that will help
provide the desired aquatic resource types and ensure they are self-
sustaining. The watershed approach also considers how other landscape
elements (e.g., other natural resources and developments) interact with
compensatory mitigation project sites and affect the functions they are
intended to provide.
    In the proposed rule, the district engineer determines whether the
compensatory mitigation option or proposal submitted by the permit
applicant is adequate to offset unavoidable impacts, based on what is
practicable and what will appropriately compensate for the aquatic
resource functions and services that will be impacted as a result of
the permitted activity. In pre-application consultation, the Corps may
also provide information on existing watershed plans or watershed
needs.
    The proposed rule also establishes that the district engineer makes
decisions regarding the approval of mitigation banking instruments,
after coordinating a review of the prospectus for the proposed
mitigation bank and the draft mitigation banking instrument with an
Interagency Review Team (IRT). We are proposing to establish clearly
defined time frames for this review and a dispute resolution process
whereby members of the IRT can expeditiously elevate issues associated
with proposed mitigation banks for higher level review where necessary.

III. Watershed Approach

    In the NRC Report, the committee recommended that the Corps adopt a
watershed-based approach to compensatory mitigation. The committee
stated that the ecological functions of a restored or established
wetland are dependent on its design and its setting or context within a
watershed. The committee also said that the types and locations of
wetlands in the landscape are important for providing desired
functions.
    Ideally, the watershed approach is based on a formal watershed
plan, developed by Federal, state, and/or local environmental managers
in consultation with affected stakeholders. Currently, there are many
areas where no watershed plan exists. The Corps and EPA are committed
to working with our counterparts at other levels of government to
develop watershed plans, especially for areas facing significant
development pressure. In the meantime, the watershed approach described
in the NRC Report does not require a formal watershed plan. Instead,
the watershed approach may be based on a structured consideration of
watershed needs and how wetland types in specific locations can fulfill
those needs.
    The use of a watershed approach is based on analysis of information
regarding watershed conditions and needs. Where an applicable watershed
plan exists, such information will generally already have been
considered in the development of the plan. Where no such plan exists,
project sponsors may propose compensatory mitigation based on the
watershed approach using appropriate information from other sources.
Such information includes: Current trends in habitat loss or
conversion, cumulative impacts of past development activities, current
development trends, the presence and needs of sensitive species, site
conditions that favor or hinder the success of mitigation projects,
chronic environmental problems such as flooding or poor water quality,
and local watershed goals and priorities. Project sponsors should make
a reasonable effort, commensurate with the scope and scale of the
project and impacts, to obtain as much of this information as possible
as they design the compensatory mitigation projects. Project sponsors
may consult with the Corps to see if such information has been
developed in the past in association with other projects in the
watershed. For smaller projects requiring DA authorization, all of the
types of information listed above may not be available, but that
information should generally be available (or developed) for larger
projects.
    The agencies request comment on whether the rule should specify
minimal information requirements for use of the watershed approach.
Commenters should bear in mind that specifying minimum information
requirements will likely limit the areas where a watershed approach can
be used, at least in the medium term, as much of the above information
is currently not available for many areas. This problem was recognized
by the NRC, which recommended that in such situations watershed based
decision-making should rely on the scientific expertise of wetlands
program staff (i.e., Corps permit writers and other Federal agency
review staff) and broad-based stakeholder participation. As discussed
below, the proposed rule includes a requirement that information on how
a prospective permittee plans to address avoidance, minimization, and
compensatory mitigation requirements be included in the permit
application and published by the Corps in the public notice for the
permit application. This requirement is intended to promote the kind of
broad-based stakeholder involvement in watershed based mitigation
decisions envisioned by the NRC Report.
    A watershed approach to compensatory mitigation involves a regional
or landscape perspective, and should involve consideration of Federal,
Tribal, state, community, and private interests, including the
requirements of other programs and objectives, such as habitat
conservation, storm water management, flood control, pollution
prevention, and economic development when determining compensatory
mitigation requirements for DA permits.
    The agencies note that the term ``watershed approach'' is now used
by a variety of Federal, State, and local agencies, as well as by
private parties, but a consensus definition of this term has not yet
emerged. The watershed approach presented in this proposed rule is a
framework being proposed for use in determining compensatory mitigation
requirements for DA permits. The watershed approach described in the
proposed rule does not supersede or replace other uses of the term
``watershed approach'' in natural

resource management programs conducted by other government agencies. We
are soliciting comments on whether, and if so, how, the watershed
approach in the proposed rule differs from the watershed approaches
used in other natural resource management programs, and how any such
differences may affect implementation of the watershed approach for
determining compensatory mitigation requirements for DA permits.
    The watershed approach in the proposed rule will be implemented by
district engineers with available information to determine the types
and locations of compensatory mitigation activities that would best
serve the watershed. Available information used by district engineers
includes current trends in habitat loss or conversion, cumulative
impacts of past development activities, current development trends, the
presence and needs of sensitive species, site conditions that favor or
hinder the success of mitigation projects, chronic environmental
problems such as flooding or poor water quality, local watershed goals
and priorities, assessments of watershed conditions, best professional
judgment, and site conditions, as well as other relevant data.
    The watershed approach in the proposed rule will help support the
objective of Clean Water Act, and is intended to result in more
effective replacement of aquatic resource functions impacted by
activities authorized by DA permits. The level of detail used in the
watershed approach for a specific activity is dependent on the
availability of information and on the scope and scale of that
activity.

IV. Organization of the Proposed Rule

    The proposed compensatory mitigation regulation in 33 CFR part 332
[40 CFR part 230], is organized into the following sections:
    Section 332.1 [230.91], Purpose and general considerations,
describes the basic purpose of the proposed rule and general principles
concerning compensatory mitigation.
    Section 332.2 [230.92], Definitions, provides definitions of
important terms relating to compensatory mitigation and the Corps
Regulatory Program.
    Section 332.3 [230.93], General compensatory mitigation
requirements, describes general compensatory mitigation requirements
for DA permits, including permit conditions and financial assurances.
This section also describes the watershed approach to compensatory
mitigation.
    Section 332.4 [230.94], Planning and documentation, describes the
review of proposed compensatory mitigation activities, as well as
requirements for mitigation plans.
    Section 332.5 [230.95], Ecological performance standards, describes
principles for establishing ecological performance standards for
compensatory mitigation projects.
    Section 332.6 [230.96], Monitoring, describes general requirements
for monitoring compensatory mitigation projects.
    Section 332.7 [230.97], Management, describes general requirements
for site protection, sustainability, adaptive management, and long-term
management of compensatory mitigation projects.
    Section 332.8 [230.98], Mitigation banks, provides requirements and
standards that are applicable to mitigation banks.
    Section 332.9 [230.99], In-lieu fee programs, establishes deadlines
for existing in-lieu fee programs to modify their current agreements to
comply with the requirements of this rule.
    It is important to note that Sec. Sec.  332.1 to 332.7 apply to all
new compensatory mitigation projects, including mitigation banks, while
Sec. Sec.  332.8 and 332.9 contain special provisions for new
mitigation banks and existing in-lieu fee programs, respectively.
Existing mitigation banks may continue operating under the terms of
their approved instruments, but any modifications to such instruments,
including the addition of new sites for umbrella instruments, would be
subject to the requirements in this rule. New in-lieu-fee programs
would not be approved once the rule goes into effect. Existing in-lieu-
fee programs may continue to operate under the terms of their approved
instrument for up to five years after the effective date of the rule.

V. Discussion of Specific Sections of the Proposed Rule

    The proposed rule is presented in two parallel sections: changes to
Corps regulation in 33 CFR and changes to EPA regulation in 40 CFR. The
two sections are almost entirely the same, with minor exceptions. These
include: (1) Corps changes to permit application requirements at 33 CFR
325.1; (2) Conforming changes to EPA's existing mitigation regulations
at 40 CFR part 230, making appropriate citations for the addition of
new Sec. Sec.  230.91 through 230.99; and (3) References to the Rivers
and Harbors Act of 1899, in which the EPA does not have a regulatory
role, have been omitted from the text in part 230.

33 CFR 325.1 Application for Permits

    Since Sec.  332.4(b)(1) of the proposed rule requires applicants
for standard section 404 permits to submit a statement explaining how
impacts to waters of the United States are to be avoided, minimized,
and compensated, we are also proposing to modify Sec.  325.1(d) by
adding a new paragraph (paragraph (d)(7)). This new paragraph would
further clarify the information required for a complete standard permit
application for activities that involve discharges of dredged or fill
material into waters of the United States, so that we can describe the
proposed avoidance, minimization, and compensation in the public
notice. The remaining paragraphs in this section would be renumbered,
but the text of those paragraphs would remain the same.

40 CFR 230.12 Findings of Compliance or Non-Compliance With the
Restrictions on Discharge

    Section 230.12(a)(2) specifies that permits may only be issued if
certain conditions are met that avoid, minimize, and compensate for
impacts to aquatic resources. The proposed change would indicate that
requirements for compensation for impacts can be found in Subpart J as
well as Subpart H.

40 CFR Part 230 Subpart H--Actions To Minimize Adverse Effects

    We propose to add a sentence to the introductory ``Note'' of
Subpart H indicating that Subpart J also contains requirements
regarding compensating for impacts to aquatic resources. At Sec.
230.75(d), we propose to add a similar reference to Subpart J following
the second sentence of the paragraph.
    Other than the inclusion of the citations described above noting
the addition of Subpart J, we are not seeking comment on the existing
text or provisions in Subparts B or H.

33 CFR 332.1 and 40 CFR 230.91 Purpose and General Considerations

    The proposed rule will not alter the circumstances under which the
district engineers require compensatory mitigation. In other words, the
threshold for determining when compensatory mitigation is required for
a particular activity that needs a DA permit is unchanged by the
proposed rule. For example, district engineers will continue to use the
criteria at 33 CFR 320.4(r) and 33 CFR 330.1(e)(3) to determine when
compensatory mitigation should be required. The proposed rule will not
increase compensatory mitigation requirements, but it focuses instead
on where and how

compensatory mitigation will be provided.
    The proposed rule also does not affect regulatory jurisdiction
under Section 404 of the Clean Water Act or Sections 9 and 10 of the
Rivers and Harbors Act of 1899. However, areas not subject to
regulatory jurisdiction under these statutes may be used as
compensatory mitigation, if the creation, restoration, enhancement, or
preservation of aquatic resources in those areas will compensate for
ecosystem functions lost at the impact site.

33 CFR 332.2 and 40 CFR 230.92 Definitions

    The definitions provided in this section of the draft rule are
intended to provide clarity to the regulated public, and promote
consistency in the implementation of this rule. The definitions were
adapted from several sources, including the Federal guidance documents
listed in the ``Background'' section in this preamble.
    We are proposing a definition of the term ``adaptive management''
as follows. Adaptive management means the development of a management
strategy that anticipates the challenges associated with likely future
impacts to the aquatic resource functions of the mitigation site. It
acknowledges the risk and uncertainty of compensatory mitigation
projects and allows modification of those projects to optimize
performance. The process will provide guidance on the selection of
appropriate remedial measures that will ensure the continued adequate
provision of aquatic resource function and involves analysis of
monitoring results to identify potential problems of a compensatory
project and identification of measures to rectify those problems.
    In the September 2003 report of the National Environmental Policy
Act (NEPA) Task Force, which is entitled ``Modernizing NEPA
Implementation,'' the NEPA Task Force recommended that the NEPA
workgroup consider establishing a definition of adaptive management
that would be promulgated in the NEPA regulations at 40 CFR part 1508.
If a definition of ``adaptive management'' is promulgated by the
Council on Environmental Quality (CEQ), we will evaluate our proposed
definition of this term to determine if any changes are necessary to
conform with CEQ's final definition. If such changes are necessary, we
will propose those changes in a future Federal Register notice.
    In the proposed definitions of ``on-site,'' we are proposing to add
the phrase ``or near'' after the phrase ``parcel of land contiguous
to'' to include lands near the impact site as ``on-site'' lands. We are
also proposing a corresponding change to the definition of ``off-site''
so that these definitions are parallel to each other.
    We are also proposing definitions of the terms ``functions'',
``services'', and ``values.'' All three of these terms have been used
by various documents in the past to describe the attributes of aquatic
resources that are being replaced through compensatory mitigation. The
agencies believe it is important to articulate the differences among
these terms and the appropriate role of each within the Section 404
Program.
    We are proposing the following definition of ``functions.''
Functions means the physical, chemical, and biological processes that
occur in aquatic resources and other ecosystems. The primary purpose of
compensatory mitigation is to replace lost aquatic resource functions
at the impact site. The agencies have a long standing policy of
achieving no overall net loss for wetland acreage and functions.
Services means the benefits that human populations receive from
functions that occur in aquatic resources and other ecosystems. For
example, providing habitat for birds is a biological function of some
aquatic habitat types, which in turn provides bird watching services to
humans. In general, compensatory mitigation projects, in replacing lost
functions at the impact site, should also replace the lost services
associated with these functions.
    Values means the utility or satisfaction that humans derive from
aquatic resource services. Values can be described in monetary terms or
in qualitative terms, although many of the values associated with
aquatic resources cannot be easily monetized. Values can be either use
values (e.g., recreational enjoyment) or non-use values (e.g.,
stewardship ethic). Values are considered by the District Engineer as
part of the public interest review of a proposed project. However, the
values associated with compensatory mitigation projects may not fully
mirror those lost at the impact site. For example, replacing a resource
in a more remote area may reduce use values (because the area is less
accessible) while enhancing non-use values (because people may value
resources on stewardship grounds more when they are in more pristine
areas). We are seeking comment on the definitions in this proposed
rule, including the proposed definitions of ``on-site'', ``off-site'',
``functions'', ``services'' and ``values.''

33 CFR 332.3 and 40 CFR 230.93 General Compensatory Mitigation
Requirements

    This section of the proposed rule establishes criteria for
determining the location and type of compensatory mitigation and
describes the watershed approach to compensatory mitigation for losses
of aquatic resources. When project impacts are located in the service
area of an approved mitigation bank, and the mitigation bank has
credits available for the type of resource impacted, the project's
mitigation requirements may be met by the purchase of an appropriate
number of credits from the mitigation bank. The use of a watershed plan
is the most preferable option when evaluating permittee-responsible
compensatory mitigation proposals and draft mitigation banking
instruments. If a watershed plan is not available, the watershed
approach described in Sec.  332.3(c) should be used. If it is not
practicable to use a watershed approach, then the district engineer
will consider the practicability of on-site compensatory mitigation, as
well as the compatibility of on-site mitigation with the proposed
project. The watershed approach will identify resource types and
locations for compensatory mitigation projects within the watershed. It
is important to understand that a watershed approach may include on-
site compensatory mitigation, off-site compensatory mitigation
(including mitigation banks), or a combination of on-site and off-site
mitigation. Also, the identified compensatory mitigation projects may
be in-kind, out-of-kind, or a mixture of in-kind and out-of-kind
compensatory mitigation.
    The information used to conduct a watershed approach is listed in
Sec.  332.3(c)(3). Where a watershed plan exists, all or most of this
information will have been considered in the development of that plan.
Where no formal watershed plan exists, project sponsors should make a
reasonable effort, commensurate with the scope and scale of the
project, to obtain as much of this information as possible as they
design the compensatory mitigation projects. Project sponsors may
consult with the Corps to see if such information has been developed in
the past in association with other projects in the watershed. For
smaller projects requiring DA authorization, all of the types of
information listed in this paragraph may not be available, but that
information should generally be available (or developed) for larger
projects.

    We are seeking comment on the watershed approach proposed in this
rule, as well as the proposed criteria regarding the location of
compensatory mitigation projects.
    The amount of required compensatory mitigation is dependent upon
the functions (or area when functions cannot be readily assessed) lost
as a result of the impacts authorized by the DA permit and the
functions (or area) provided by the compensatory mitigation project. In
some cases, replacing the functions provided by the impacted aquatic
resource may be achieved by a compensatory mitigation project smaller
in area than the impact site. In other cases, a larger compensatory
mitigation project may be needed to replace the functions provided by
the impacted aquatic resource.
    To determine the amount of compensatory mitigation required for a
specific activity, acres or similar units of measure are likely to be
the principal units for determining credits and debits. However, in
cases where functional assessment methods are available, appropriate,
and practical to use, district engineers should use those functional
assessment methods to determine how much compensatory mitigation should
be required. For activities authorized by general permits, it may not
be practical to conduct functional assessments for each general permit
activity. For certain types of aquatic resources, such as streams, it
may be more appropriate to quantify credits and debits by using linear
feet. The value of a credit or debit is dependent upon the amount of
aquatic resource functions provided per acre (or linear foot).
    In the proposed rule, site selection is a primary consideration for
compensatory mitigation projects. The watershed approach provides an
analytical approach similar to the approach recommended by the NRC
committee. A watershed approach to compensatory mitigation considers
the importance of landscape position and resource type for the
ecological functions and sustainability of aquatic resources within the
watershed. A watershed approach also considers the services provided by
aquatic resources, as well as the values derived from aquatic resource
functions and services. Such an approach considers how the types and
locations of compensatory mitigation projects will provide the desired
aquatic resource functions, and will continue to function over time in
a changing landscape. It also considers the habitat requirements of
important species, habitat loss or conversion trends, sources of
watershed impairment, and current development trends, as well as the
requirements of other regulatory and non-regulatory programs that
affect the watershed, such as storm water management or habitat
conservation programs.
    Another site selection factor is the compatibility of compensatory
mitigation projects with proposed or existing facilities or projects.
For example, it is not appropriate to locate compensatory mitigation
projects designed to attract wildlife species that are known to be
hazardous to aviation near airports. The Federal Aviation
Administration issued Advisory Circular 150/5200-33, ``Hazardous
Wildlife Attractants on or Near Airports,'' In addition, the
``Memorandum of Agreement Between the Federal Aviation Administration,
U.S. Air Force, U.S. Army, U.S. Environmental Protection Agency, and
U.S. Department of Agriculture to Address Aircraft Wildlife Strikes,
which became effective in July 2003, also addresses this particular
issue. District engineers need to consider these types of issues when
determining compensatory mitigation requirements for DA permits (see
Sec.  332.3(b) of the proposed rule).
    If the district engineer determines that all of the aquatic
resource functions cannot be effectively replaced at a single site,
then more than one site may be used to provide the desired aquatic
resource functions. Therefore, to maintain aquatic resource functions
in a watershed, the district engineer may require a combination of on-
site and off-site compensatory mitigation. For example, on-site
compensation may be required to provide water quality, water storage,
and flood protection functions and services, while off-site
compensation may be required for losses of habitat functions. In
general, the proposed rule requires off-site compensatory mitigation to
be located in the same watershed as the impact site.
    The proposed rule generally requires wetland compensatory
mitigation for wetland losses, and stream compensatory mitigation for
stream losses. However, the proposed rule provides flexibility for
district engineers to require compensatory mitigation that is best for
the watershed. For example, out-of-kind compensatory mitigation may
involve the restoration or establishment of an aquatic habitat type
that is now rare, because of disproportionate impacts to that habitat
type in the past. Restoring or establishing rare habitat types may help
restore valuable ecological functions and services to the watershed. In
the watershed approach in the proposed rule, district engineers will
first consider in-kind compensatory mitigation, but if the watershed
approach determines that out-of-kind compensatory mitigation would
result in greater benefits to the aquatic environment within the
watershed, then out-of-kind compensation may be authorized.
    The NRC Report stated that the preservation of wetlands is
appropriate in a watershed approach to compensatory mitigation, because
it helps support the objective of the Clean Water Act. Preservation of
aquatic resources helps secure desired wetland types in a watershed and
maintain wetland diversity in that watershed. The preservation of
aquatic resources through appropriate real estate and legal instruments
helps provide long-term maintenance of the aquatic environment in
watersheds.
    Both wetland and non-wetland riparian areas are also important for
maintaining the aquatic resource functions and services of watersheds.
Riparian areas are important for stream restoration activities, as well
as the restoration of other open waters. Riparian areas are important
to streams and other open waters, and help augment aquatic resource
functions by moderating temperature changes, removing excess nutrients
and pollutants, providing a source of detritus for aquatic food webs,
providing aquatic habitat heterogeneity, storing flood waters,
stabilizing sediments, and providing habitat for a variety of aquatic
and terrestrial species.
    Restoration or establishment of non-aquatic riparian areas normally
would be used in conjunction with aquatic resource restoration,
establishment, enhancement, and/or preservation activities, as part of
an overall compensatory mitigation project to offset losses of aquatic
resources. With the watershed approach, we are looking at combinations
of different habitats as components of a functioning landscape, instead
of habitat units in isolation from one another.
    The NRC Report also acknowledged the importance of upland areas as
part of the watershed approach to compensatory mitigation. The proposed
rule also requires consideration of the establishment and maintenance
of upland buffers around the restored, established, enhanced, or
protected aquatic habitats to ensure the sustainability of those
habitats. Buffers may augment aquatic resource functions, and help
increase the overall ecological functions of the

compensatory mitigation project site. Under limited circumstances, the
district engineer may grant compensatory mitigation credit for upland
areas within a compensatory mitigation project, if those uplands
increase the overall ecological functioning of the compensatory
mitigation site or other aquatic resources in the watershed or
ecoregion. For example, uplands may provide connections between aquatic
habitats that are essential for the preservation of certain species,
such as amphibians. When determining the amount of compensatory
mitigation credit provided by uplands, the district engineer must
consider whether the uplands perform ecological functions that are
important to the watershed and are under threat of loss or substantial
degradation.
    The proposed rule requires that mitigation providers secure
sufficient financial assurances to assure completion of the
compensatory mitigation project consistent with an approved mitigation
plan. Government agencies may use other mechanisms to provide
reasonable assurances that compensatory mitigation projects will be
completed, such as partnerships established in accordance with the
Economy Act. In cases where alternative mechanisms are used to provide
reasonable assurances that compensatory mitigation projects will be
completed, financial assurances may not be necessary or appropriate.
The district engineer will determine appropriate financial assurances
on a case-by-case basis. Financial assurances may take a number of
forms including letters of credit, performance bonds, or other
sureties. In some circumstances in the past, mitigation providers have
allowed their financial assurance arrangements to lapse before the
mitigation project was completed leaving the Corps without the
necessary funds to ensure completion of the mitigation project should
the mitigation provider default. The proposed rule does not
specifically address this issue. We are soliciting comment on whether
to include a regulatory provision to require that the providers of
these financial assurances obtain permission from, or alternatively,
notify the district engineer prior to canceling them or allowing them
to lapse. We are also soliciting comment on the appropriate time frame
(e.g., 120 days) for any such advance notification.
    If failure of a compensatory mitigation project is due to natural
catastrophes, such as floods, droughts, diseases, or pest infestations,
that occur during the monitoring period, the district engineer normally
would require the responsible party to implement appropriate remedial
measures, unless the compensatory mitigation project is expected to
respond to the event in a similar manner as comparable types of aquatic
resources in the watershed. After the monitoring period has ended, the
district engineer would normally not require remediation if he
determines that the failure is due to a natural catastrophe that was
beyond the control of the responsible party to prevent or mitigate. In
such cases, the provisions of the conservation easement (or other legal
mechanism for long-term protection of the site) will remain in effect
so that the compensatory mitigation project site will be allowed to
continue to evolve through natural ecosystem development processes.
This approach to addressing natural catastrophes acknowledges the
dynamic nature of the environment.
    We are seeking comment on the provisions in this section.

33 CFR 332.4 and 40 CFR 230.94 Planning and Documentation

    In paragraph (b) of this section, we are proposing to require
applicants for standard permits involving discharges of dredged or fill
material into waters of the United States to submit a statement
explaining how impacts to waters of the United States will be avoided,
minimized, and compensated. Information from that statement will be
provided in the public notice for the proposed permit. This requirement
will necessitate changing the standard permit application form (ENG
Form 4345), and compliance with the requirements of the Paperwork
Reduction Act of 1995. Compliance with the Paperwork Reduction Act is
discussed in more detail in Section VII, Administrative Requirements,
below.
    The agencies recognize that government agencies sponsoring projects
that require National Environmental Policy Act (NEPA) compliance
generally try to coordinate their NEPA review with their DA permit
review. This may mean submitting a permit application while the draft
Environmental Impact Statement (EIS), including analysis of
compensatory mitigation options, is still undergoing public review and
comment. We believe that the requirements of paragraph (b) of this
section are fully consistent with such efforts. In such cases, the
information provided with the permit application should provide a
conceptual discussion of the proposed compensatory mitigation, and
reference the more detailed description of options in the draft EIS.
This should further facilitate public participation in both the permit
application and NEPA review process. The purpose of the new permit
application requirements is to inform the public of the sponsor's
compensatory mitigation plans, as of the time the application is filed,
and most importantly, to solicit informed public comment on those
plans, in whatever stage of development they may be. It is not
necessary for the final compensatory mitigation option to have been
selected prior to submitting a DA permit application.
    Paragraph (c) of this section of the proposed rule requires
permittees or mitigation bank sponsors to submit draft and final
mitigation plans to district engineers. In the proposed rule, there is
a requirement for the district engineer to approve the final mitigation
plan prior to issuing the DA permit or approving the mitigation banking
instrument.
    This section also lists the types of information to be provided in
draft and final mitigation plans. Permittees proposing to use a
mitigation bank to provide required compensatory mitigation would be
required to submit only information concerning the mitigation bank they
plan to use, project baseline information, and credit determinations.
    We are seeking comment on the provisions in this section.

33 CFR 332.5 and 40 CFR 230.95 Ecological Performance Standards

    This section discusses, in general terms, ecological performance
standards that will be used to assess whether compensatory mitigation
projects, including mitigation banks, are achieving their objectives.
Since ecological performance standards usually vary by aquatic type and
geographic region, this section provides only general considerations
for establishing those standards.
    We are seeking comment on the provisions in this section.

33 CFR 332.6 and 40 CFR 230.96 Monitoring

    This proposed rule provides general standards for monitoring
compensatory mitigation projects, including mitigation banks.
Monitoring reports are used for assessing how well the compensatory
mitigation project is satisfying its objectives. We are proposing a
minimum required monitoring period of five years, with flexibility for
district engineers to stop requiring monitoring reports if compensatory
mitigation projects, such as those involving the establishment of open
water habitats, meet their performance standards in a shorter period of
time. Longer

monitoring periods may be required for compensatory mitigation
activities, such as the establishment of forested wetlands, that
develop slowly, or that require remediation.
    We are seeking comment on the provisions in this section. We are
also requesting comment on examples of specific types of compensatory
mitigation projects (e.g., specific habitat types) where monitoring
periods of less than five years may be appropriate.

33 CFR 332.7 and 40 CFR 230.97 Management

    This section of the proposed rule establishes criteria and
standards for the management of compensatory mitigation projects,
including mitigation banks. Some compensatory mitigation projects may
require active management and maintenance, as well as adaptive
management. For some aquatic resources, such as fringe wetlands in
coastal areas, long-term management may not be feasible or desirable
because of the dynamic nature of the environment.
    The various real estate or legal instruments that can be used to
protect compensatory mitigation project sites may differ from state to
state, or among other government jurisdictions. Therefore, we are not
proposing detailed requirements for real estate instruments used for
long-term protection of compensatory mitigation project sites. We
believe those instruments are best addressed by district engineers on a
case-by-case basis.
    For compensatory mitigation projects on public lands, other long-
term protection mechanisms may be more appropriate, such as Federal
facility management plans or integrated natural resources management
plans. Therefore, this section of the proposed rule has flexibility for
district engineers to determine requirements for site protection on a
case-by-case basis. The agencies recognize that changes in statute,
regulation or agency needs or mission may sometimes necessitate
authorization of an incompatible use on public lands originally set
aside for compensatory mitigation. In such cases, the public agency
authorizing the incompatible use would be responsible for providing
alternative compensatory mitigation for any loss in functions resulting
from the incompatible use.
    Paragraph (c) of this section discusses remediation requirements if
a compensatory mitigation project is not progressing towards meeting
its performance standards. In addition to consulting with the
responsible party to determine appropriate remediation requirements,
the district engineer should also consult with any other Federal,
Tribal, state, or local agency ``where appropriate.'' In general, such
consultation would be appropriate if the other agency was involved
earlier in the review of the compensatory mitigation requirements in
the DA permit.
    The proposed rule requires that the permit conditions or mitigation
banking instrument identify the party responsible for the ownership and
long-term management of the compensatory mitigation project. The
permittee or mitigation bank sponsor must provide long-term financing
as necessary to ensure that funds are available for the long-term
management of the project site once the monitoring period is over. This
can be accomplished in a number of ways, but in the past problems have
arisen when arrangements for the capitalization of long-term management
funds have not taken place in a timely fashion. Although the rule text
does not address this deficiency, we are soliciting comments on the
inclusion of a provision that would require that the arrangements for
the adequate capitalization of long-term management funds be finalized
prior to permit issuance.
    If the entity responsible for long-term management is a government
agency or public authority, and that entity is willing to accept the
stewardship responsibilities for the compensatory mitigation project
site, the district engineer may accept the stewardship commitment by
the government agency or public authority in lieu of imposing long-term
financing requirements in the DA permit or mitigation banking
instrument. Such acceptance of stewardship responsibilities will
generally involve a formal transaction of some type (e.g., transfer of
title, designation as a protected area, etc). We are aware of
situations where government agencies have accepted stewardship
responsibilities without adequately considering long-term financial
needs for the management of a site, and strongly encourage agencies to
plan for such needs before accepting stewardship responsibilities. Such
planning may include requiring a financial commitment from the original
responsible party as a condition of accepting long-term stewardship
responsibilities.
    We are seeking comment on the provisions in this section.

33 CFR 332.8 and 40 CFR 230.98 Mitigation Banks

    The proposed rule establishes criteria and standards for mitigation
banks, including requirements and processes for the review, approval,
and oversight of those banks. We are seeking comment on all provisions
of this section, especially the timeframes and milestones for
mitigation bank review and approval.
    The proposed rule contains explicit requirements for the mitigation
bank prospectus, and requires the district engineer to notify the
sponsor within 15 days if the prospectus is incomplete. The proposed
rule also has requirements for the content of mitigation banking
instruments.
    The district engineer is responsible for the review and approval of
mitigation banks that are intended to be used to provide compensatory
mitigation for DA permits, after seeking comment from the Interagency
Review Team (IRT) and the public. The role of the IRT is to advise the
district engineer on the establishment and management of mitigation
banks. Representatives of the U.S Environmental Protection Agency,
National Marine Fisheries Service, and U.S. Fish and Wildlife Service
hold ex officio positions on the IRT. Beyond this, the district
engineer determines the composition of the IRT. The IRT in the proposed
rule replaces the Mitigation Bank Review Team (MBRT) in the 1995
mitigation banking guidance.
    Each proposed mitigation bank will be subject to a public notice
and comment process, regardless of whether a DA permit is required to
construct or establish the mitigation bank. In the proposed rule, we
are specifying formal procedures and timeframes for establishing
mitigation banks, to provide more predictability and efficiency to the
mitigation bank review and approval process.
    In general, the timelines provided in this section of the proposed
rule should result in a decision on the proposed mitigation bank within
one year of receipt of a complete prospectus. However, there may be
exceptional circumstances associated with a particular proposed
mitigation bank that may result in a longer review period.
    The district engineer, in consultation with the IRT and using a
watershed approach to the extent practicable, will determine the
service area of an approved mitigation bank. The service area of a
mitigation bank is to be described in the mitigation banking
instrument. The service area should be large enough to support an
economically viable mitigation bank, but must not be larger than is
appropriate to ensure that the aquatic resources provided by the
mitigation bank will effectively compensate for adverse environmental
impacts across the entire service area. In

Sec.  332.8(c)(5)(ii), we provide some guidelines for service areas
based on the hydrologic unit codes designated by the U.S. Geological
Survey. The service areas suggested in the text of this section may not
be appropriate for some mitigation banks, such as single-user
mitigation banks sponsored by state departments of transportation. For
these sponsors, it may be infeasible to have relatively small service
areas for their mitigation banks, such as those based on 8-digit
hydrologic unit codes, because they incur a relatively small amount of
debits per year. Also, having relatively small service areas for some
single user mitigation banks may discourage the establishment of large
mitigation banks that provide substantial amounts of habitat and other
aquatic resource functions and services. On the other hand, in areas
with significant development, service areas even smaller than an 8-
digit hydrologic unit code may be appropriate.
    We are proposing a dispute resolution process to resolve agency
concerns about proposed mitigation banks. The dispute resolution
process involves higher levels of review, up to the respective agency
headquarters. We are seeking comment on the milestones and timeframes
in the proposed dispute resolution process. It is intended as a last
resort for significant issues that cannot be resolved in a timely
manner within the IRT. The agencies anticipate that it will be used
infrequently.
    In cases where initial establishment of the mitigation bank
requires authorization through a DA permit, it is important that the
permit be fully consistent with the provisions of the mitigation
banking instrument. Issuing the permit before all relevant provisions
of the mitigation banking instrument have been substantively determined
may lead to inconsistencies between the permit and the instrument and/
or may constrain the district engineer's ability to address substantive
concerns that arise through the IRT review process. Where issues
potentially affecting permit conditions are still unresolved within the
IRT, the district engineer should delay permit issuance until the final
terms of the mitigation banking instrument have been determined.
    We are proposing to establish a process for modifying mitigation
banking instruments. For example, a mitigation banking instrument may
be modified if the mitigation bank develops aquatic resource functions
that are substantially greater than expected, to allow the sponsor to
sell those extra credits after achieving all performance standards
specified in the bank's instrument. The full IRT review process would
be used for major modifications to the mitigation banking instrument,
such as expanding the mitigation bank by conducting more aquatic
resource restoration, establishment, enhancement, and/or preservation
at the bank site. Certain types of minor modifications to instruments,
such as changes in credit release schedules, may be accomplished
through a streamlined modification process.
    Umbrella mitigation banking instruments, which have been used to
establish mitigation banks on multiple sites, are provided for in the
proposed rule with additional sites treated as modifications of the
original mitigation banking instruments. In the proposed rule, a
mitigation banking instrument would have to be approved for the initial
mitigation bank site, and subsequent mitigation bank sites under the
``umbrella'' instrument would be added to that instrument as major
modifications.
    The proposed rule also establishes criteria for credit release from
mitigation banks. A limited proportion of projected credits may be
released when the mitigation banking instrument and mitigation plan
have been approved, the bank site secured, and required financial
assurances have been established. The proposed rule also requires a
substantial proportion of credits to be released only after performance
standards are achieved. Criteria for determining the credit release
schedule are provided in the text of the proposed rule. District
engineers must also approve credit releases.
    Existing mitigation banks may continue operating under the terms of
their approved instruments. However, modifications to the instrument,
including the addition of new sites for umbrella instruments, must be
made in accordance with the requirements of Part 332. We are also
seeking comment on the appropriate legal mechanism for transferring the
responsibility for providing compensatory mitigation from the permittee
to a mitigation bank. One option would be through parallel provisions
in DA permit special conditions and mitigation banking instruments.
Therefore, we are seeking comment on the following language for a
special condition for a DA permit to transfer responsibility for
providing compensatory mitigation in cases where credits are secured
from a mitigation bank:

    ``You have agreed to provide compensatory mitigation for the
permitted impacts by purchasing credits at [INSERT NAME OF
MITIGATION BANK]. As compensation for impacting [INSERT NUMBER]
acres [OR OTHER UNIT OF MEASURE] of [INSERT AQUATIC RESOURCE TYPE],
a total of [INSERT NUMBER] credits must be acquired from the [INSERT
NAME OF MITIGATION BANK]. Upon the mitigation bank sponsor's
acceptance of payment for those credits, that compensatory
mitigation requirement will be considered fulfilled, and your
responsibility for providing that compensatory mitigation will be
transferred to the [INSERT NAME OF MITIGATION BANK]. Proof of
securing these compensatory mitigation credits must be provided to
this office prior to initiating any work in waters of the United
States on the project site, unless the district engineer waives this
requirement. If you cannot obtain the required amount and type of
credits from [INSERT NAME OF MITIGATION BANK], you must submit a
revised compensatory mitigation proposal to this office, and receive
approval of the revised compensatory mitigation plan, prior to
initiating any work in waters of the United States.''

    We are also seeking comment on the following language for a
mitigation banking instrument, whereby the mitigation bank would then
accept responsibility for providing compensatory mitigation for a DA
permit in cases where the permittee secures credits from that
mitigation bank sponsor:

    ``For projects in the service area of this Mitigation Bank that
require Department of the Army authorization pursuant to Section 404
of the Clean Water Act and/or Section 10 of the Rivers and Harbors
Act of 1899, and if such authorizations require compensatory
mitigation, credits from this Mitigation Bank may be used to satisfy
those compensatory mitigation requirements, subject to Corps
approval on a case-by-case basis.
    In accordance with the terms of this Instrument, the sponsor
agrees that upon Corps approval of a proposal by the Permittee to
secure mitigation bank credits through a contract with this
Mitigation Bank, a fully executed contract between the Sponsor and
the Permittee shall act to transfer to this Mitigation Bank all
responsibility for the compensatory mitigation required by the
permittee's DA permit.''

    We are also seeking comment on other possible mechanisms for
transferring legal responsibility for providing compensatory mitigation
from the permittee to a mitigation bank. One potential mechanism may be
co-permitting, where the mitigation bank sponsor would sign the DA
permit and assume responsibility for providing compensatory mitigation
credits, once the permittee has secured those credits from the
mitigation bank. The compensatory mitigation provisions of the permit
(and those provisions only) would then be directly enforceable against
the mitigation bank sponsor using normal Clean Water Act enforcement
authorities. The agencies seek comment on these and other mechanisms
for transferring legal responsibility for providing

compensatory mitigation from the permittee to the mitigation bank
sponsor.
    In addition to the Corps, other Federal agencies (as well as some
state agencies) have, in the past, signed mitigation banking
instruments to indicate their agreement with the terms of those
instruments. Since district engineers are responsible for approving
instruments for mitigation banks, as well as for approving the use of
credits from those banks as compensatory mitigation for specific DA
permits, we are seeking comment on whether the provisions in Sec.
332.8(b)(3) relating to other IRT members signing mitigation banking
instruments are appropriate. In particular, do, or should, the
signatures of other agencies have any legal effect in the
implementation and enforcement of the banking instrument?

33 CFR 332.9 and 40 CFR 230.99 In-Lieu Fee Programs

    Since we are proposing to require in-lieu fee programs after five
years to comply with the same criteria, requirements, and standards as
mitigation banks, we believe there is a need for a grandfathering
provision for current in-lieu fee programs. We are seeking comments on
this section, in particular the proposed time frames. Section VI below
explains our rationale for phasing out in-lieu fee programs and
discusses possible alternative approaches.

VI. In-Lieu Fee Programs/Arrangements

    Under the proposed rule, existing in-lieu fee programs would have
to be modified within five years to meet the requirements for
mitigation banks in 33 CFR 332.8 and 40 CFR 230.98 in order to continue
to provide compensatory mitigation credits for DA permits. In other
words, after five years, in-lieu fee programs would cease to exist as a
separate mechanism for providing compensatory mitigation. As of the
effective date of the rule, new programs would have to meet the
requirements in 33 CFR 332.8 and 40 CFR 230.98 in order to sell
credits. Current in-lieu fee programs with multiple sites could develop
umbrella mitigation banking instruments (see 33 CFR 332.8(g) and 40 CFR
230.98(g) of the proposed rule).
    Under current practice, there are several important differences
between in-lieu fee programs and mitigation banks. First, in-lieu fee
programs are generally administered by state governments, local
governments, or non-profit non-governmental organizations while
mitigation banks are usually (though not always) operated for profit by
private entities, at least those that are third-party mitigation
providers. Second, in-lieu fee programs rely on collected fees from
permittees to initiate compensatory mitigation projects while
mitigation banks usually rely on private investment for initial
financing. Most importantly, mitigation banks must achieve certain
milestones, including site selection, plan approval, and financial
assurances, before they can sell credits, and generally sell a majority
of their credits only after the mitigation has been provided. In
contrast, in-lieu fee programs generally provide mitigation only after
collecting fees, and there is often a substantial time lag between
permitted impacts and implementation of compensatory mitigation
projects. In-lieu fee programs are also not generally required to
provide the same financial assurances as mitigation banks. For all of
these reasons, in some cases there may be greater uncertainty
associated with in-lieu fee programs regarding the final mitigation and
its adequacy to compensate for lost functions and services. On the
other hand, some in-lieu fee programs have been able to protect high
quality aquatic resources under threat of imminent impact, to employ a
conservation strategy that is consistent with the watershed approach
discussed in Sec.  332.3(c) of the proposed rule, and to partner with
government agencies and non-profit non-governmental organizations to
maximize protection of those at-risk resources. In-lieu fee programs
may also be able to provide effective compensatory mitigation in
certain areas, such as coastal areas, where options for economically
viable mitigation banks are limited.
    The 2004 National Defense Authorization Act directs that, ``To the
maximum extent practicable, the regulatory standards and criteria shall
maximize available credits and opportunities for mitigation * * * and
apply equivalent standards and criteria to each type of compensatory
mitigation.'' The agencies carefully considered this directive in
developing the proposed rule. Based on this consideration, the agencies
believe that the proposed requirements for mitigation banks are
necessary and sufficient to ensure that third-party compensatory
mitigation is actually completed, while also balancing the need to make
mitigation banking economically viable and thus ``maximize available
credits.'' The agencies are concerned that providing less stringent
oversight or up-front requirements for in-lieu fee programs may not
ensure that compensatory mitigation is actually performed, or satisfy
the statutory directive to apply equivalent standards and criteria to
each type of mitigation to the maximum extent practicable. The agencies
recognize that the proposed requirements for permittee-responsible
mitigation are not exactly the same as those for mitigation banks,
though we have tried to harmonize them to the extent practicable. But
there are certain requirements, such as formal review by an IRT, that
are not practicable for permittee-responsible projects, particularly
smaller ones. However, for in-lieu fee programs, which as third-party
mitigation providers sell credits to permittees and take on
responsibility for providing required compensatory mitigation in the
same way that mitigation banks do, we have not found strong grounds for
concluding that meeting the same requirements as mitigation banks is
not appropriate and practicable.
    Another concern with in-lieu fee programs is the sale price of
credits. Because credits are often sold before the details (or even the
location) of a specific compensatory mitigation project have been
determined, it may be difficult for the project sponsor to determine a
price that will fully fund the future compensatory mitigation project.
Because the market pressure of needing to provide a sufficient return
to investors is missing, in-lieu fee sponsors may underestimate the
credit price, and perhaps undercut a mitigation bank doing business in
the same service area. Furthermore, it is difficult for the Corps to
determine what an adequate price might be in the absence of definitive
information about the location and type of mitigation project to be
provided.
    The agencies realize that phasing out in-lieu fee programs entails
some challenges. In some areas, there are no mitigation banks and in-
lieu fee programs provide the only option for third-party mitigation.
However, the agencies are concerned that this may to some extent
reflect the less stringent requirements under which in-lieu-fee
programs currently operate. The agencies believe that if in-lieu fee
programs are required to meet the same requirements as banks, this will
provide a level playing field that will allow mitigation banks to
compete in areas where this may not be currently possible. We also
recognize that in areas with a ``thin'' market (e.g., areas where there
is a low density of dredge and fill projects requiring compensatory
mitigation) it may not be economically viable to obtain the level of
up-front financing that is necessary to start a mitigation bank. This
concern can be at

least partially addressed through the size of the mitigation bank's
service area. Proposed Sec.  332.8(5)(ii) provides that the service
area ``should be large enough to support an economically viable
mitigation bank, but must not be larger than is appropriate to ensure
that the aquatic resources provided by the mitigation bank will
effectively compensate for adverse environmental impacts across the
entire service area.''
    The agencies recognize that phasing out in-lieu fee programs would
represent a substantial departure from current practice. We are aware
that there are a number of successful in-lieu fee programs that are
providing effective compensatory mitigation. We therefore request
comment on the challenges associated with transforming these projects
into mitigation banks over a five-year period. We also request comment
on retaining in-lieu fee programs as a distinct regulatory entity.
Under this approach, in-lieu fee programs would have equally specific,
but somewhat different, requirements from mitigation banks. Areas in
which in-lieu fee programs might be different include: (1) The degree
of up-front planning required before credits could be sold (e.g., in-
lieu fee programs might not be required to identify and secure a site
and provide detailed site plans for the compensatory mitigation
project); (2) the level of financial assurances that would be required,
although we note that under the proposed rule district engineers retain
substantial discretion in determining appropriate financial assurances
for banks, and may consider factors such as the type of sponsoring
entity (e.g., government, private, non-profit); (3) the types of
projects for which they could be used (e.g., in-lieu fee programs might
be limited to providing compensatory mitigation only for nationwide
permits and other general permits, or for projects below a specified
acreage cutoff, such as 1 acre); (4) the required compensation ratios
(e.g., these could be higher for in-lieu fee programs than for
mitigation banks); (5) the credit release schedule (e.g., in-lieu fee
programs might be permitted to sell more credits at an earlier point in
the planning process); (6) limiting the establishment and use of in-
lieu fee programs to specific types of aquatic resources (e.g., tidal
wetlands) or specific geographic regions, such as coastal areas; and
(7) the types of permitted sponsoring entities (i.e., in-lieu fee
programs might be limited to government agencies and/or non-profit land
stewardship entities with proven track records). Commenters may suggest
other ways in which the requirements for in-lieu fee programs might be
different from those for mitigation banks.
    Another option would be to retain in-lieu fee programs but provide
a ``preference'' for in-place compensatory mitigation (e.g.,
compensatory mitigation sites such as mitigation banks established in
advance of permitted impacts) over compensatory mitigation that would
be established after permitted impacts are authorized (e.g., many in-
lieu fee programs) because of their greater certainty of successfully
providing compensatory mitigation credits. Under this approach, if the
permitted project was in the service area of both an established
mitigation bank and an in-lieu fee project that had not been
constructed, the permittee would first have to consider purchasing
credits from the mitigation bank, and could only use the in-lieu fee
program if purchasing credits from the mitigation bank was not
practicable.
    Comments will be most helpful if they provide specific information.
Current in-lieu fee program sponsors should explain exactly what
difficulties they would experience in transitioning to a mitigation
bank. Commenters who support retaining in-lieu fee programs as a
distinct regulatory entity should explain exactly what requirements
would be different from those for mitigation banks, and what would be
the basis for establishing these different requirements in light of the
statutory directive noted above. The agencies believe that the detailed
discussion of issues and options in this preamble provides sufficient
notice and opportunity for informed public comment, such that we may
choose to finalize a rule that retains a separate in-lieu fee option
along the lines discussed here without issuing a new proposed rule.

VII. Administrative Requirements

Plain Language

    In compliance with the principles in the President's Memorandum of
June 1, 1998, (63 FR 31855) regarding plain language, this preamble is
written using plain language. The use of ``we'' in this notice refers
to the Corps and EPA. We have also used the active voice, short
sentences, and common everyday terms except for necessary technical
terms.

Paperwork Reduction Act

    This proposed action will impose a new information collection
burden under the provisions of the Paperwork Reduction Act (44 U.S.C.
3501 et seq.). Applicants for Clean Water Act section 404 permits will
be required, under 33 CFR 332.4(b)(1) and 40 CFR 230.93(b)(1) of the
proposed rule, to submit a statement explaining how impacts associated
with the proposed activity are to be avoided, minimized, and
compensated for. This statement must also include a description of any
proposed compensatory mitigation, or the intention to use an approved
mitigation bank.
    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid Office of Management and Budget (OMB) control number.
For the Corps Regulatory Program under Section 10 of the Rivers and
Harbors Act of 1899, section 404 of the Clean Water Act, and section
103 of the Marine Protection, Research and Sanctuaries Act of 1972, the
current OMB approval number for information collection requirements is
maintained by the Corps of Engineers (OMB approval number 0710-0003,
which expires on April 30, 2008). As a result of the new information
collection requirement in the proposed rule, we are proposing to modify
our standard permit application form in accordance with the
requirements of the Paperwork Reduction Act.
    Title, Form, and OMB Number: Application for a Department of Army
Permit; Eng Form 4345; OMB Control Number 0710-0003.
    Type of Request: Revision.
    Number of Respondents: 85,500.
    Responses Per Respondent: 1.
    Annual Responses: 85,500.
    Average Burden Per Response: 11 hours.
    Annual Burden Hours: 374,000.
    Needs and Uses: Information collected is used to evaluate, as
required by law, proposed construction or filing in waters of the
United States that result in impacts to the aquatic environment and
nearby properties, and to determine if issuance of a permit is in the
public interest. Respondents are private landowners, businesses, non-
profit organizations, and government agencies.
    Affected Public: Individuals or households; business or other for-
profit; not-for-profit institutions; farms; Federal government; State,
local or tribal government.
    Frequency: On occasion.
    Respondents Obligation: Mandatory.
    OMB Desk Officer: Jim Laity.
    Written comments and recommendations on the proposed information
collection should be sent to Jim Laity at the Office of Management and
Budget, Desk Officer for USACE, Room 10202, New Executive Office
Building, Washington, DC 20503.

Executive Order 12866

    Under Executive Order 12866 (58 FR 51735, October 4, 1993), we must
determine whether the regulatory action is ``significant'' and
therefore subject to review by OMB and the requirements of the
Executive Order. The Executive Order defines ``significant regulatory
action'' as one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or
adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local, or Tribal governments or
communities;
    (2) Create a serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
    (4) Raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
the Executive Order.
    Pursuant to the terms of Executive Order 12866, we have determined
that the proposed rule is a ``significant regulatory action'' and the
draft was submitted to OMB for review.
    The regulatory analysis required by E.O. 12866 has been prepared
for this proposed rule. The regulatory analysis is available on the
Internet at: http://www.usace.army.mil/inet/functions/cw/cecwo/reg/citizen.htm.
 It is also available by contacting Headquarters, U.S. Army

Corps of Engineers, Operations and Regulatory Community of Practice,
441 G Street, NW., Washington, DC 20314-1000.

Executive Order 13132

    Executive Order 13132, entitled ``Federalism'' (64 FR 43255, August
10, 1999), requires the Corps to develop an accountable process to
ensure ``meaningful and timely input by State and local officials in
the development of regulatory policies that have Federalism
implications.'' The proposed rule does not have Federalism
implications. We do not believe that the proposed rule will have
substantial direct effects on the States, on the relationship between
the Federal government and the States, or on the distribution of power
and responsibilities among the various levels of government. The
proposed rule does not impose new substantive requirements. In
addition, the proposed rule will not impose any additional substantive
obligations on State or local governments. State and local governments
that administer in-lieu fee programs to provide compensatory mitigation
for impacts to wetlands and other aquatic resources can modify their
in-lieu fee programs to conform with the requirements of this proposed
rule. Therefore, Executive Order 13132 does not apply to this proposed
rule. However, in the spirit of Executive Order 13132, we specifically
request comment from state and local officials on the proposed rule.

Regulatory Flexibility Act, as Amended by the Small Business Regulatory
Enforcement Fairness Act of 1996, 5 U.S.C. 601 et seq.

    The Regulatory Flexibility Act generally requires an agency to
prepare a regulatory flexibility analysis of any rule subject to
notice-and-comment rulemaking requirements under the Administrative
Procedure Act or any other statute unless the agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
small organizations and small governmental jurisdictions.
    For purposes of assessing the impacts of this proposed rule on
small entities, a small entity is defined as: (1) A small business
based on Small Business Administration size standards; (2) a small
governmental jurisdiction that is a government of a city, county, town,
school district, or special district with a population of less than
50,000; or (3) a small organization that is any not-for-profit
enterprise which is independently owned and operated and is not
dominant in its field.
    The statutory basis for the proposed rule is Section 314 of the
National Defense Authorization Act for Fiscal Year 2004 (Pub. L. 108-
136), which is discussed above. After considering the economic impacts
of the proposed rule on small entities, we certify that this action
will not have a significant impact on a substantial number of small
entities. Small entities subject to the proposed rule include those
small entities that need to obtain DA permits pursuant to Section 404
of the Clean Water Act and Section 10 of the Rivers and Harbors Act of
1899.
    This rulemaking will not change compensatory mitigation
requirements, or change the number of permitted activities that require
compensatory mitigation. This rule further clarifies mitigation
requirements established by Corps and EPA, and is generally consistent
with current agency practices. Some provisions of the rule may result
in increases in compliance costs, other provisions may result in
decreases in compliance costs, but most of the provisions in the rule
are expected to result in no changes in compliance costs. To the extent
that it promotes mitigation banking, the rule may lower compensatory
mitigation costs for small projects by making credits more widely
available. Overall, we believe the proposed rule will result in no net
change in compliance costs for permittees, including small entities
that need to obtain DA permits. For a more detailed analysis of
potential economic impacts of this rule, please see the regulatory
analysis in the Environmental Assessment prepared for the proposed
rule. We are interested in the potential impacts of the proposed rule
on small entities and welcome comments on issues related to such
impacts.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and Tribal
governments and the private sector. Under Section 202 of the UMRA, the
agencies generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal
mandates'' that may result in expenditures to State, local, and Tribal
governments, in the aggregate, or to the private sector, of $100
million or more in any one year. Before promulgating a rule for which a
written statement is needed, Section 205 of the UMRA generally requires
the agencies to identify and consider a reasonable number of regulatory
alternatives and adopt the least costly, most cost-effective, or least
burdensome alternative that achieves the objectives of the rule. The
provisions of section 205 do not apply when they are inconsistent with
applicable law. Moreover, section 205 allows an agency to adopt an
alternative other than the least costly, most cost-effective, or least
burdensome alternative if the agency publishes with the final rule an
explanation why that alternative was not adopted. Before an agency
establishes any regulatory requirements that may significantly or
uniquely affect small governments, including Tribal governments, it
must have developed, under Section 203 of the UMRA, a small government
agency plan. The plan must provide for notifying potentially affected
small governments, enabling officials of affected small governments to
have meaningful and timely input in the development of regulatory
proposals with significant Federal intergovernmental mandates, and

informing, educating, and advising small governments on compliance with
the regulatory requirements.
    We have determined that the proposed rule does not contain a
Federal mandate that may result in expenditures of $100 million or more
for State, local, and Tribal governments, in the aggregate, or the
private sector in any one year. The proposed rule is generally
consistent with current agency practice and therefore does not contain
a Federal mandate that may result in expenditures of $100 million or
more for State, local, and Tribal governments, in the aggregate, or the
private sector in any one year. Therefore, the proposed rule is not
subject to the requirements of Sections 202 and 205 of the UMRA. For
the same reasons, we have determined that the proposed rule contains no
regulatory requirements that might significantly or uniquely affect
small governments. Therefore, the proposed rule is not subject to the
requirements of Section 203 of UMRA.

Executive Order 13045

    Executive Order 13045, ``Protection of Children from Environmental
Health Risks and Safety Risks'' (62 FR 19885, April 23, 1997), applies
to any rule that: (1) Is determined to be ``economically significant''
as defined under Executive Order 12866, and (2) concerns an
environmental health or safety risk that we have reason to believe may
have a disproportionate effect on children. If the regulatory action
meets both criteria, we must evaluate the environmental health or
safety effects of the proposed rule on children, and explain why the
regulation is preferable to other potentially effective and reasonably
feasible alternatives.
    The proposed rule is not subject to this Executive Order because it
is not economically significant as defined in Executive Order 12866. In
addition, it does not concern an environmental or safety risk that we
have reason to believe may have a disproportionate effect on children.

Executive Order 13175

    Executive Order 13175, entitled ``Consultation and Coordination
with Indian Tribal Governments'' (65 FR 67249, November 6, 2000),
requires agencies to develop an accountable process to ensure
``meaningful and timely input by tribal officials in the development of
regulatory policies that have tribal implications.'' The phrase
``policies that have tribal implications'' is defined in the Executive
Order to include regulations that have ``substantial direct effects on
one or more Indian tribes, on the relationship between the Federal
government and the Indian tribes, or on the distribution of power and
responsibilities between the Federal government and Indian tribes.''
    The proposed rule does not have tribal implications. It is
generally consistent with current agency practice and will not have
substantial direct effects on tribal governments, on the relationship
between the Federal government and the Indian tribes, or on the
distribution of power and responsibilities between the Federal
government and Indian tribes. Therefore, Executive Order 13175 does not
apply to this proposed rule. However, in the spirit of Executive Order
13175, we specifically request comment from Tribal officials on the
proposed rule.

Environmental Documentation

    The Corps has prepared a draft Environmental Assessment (EA) and
Finding of No Significant Impact (FONSI) for the proposed rule. The
draft EA and FONSI are available at: http://www.usace.army.mil/inet/functions/cw/cecwo/reg/citizen.htm.
 It is also available by contacting

Headquarters, U.S. Army Corps of Engineers, Operations and Regulatory
Community of Practice, 441 G Street, NW., Washington, DC 20314-1000.

Congressional Review Act

    The Congressional Review Act, 5 U.S.C. 801 et seq., as added by the
Small Business Regulatory Enforcement Fairness Act of 1996, generally
provides that before a rule may take effect, the agency promulgating
the rule must submit a rule report, which includes a copy of the rule,
to each House of the Congress and to the Comptroller General of the
United States. We will submit a report containing this rule and other
required information to the U.S. Senate, the U.S. House of
Representatives, and the Comptroller General of the United States. A
major rule cannot take effect until 60 days after it is published in
the Federal Register. The proposed rule is not a ``major rule'' as
defined by 5 U.S.C. 804(2).

Executive Order 12898

    Executive Order 12898 requires that, to the greatest extent
practicable and permitted by law, each Federal agency must make
achieving environmental justice part of its mission. Executive Order
12898 provides that each Federal agency conduct its programs, policies,
and activities that substantially affect human health or the
environment in a manner that ensures that such programs, policies, and
activities do not have the effect of excluding persons (including
populations) from participation in, denying persons (including
populations) the benefits of, or subjecting persons (including
populations) to discrimination under such programs, policies, and
activities because of their race, color, or national origin.
    The proposed rule is not expected to negatively impact any
community, and therefore is not expected to cause any
disproportionately high and adverse impacts to minority or low-income
communities.

Executive Order 13211

    The proposed rule is not a ``significant energy action'' as defined
in Executive Order 13211, ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR
28355, May 22, 2001) because it is not likely to have a significant
adverse effect on the supply, distribution, or use of energy.

National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement
Act of 1995 (NTTAA), Public Law 104-113, section 12(d), (15 U.S.C. 272
note), directs us to use voluntary consensus standards in its
regulatory activities unless to do so would be inconsistent with
applicable law or otherwise impractical. Voluntary consensus standards
are technical standards (e.g., materials specifications, test methods,
sampling procedures, business practices) that are developed or adopted
by voluntary consensus standards bodies. The NTTAA directs us to
provide Congress, through the Office of Management and Budget (OMB),
explanations when the we decide not to use available and applicable
voluntary consensus standards.
    This action does not involve technical standards. Therefore, the
Corps and EPA did not consider the use of any new voluntary consensus
standards.

List of Subjects

33 CFR Part 325

    Administrative practice and procedure, Intergovernmental relations,
Environmental protection, Navigation, Water pollution control,
Waterways.

33 CFR Part 332

    Administrative practice and procedure, Intergovernmental relations,
Navigation (water), Water pollution control, Water resources,
Watersheds, Waterways.

40 CFR Part 230

    Environmental protection, Water pollution control.

Corps of Engineers

33 CFR Chapter II

    For the reasons stated in the preamble, the Corps proposes to amend
33 CFR chapter II as set forth below:

PART 325--PROCESSING OF DEPARTMENT OF THE ARMY PERMITS

    1. The authority citation for part 325 continues to read as
follows:

    Authority: 33 U.S.C. 401 et seq.; 33 U.S.C. 1344; 33 U.S.C.
1413.

    2. Amend Sec.  325.1 by redesignating paragraphs (d)(7), (d)(8),
and (d)(9) as paragraphs (d)(8), (d)(9), and (d)(10), respectively, and
adding new paragraph (d)(7) as follows:

Sec.  325.1  Applications for permits.

* * * * *
    (d) * * *
    (7) For activities involving discharges of dredged or fill material
into waters of the United States, the application must include a
statement describing how impacts to waters of the United States are to
be avoided, minimized, and compensated (see Sec.  332.4(b)(1)).
* * * * *

PART 332--COMPENSATORY MITIGATION FOR LOSSES OF AQUATIC RESOURCES

    3. Add part 332 to read as follows:

PART 332--COMPENSATORY MITIGATION FOR LOSSES OF AQUATIC RESOURCES

Sec.
332.1 Purpose and general considerations.
332.2 Definitions.
332.3 General compensatory mitigation requirements.
332.4 Planning and documentation.
332.5 Ecological performance standards.
332.6 Monitoring.
332.7 Management.
332.8 Mitigation banks.
332.9 In-lieu fee programs.

    Authority: 33 U.S.C. 401 et seq.; 33 U.S.C. 1344; and Pub. L.
108-136.

Sec.  332.1  Purpose and general considerations.

    (a) Purpose. (1) The purpose of this part is to establish standards
and criteria for the use of all types of compensatory mitigation,
including on-site and off-site permittee-responsible mitigation,
mitigation banks, and in-lieu fee mitigation to offset unavoidable
impacts to waters of the United States authorized through the issuance
of Department of the Army (DA) permits pursuant to Section 404 of the
Clean Water Act (33 U.S.C. 1344) and/or Sections 9 or 10 of the Rivers
and Harbors Act of 1899 (33 U.S.C. 401, 403). This part implements
Section 314(b) of the 2004 National Defense Authorization Act (Pub. L.
108-136), which directs that the standards and criteria shall, to the
maximum extent practicable, maximize available credits and
opportunities for mitigation, provide for regional variations in
wetland conditions, functions, and values, and apply equivalent
standards and criteria to each type of compensatory mitigation. This
part is intended to further clarify mitigation requirements established
under U.S. Army Corps of Engineers (Corps) and U.S. Environmental
Protection Agency regulations at 33 CFR part 320 and 40 CFR part 230,
respectively.
    (2) These rules have been jointly developed by the Secretary of the
Army, acting through the Chief of Engineers, and the Administrator of
the Environmental Protection Agency. From time to time guidance on
interpreting and implementing these rules may be prepared jointly by
EPA and the U.S. Army Corps of Engineers at the national or regional
level. No modifications to the basic application, meaning, or intent of
these rules will be made without further joint rulemaking by the
Secretary of the Army, acting through the Chief of Engineers and the
Administrator of the Environmental Protection Agency pursuant to the
Administrative Procedure Act (5 U.S.C. 551 et seq.).
    (b) Applicability. This part does not alter the regulations at
Sec.  320.4(r) of this title, which address the general mitigation
requirements for DA permits. In particular, it does not alter the
circumstances under which compensatory mitigation is required or the
definitions of ``waters of the United States'' or ``navigable waters of
the United States,'' which are provided at parts 328 and 329 of this
title, respectively. Use of resources as compensatory mitigation that
are not otherwise subject to regulation under Section 404 of the Clean
Water Act and/or Sections 9 or 10 of the Rivers and Harbors Act of 1899
does not in and of itself make them subject to such regulation.
    (c) Sequencing. Pursuant to these requirements, the district
engineer will issue a section 404 permit only upon a determination that
the permit applicant has taken all appropriate and practicable steps to
avoid and minimize adverse impacts to waters of the United States.
Practicable means available and capable of being done after taking into
consideration cost, existing technology, and logistics in light of
overall project purposes. Compensatory mitigation for unavoidable
impacts may be required to ensure that a section 404 activity complies
with the Section 404(b)(1) Guidelines. Compensatory mitigation may also
be required to ensure that an activity requiring authorization under
Section 404 of the Clean Water Act and/or Sections 9 or 10 of the
Rivers and Harbors Act of 1899 is not contrary to the public interest.
    (d) Accounting for regional variations. Where appropriate, district
engineers shall account for regional characteristics of aquatic
resource types, functions, services, and values when determining
performance standards and monitoring requirements for compensatory
mitigation projects.

Sec.  332.2  Definitions.

    For the purposes of this part, the following terms are defined:
    Adaptive management means the development of a management strategy
that anticipates the challenges associated with likely future impacts
to the aquatic resource functions of the mitigation site. It
acknowledges the risk and uncertainty of compensatory mitigation
projects and allows modification of those projects to optimize
performance. The process will provide guidance on the selection of
appropriate remedial measures that will ensure the continued adequate
provision of aquatic resource function and involves analysis of
monitoring results to identify potential problems of a compensatory
project and identification of measures to rectify those problems.
    Buffer means an upland and/or riparian area that protects and/or
enhances aquatic resource functions associated with wetlands, rivers,
streams, lakes, marine, and estuarine systems from disturbances
associated with adjacent land uses.
    Compensatory mitigation means the restoration (re-establishment or
rehabilitation), establishment (creation), enhancement, and/or in
certain circumstances preservation of aquatic resources for the
purposes of compensating for unavoidable adverse impacts which remain
after all appropriate and practicable avoidance and minimization has
been achieved.
    Compensatory mitigation project means a restoration, establishment,
enhancement, and/or preservation activity implemented by the permittee
as a requirement of a DA permit (i.e.,

permittee-responsible mitigation), or by a third party (e.g., a
mitigation bank).
    Credit means a unit of measure (e.g., a functional or area measure)
representing the accrual or attainment of aquatic functions at a
compensatory mitigation site. The measure of function is based on the
aquatic resources restored, established, enhanced, or preserved.
    DA means Department of the Army.
    Days means calendar days.
    Debit means a unit of measure (e.g., a functional or area measure)
representing the loss of aquatic functions at an impact or project
site. The measure of function is based on the aquatic resources
impacted by the authorized activity.
    Enhancement means the manipulation of the physical, chemical, or
biological characteristics of an aquatic resource to heighten,
intensify, or improve a specific aquatic resource function(s).
Enhancement results in the gain of selected aquatic resource
function(s), but may also lead to a decline in other aquatic resource
function(s). Enhancement does not result in a gain in aquatic resource
area.
    Establishment (creation) means the manipulation of the physical,
chemical, or biological characteristics present to develop an aquatic
resource that did not previously exist at an upland or deepwater site.
Establishment results in a gain in aquatic resource area.
    Functional capacity means the degree to which an area of aquatic
resource performs a specific function.
    Functions means the physical, chemical, and biological processes
that occur in aquatic resources and other ecosystems.
    Impact means adverse effect.
    In-kind means a resource type that is structurally and/or
functionally similar to the impacted resource type.
    Interagency Review Team (IRT) means an interagency group of
Federal, Tribal, State, and/or local regulatory and resource agency
representatives that reviews documentation for, and advises the
district engineer on, the establishment and management of a mitigation
bank.
    Mitigation bank means a site, or suite of sites, where aquatic
resources such as wetlands or streams are restored, established,
enhanced, and/or preserved for the purpose of providing compensatory
mitigation for authorized impacts to similar resources. Third-party
mitigation banks generally sell compensatory mitigation credits to
permittees whose obligation to provide mitigation is then transferred
to the mitigation bank sponsor. The operation and use of a mitigation
bank are governed by a mitigation banking instrument.
    Mitigation banking instrument means the legal document for the
establishment, operation, and use of a mitigation bank.
    Off-site means an area that is neither located on the same parcel
of land as the impact site, nor on a parcel of land contiguous to or
near the parcel containing the impact site.
    On-site means an area located on the same parcel of land as the
impact site, or on a parcel of land contiguous to or near the impact
site.
    Out-of-kind means a resource type that is structurally and/or
functionally different than the impacted resource type.
    Performance standards are observable or measurable attributes that
are used to determine if a compensatory mitigation project meets its
objectives.
    Permittee-responsible mitigation means an aquatic resource
restoration, establishment, enhancement, and/or preservation activity
undertaken by the permittee (or an authorized agent or contractor) to
provide compensatory mitigation for which the permittee retains full
responsibility.
    Preservation means the removal of a threat to, or preventing the
decline of, aquatic resources by an action in or near those aquatic
resources. This term includes activities commonly associated with the
protection and maintenance of aquatic resources through the
implementation of appropriate legal and physical mechanisms.
Preservation does not result in a gain of aquatic resource area or
functions.
    Re-establishment means the manipulation of the physical, chemical,
or biological characteristics of a site with the goal of returning
natural/historic functions to a former aquatic resource. Re-
establishment results in rebuilding a former aquatic resource and
results in a gain in aquatic resource area.
    Reference aquatic resources are aquatic resources that represent
the range of variability exhibited by a regional class of aquatic
resources as a result of natural processes and anthropogenic
disturbances.
    Rehabilitation means the manipulation of the physical, chemical, or
biological characteristics of a site with the goal of repairing
natural/historic functions to a degraded aquatic resource.
Rehabilitation results in a gain in aquatic resource function, but does
not result in a gain in aquatic resource area.
    Restoration means the manipulation of the physical, chemical, or
biological characteristics of a site with the goal of returning
natural/historic functions to a former or degraded aquatic resource.
For the purpose of tracking net gains in aquatic resource area,
restoration is divided into two categories: re-establishment and
rehabilitation.
    Riparian areas are lands adjacent to a waterbody. Riparian areas
are transitional between terrestrial and aquatic ecosystems, through
which surface and subsurface hydrology connects waterbodies with their
adjacent uplands. Riparian areas are adjacent to streams, lakes, and
estuarine-marine shorelines and provide a variety of ecological
functions and services and help improve or maintain local water
quality.
    Service area means the geographic area within which impacts can be
mitigated at a particular mitigation bank, as designated in its
instrument.
    Services means the benefits that human populations receive from
functions that occur in aquatic resources and other ecosystems.
    Sponsor means any public or private entity responsible for
establishing and, in most circumstances, operating a mitigation bank.
    Standard permit means a standard, individual permit issued under
the authority of Section 404 of the Clean Water Act and/or Sections 9
or 10 of the Rivers and Harbors Act of 1899.
    Values means the utility or satisfaction that humans derive from
aquatic resource services. Values can be described in monetary terms or
in qualitative terms, although many of the values associated with
aquatic resources cannot be easily monetized. Values can be either use
values (e.g., recreational enjoyment) or non-use values (e.g.,
stewardship, biodiversity).
    Watershed plan means a plan developed by federal, tribal, state,
and/or local government agencies, in consultation with relevant
stakeholders. A watershed plan addresses ecological conditions in the
watershed, multiple stakeholder interests, and land uses. Watershed
plans may also identify priority sites for aquatic resource restoration
and protection. Examples of watershed plans include special area
management plans, advance identification programs, and watershed
management plans.

Sec.  332.3  General compensatory mitigation requirements.

    (a) General considerations. The fundamental objective of
compensatory mitigation is to offset environmental losses resulting
from unavoidable impacts to waters of the United States authorized by
DA permits. The district engineer must determine the

compensatory mitigation to be required in a DA permit, based on what is
available, practicable, and capable of compensating for the aquatic
resource functions that will be lost as a result of the permitted
activity. In making this determination, the district engineer must
assess the likelihood for ecological success and sustainability, the
location of the compensation site relative to the impact site and their
significance within the watershed, and the economic costs of the
compensatory mitigation. Compensatory mitigation requirements must be
commensurate with the amount and type of impact that is associated with
a particular DA permit. Permit applicants are responsible for proposing
an appropriate compensatory mitigation option to offset unavoidable
impacts.
    (b) Location and type of compensatory mitigation. (1) Where project
impacts are located within the service area of an approved mitigation
bank, and the mitigation bank has credits available for the type of
resource impacted, the project's compensatory mitigation requirements
may be met by the purchase of an appropriate number of credits from the
mitigation bank.
    (2) Where practicable and appropriate, the district engineer will
require that the location and aquatic resource type of permittee-
responsible compensatory mitigation necessary to offset anticipated
impacts be consistent with an established watershed plan or be
determined using the principles of a watershed approach as outlined in
paragraph (c) of this section. The district engineer and the IRT should
also use a watershed approach to the extent practicable in reviewing
mitigation banking instruments.
    (3) Where reliance on a watershed plan or approach is not
practicable, the district engineer will consider opportunities to
offset anticipated aquatic resource impacts by requiring on-site and
in-kind compensatory mitigation. The district engineer must also
consider the practicability of on-site compensatory mitigation and its
compatibility with the proposed project.
    (4) If, after considering opportunities for on-site, in-kind
compensatory mitigation as provided in paragraph (b)(3) of this
section, the district engineer determines that these compensatory
mitigation opportunities are not practicable, are unlikely to
compensate for the permitted activity, or will be incompatible with the
proposed project, and an alternative, practicable off-site and/or out-
of-kind mitigation opportunity is identified that has a greater
likelihood of offsetting the permitted activity, the district engineer
shall require that this alternative compensatory mitigation be
provided. In general, compensatory mitigation should be located within
the same watershed as the impact site, and should be located where it
is most likely to successfully replace lost functions, services, and
values, taking into account such watershed scale features as aquatic
habitat diversity, habitat connectivity, relationships to hydrologic
sources (including the availability of water rights), and compatibility
with adjacent land uses.
    (c) Watershed approach to compensatory mitigation. (1) The district
engineer must use a watershed approach to establish compensatory
mitigation requirements in DA permits to the extent appropriate and
practicable. Where an applicable watershed plan is available, the
watershed approach should be based on the existing plan. Where no such
plan is available, the watershed approach should be based on
information provided by the project sponsor or available from other
sources. The ultimate goal of a watershed approach is to maintain and
improve the quality and quantity of aquatic resources within watersheds
through strategic selection of compensatory mitigation sites.
    (2) Considerations. (i) A watershed approach to compensatory
mitigation considers the importance of landscape position and resource
type of compensatory mitigation projects for the ecological functions
and sustainability of aquatic resources within the watershed. Such an
approach considers how the types and locations of compensatory
mitigation projects will provide the desired aquatic resource
functions, and will continue to function over time in a changing
landscape. It also considers the habitat requirements of important
species, habitat loss or conversion trends, sources of watershed
impairment, and current development trends, as well as the requirements
of other regulatory and non-regulatory programs that affect the
watershed, such as storm water management or habitat conservation
programs. It includes the protection and maintenance of terrestrial
resources, such as non-wetland riparian areas and uplands, when those
resources contribute to or improve the overall ecological functioning
of aquatic resources in the watershed.
    (ii) Locational factors (e.g., hydrology, surrounding land use) are
important to the success of compensatory mitigation for impacted
habitat functions and values and may lead to siting of such mitigation
away from the project area. However, consideration should also be given
to functions, services, and values (e.g., water quality, flood control,
shoreline protection) that will likely need to be addressed at or near
the areas impacted by the permitted project.
    (iii) A watershed approach to compensatory mitigation may involve
planning efforts to inventory historic and existing aquatic resources,
including identification of degraded aquatic resources, and planning
efforts to identify immediate and long-term aquatic resource needs
within watersheds that can be met through permittee-responsible
mitigation projects or mitigation banks. Watershed planning efforts may
identify and/or prioritize aquatic resources that are important for
maintaining and restoring ecological functions of the watershed.
    (3) Information Needs. The use of a watershed approach is based on
analysis of information regarding watershed conditions and needs. Such
information includes: Current trends in habitat loss or conversion,
cumulative impacts of past development activities, current development
trends, the presence and needs of sensitive species, site conditions
that favor or hinder the success of mitigation projects, chronic
environmental problems such as flooding or poor water quality, and
local watershed goals and priorities. This information may be contained
in an existing watershed plan or may be available from other sources.
The level of information and analysis needed to support a watershed
approach must be commensurate with the scope and scale of the proposed
project requiring a DA permit, as well as the functions lost as a
result of that project.
    (d) Site selection. The compensatory mitigation project site must
be ecologically suitable for providing the desired aquatic resource
functions. In determining the ecological suitability of the
compensatory mitigation project site, the district engineer must
consider the following factors:
    (1) Hydrological conditions, soil characteristics, and other
physical and chemical characteristics;
    (2) Watershed-scale features, such as aquatic habitat diversity,
habitat connectivity, and other landscape scale functions;
    (3) The size and location of the compensatory mitigation site
relative to hydrologic sources (including the availability of water
rights) and other ecological features;
    (4) Compatibility with adjacent land uses and watershed management
plans;
    (5) Reasonably foreseeable effects the compensatory mitigation
project will have on ecologically important aquatic or terrestrial
resources (e.g., shallow sub-tidal habitat, mature forests),

cultural sites, or habitat for Federally- or State-listed threatened
and endangered species; and
    (6) Other relevant factors including, but not limited to,
development trends, anticipated land use changes, habitat status and
trends, local or regional goals for the restoration or protection of
particular habitat types or functions (e.g., re-establishment of
habitat corridors or habitat for species of concern), water quality
goals, floodplain management goals, and the relative potential for
chemical contamination of the aquatic resources.
    (e) Mitigation type. (1) In general, in-kind mitigation is
preferable to out-of-kind mitigation because it is most likely to
compensate for the functions, services, and values lost at the impact
site. For example, restoration of wetlands is most likely to compensate
for unavoidable impacts to wetlands, while restoration of streams is
most likely to compensate for unavoidable impacts to streams. Thus,
except as provided in paragraph (e)(2) of this section, the district
engineer should require that compensatory mitigation be of a similar
type to the impacted aquatic resource.
    (2) If the district engineer determines through the decision