the watershed, and the costs of the compensatory mitigation project.
    One commenter stated that the economic cost of mitigation should
not be a primary consideration when determining the amount, location,
or type of compensatory mitigation required, and that reference to
economic costs should be deleted from this section. Several commenters
said that the district engineer should not be required to consider
economic costs when assessing the success and sustainability of a
mitigation project. Another commenter, however, recommended that the
final rule require the district engineer to consider economic factors
more comprehensively, including not only the economic cost of the
compensatory mitigation, but also the full range of costs and benefits
to society stemming from the loss of aquatic resources.
    Economic costs are an important consideration when determining the
practicability of a proposed compensatory mitigation project. In
addition to economic costs, existing technology and logistics must also
be considered. If a particular compensatory mitigation project is cost-
prohibitive, then an alternative compensation project that is more
practicable should be required. District engineers will also consider
impacts to the public interest, including potential losses of aquatic
resource functions and services, when evaluating permit applications
and compensatory mitigation proposals, and determining appropriate and
practicable compensatory mitigation requirements.
    We have added Sec.  332.3(a)(2) [Sec.  230.93(a)(2)] to provide
clarification regarding the potential mechanisms for providing
compensatory mitigation. It states that restoration should be the first
option considered since the likelihood of success is greater.
Restoration also helps reduce impacts to ecologically important
uplands, such as mature forests, where compensatory mitigation
activities may be proposed because of land availability. The 404(b)(1)
Guidelines prohibit discharges in areas where there may be other
significant environmental consequences (see 40 CFR 230.10(a)).
    Some commenters recommended that the rule allow compensatory
mitigation projects on federal lands where state wildlife agencies
lease management rights for fish and wildlife purposes. Others
commenters suggested prohibiting compensatory mitigation projects on
existing public conservation lands.
    We have added Sec.  332.3(a)(3) [Sec.  230.93(a)(3)], which was
moved from Sec.  332.8(a)(2) [Sec.  230.98(a)(2)] of the proposed rule.
We have modified this paragraph to be generally applicable to all
compensatory mitigation projects, not just mitigation banks.
Compensatory mitigation projects may be located on federal lands, as
long as those projects comply with the provisions of this part,
including the site protection requirements in Sec.  332.7(a)(4) [Sec.
230.97(a)(4)].
    (b) Type and location of compensatory mitigation. Several
commenters stated that the established order of preference in the
proposed rule (i.e., mitigation bank credits; permittee-responsible
mitigation in accordance with a watershed plan or watershed approach;
on-site, in-kind permittee-responsible mitigation; and lastly, off-
site, out-of-kind permittee-responsible mitigation) is too limiting and
creates inefficiency. Many commenters stated that the proposed rule
establishes a preference for mitigation banks, and some of these
commenters argued that the preference for mitigation banks over in-lieu
fee programs cannot be justified. One commenter suggested that this
rule stipulate that mitigation banks should not necessarily represent a
``first resort'' to fulfilling mitigation requirements if there are on-
site opportunities that are likely to provide greater ecological
benefits. However, another commenter said that section 314 warrants a
stronger preference for using approved mitigation banks.
    We have substantially revised and reorganized this section of the
final rule, and have provided flexibility for district engineers to
make compensatory mitigation decisions based on what is environmentally
preferable and is most likely to successfully provide the required
compensatory mitigation. Sections 332.3(b)(2)-(6) [Sec.  230.93(b)(2)-
(6)] present a preference hierarchy, which was developed through
careful consideration of comments received in response to the proposed
rule, as well as various studies on the different approaches for
providing compensatory mitigation. The hierarchy is based on

administrative and environmental considerations, to reduce risk and
uncertainty associated with compensatory mitigation projects, as well
as temporal losses of aquatic resource functions and services.
Reduction of risk and uncertainty associated with compensatory
mitigation projects is achieved by favoring compensatory mitigation
that is further along in the planning and approval process or will
better support a watershed approach. Since there are time lags
associated with all sources of compensatory mitigation (see the 2001
NRC Report), our focus is on reducing temporal losses to the extent
practicable. Administrative considerations include the regulations
governing mitigation banks, in-lieu fee programs, and permittee-
responsible mitigation that are provided in this rule, as well as the
timing of actions required for those sources of compensatory
mitigation. Environmental considerations include the expected
ecological benefits of third-party compensatory mitigation as well as
independent studies that have shown that the ecological success of
permittee-responsible mitigation is uneven. There have been few
independent studies of the ecological success of mitigation banks and
in-lieu fee programs, so we have no basis for establishing a preference
based solely on third-party mitigation success.
    Section 332.3(b)(1) [Sec.  230.93(b)(1)] discusses general
principles for determining the appropriate type and location for
compensatory mitigation projects. Some of these principles were taken
from Sec.  332.3(b)(4) [Sec.  230.93(b)(4)] of the proposed rule, which
discussed the use of off-site and out-of-kind compensation. Since these
basic principles should be applied earlier in the selection process, we
have moved those provisions to Sec.  332.3(a)(1) [Sec.  230.93(a)(1)]
of the final rule. Paragraph (b)(1) of this section also states that
the compensatory mitigation options provided in paragraphs (b)(2)
through (b)(6) should be applied in the order they are given, to make
it clear that this is a hierarchy from highest to lowest preference. It
is important to understand that this is a preference hierarchy that
does not override a district engineer's judgment as to what constitutes
the most appropriate and practicable compensatory mitigation based on
consideration of case-specific circumstances. In this paragraph, we
have added a provision to address compensating for impacts to marine
resources. This provision states that compensatory mitigation project
sites for marine resources should be located in the same marine
ecological system as the impact site, citing reef complexes and
littoral drift cells as examples of marine ecological systems. We have
also added provisions indicating that compensation for impacts to
aquatic resources in coastal watersheds should be located in a coastal
watershed where practicable, and that mitigation projects should not be
located where they will increase risks to aviation by attracting
wildlife to areas where aircraft-wildlife strikes may occur (e.g., near
airports).
    Section 332.3(b)(2) [Sec.  230.93(b)(2)] establishes a preference
for the use of mitigation bank credits if the mitigation bank has the
appropriate number and resource type of credits available. This
preference is based on the requirements in this rule: before credits
can be sold or transferred to permittees the sponsor must have an
approved instrument, as well as an approved mitigation plan and other
assurances in place. Those other assurances are specified in the
mitigation banking instrument and usually include securing the
mitigation bank site, establishing financial assurances, and finalizing
the appropriate site protection mechanisms. Because of these
requirements for mitigation banks, there is generally less risk and
uncertainty (and less temporal loss) than there is with in-lieu fee
programs and permittee-responsibility. Because of the credit release
schedule required for mitigation banks, there is some degree of
demonstrated success in providing the compensatory mitigation. In
addition, the planning and resources involved in developing and
implementing a mitigation bank help provide greater assurance that the
compensatory mitigation project will provide environmental benefits.
However, district engineers can apply these considerations to other
sources of compensatory mitigation to override the preference for
mitigation bank credits. For example, the district engineer may
authorize the use of released credits from an in-lieu fee program since
the requirements for release of these credits are comparable to the
requirements for release of credits from an approved mitigation bank.
In a situation where the permittee has proposed to restore an
outstanding resource, and has provided sufficient scientific and
technical analysis to demonstrate that such a project will be
successful, the district engineer may authorize the use of that
compensatory mitigation project instead of mitigation bank credits.
    If the permitted impacts are not in the service area of an approved
mitigation bank, or are in the service area of an approved mitigation
bank, but that mitigation bank does not have the appropriate number and
resource type of credits available, and an approved in-lieu fee program
does not have appropriate released credits available, Sec.  332.3(b)(3)
[Sec.  230.93(b)(3)] establishes a preference for in-lieu fee program
credits. In-lieu fee programs fall into the next level of the hierarchy
because of the levels of planning and review they are required to
perform as a result of this rule. In-lieu fee programs are required to
develop a compensation planning framework that supports a watershed
approach (see Sec.  332.8(c) [Sec.  230.98(c)]). In-lieu fee programs
can also bring substantial expertise to aquatic resource restoration
and protection activities, and many in-lieu fee program sponsors are
conservation organizations with an interest in long-term management of
aquatic resources. This preference may be overridden by a high quality
permittee-responsible mitigation project or one that is likely to meet
performance standards before the in-lieu fee program sponsor fulfills
his or her obligation for advance credits.
    If an approved mitigation bank or in-lieu fee program cannot be
used to provide the required compensatory mitigation, Sec.  332.3(b)(4)
establishes a preference for permittee-responsible mitigation conducted
under a watershed approach. In cases where a watershed approach is not
practicable for permittee-responsible mitigation, under Sec.
332.3(b)(5) [Sec.  230.93(b)(5)] the district engineer should consider
options for on-site and/or in-kind compensation to fulfill the
compensatory mitigation requirements. The last option under the
preference hierarchy is for permittee-responsible mitigation through
off-site and/or out-of-kind compensatory mitigation (see Sec.
332.3(b)(6) [Sec.  230.93(b)(6)]).
    One commenter said the proposed rule seems excessively rigid, and
the limited funds available to public agencies should be used to
implement mitigation where it will be most cost-effective. One
commenter said that wetland establishment should not be an acceptable
form of wetland compensation, as it is too uncertain and has a bad
track record. One commenter recommended that this section be re-
organized to explain how the watershed approach should be applied to
each mitigation location option.
    Cost considerations may be used to evaluate whether the proposed
compensatory mitigation requirement for a DA permit is practicable.
However, the ecological success of the compensatory mitigation project
and its effectiveness at offsetting the permitted impacts are also
important

considerations. We recognize that wetland establishment may not be
successful in many situations, so we have established a preference for
restoration in Sec.  332.3(a)(2) [Sec.  230.93(a)(2)]. The watershed
approach is discussed in Sec.  332.3(c) [Sec.  230.93(c)]. District
engineers will apply the watershed approach to the extent practicable
when considering compensatory mitigation options, as well as during the
review and approval of instruments for mitigation banks and in-lieu fee
programs.
    The final rule states that compensatory mitigation decisions will
be based on what is environmentally preferable, which, in a particular
situation, might be on-site compensation. As discussed above, it
provides a hierarchy of preferences for satisfying compensatory
mitigation requirements for DA permits, starting with mitigation bank
credits.
    Many commenters supported eliminating the preference for in-kind
and on-site compensatory mitigation. Most of these commenters said that
compensatory mitigation requirements should be based on ecological
criteria, as well as the likelihood of offsetting the permitted
impacts, not on a preference for on-site mitigation. Some commenters
noted that rigid rules favoring on-site compensation often yield small,
poorly functioning compensatory mitigation projects. One commenter
noted that federal agencies that review permit applications are often
restricted from accepting more environmentally meaningful compensation
proposals because of the preference for in-kind, on-site compensatory
mitigation projects. Several other commenters, however, recommended
that the final rule express a preference for on-site mitigation. Two
commenters said that compensatory mitigation wetlands should be located
as close as possible to the impacted wetlands, and should be the same
wetland type. A few commenters suggested that on-site, in-kind
mitigation should be preferred until substantive watershed-level plans
are developed to guide compensatory mitigation decisions. Several
commenters stated that off-site mitigation should only be considered if
other forms of mitigation are likely to be ineffective, and several
commenters requested clarification of the circumstances under which
off-site or out-of-kind mitigation can be provided. A few commenters
stated that district engineers needed to be provided direction for
considering off-site mitigation.
    We believe that compensatory mitigation requirements should be
guided by ecological and practicability considerations, to help ensure
that the required compensation successfully fulfills its objective, to
offset aquatic resource functions lost as a result of the permitted
impacts. The watershed approach, as well as the other considerations
provided in Sec.  332.3 [Sec.  230.93] will help meet these objectives.
Because of its poor record of ecological success, a preference for on-
site mitigation cannot be justified. The final rule is supported by the
findings of the 2001 NRC Report, which indicated that an automatic
preference for on-site, in-kind 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. District engineers will use available tools and information
to guide their decision-making regarding where compensatory mitigation
projects should be located. As additional data are gathered, and new
tools are developed, district engineers will use those items as
appropriate.
    A number of commenters agreed that it may be appropriate to replace
certain aquatic resource functions on-site and other functions off-site
and that this flexibility is a positive aspect of the rule. However,
several commenters suggested that the rule should not allow a
combination of off-site and on-site mitigation, as it is overly
burdensome and would dilute the overall effectiveness of compensation.
One commenter said that compensating for functions at different
locations may create situations where each site is not fully
functional. Two commenters stated that the rule should allow a single,
permittee-sponsored mitigation project to compensate for the aquatic
impacts of a linear facility, such as a transmission line, which may
affect more than one watershed.
    We believe that using a combination of on-site and off-site
compensatory mitigation is often necessary or preferable to
successfully offset the functions lost at the impact site. This is an
important facet of a watershed approach to compensatory mitigation. To
be effective, compensatory mitigation projects must be located in
appropriate landscape settings. The off-site aquatic habitat
restoration or establishment activities should provide the suite of
functions performed by that habitat. The on-site mitigation will likely
focus on effectively replacing specific functions, such as water
quality or water quantity functions. Therefore, from a watershed
perspective, there will likely be a net increase in aquatic resource
functions. In general, off-site compensatory mitigation will be located
in the same watershed as the impact site. District engineers also have
flexibility under this rule to allow compensation for linear projects
to be conducted on one or multiple sites, based on environmentally
preferable and practicable compensatory mitigation options.
    A number of commenters expressed concern that an emphasis on off-
site compensatory mitigation can lead to the transfer of wetland
ecosystem services from urban to rural areas. Two commenters argued
that unless the rule requires applicants to include a description of
service values and benefits at the impact site and the compensatory
mitigation project site, rural areas will benefit and urban populations
will incur the costs. One commenter stated that recent and past studies
indicate that the location of mitigation banks is dictated primarily by
land costs rather than by sound scientific watershed principles.
    We recognize that aquatic resources in urban settings can provide
important functions and services, and we believe it is important that
urban areas not become devoid of aquatic resources simply because it is
more difficult to successfully restore or establish aquatic habitat in
developed areas. Compensatory mitigation required by district engineers
will be located in areas where it is appropriate and practicable to
conduct successful aquatic resource restoration, establishment, and
enhancement activities. In some cases, this will result in compensatory
mitigation for impacts in urban areas to be conducted in more remote
locations; in other cases, it may be appropriate to replace certain
aquatic resources in urban areas. Site selection is a primary
consideration for compensatory mitigation projects and district
engineers will evaluate proposed mitigation projects, including
mitigation banks, using the watershed approach to ensure that they
contribute to the functions and sustainability of aquatic resources
within a watershed. As discussed above, the use of a combination of on-
site and off-site compensatory mitigation can be effective in retaining
aquatic resource functions and services in urban areas.
    (c) Watershed approach to compensatory mitigation. Many commenters
supported use of a watershed approach for compensatory mitigation. One
commenter said that consideration of watershed functions is an orderly,
incremental next step to move section 404 permitting towards a
watershed-based perspective. One

commenter stated that an ecosystem approach will result in a
comprehensive package that best fits the landscape and its needs.
Several commenters noted that the use of a watershed approach would
increase the flexibility for compensatory mitigation and ensure a
project's sustainability. Four commenters encouraged the Corps to use
its funding to develop a general and flexible framework for
consideration of landscape or watershed needs, rather than formal
watershed plans.
    We have retained the watershed approach in the final rule, with
modifications made in response to specific comments. The watershed
approach retains many of the recommendations from the 2001 NRC Report.
While the watershed approach provides flexibility for identifying an
appropriate compensatory mitigation project, as well as its location in
the watershed, a main objective of the watershed approach is to
maintain and improve the quantity and quality of wetlands and other
aquatic resources in watersheds through strategic selection of
compensatory mitigation project sites. As experience is gained in the
use of the watershed approach, Corps districts will use that experience
to improve decision-making for compensatory mitigation requirements.
    One commenter suggested that use of a watershed approach be
encouraged, but not required, and a few commenters asserted that the
term ``watershed approach'' is too ambiguous to be a mandatory
requirement. Many commenters recommended that the agencies not require
use of the watershed approach until there is consensus on how
watersheds are defined and the development of planning tools. One
commenter said that a state, district, or county cannot be compelled to
establish a watershed approach. One commenter stated that the language
in Sec.  332.3(c)(3) [Sec.  230.93(c)(3)] suggests that watershed
approach will be taken on a project-by-project basis and contradicts
the entire idea of a watershed approach. This commenter added that
watershed studies should not be project-specific.
    The watershed approach described in the proposed rule is intended
to be a general framework for better decision-making for compensatory
mitigation requirements for DA permits. The rule language needs to be
flexible, so that district engineers can adapt the general framework to
more effectively address aquatic resource needs in their regions. We
have added a definition of the term ``watershed'' to Sec.  332.2 [Sec.
230.92], but the appropriate watershed scale to use for the watershed
approach will vary by region, as well as the particular aquatic
resources under consideration. There are a number of planning tools
available for use with a watershed approach, and more will be developed
as this rule is implemented and further experience is gained from using
a watershed perspective. As stated in Sec.  332.3(c)(1) [Sec.
230.93(c)(1)], the watershed approach is to be used to the extent
appropriate and practicable. There will be situations, such as
compensatory mitigation requirements for small impacts, where it would
not be cost-effective to utilize a watershed approach. Since using a
watershed approach is not appropriate in areas without watershed
boundaries, such as marine waters, we have added a provision (Sec.
332.3(c)(2)(v) [Sec.  230.93(c)(2)(v)]) to clarify that other types of
spatial scales may be more appropriate in those areas. This rule does
not require the development of watershed studies on a project-by-
project basis.
    Several commenters supported the idea of a watershed and/or
ecosystem approach but said that watershed plans should be prepared
before permitted impacts can occur. A few commenters stated that many
existing watershed plans are not comprehensive. One commenter noted
that it will be difficult to implement the watershed approach in a
meaningful way in the majority of developing watersheds that are
without watershed plans. Several commenters requested that the rule
stipulate that only mitigation banks that conform to approved watershed
plans shall be approved by the district engineer and the IRT. Several
commenters stated that, in the absence of a watershed plan, a watershed
approach will lead to inappropriate mitigation and the cumulative loss
of wetland functions. These commenters also noted that the proposed
rule did not provide an incentive to undertake real watershed planning,
and recommended that the agencies develop criteria and standards for
watershed plans that incorporate the recommendations of the National
Research Council and the elements of watershed plans discussed in the
rule.
    As with the 2001 NRC Report, the watershed approach described in
this final rule does not require a formal watershed plan. The watershed
approach may be based on a structured consideration of watershed needs
and how wetlands and other types of aquatic resources in specific
locations will address those needs. We realize that in many areas,
watershed plans appropriate for use in planning compensatory mitigation
activities have not been developed. Although it would be desirable to
have watershed plans designed to more fully support a watershed
approach, we believe that a watershed approach can be effectively
implemented without watershed plans. Mitigation banks can support a
watershed approach without using watershed plans. There are different
types of watershed plans that could be developed for purposes other
than aquatic resource restoration, establishment, enhancement, and/or
preservation activities. For example, some watershed plans are
conceived to guide development activities or the placement of storm
water infrastructure. Therefore, we have modified Sec.  332.3(c)(1)
[Sec.  230.93(c)(1)] to state that the district engineer will determine
whether a watershed plan is appropriate for use in the watershed
approach for compensatory mitigation. The final rule does not provide
disincentives to develop watershed plans. District engineers are
encouraged to work with other government agencies and stakeholders to
develop watershed plans to support decision-making in the Corps
Regulatory Program, but we also recognize that the development of
watershed plans is resource-intensive, and may not be feasible in many
areas. Criteria and standards for developing watershed plans
appropriate for use in the Corps Regulatory Program may be established
at a later time.
    Some commenters stated that it is unclear how the watershed
approach will be implemented in the absence of a watershed plan. One
commenter stated that most watershed management plans are relatively
small in scope relative to an economically sustainable service area,
and therefore using such plans can thwart regional water quality needs.
Others argued that the government, not permit applicants, should
develop watershed plans, because most applicants lack the time and
resources needed to develop those plans. One commenter said that
watershed plans vary considerably from region to region and are usually
unable to support evaluations of compensatory mitigation needs. This
commenter recommended that EPA and the Corps establish a certification
process to assure the format and information content of watershed plans
is sufficient to meet the intent of the proposed rule.
    To implement a watershed approach in the absence of a watershed
plan, district engineers will utilize the considerations specified in
Sec.  332.3(c)(2) [Sec.  230.93(c)(2)] and available information on
watershed conditions and needs, as discussed in Sec.  332.3(c)(3)
[Sec.  230.93(c)(3)]. Although many of the watershed plans that have
been

developed in the past focus on small watersheds, water quality
considerations can be effectively addressed through a watershed
approach without relying on watershed plans. Most watershed plans will
be developed through collaboration among federal, tribal, state, and
local government agencies, as well as non-governmental organizations,
landowners, and various other stakeholders. This rule does not require
the development of watershed plans by permit applicants. As discussed
above, the district engineer will determine whether an existing
watershed plan is appropriate for use in a watershed approach for
compensatory mitigation. We do not believe it is necessary to establish
a certification process for appropriate watershed plans.
    Commenters requested clarification regarding watershed parameters,
interstate watersheds, the effect the watershed approach will have on
section 404 permitting, and the definitions of watershed and watershed
approach. A few commenters cited the high cost of obtaining data for a
watershed approach and the difficulties in developing watershed plans.
Many commenters recommended additional considerations to be included in
the watershed approach. These considerations include the following: (1)
Potential wetland landscape function; (2) aquatic resources in an
ecosystem context; (3) decisions regarding mitigation for aquatic
resources that take into account the needs of the ecosystem as a whole,
including mitigation priorities for other resources, such as endangered
species; (4) interactions and habitat connectivity; (5) inventory of
historic as well as existing aquatic resources and conditions; (6)
social values; (7) provision of adequate and suitable on-site storm
water management; (8) consideration of aquatic resource problems and
risks, and specific opportunities for addressing those problems and
risks; and (9) evaluation of functions of the current wetland
landscape.
    Appropriate watershed parameters for use in a watershed approach
will be determined by district engineers for their regions of
responsibility. District engineers may consult with other agencies and
other interested parties to identify watershed parameters that should
be used. The intended effect of implementing a watershed approach to
compensatory mitigation is to improve the success and effectiveness of
aquatic resource restoration, establishment, enhancement, and/or
preservation required by DA permits, and to maintain and improve
aquatic resource functions and services within watersheds. The terms
``watershed'' and ``watershed approach'' have been defined at Sec.
332.2 [Sec.  230.92]. If an appropriate watershed plan is not
available, district engineers are to use a watershed approach based on
analysis of available information (see Sec.  332.3(c)(3)(i) [Sec.
230.93(c)(3)(i)]). Permit applicants are not required to incur
substantial costs to provide information for the watershed approach.
The nine considerations provided in the previous paragraph are already
addressed through various provisions in this rule. For example, social
values are considered as ecosystem services. We have added a sentence
to Sec.  332.3(c)(2)(iv) [Sec.  230.93(c)(2)(iv)] (Sec.
332.3(c)(2)(ii) [Sec.  230.93(c)(2)(ii)] in the proposed rule) to state
that the identification and prioritization of resource needs should be
as specific as possible, to enhance the use of the watershed approach.
We have also added a provision to this section which states that a
watershed approach may include on-site compensatory mitigation, off-
site compensatory mitigation, or a combination of on-site and off-site
compensatory mitigation (see Sec.  332.3(c)(2)(iii) [Sec.
230.93(c)(2)(iii)]).
    Many commenters did not believe that the rule should specify
minimum information requirements for use of the watershed approach to
compensatory mitigation site selection. Several commenters said that
this would place an undue burden on the regulated community and the
agencies, especially if the information is not available, and could
potentially delay the issuance of permits or the implementation of
mitigation plans. Others expressed concern that, because the minimum
information mentioned in the preamble is not currently available in
many areas, a requirement for such information would limit the use of a
watershed approach. Some commenters argued that the rule should not
rely on only the applicants to provide supporting data for a watershed
approach. Several commenters supported the inclusion of minimal
information requirements. One commenter noted that these requirements
are necessary to establish a consistent and scientifically defensible
method of using the watershed approach. One commenter suggested that
the requirements be based on information generally known to be
available for most watersheds. Other commenters argued that all
projects regardless of size should be subject to the requirement for
additional information.
    We have revised Sec.  332.3(c)(3) [Sec.  230.93(c)(3)] to clarify
the information that the district engineers should use as the basis for
a watershed approach, and to identify potential sources for such
information. While there is no bright line for the minimum amount of
information needed to support a watershed approach, the final rule
identifies information that is generally needed to implement a
watershed approach effectively. That information will address watershed
conditions and needs, and should include potential sites (as well as
priority sites) for compensatory mitigation projects. We have indicated
that appropriate information may be available from sources such as
wetland maps, soil surveys, aerial photographs, local ecological
reports, etc. In Sec.  332.3(c)(3)(iii) [Sec.  230.93(c)(3)(iii)], we
state that the level of information and analysis must be commensurate
with the scope and scale of the proposed impacts that require a DA
permit, as well as the functions lost as a result of those impacts.
Larger projects will generally warrant greater investment in
information gathering to ensure proper consideration of watershed
factors in the selection of appropriate compensatory mitigation.
    (d) Site selection. One commenter stated that the proposed site
selection criteria are well-defined and appropriate. Another commenter
said that the criteria were too broad. One commenter stated that the
rule should require the district engineer to deny the use of
compensatory mitigation project sites that are not ecologically
suitable. Two commenters suggested that site selection criteria should
consider species that should be present or have access to the
compensatory mitigation project site. Another commenter noted that the
proposed rule provides end goals of a site selection process but does
not provide details concerning how these goals would be met. One
commenter stated that requirements that further limit compensatory
mitigation site selection would be overly burdensome. Two commenters
expressed concern that mitigation banks would be prohibited near
airports. One commenter recommended that the agencies discourage
compensatory mitigation projects on public lands as these tend to
result in a loss of wetlands accompanied only by some limited
improvement in lands already set aside for conservation purposes.
    This provision provides site criteria that district engineers must
consider, to the extent practicable, to help determine whether a
proposed compensatory mitigation project site will be suitable for
successfully replacing lost aquatic resource functions. They are
general

considerations, since it is impractical to provide a comprehensive list
that accounts for different regions across the country. If a proposed
compensatory mitigation project site is determined to be unsuitable,
then other sites ought to be considered. Section 332.3(d)(1)(vi) [Sec.
230.93(d)(1)(vi)] includes consideration of habitats for species of
interest. In some cases, selecting an appropriate compensatory
mitigation project site will be an iterative process, so that the most
suitable site for achieving as many objectives as possible can be
found. The intent of Sec.  332.3(d) [Sec.  230.93(d)] is to assist in
site selection that will support ecologically successful and
sustainable compensatory mitigation projects. As discussed in the
preamble to the proposed rule, locating compensatory mitigation
projects (including mitigation banks) near airports is likely to
attract wildlife species and pose hazards to aviation. This does not
mean that no compensatory mitigation projects can be located near any
airport; it means that compatibility with existing facilities must be
considered. We believe it is appropriate, in some instances, to site
compensatory mitigation projects on public lands, where they are
consistent with the use and management of the public land, and the
credits are based solely on aquatic resource functions provided by the
compensatory mitigation project, over and above those provided by
public programs already planned or in place.
    (e) Mitigation type. Many commenters recommended that the rule
retain a preference for in-kind mitigation. Several commenters stated
that out-of-kind mitigation does not address the specific functions,
services, or values of the resource being impacted. Several commenters
said that the current preference for on-site, in-kind mitigation should
be continued until substantive watershed-level plans are developed to
guide compensatory mitigation activities, and one commenter noted that
the proposed rule appears to allow the district engineer to accept out-
of-kind mitigation without determining if it serves the needs of the
watershed. One commenter was concerned that the rule has loosened the
definition of in-kind to allow more flexibility, which would lead to a
more relaxed mitigation approach, and other commenters noted that a
broad application of ``out-of-kind'' would allow the replacement of a
wetland with a stream habitat or vice versa.
    The final rule retains a preference for in-kind mitigation. As
defined in Sec.  332.2 [Sec.  230.92], the term ``in-kind'' refers to
similar structural and functional types. However, we would like to
clarify that in-kind mitigation does not mean compensating for impacts
to degraded aquatic resources by providing degraded compensatory
mitigation projects. A compensatory mitigation project should result in
high quality aquatic resources that provide optimum functions within
its landscape context, taking into account unavoidable constraints.
    We have modified the example in Sec.  332.3(e)(2) [Sec.
230.93(e)(2)] to provide clarification as to what constitutes in-kind
mitigation in terms of aquatic resource type. The revised example
states that tidal wetlands are most likely to compensate for
unavoidable impacts to tidal wetlands. Perennial streams are used as
the other example of in-kind mitigation. Although out-of-kind
mitigation may not offset all aquatic resource functions and services
provided by the aquatic resource being affected by the permitted
activity, out-of-kind mitigation may be important for restoring or
improving watersheds, especially in cases where certain aquatic
resource types have been disproportionately lost from a watershed (see
the 2001 NRC Report). It is not necessary to develop watershed plans to
allow out-of-kind mitigation, but watershed factors need to be
considered. Section 332.3(e)(2) [Sec.  230.93(e)(2)] requires district
engineers to document the basis for requiring out-of-kind mitigation in
the administrative record for the permit action.
    Several commenters supported the provision in the proposed rule
that allows for out-of-kind compensation, and one commenter said that
out-of-kind mitigation should be used when it is ``environmentally
preferable'' to in-kind mitigation. A number of commenters requested
further guidance on when out-of-kind mitigation is appropriate and a
more definitive and transparent list of ``factors'' to be considered
when proposing or evaluating out-of-kind mitigation. One commenter
noted that the rule as proposed does not limit the types of projects
that could be authorized as compensatory mitigation for permanent
stream losses. Another commenter suggested that stream mitigation
should only be appropriate compensation for wetland impacts in limited
situations. One commenter expressed concern that the requirements in
the proposed rule will make it difficult to provide in-kind
compensation for losses of ephemeral channels.
    The final rule states that district engineers can require the use
of out-of-kind compensatory mitigation when he or she determines that
it will serve the aquatic resource needs of the watershed. In addition,
Sec.  332.3(a)(1) [Sec.  230.93(a)(1)] states that, when evaluating
compensatory mitigation options, the district engineer will consider
what is environmentally preferable. This includes consideration of in-
kind versus out-of-kind mitigation. District engineers will determine
on a case-by-case basis if out-of-kind mitigation would be more
appropriate for offsetting the losses of aquatic resource functions
caused by the permitted impacts. In this rule, it would not be
appropriate to list factors for consideration, since these are likely
to vary by geographic region and by watershed. District engineers will
determine appropriate and practicable compensatory mitigation
requirements for permanent losses of streams. Unless there are case-
specific watershed considerations that warrant out-of-kind mitigation
for stream impacts, district engineers will generally require stream
restoration, enhancement, or preservation activities to provide
required compensatory mitigation for permitted impacts to streams. The
appropriateness and practicability of requiring in-kind compensation
for permitted losses of ephemeral streams will be determined by
district engineers on a case-by-case basis.
    One commenter recommended that the rule specify the types of
compensatory mitigation activities that are preferred. This commenter
said that re-establishment should be the preferred method of mitigation
and that establishment should be rarely accepted. Another commenter
stated that the proposal places full discretion with the district
engineer for making determinations of what type of compensatory
mitigation might be most appropriate in any given scenario.
    Preferred compensatory mitigation activities in terms of what would
be best for the aquatic environment, including a particular watershed,
will be determined by the district engineer on a case-by-case basis. We
have added a new paragraph at Sec.  332.3(a)(2) [Sec.  230.93(a)(2)],
which states that restoration should be the first option considered for
providing compensatory mitigation. Aquatic resource establishment may
be acceptable after considering the likelihood of success of a
particular compensatory mitigation project, including the suitability
of the proposed site to satisfy the objectives of the compensatory
mitigation project after that project is fully implemented. The final
rule retains the discretion of the district engineer to determine the
appropriateness and practicability of any compensatory mitigation
required for DA permits.

    Three commenters supported adding a provision which states that
district engineers should not permit out-of-kind mitigation for rare or
hard to replace wetlands. Two commenters also stated that such a
provision would eliminate compensatory mitigation for those habitat
types that are not the easiest to recreate or those that would not have
a relatively high likelihood of success. Some commenters objected to
the inclusion of ``relative likelihood of success in establishing
different habitat types'' as it allows impacts to higher quality,
difficult-to-replace wetlands (e.g., fens or forested wetlands),
without requiring their replacement. One commenter added that meeting
ecological needs should take priority over the likelihood of a
compensatory mitigation project's success. One commenter noted that a
strict preference for on-site, in-kind mitigation often results in
compensatory mitigation projects that have relatively little ecological
value, are more difficult to establish, and are less likely to be
sustained over the long term.
    To reduce losses of difficult-to-replace aquatic resources, we have
added Sec.  332.3(e)(3) [Sec.  230.93(e)(3)] which states that, in
cases where further avoidance and minimization is not practicable, the
required compensatory mitigation must be provided through in-kind
rehabilitation, enhancement or preservation to the extent practicable.
When evaluating a request for a section 404 permit for an activity that
would result in the loss of a difficult-to-replace aquatic resource,
the district engineer will determine whether the proposed activity
fully complies with the 404(b)(1) Guidelines, including requirements to
avoid and minimize impacts to those resources to the maximum extent
practicable and to consider alternatives. The likelihood of success
must be considered when evaluating compensatory mitigation proposal. If
the potential for successfully satisfying the objectives of a
compensatory mitigation project is low, then an alternative
compensatory mitigation project with a higher likelihood of success
should be required instead. There will always be some risk and
uncertainty associated with compensatory mitigation projects, but risks
and uncertainties need to be minimized as much as possible so that the
objectives of those projects will be achieved.
    A few other commenters suggested that the rule specify that the
credit or ratio authorized for out-of-kind mitigation be equivalent
across mitigation providers. Two commenters recommended that stream
credits be treated the same as wetlands credits in the rule.
    Appropriate compensation ratios will be determined by district
engineers on a case-by-case basis (see Sec.  332.3(f) [Sec.
230.93(f)]). District engineers will determine the appropriate units of
measure for wetland and stream credits.
    (f) Amount of compensatory mitigation. Some commenters agreed with
the minimum mitigation ratio in the proposed rule. Many commenters
argued that the suggested baseline mitigation ratio of one-to-one in
the proposed rule is not conservative enough, and is not scientifically
defensible given the high documented rate of failure or under-
performance of many mitigation sites. A considerable number of these
commenters also argued that mitigation should never be at a ratio that
is less than one-to-one. One commenter suggested that a 1.5 to 1 ratio
would be a better minimum ratio and would reasonably account for
expected failures. One commenter stated that the rule gives the
district engineer too much discretion to decide on the replacement
ratio.
    We have modified Sec.  332.3(f)(1) [Sec.  230.93(f)(1)] to clarify
that, in cases where the district engineer determines that compensatory
mitigation is required to offset unavoidable impacts to aquatic
resources, the amount of compensatory mitigation must be, to the extent
appropriate and practicable, sufficient to replace lost aquatic
resource functions. With this rule, we are encouraging the use of
functional and condition assessments to determine the appropriate
amount of compensatory mitigation needed to offset authorized impacts,
instead of relying primarily on surrogate measures such as acres and
linear feet. In the future, there will be more assessment methods
available to quantify impacts and compensatory mitigation. We recognize
that, in some cases, it may not be appropriate and practicable to
require full replacement of aquatic resource functions. This paragraph
also states that in cases where functional or condition assessments or
other suitable metrics are not used, a minimum one-to-one acreage or
linear foot compensation ratio must be used. The latter provision will
help ensure that an equivalent area or length of aquatic habitat will
be used to provide compensatory mitigation, to help offset aquatic
resource losses that will occur as a result of the permitted activity.
When determining the appropriate compensation ratio in the absence of a
functional or condition assessment method, it is necessary to rely on
other metrics, such as area and linear measures. In this rule, a
baseline ratio greater than one-to-one cannot be justified because of
the uncertainties surrounding impact and compensatory mitigation sites.
Those uncertainties must be accounted for on a case-by-case basis by
district engineers. Most aquatic resources likely to be impacted by
activities that require DA permits are degraded to some degree.
District engineers can only require an amount of compensatory
mitigation that is roughly proportional with the permitted impacts, so
that it is sufficient to offset those lost aquatic resource functions.
Only in cases where a functional or condition assessment or other
suitable metric is used can the district engineer require less than
one-to-one compensation on an acreage or linear foot basis. Even in
cases where functional or condition assessment methods are used, these
will not usually result in less than one-to-one ratios, because of the
other factors (uncertainty, temporal loss) that must be considered.
    A few commenters noted said there is no scientific basis for a
replacement ratio based on linear feet. According to these commenters,
compensatory mitigation credits and debits must be based on the net
gain or loss of stream functions, not stream length. Several commenters
argued that the use of a required minimum replacement ratio in the
absence of a functional assessment is too inflexible for stream
mitigation. One commenter supported efforts to achieve a one-to-one
replacement ratio in stream mitigation. Another commenter argued that a
one-to-one minimum replacement ratio would be too inflexible and that,
in some instances, stream restoration is better handled by other means
(e.g., rotational grazing and livestock exclusion).
    The use of linear feet may be more appropriate for determining
compensatory mitigation amounts for aquatic resources that are more
linear in nature, such as streams. District engineers retain the
discretion to quantify stream impacts and required compensatory
mitigation in terms of area or other appropriate units of measure.
Where they are available and appropriate for use, we encourage the use
of functional and condition assessments to quantify debits and credits
for stream impacts and compensation. The amount of required stream
compensatory mitigation is dependent on the method of providing the
compensation, as well as other factors (see Sec.  332.3(f)(2) [Sec.
230.93(f)(2)]).
    Many commenters requested further guidance as to when functional
assessments should be used to determine the required amount of

compensatory mitigation. A few commenters stated that there could be
situations where a functional assessment is inappropriate or not needed
(e.g., temporary impacts to unvegetated waters). Commenters also
requested clarification as to whether a preferred assessment method
would be specified in the final rule, if the district engineer will
perform these assessments, and how the Corps planned to reconcile
differences in opinion regarding functional assessments. While some
commenters supported the use of functional assessments, others
recommended retaining replacement ratios based on area until there is
an approved model for accurate functional assessment. According to one
commenter, functional assessment methods and mitigation ratios should
be determined with input or consensus from the regulated community. One
commenter said that use of a functional assessment methodology should
never result in less mitigation than the amount of acreage or linear
footage impacted. However, several commenters urged the agencies to
insert language into the rule that would provide district engineers
with explicit guidelines to allow for mitigation ratios of less than
one-to-one where appropriate.
    Functional assessments will be used to determine compensatory
mitigation amounts in cases where such methods are available,
appropriate, and practicable for use. There are on-going efforts to
develop and refine functional assessment methods and other science-
based assessment tools. If appropriate functional assessment methods
are not available, or if it is not practicable to use the appropriate
and available functional assessment method for a particular project,
then other appropriate metrics are to be used. We have modified Sec.
332.3(f)(1) [Sec.  230.93(f)(1)] to include the use of condition
assessment methods and other appropriate metrics for determining the
amount of compensatory mitigation that is to be required for DA
permits. Condition assessments are typically based on indices of
biological integrity. District engineers will determine on a case-by-
case basis whether a particular functional or condition assessment
method is appropriate and practicable for calculating compensatory
mitigation amounts for DA permits. District engineers may consult with
the regulated public and other stakeholders on the appropriateness of
using existing functional or condition assessment methods in a
particular region, or for certain types of aquatic resources, but the
district engineer retains responsibility for the final decision as to
how much mitigation will be required and how it is determined.
    Since functional assessments typically provide quantitative
measures of specific functions performed by an impact site, and
expected functions to be provided by the compensatory mitigation
project site, there may be cases where the compensatory mitigation
project site is expected to provide higher levels of functions than the
impact site, especially if the impact site is substantially degraded.
Where quantitative measures are used, there needs to be flexibility to
ensure that the required compensatory mitigation is roughly
proportional to the permitted impacts.
    In Sec.  332.3(f)(2) [Sec.  230.93(f)(2)], we have added
``likelihood of success'' and ``the distance between the affected
aquatic resource and the compensation site'' to the list of factors to
be considered by district engineers when determining the appropriate
amount of compensatory mitigation for permitted impacts. We have also
added a new Sec.  332.3(f)(3) [Sec.  230.93(f)(3)], to state that in
cases where an in-lieu fee program will be used to provide the required
compensatory mitigation, and advance credits will be used to provide
that compensatory mitigation, the district engineer must require
additional compensatory mitigation to account for the risk and
uncertainty associated with in-lieu fee projects that have not yet been
implemented. Finally we note that, while temporal loss must also be
considered in determining mitigation ratios, the definition of
``temporal loss'' in Sec.  332.2 [Sec.  230.92] specifies that district
engineers may determine that additional compensation for temporal loss
is not required if the mitigation is initiated prior to or concurrent
with the permitted impacts, except for resources with long development
times (e.g., forested wetlands).
    (g) Use of mitigation banks and in-lieu fee programs. Two
commenters supported the use of mitigation banks for all DA
authorizations. One commenter requested clarification on whether
mitigation banks could provide compensatory mitigation for all types of
mitigation requirements. A few commenters stated that mitigation banks
should not be used to provide compensation for after-the-fact permits
until all appropriate federal, state and local enforcement conditions
are met, and that compensatory mitigation should not be allowed instead
of restoration if the activity would not have been eligible for a DA
permit. Another commenter suggested that ratios for after-the-fact
permits should be higher. Another commenter said that mitigation banks
should only be used in after-the-fact permits with a debit penalty.
    Since the final rule includes in-lieu fee programs as a source of
compensatory mitigation, we have modified this paragraph to include
both mitigation banks and in-lieu fee programs. We have also modified
this paragraph to refer to the preference hierarchy provided in Sec.
332.3(b) [Sec.  230.93(b)]. Mitigation banks and in-lieu fee programs
may be used to compensate for impacts to aquatic resources authorized
by general permits and individual permits, including after-the-fact
permits. Corps enforcement actions will be handled in accordance with
the regulations at 33 CFR part 326, which stipulate when after-the-fact
permit applications will be accepted. If the district engineer
determines that compensatory mitigation is necessary, he will determine
the appropriate ratio based on what is required to compensate for the
aquatic resources.
    Two commenters said that the provision stating that mitigation
banks may also be used to satisfy requirements arising out of an
enforcement action, such as supplemental environmental projects, should
be included in 33 CFR 332.3(g). One commenter said that mitigation
banks should be used to resolve violations.
    The Corps does not have the authority to require supplemental
environmental projects to resolve Clean Water Act violations. EPA has a
Supplemental Environmental Projects (SEP) Policy that allows the Agency
to consider projects proposed by violators to mitigate the penalties
assessed for violations of the CWA. Mitigation banks and in-lieu fee
programs can qualify as these types of projects if they meet the basic
requirements of the Agency's SEP Policy.
    (h) Preservation. Many commenters supported the use of preservation
as a form of compensatory mitigation. Several commenters said that
preservation is needed in urban and coastal areas. Other commenters
stated that preservation is important to sustainable ecosystems and to
protect watershed health. Several commenters recommended that the rule
require the use of a permanent legal instrument to ensure the
protection of the preserved site. Several additional commenters argued
that compensation ratios should be greater than one-to-one for
preservation mitigation projects. Some commenters supported a
requirement that any use of preservation should be the result of a
watershed plan or a

watershed approach. One commenter said that the requirement for the
preserved resource to ``contribute to the ecological sustainability of
the watershed'' is too vague.
    The 2001 NRC Report stated that wetland preservation is an
important tool for maintaining wetland diversity in a watershed, and
achieving the goals of the Clean Water Act in that watershed.
Preservation is particularly valuable for protecting unique, rare, or
difficult-to-replace aquatic resources, such as bogs, fens, and
streams, and may be the most appropriate form of compensatory
mitigation for those resources. We recognize that wetland preservation
does not, in the short term, result in new wetland resources and thus
contribute to the ``no overall net loss'' goal, but over longer time
periods preservation helps reduce wetland losses by removing the
protected wetlands from the pool of wetlands that may be subject to
future development activities that require DA permits. Aquatic resource
preservation, when combined with restoration or establishment
activities, can provide important aquatic services in a watershed.
Section 332.3(h)(1)(v) [Sec.  230.93(h)(1)(v)] requires the site
containing the preserved resources to be permanently protected through
appropriate instruments.
    Decisions on whether to allow preservation as part of a
compensatory mitigation package will be made by the district engineer,
based, to the extent appropriate and practicable, on the watershed
approach. We have modified Sec.  332.3(h)(1) [Sec.  230.93(h)(1)] to
clarify that all five criteria must be met for preservation to be used
as compensatory mitigation for DA permits. We have also modified Sec.
332.3(h)(1)(ii) [Sec.  230.93(h)(1)(ii)] to state that the resources to
be preserved must provide a significant contribution to the ecological
sustainability of the watershed. In determining whether this
requirement is met, the district engineer may also consider whether the
resource to be preserved is unique, rare, or hard to replace. To
support compliance with that requirement, this provision also requires
the district engineer to use appropriate quantitative assessment tools,
in cases where such tools are available. The district engineer will
also decide whether a proposed preservation site contributes to
ecological sustainability of the watershed, based on case-specific
factors.
    Many commenters stated that preservation alone is not an acceptable
form of compensatory mitigation and preservation does not promote ``no
net loss'' of wetlands. Several commenters said that preservation and
enhancement should only be used to augment aquatic resource restoration
and establishment. Other commenters recommended that only a small
percentage of credits for a particular compensatory mitigation project
should be given for preservation and only when it is used in
conjunction with restoration, enhancement, and/or establishment.
    As stated in Sec.  332.3(h)(2) [Sec.  230.93(h)(2)], preservation
will be provided in conjunction with aquatic resource restoration,
establishment, and/or enhancement activities, unless the district
engineer waives this requirement in a situation where preservation has
been identified as a high priority using a watershed approach. If the
district engineer makes such a waiver, a higher compensation ratio
shall be required. For each mitigation bank and in-lieu fee project
involving preservation, the district engineer, in consultation with the
IRT, will determine the number of credits that will result from that
preservation activity.
    (i) Buffers. Many commenters agreed that upland buffers and
riparian areas should be used as compensatory mitigation. Several
commenters stated that buffers should be required for all compensatory
mitigation projects. Some commenters noted that uplands and buffers
play important roles in wetland and stream mitigation banks and are an
integral part of a compensatory mitigation project's functions and
values. One commenter said that buffers should not be used to generate
compensatory mitigation credits unless they contribute substantially to
habitat connectivity. A number of commenters said that buffers should
not be used as compensatory mitigation.
    Upland buffers and non-wetland riparian areas can provide
substantial contributions to the ecological sustainability of aquatic
resources within watersheds. These areas may also be critical to the
success of aquatic resource restoration, establishment, enhancement,
and preservation activities. It is not feasible to require buffers for
all compensatory mitigation projects; such decisions need to be made by
district engineers on a case-by-case basis. We have added a sentence to
Sec.  332.3(i) [Sec.  230.93(i)] to clarify that buffers may provide
habitat or corridors necessary for the ecological functioning of
aquatic resources.
    One commenter said that the final rule should allow credit for
riparian and upland areas that serve as the principal or sole
compensatory mitigation in certain circumstances (e.g., in arid regions
in the western United States). Some commenters suggested that adjacent
upland habitat should not be counted separately for compensatory
mitigation credit, unless a minimum one-to-one ratio of wetland
restoration or establishment is provided. Three commenters requested
guidance that explains how and when buffers could be used to provide
compensatory mitigation credit.
    We have added a sentence to Sec.  332.3(i) [Sec.  230.93(i)] to
clarify that in cases where buffers are required by the district
engineer as part of a compensatory mitigation project, compensatory
mitigation credit will be provided for those buffers. In most cases,
the required buffers will supplement aquatic resource restoration,
establishment, enhancement, and/or preservation activities. To qualify
as providing compensatory mitigation credit, adjacent upland habitat
must contribute to the long-term viability of the adjoining aquatic
resources. District engineers will determine on a case-by-case basis
whether buffers are necessary components of compensatory mitigation
projects.
    (j) Relationship to other federal, tribal, state, and local
programs. Several commenters requested clarification regarding the
relationship between compensatory mitigation undertaken for purposes of
compensating for losses under the Corps Regulatory Program and
mitigation actions taken under other federal, state, or local programs.
Many commenters said that the same compensatory mitigation project site
or mitigation bank should satisfy all sets of statutory requirements
without the need for additional compensatory mitigation required by the
Corps, as long as the functions provided through compensatory
mitigation under each statute are the same or complementary. One
commenter noted that the rule should recognize that compensatory
mitigation, including compensation provided by mitigation banks, may be
designed to comprehensively address requirements under multiple
programs and authorities for the same activity. Another commenter
stated that this provision is contrary to the intent of the statute
that the regulations should maximize opportunities for mitigation
credits. Other commenters, however, supported this provision of the
proposed rule.
    Compensatory mitigation projects used to fulfill the compensation
requirements for DA permits may be used to satisfy the environmental
requirements for other programs, such as wetlands regulatory programs
administered by tribal, state, and local

governments. In cases where tribal, state, or local governments
regulate similar activities to those regulated by the Corps,
compensatory mitigation projects may be designed to fulfill all
applicable compensation requirements. For example, a surface coal
mining activity that requires authorization under section 404 of the
Clean Water Act and the Surface Mining Control and Reclamation Act
(SMCRA) may offset environmental losses through a compensatory
mitigation project that is designed to satisfy the requirements of both
statutes. Also, mitigation banks and in-lieu fee programs that are
developed for the purposes of providing compensatory mitigation under
the Corps Regulatory Program may also be used to provide compensatory
mitigation for Corps Civil Works projects (see section 2036(c) of the
2007 Water Resources Development Act) or activities conducted on
military installations (see 10 U.S.C. 2694b).
    We have revised Sec.  332.3(j) [Sec.  230.93(j)] by subdividing it
into several paragraphs to make it easier to read. In Sec.  332.3(j)(1)
[Sec.  239.93(j)(1)], we have replaced the phrase ``compensate for
environmental impacts authorized under'' with the phrase ``satisfy the
environmental requirements of'' to clarify that a single compensatory
mitigation project can be used to satisfy the requirements of more than
one law. We have replaced the reference to the National Pollutant
Discharge Elimination System Program (NPDES) with the phrase ``other
federal programs such as the Surface Mining Control and Reclamation
Act'' since activities authorized under the NPDES do not generally
require compensatory mitigation. A coal mining project that requires
authorization under both section 404 of the Clean Water Act and SMCRA
can often satisfy the compensatory mitigation requirements for both
authorizations through a single compensatory mitigation project.
    Section 332.3(j) [Sec.  230.93(j)] is not contrary to section 314.
It requires accounting for the use of compensatory mitigation credits.
It does not limit production of compensatory mitigation credits;
instead, it prevents the same credits from being used for different
projects.
    In Sec.  332.3(j)(1)(i) [Sec.  230.93(j)(1)(i)], we have modified
the rule language to state that the compensatory mitigation project
must include appropriate compensation required by the DA permit. This
is intended to address situations where a compensatory mitigation
project may be designed to address the environmental requirements of
both the DA permit and other permits issued by other federal, tribal,
state, or local agencies. In such cases, the additional environmental
benefits required through those other permits could be satisfied by
other components of the compensation project.
    In the revisions to Sec.  332.3(j)(1)(ii) [Sec.  230.93(j)(1)(ii)],
we are clarifying that the same credits can not be used to provide
mitigation for more than one permitted activity. We are also clarifying
that in-lieu fee programs can be designed to holistically address
requirements under multiple programs and authorities. We have added
Sec.  332.3(j)(3) [Sec.  230.93(j)(3)] to clarify that compensatory
mitigation projects can also be designed to satisfy the mitigation
requirements of the Endangered Species Act, as long as they comply with
the requirements of this section.
    One commenter noted that the proposed rule does not recognize the
inherent ability of many of these programs to provide the necessary
financial incentives for landowners to restore and enhance their
wetlands and wildlife habitat as part of a larger resource management
plan for their lands in the hopes of garnering future compensatory
mitigation credits. Two commenters agreed with the provision in the
proposed rule that stipulates that projects undertaken with federal
funds should not be used to generate mitigation credits. Two commenters
disagreed with this proposed provision. One commenter stated that the
agencies should retain flexibility in managing these landscapes and
promote creativity in assigning credits for large-scale mitigation
banks that offer a variety of ecosystem services beyond wetlands
replacement.
    Section 332.3(j)(2) [Sec.  230.93(j)(2)] has been made into a
separate paragraph to address situations where federal funding is
provided for wetland conservation projects. In cases where a landowner
has taken advantage of financial incentives to restore or enhance
wetlands on their property, that landowner can also produce
compensatory mitigation credits that can be used for DA permits, as
long as those credits are the result of supplemental ecological
improvements. In other words, the ecological improvements that result
from the financial incentives provided to the landowner cannot be used
to satisfy compensatory mitigation requirements of DA permits, but
additional ecological improvements involving aquatic resource
restoration, establishment, enhancement, and/or preservation may be
used as compensatory mitigation for DA permits, provided these
additional improvements were not part of the requirements for obtaining
the financial incentives. For example, if a federal program has a 50%
landowner match requirement, neither the federally funded portion of
the project, nor the landowner's 50% match, which is part of the
requirements for obtaining federal funding, may be used for
compensatory mitigation credits. However, if the landowner provides a
greater than 50% match, any improvements provided by the landowner over
and above those required for federal funding could be used as
compensatory mitigation credits. Note however that in order to sell
credits to a third party, a landowner must have an approved mitigation
banking instrument. The final rule provides flexibility for managing
landscapes to produce a variety of ecological functions and services,
but the rule also requires careful accounting of any credits that are
produced.
    (k) Permit conditions. Many commenters supported the provision in
the proposed rule that calls for compensatory mitigation requirements
to be included as enforceable conditions of DA permits. One commenter
stated that performance standards should be mandatory and enforceable
permit components. One commenter stated that financial assurances
should be included in the DA permit. Another commenter requested
clarification of whether the term ``describe'' means to provide an
overview of the proposed mechanism for financing a compensatory
mitigation project or whether the intent is to give Corps the right to
review and/or approve a final draft legal instrument.
    We have substantially revised this section to clarify the
requirements for special conditions for individual permits requiring
permittee-responsible mitigation (Sec.  332.3(k)(2) [Sec.
230.93(k)(2)]), requirements for special conditions for general permits
requiring permittee-responsible mitigation (Sec.  332.3(k)(3) [Sec.
230.93(k)(3)]), and the use of mitigation banks and in-lieu fee
programs (Sec.  332.3(k)(4) [Sec.  230.93(k)(4)]). For individual
permits that require permittee-responsible mitigation, the special
conditions must identify who is responsible for providing the
compensatory mitigation, incorporate by reference the approved
mitigation plan, state the objectives and substantive requirements of
the compensatory mitigation project, and describe any required
financial assurances or long-term management. For general permit
authorizations that require permittee-responsible mitigation, the
special conditions must describe the compensatory mitigation proposal,

require district engineer approval of a final mitigation plan before
commencing work in waters of the United States (unless exceptions are
granted), and address, as appropriate, the requirements of Sec.
332.3(k)(2) [Sec.  230.93(k)(2)]. Examples of situations where the
district engineer may waive the requirement to approve a final
mitigation plan before the permittee commences work in waters of the
United States include after-the-fact permits and cases where the
authorized work must be completed immediately (e.g., emergency
situations).
    If a mitigation bank or in-lieu fee program will be used to provide
the required compensatory mitigation, Sec.  332.3(k)(4) [Sec.
230.93(k)(4)] describes requirements for permit conditions. For
individual permits and general permits, the special conditions must
specify the number and resource type of third-party mitigation credits
the permittee is required to secure. For individual permits (i.e.,
standard individual permits and letters of permission), the special
conditions must specify the particular mitigation bank or in-lieu fee
program that will be used to provide the compensatory mitigation. For
general permits, there is more flexibility because of the timeframes
that must be met, such as the 45-day pre-construction notification
review period for nationwide permits. For general permit verifications,
the special conditions must specify either the mitigation bank or in-
lieu fee program that will be used, or state that the use of a
mitigation bank or in-lieu fee program will be identified at a later
time, once the permittee has negotiated the terms of securing the
appropriate number and resource type of credits from the sponsor, and
the district engineer has approved the use of those credits. In the
latter case, once the district engineer has approved the use of those
credits, the permittee would then secure the credits from the sponsor
in order to fulfill his or her compensatory mitigation requirements.
Once the permittee has secured credits from the sponsor, and provided
the appropriate documentation to the district engineer (see Sec.
332.3(l) [Sec.  230.93(l)]), the responsibility for providing the
required compensatory mitigation is transferred from the permittee to
the third-party mitigation sponsor.
    The provision requiring a description of any required financial
assurances is intended to ensure that the provisions regarding those
financial assurances are addressed as enforceable conditions of the DA
permit. The regulations relating to financial assurances at Sec.
332.3(n) [Sec.  230.93(n)] should be used as a guide for writing those
conditions.
    Several commenters argued that compensatory mitigation plans should
not be included in permits, and some commenters said that this
provision would delay the permitting process. Two commenters
recommended flexibility in this section so the district engineer can
accept a preliminary compensatory mitigation plan prior to permit
issuance and an approved final mitigation plan prior to the start of
construction.
    The approved mitigation plans must be linked to the individual
permit or to the general permit verification through special
conditions, so that the Corps has a legal basis for ensuring compliance
with the terms and conditions of its permits. For individual permits,
the mitigation plan must be approved before the permit can be issued
(see Sec.  332.4(c)(1) [Sec.  230.93(c)(1)]. Approval of a final
mitigation plan prior to issuance of an individual permit is necessary
to ensure that the approved compensatory mitigation project provides
appropriate compensation for the permitted impacts. For general permits
that require compensatory mitigation, the district engineer may approve
a conceptual or detailed mitigation plan in order to meet applicable
timeframes for general permit verifications. However, the permittee
cannot begin work in waters of the United States authorized by general
permit until a final mitigation plan has been approved by the district
engineer.
    Two commenters said that both the permittee and the mitigation bank
must be required to comply with the permit conditions relating to
compensatory mitigation and be subject to enforcement for failure to
meet their obligations. One commenter stated that if an in-lieu fee
program is approved by the district engineer to provide required
compensatory mitigation for a DA permit, the special conditions of that
DA permit must indicate which in-lieu fee program will be used to
provide that compensatory mitigation. One commenter asked whether the
Corps has the authority to specify in a permit condition that the
permittee must purchase credits at a specific bank, which could
restrict the permittee's ability to negotiate, and would prevent the
permittee from purchasing credits from a given bank because they were
the least expensive rather than the most environmentally beneficial.
    In cases where the district engineer has determined that the use of
a mitigation bank or in-lieu fee program is appropriate to satisfy some
or all of the compensatory mitigation requirements for a DA permit, the
responsibility for providing the compensatory mitigation is transferred
to the third-party mitigation sponsor once the permittee has secured
the appropriate number and resource type of credits and the necessary
documentation has been provided to the district engineer in accordance
with Sec.  332.3(l) [Sec.  230.93(l)]. The Corps has the authority to
impose conditions on a DA permit that specify which mitigation bank or
in-lieu fee program will be used to provide the required compensatory
mitigation. Permittees are free to negotiate with mitigation banks or
in-lieu fee programs before the permit is issued. Once they have made
arrangements to purchase the appropriate number of credits, the name of
the third-party provider and the number and resource type of credits
must be approved by the district engineer, and in the case of an
individual permit, included as a special condition in the permit. If
the permittee later finds an alternative source of third-party
mitigation, then he or she can request a permit modification to change
the special conditions to use that alternative compensatory mitigation,
contingent upon approval by the district engineer. The district
engineer will determine whether the modified compensatory mitigation
proposal is sufficient for offsetting the permitted losses of aquatic
resources. For general permits, the district engineer has the option of
specifying the mitigation bank or in-lieu fee program in the special
conditions, or stating that the use of a mitigation bank or in-lieu fee
program is contingent upon approval by the district engineer.
    Three commenters supported the inclusion of long-term management
provisions in the permit conditions. According to one commenter,
requiring adequate arrangements for long-term management funds prior to
permit issuance will help ensure mitigation project success and provide
a significant incentive for the permit applicant to supply adequate
financing acceptable to the resources agencies. One commenter argued
that it would be difficult to enforce this permit condition until a
proven tool for control of invasive species is found. Another commenter
was unclear if the intent was to describe the long-term management
provisions or give the Corps the right to review and/or approve the
legal instrument.
    The control of invasive species is an implementation issue that is
more appropriately addressed on a case-by-case basis. For the purposes
of Sec.  332.3(k) [Sec.  230.93(k)], the special conditions should
address, to the extent appropriate, how the provisions at Sec.
332.7(d) [Sec.  230.97(d)] will be satisfied. That section discusses
long-term

management for compensatory mitigation projects. District engineers
will evaluate proposals for long-term management to determine whether
they are sufficient for the purposes of compensatory mitigation for DA
permits. The requirements for long-term management plans will be
specified through enforceable special conditions.
    (l) Party responsible for compensatory mitigation. One commenter
stated that when a mitigation bank or in-lieu fee program is cited as a
responsible party in the permit, responsibility should be transferred
from the permittee to the sponsor once the permittee has completed the
payment transaction. One commenter, however, said that the
responsibility for compensatory mitigation should remain with the
project proponent. If a project proponent has the responsibility to
provide successful mitigation, that person has an incentive to avoid
and minimize impacts.
    In this rule, when a permittee has secured the required number and
resource type of credits from an approved mitigation bank or in-lieu
fee program, and the district engineer receives the documentation
specified in Sec.  332.3(l)(3) [Sec.  230.93(l)(3)], the responsibility
for providing the required compensatory mitigation is transferred to
the sponsor. As indicated in Sec. Sec.  332.3(l)(2) and 332.8(d)(8)
[Sec. Sec.  230.93(l)(2) and 230.98(d)(8)], a mitigation banking
instrument and an in-lieu fee program instrument must have a provision
stating that the legal responsibility for providing compensatory
mitigation lies with the sponsor once a permittee has secured credits
from that sponsor (see Sec.  332.8(d)(6)(ii)(C) [Sec.
230.98(d)(6)(ii)(C)]). The combination of the third-party instrument
and the documentation demonstrating that the permittee has secured the
appropriate number and resource type of credits, establishes a legally
enforceable transfer of responsibility. If the sponsor fails to provide
the required compensatory mitigation, the district engineer will take
appropriate action to achieve compliance with the terms of the
instrument. Such actions may include suspending credit sales, use of
the financial assurances to provide alternative compensation, referring
the non-compliance with the terms of the instrument to the Department
of Justice, or using in-lieu fee program account funds to secure
credits from another source of third-party mitigation.
    We have modified Sec.  332.3(l)(2) [Sec.  230.93(l)(2)] to include
in-lieu fee programs. This provision states that mitigation banking
instruments and in-lieu fee program instruments must contain a
provision expressing the sponsor's agreement to assume responsibility
for providing the required compensatory mitigation once the credits
have been secured by the permittee and the district engineer receives
the appropriate documentation.
    In addition, we have modified Sec.  332.3(l)(3) [Sec.
230.93(l)(3)] to explain what documentation is required to confirm that
the appropriate number and resource type of credits have been secured
from the sponsor. This paragraph also states that the district engineer
may pursue measures against the sponsor to ensure compliance if that
entity fails to provide the required compensatory mitigation in a
timely manner.
    (m) Timing. Several commenters said that all temporal losses should
be considered in mitigation ratios. Some commenters recommended that
the rule require additional compensatory mitigation if functions have
not been restored in a certain time frame, and this should not be left
to the discretion of the district engineer. These commenters stated
that many functions are likely to require more than one year to become
restored or established. Three commenters requested more flexibility in
timing requirements. One commenter said that the final rule should not
require permanent mitigation, particularly at a ratio greater than one-
to-one, for temporary losses of wetland functions.
    District engineers can require additional compensatory mitigation
to offset temporary losses of aquatic resource functions if the
compensatory mitigation project cannot be implemented in advance of, or
concurrent with, the permitted impacts. Factors to be considered in
determining appropriate compensatory mitigation ratios are provided at
Sec.  332.3(f)(2) [Sec.  230.93(f)(2)]. We understand that different
functions often develop at different rates after aquatic resource
restoration, establishment, or enhancement activities are implemented,
because of the ecosystem development processes that occur. However, it
is usually not feasible to require full functionality of a compensatory
mitigation project to be achieved before the permitted impacts occur.
The provisions in this rule are intended to minimize temporal losses of
aquatic resource functions, to the extent practicable. There is
sufficient flexibility in the timing requirements provided by this
rule. District engineers will determine appropriate compensatory
mitigation requirements for temporary impacts. It is important to
understand that temporary impacts may result in permanent changes to,
or losses of, specific functions. As an incentive for timely
mitigation, district engineers may determine that additional
compensation for temporal losses is not necessary if the mitigation
project is initiated prior to or concurrent with the permitted impacts,
except in the case of resources with long development times (e.g.,
forested wetlands).
    One commenter noted that it is virtually impossible to implement a
compensatory mitigation project in advance of, or concurrently with,
permitted impacts on large, multi-phased, linear transportation
projects that are constructed over several years. Another commenter
stated that the proposed rule is silent on how it would be applied to
projects that occur in phases, where the amount of compensatory
mitigation should be timed to correspond to each phase of development.
This commenter said that the rule ought to provide the flexibility to
allow applicants to build phased mitigation that tracks the project
phases.
    For linear transportation projects, district engineers will
considered the practicability of requiring advance or concurrent
compensatory mitigation. Depending on the specific circumstances
surrounding a phased development project, compensatory mitigation may
be required up-front as the first phase of the development project is
constructed. Or there could be separate compensatory mitigation
projects required for each phase. The appropriate approach for phased
construction projects is at the discretion of the district engineer.
    (n) Financial assurances. Most commenters supported the provision
in the proposed rule that requires mitigation providers to secure
financial assurances to ensure project completion and long-term
management. Other commenters did not agree with the financial
assurances provisions. Some commenters said that the financial
assurance provisions should be strengthened. One commenter suggested
that financial assurances should only be required for larger, more
critical projects comprising several acres, large-scale preservation
and protection, or wetland banking projects. One commenter stated that
financial assurances should not be required for projects authorized by
nationwide permits.
    We have modified Sec.  332.3(n) [Sec.  230.93(n)] to address the
comments received on the proposed financial assurance provisions. The
district engineer shall require sufficient financial assurances to
ensure a high level of confidence that the

compensatory mitigation project will be successfully completed, in
accordance with applicable performance standards. In cases where an
alternate mechanism is available to ensure a high level of confidence
that the compensatory mitigation will be provided and maintained (e.g.,
a formal, documented commitment from a government agency or public
authority) the district engineer may determine that financial
assurances are not necessary for that compensatory mitigation project.
Decisions regarding the appropriate type and amount of financial
assurances should not be based solely on the size of the compensatory
mitigation project, or whether it is a mitigation bank. The risk and
uncertainty associated with a specific compensatory mitigation project
should be considered. For small losses of waters of the United States
authorized by nationwide permits and regional general permits, it may
not be practicable to require financial assurances, and permit
conditions may be all that is necessary to provide a high level of
confidence that the required compensatory mitigation is provided.
    Two commenters stated that compensatory mitigation providers who
have substantial assets and can demonstrate a continuing ability to
cover expenses associated with compensatory mitigation requirements
should not have to provide financial assurances. Two commenters said
that the use of financial instruments, such as those proposed in the
rule, is inconsistent with other EPA programs with potentially much
greater financial liability.
    Section 332.3(n)(2) [Sec.  230.93(n)(2)] identifies a number of
different mechanisms that can be used to address financial assurance
requirements at the discretion of the district engineer.
    Three commenters said that the financial assurance requirements
should not be duplicative of the financial assurances that a permittee
may be required to give under state or local law to secure the
performance of the same activities.
    District engineers can consider whether financial assurances
required for compensatory mitigation projects under state or local laws
are sufficient for the purposes of achieving compliance with
compensatory mitigation requirements for DA permits. State or local
requirements for financial assurances may be adequate in cases where
the same compensatory mitigation project will be used to satisfy the
requirements of the Corps Regulatory Program, as well as similar state
or local regulatory programs.
    Two commenters said that, because a mitigation bank sponsor is not
allowed 100 percent immediate credit release, the sponsor should only
have to post financial assurances for the percentage of the mitigation
bank site that has been debited for use and that has not met final or
interim performance standards.
    The initial debiting (release of credits) for mitigation banks
provided at Sec.  332.8(m) [Sec.  230.93(m)] provides some capital to
the mitigation bank sponsor once the instrument has been approved and
certain tasks are achieved. That capital is intended to support the
success of the mitigation bank during its early stages of development.
Since the ecological success of a mitigation bank is usually dependent
upon having sufficient funds available to do the tasks necessary for
aquatic resource restoration, establishment, and/or enhancement
activities, the amount of any required financial assurances must
reflect the costs of doing those necessary activities. The district
engineer, in consultation with the sponsor and the IRT, will determine
the appropriate amount for the required financial assurances.
    Three commenters stated that financial assurances should not be
required for government agencies. One commenter said that government
agencies should be required to provide financial assurances if adequate
funding cannot be assured.
    This rule does provide flexibility for government agencies in
meeting financial assurance requirements. In cases where a formal,
documented commitment from a government agency is provided, the
district engineer may determine that financial assurances are not
necessary for that compensatory mitigation project. This flexibility is
afforded since government agencies tend to be relatively stable
entities, and operate in the public interest.
    Two commenters stated that financial assurances should include all
construction and monitoring costs.
    We have added a new sentence to Sec.  332.3(n)(2) [Sec.
230.93(n)(2)] to clarify that district engineers will consider
construction and monitoring costs, as well as costs for land
acquisition, planning and engineering, legal fees, mobilization, and
long-term stewardship when determining amounts of required financial
assurances. In addition, we have modified this paragraph to require
documentation of the basis for the financial assurance amount in the
administrative record for either the DA permit or the third-party
mitigation instrument. We have also added a new paragraph (3) to Sec.
332.3(n) [Sec.  230.93(n)], which states that if financial assurances
are required, the DA permit must include a special condition requiring
those assurances to be in place before commencing the permitted
activity.
    Several commenters recommended that the final rule explicitly state
that financial assurances are only to be released upon the full
completion of all compensatory mitigation requirements. In contrast,
some commenters said that financial assurance should be phased out as
phases of compensatory mitigation projects are completed. A few
commenters stated that a portion of the financial assurance should be
retained until the end of the monitoring period, after the compensatory
mitigation project has met all legal and performance standards.
    Section 332.3(n)(4) [Sec.  230.93(n)(4)] states that financial
assurances shall be phased out once the compensatory mitigation project
has been determined by the district engineer to be successful in
accordance with its performance standards. The DA permit or third-party
mitigation instrument has to clearly specify the conditions under which
the financial assurances will be released. Financial assurances should
not be phased out until the district engineer decides that the
compensatory mitigation project has met its performance standards.
Phasing out financial assurances in increments before compliance with
performance standards has been achieved would increase the risk that
insufficient financial assurances would be available if the
compensatory mitigation project were to fail at a later date.
    One commenter said that the proposed rules for financial assurance
will consume critical federal and state staff resources in managing,
tracking, and enforcing these new requirements, and it could result in
considerable expenses for many permittees with little value added.
    Financial assurances are important to ensure that a compensatory
mitigation project will be implemented and maintained. Requiring
financial assurances is not a new practice, so we do not expect there
to be substantial changes in staff resources for managing, tracking,
and enforcing this rule.
    A number of commenters supported the suggestion requiring advance
notice to the district engineer before financial assurances are
canceled or allowed to lapse. Several commenters said that a minimum of
120 days should be the standard for notification and a few commenters
indicated that 30 days should be the minimum. Other commenters
recommended minimum time periods of 45, 60, and 90 days. One

commenter suggested that the Corps suspend or revoke a permit if the
financial assurance has lapsed. Another commenter stated that, in order
to perform this function adequately, the Corps district would need
additional staff.
    We have added paragraph (5) to Sec.  332.3(n) [Sec.  230.93(n)] to
require financial assurances to be in a form that ensures that the
district engineer receives notification at least 120 days in advance of
any termination or revocation. District engineers will determine, on a
case-by-case basis, the appropriate action to take if notified that the
financial assurances will lapse. We do not believe that this provision
would impose additional burdens on Corps staff, since it simply
provides notice in cases where a requirement for a compensatory
mitigation project is not being fulfilled.
    One commenter suggested that the financial assurances should be
structured to ensure that in the event of a failure of a compensatory
mitigation project, the Corps can easily obtain funds to pay for
project correction by a third party, if needed.
    The Corps lacks statutory authority to accept directly, retain, and
draw upon financial assurances, such as performance bonds, to ensure
compliance with permit conditions. These limitations are a result of
the Miscellaneous Receipts Statute (31 U.S.C. Sec.  3302(b)). If the
Corps were to directly, retain, and draw upon those funds, the monies
would be categorized as a ``miscellaneous receipt'' under the
Miscellaneous Receipts Statute and would be deposited in the U.S.
Treasury without being used to ensure permit compliance.
    District engineers have the authority to condition the approval of
a permit to require the posting and execution of financial assurances
by a third-party mitigation sponsor or a permittee, as long as the
Corps is not positioned to accept directly, retain, or draw upon those
funds in the event of a default. Financial assurances should be
executed with the signatures of an additional governmental or non-
governmental environmental management entity or entities as a bond
``surety'' or ``sureties,'' who agree to ensure performance if the
Corps should determine that the sponsor or permittee, as the bond
``principal,'' has defaulted on any of his or her responsibilities. The
third-party instrument or permit conditions should also specify that
the Corps stands as a third-party ``obligee'' to the principal and
surety(ies) of the bond, possessing the full and final authority to
determine the penal sum amount, and to determine whether the principal
and the surety(ies) have specifically performed some or all of the
obligations, covenants, terms, conditions, and agreements of the
financial assurance. Finally, the financial assurance should specify
that if both the principal and the surety(ies) default in their
responsibilities, the Corps retains the full and final discretionary
authority to identify new parties as additional surety(ies) to the
bond.
    We have added a new paragraph (6) to Sec.  332.3(n) [Sec.
230.93(n)] to state that financial assurance are to be payable at the
direction of the district engineer to his designee or to a standby
trust agreement. In cases where a standby trust is used, all amounts
paid by the financial assurance provider are to be directly deposited
into the standby trust fund for distribution by the trustee in
accordance with the district engineer's instructions. Still, the
district engineer cannot accept directly, retain, or draw upon those
funds.
    Several commenters recommended that each Corps district be required
to develop consistent requirements for financial assurances, so that
there will be a level playing field among mitigation providers for all
types of compensatory mitigation. One commenter requested that Corps
project managers and attorneys receive training on how to evaluate the
appropriateness of a proposed financial assurance. One commenter
suggested that the agencies incorporate an appeals or arbitration
process into the rule in case a district engineer imposes excessive or
other unreasonable requirements.
    Additional guidance for financial assurances is provided by
Regulatory Guidance Letter 05-01, which is available at: http://
www.usace.army.mil/cw/cecwo/reg/rgls/rgl05_01.pdf. For individual
permits, prospective permittees can utilize the Corps administrative
appeal process. The administrative appeal process can be used in cases
where a district engineer proffers an individual permit, and the
prospective permittee does not agree with the terms and conditions of
that permit. The regulations governing the Corps administrative appeal
process are found at 33 CFR part 331.
    (o) Compliance with applicable law. No comments were received on
this subsection. In the second sentence, we have added ``in-lieu fee
program'' instrument, since this final rule includes in-lieu fee
programs as another source of compensatory mitigation for DA permits.

33 CFR 332.4 and 40 CFR 230.94 Planning and Documentation

    (a) Pre-application consultations. Several commenters supported the
provision for pre-application consultations, as they would save time
and reduce misunderstandings. Some commenters expressed concern that
pre-application meetings would stretch district staff resources. A few
commenters said that discussing compensatory mitigation before the
public review and comment period is at odds with sequencing
requirements, which require consideration of avoidance and minimization
prior to consideration of compensatory mitigation.
    We believe that pre-application coordination is an important tool
that provides prospective permit applicants an opportunity to address
important issues in early planning stages. The Corps current
regulations already include pre-application consultations (see 33 CFR
325.1(b)), so we do not believe this provision would place additional
burdens on district resources. We have removed the word
``compensatory'' from this paragraph to clarify that all potential
mitigation measures, including avoidance, minimization, and
compensation, should be discussed during pre-application consultations.
    (b) Public review and comment. Many commenters supported the
proposed requirement that public notices include a statement describing
how impacts to aquatic resources will be avoided, minimized, and
compensated for. These commenters stated that the requirement would
result in better up-front planning and design and would allow for more
meaningful public participation. There were many other commenters,
however, who did not support this proposed provision. Several of these
commenters recommended that only a brief statement of avoidance,
minimization, and compensation, or conceptual mitigation plan, be
included in the public notice. Several commenters suggested that this
subsection should be reworded to ensure that the public and the
agencies are aware that any mitigation options described in a public
notice are preliminary measures that the applicant has proposed, and
may be changed during the evaluation process. Some commenters requested
that the final rule specify that this provision is required of all
permits, instead of limiting it to individual permits.
    We have clarified in the final rule that the mitigation statement
in the public notice is to be based on the information submitted by the
applicant, in

accordance with the new requirement at 33 CFR 325.1(d)(7). As discussed
in the section of this preamble that addresses Sec.  325.1(d)(7), this
should be a brief statement because this occurs in the early stages of
the evaluation process, and the evaluation of mitigation options is an
iterative process. As district engineers conduct their evaluations in
accordance with applicable Corps regulations, the 404(b)(1) Guidelines,
and regulations governing other applicable laws (e.g., section 7 of the
Endangered Species Act), additional avoidance and minimization may be
required, and compensatory mitigation requirements will be determined
in greater detail to offset the permitted impacts to the extent
appropriate and practicable. We have also modified Sec.  332.4(b)(1)
[Sec.  230.94(b)(1)] to allow prospective permittees to indicate an
intention to use an approved in-lieu fee program. In the last sentence
of Sec.  332.4(b)(1) [Sec.  230.94(b)(1)] we have replaced the word
``project'' with impacts, since the impacts that require DA
authorization often comprise a small proportion of the overall project.
The Corps can only require appropriate and practicable compensatory
mitigation to offset the permitted impacts to waters of the United
States (see 33 CFR 320.4(r)(2)).
    We do not believe it is necessary to reword this subsection to
clarify that the mitigation statement contains preliminary mitigation
measures proposed by the permit applicant. It is understood that these
preliminary measures may be revised in response to public comment and
other input to the permit process. It would not be appropriate to
expand the requirements of Sec.  332.4(b) [Sec.  230.94(b)] to letters
of permission and general permits because those forms of authorization
do not require project-specific public notices. Public notices are
required only for standard permits.
    We have added Sec.  332.4(b)(2) [Sec.  230.94(b)(2)] to require
district engineers to consider any timely comments and recommendations
received from other federal agencies, tribal, state, or local
governments, and the public. We have modified Sec.  332.4(b)(3) [Sec.
230.94(b)(3)] to state that, for activities authorized by letters of
permission and general permits, district engineers must comply with
review and approval processes for compensatory mitigation proposals and
plans that are applicable to those forms of DA authorization. We have
also modified Sec.  332.4(b)(1) [Sec.  230.94(b)(1)] to provide that
certain information may be kept confidential for business purposes. For
example, permittees may not want to reveal the exact parcel of land
that they are considering for a compensatory mitigation project if they
have not yet secured the site, since revealing this information may
adversely affect their ability to do so. The district engineer must
agree that any information withheld is legitimately confidential for
business purposes, and must ensure that adequate information is
included in the public notice to enable the public to provide
meaningful comment.
    (c) Mitigation plan. Many commenters supported the provision that
requires a permit applicant to prepare a detailed draft mitigation plan
and submit it to the district engineer for review and approval.
Commenters noted that this requirement emphasizes the need for up-front
planning for compensatory mitigation, and provides a level of assurance
that the compensatory mitigation project will be completed. Three
commenters recommended that an applicant also be required to submit a
draft mitigation plan to other appropriate federal, state, or local
government agencies. One commenter supported the provision but also
suggested that the final rule should provide a time frame for the Corps
to review and approve the mitigation plan to ensure that the permit
process is not delayed by this requirement. Another commenter said that
it was unclear if this provision applies to general permits. One
commenter indicated that National Environmental Policy Act case law
does not establish a requirement for a complete mitigation plan to be
provided at the time of permit issuance.
    We have revised Sec.  332.4(c) [Sec.  230.94(c)] to clarify the
different requirements for mitigation plans for individual permits,
general permits, and third-party mitigation. Section 332.4(c)(1)(i)
[Sec.  230.94(c)(1)(i)] describes mitigation plan requirements for
individual permits. Before an individual permit can be issued, a final
mitigation plan must be approved by the district engineer. This will
help ensure that the required compensatory mitigation is appropriate
for the authorized impacts. The final mitigation plan must include the
items listed in Sec.  332.4(c)(2) through (c)(14) [Sec.  230.94(c)(2)
through (c)(14)], but the level of detail should be commensurate with
the scale and scope of the impacts that will be authorized by the
individual permit. We have also added language to this paragraph that
allows district engineers to utilize permit conditions to address any
of the items listed in paragraphs (c)(2) through (c)(14). Paragraph
(c)(1)(i) does not require the prospective permittee to provide
contract-ready mitigation plans. However, the mitigation plans need to
be sufficiently detailed to demonstrate that the items listed in
paragraphs (c)(2) through (c)(14) have been appropriately addressed.
District engineers must also ensure that the final mitigation plans
have the appropriate level of detail necessary for compliance under the
Corps regulatory authorities. If the prospective permittee intends to
use a mitigation bank or in-lieu fee program to provide the required
compensatory mitigation, he or she needs to provide the name of the
mitigation bank or in-lieu fee program, as well as baseline information
and a description of the number of credits to be provided.
    For activities authorized by individual permits, district engineers
may coordinate draft mitigation plans with commenting agencies during
the permit application evaluation process. We do not agree that it is
necessary to impose a requirement for district engineers to approve a
final mitigation plan within a specific number of days.
    To address requirements for mitigation plans for activities
authorized by general permits, we have added Sec.  332.4(c)(1)(ii)
[Sec.  230.94(c)(1)(ii)]. If compensatory mitigation is required for an
activity authorized by a general permit, the district engineer may
approve a conceptual or detailed mitigation plan to meet required
timeframes for general permit verifications. A final mitigation plan
must be approved by the district engineer before the permittee
commences work in waters of the United States. If third-party
mitigation will be used, the mitigation plan must include information
on the baseline conditions and the credits to be provided, and either
the name of the specific mitigation bank or in-lieu fee program to be
used, or a statement that a mitigation bank or in-lieu fee program will
be used, contingent upon approval of the district engineer. The latter
provision will allow permittees to seek the appropriate number and
resource type of credits from a third-party mitigation sponsor and
negotiate the terms of securing those credits. However, the number and
resource type of credits must be approved by the district engineer
before those credits are secured by the permittee (see Sec.
332.3(k)(4) [Sec.  230.93(k)(4)]).
    For mitigation banks and in-lieu fee programs, we have added Sec.
332.4(c)(1)(iii) [Sec.  230.94(c)(1)(iii)], which states that the
mitigation plans must include the items listed in paragraphs (c)(2)
through (c)(14) of this section. Mitigation plans must be prepared for
each separate compensatory mitigation project site. The review and
approval process for

mitigation plans for third-party mitigation is provided at Sec.  332.8
[Sec.  230.98].
    Three commenters supported the proposed list of items to be
included in mitigation plans. One commenter stated that requiring these
items would improve the efficiency of permit reviews and the success of
compensatory mitigation projects. There were also many commenters who
disagreed with these requirements. Several commenters said that
requiring these items to be included in mitigation plans would delay
compensatory mitigation projects. One commenter stated that the content
of a mitigation plan should not be left to the discretion of the
district engineer. In contrast, another commenter stated that the final
rule needs to provide flexibility for the district engineer to decide,
on a case-by-case basis, what needs to be included in a mitigation
plan; such considerations should be based on the size and nature of the
compensatory mitigation project. One commenter recommended that in-lieu
fee programs should be required to submit a draft mitigation strategy,
in place of the mitigation plan.
    The items listed in Sec.  332.4(c)(2) through (c)(14) [Sec.
230.94(c)(2) through (c)(14)] are necessary to help ensure that
mitigation plans for DA permits contain the appropriate types of
information for the purposes of developing successful compensatory
mitigation projects and facilitating effective compliance measures.
Because of the potential variability among compensatory mitigation
project types, as well as differences in compensatory mitigation
practices among regions, the rule provides flexibility in the level of
detail required for the content of mitigation plans. It specifies that
while all required items must be addressed, the level of detail should
be commensurate with the scope and scale of the impacts. This is up to
the district engineer to determine. Under the regulations governing in-
lieu fee programs, a sponsor will be required to develop a compensation
planning framework (see Sec.  332.8(c) [Sec.  230.98(c)]), as well as
mitigation plans for each in-lieu fee project (see Sec.  332.8(j)
[Sec.  230.98(j)]).
    One commenter objected to the proposed language stating that the
level of detail in the mitigation plan would be commensurate with the
scale and scope of the project, because that language is vague and
would result in mitigation plans of varied thoroughness and quality.
Another commenter said that the level of detail should take the nature
of the impacted resource into account. One commenter stated that the
level of detail should not be related to the size and scale of the
project; instead, the level of detail should be sufficient to evaluate
the water quality benefits and to ensure that the compensatory
mitigation project offsets the impacts.
    Flexibility in the level of detail required for mitigation plans is
necessary to account for differences in compensatory mitigation
projects. It would be impractical to require the same level of detail
for all mitigation plans developed for individual permits, general
permits, and third-party mitigation. Rather, projects with significant
impacts will necessarily need to devote more effort and resources to
mitigation planning than projects with minor impacts. We have modified
Sec.  332.4(c)(1)(i) [Sec.  230.94(c)(1)(i)] to state that, for
individual permits, the level of detail of the mitigation plan should
be commensurate with the scale and scope of the impacts. The same
principle applies to general permits. Compensatory mitigation projects
required for DA permits rarely focus solely on water quality benefits.
These projects usually result in the restoration, establishment, and/or
enhancement of other aquatic resource functions, such as habitat and
water quantity storage.
    (2) Objectives. We added ``physiographic province'' to the list of
types of geographic areas that may be served by the objectives of a
compensatory mitigation project.
    (3) Site selection. We have added a reference to Sec.  332.3(d)
[Sec.  230.93(d)] to this paragraph.
    (4) Site protection instrument. One commenter recommended that
every parcel of land set aside for compensatory mitigation have a
recorded conservation easement held by a third-party governmental
agency or non-profit organization. Another commenter suggested that the
site protection instrument should ensure the permanent protection of
the mitigation site.
    Specific requirements for site protection are provided in Sec.
332.7(a) [Sec.  230.97(a)]. In some cases, it is not practicable to
require execution of a conservation easement that would be held by a
third party. For example, it may not be possible to find a third-party
willing to hold the conservation easement. While the goal of the rule
is to ensure permanent protection of all compensatory mitigation
project sites, we recognize that the degree of long-term protection
afforded by real estate instruments varies from state to state.
    (5) Baseline information. One commenter recommended the addition of
stream-oriented baseline information requirements. Other commenters
recommended requiring additional baseline information, including
geographic coordinates of all impact and mitigation sites, planned
alterations to lands or waters adjacent to the proposed site, flooding
frequency of a proposed mitigation site, and a delineation of waters of
the United States, including jurisdictional wetlands (if any
unavoidable impacts to jurisdictional waters will occur on the proposed
mitigation site).
    We have modified this paragraph to add several more examples of
information that may be required as baseline information. A map showing
the locations of the impact and mitigation site(s) or the geographic
coordinates for those site(s) should be provided. Also, information
concerning other site characteristics appropriate to the type of
resource proposed as compensation may also be included in the baseline
information. We have added a sentence stating that the baseline
information should also include a delineation of waters of the United
States on the proposed compensatory mitigation project site. We have
added a reference to in-lieu fee programs to the last sentence of this
paragraph, since we are including in-lieu fee programs in this rule.
    (6) Determination of credits. One commenter recommended that the
explanation of the rationale for determining credits should be detailed
and should include results of a functional assessment of the impacted
habitat.
    We believe that the level of detail of the mitigation plan,
including the rationale for determining credits, should be commensurate
with the scale and scope of the impacts. Appropriate functional or
condition assessments may not be available in some regions, and for
some activities that require DA authorization, it may not be
practicable to use functional or condition assessments. We have added a
reference to Sec.  332.3(f) [Sec.  230.93(f)] since credit
determinations are related to the amount of compensatory mitigation
required. In Sec.  332.4(c)(6)(i) [Sec.  230.94(c)(6)(i)], we are
clarifying that the determination of credits relates to the required
permittee-responsible mitigation. Section 332.4(c)(6)(ii) [Sec.
230.94(c)(6)(ii)] applies to permittees intending to secure credits
from mitigation banks or in-lieu fee programs.
    (7) Mitigation work plan. One commenter suggested that the
mitigation work plan should specify whether the wetland to be used to
provide compensatory mitigation will be permanent, temporary, or
ephemeral.
    The mitigation work plan is to provide written specifications and
work

[[Continued on page 19643]]

]

[[pp. 19643-19692]] Compensatory Mitigation for Losses of Aquatic Resources

[[Continued from page 19642]]

descriptions for compensatory mitigation projects. If wetlands
compensatory mitigation is to be provided, the objectives are the most
appropriate place to describe the wetland type. We have modified this
paragraph by replacing ``plant species to be planted at the site'' with
``methods for establishing the desired plant community'' since the
means for establishing a particular plant community is not limited to
planting certain species at the compensatory mitigation project site.
We have also added ``soil management'' since soil amendments and other
techniques may be needed for the project. Also, we added information on
elements that might be needed for stream mitigation project work plans,
such as planform geometry, channel form, watershed size, design
discharge, and riparian area plantings.
    (8) Maintenance plan. We received no comments and made no changes
to this paragraph.
    (9) Performance standards. One commenter expressed concern that the
requirement to include ecologically based performance standards in a
mitigation plan for impacts to ephemeral channels will create a
significant burden for permit applicants. This commenter also said that
such requirements will put local Corps staff in a difficult position in
terms of evaluating such standards, when no widely available metrics
exist.
    Ecological performance standards are necessary to assess whether
the project is achieving its objectives. Performance standards will
vary by aquatic resource type and geographic region. This rule provides
the district engineer with flexibility to require standards that are
appropriate for compensatory mitigation projects that involve ephemeral
streams. Since ecological performance standards are discussed in more
detail in Sec.  332.5 [Sec.  230.95], we have added a reference to that
subsection.
    (10) Monitoring requirements. One commenter suggested replacing
``adaptive management'' with ``remedial measures'' in this paragraph.
    Since this rule utilizes adaptive management to address
deficiencies in compensatory mitigation projects, it would not be
appropriate to make the suggested change. Since monitoring is discussed
in more detail at Sec.  332.6 [Sec.  230.96], we have added a reference
to that subsection.
    (11) Long-term management plan. Several commenters supported the
inclusion of a long-term management plan in the mitigation plan. One
commenter recommended that the long-term management plan also include a
description of long-term management needs and detailed annual cost
estimates for these needs, and identify the funding mechanism that will
be used to meet those needs. Two commenters said that there should be
no requirement for long-term management other than for structural
components that may have been constructed as part of the compensatory
mitigation project, once monitoring requirements have been fulfilled
and the compensatory mitigation project has been determined to be
successful.
    In order for compensatory mitigation to offset permitted losses,
compensation projects need to be sustainable for the long-term.
Accordingly, the rule requires that provisions necessary for long-term
management be provided as permit conditions or as stipulations in a
mitigation banking or in-lieu fee program instrument. Specific
requirements for long-term management plans are provided in Sec.
332.7(d) [Sec.  230.97(d)]. In response to these comments, we have
added a new Sec.  332.7(d)(2) [Sec.  230.97(d)(2)] to state that a
long-term management plan should include a description of long-term
management needs, annual cost estimates for these needs, and identify
the funding mechanism that will be used to meet those needs. Since
long-term management is discussed in more detail in Sec.  332.7(d)
[Sec.  230.97(d)], we have added a reference to that subsection.
    (12) Adaptive management plan. We have modified this paragraph to
reflect changes to the definition of adaptive management at Sec.  332.2
[Sec.  230.92] and the regulations governing adaptive management at
Sec.  332.7(c) [Sec.  230.97(c)]. We have also added a reference to
Sec.  332.7(c) [Sec.  230.97(c)], since the rules governing adaptive
management are provided in that subsection.
    (13) Financial assurances. One commenter requested further
clarification of the term ``high level of confidence.'' Another
commenter noted that requiring financial assurances would cause a
workload burden on Corps districts.
    Financial assurances are intended to provide a pool of funds that
would be available to implement a compensatory mitigation project. The
term ``high level of confidence'' is used because having sufficient
funding is often a critical element for successfully providing the
required compensation. The funds available from financial assurances
can be used to correct deficiencies in a compensatory mitigation
project or to provide alternative compensation. Requiring financial
assurances for compensatory mitigation projects is not a new practice,
so it will not cause substantial increases in the Corps workload. Since
financial assurances are discussed in more detail in Sec.  332.3(n)
[Sec.  230.93(n)], we have added a reference to that subsection.
    (14) Other information. Two commenters recommended that the
mitigation plan include a discussion of the alternative mitigation
options considered and a full explanation of why the chosen option will
best replace the functions and values of the impacted aquatic resource.
    Alternative compensatory mitigation options are more appropriately
discussed prior to submittal of a mitigation plan. Once the district
engineer has determined the appropriate and practicable compensatory
mitigation option for a particular DA permit, the prospective permittee
will prepare the mitigation plan.

33 CFR 332.5 and 40 CFR 230.95 Ecological Performance Standards

    A number of commenters supported the use of ecological performance
standards because they are based on objective and verifiable
characteristics that can be measured with a ``reasonable amount of
effort.'' Three commenters supported establishing criteria and metrics
based on aquatic functions rather than type and amount of wetlands or
streams. Several commenters stated that the proposed rule focuses on
process and procedure, but lacks explicit ecological performance
measures. However, a number of commenters supported the lack of
specifics in the proposed rule so that ecological performance standards
are tailored to each site.
    We have modified Sec.  332.5 [Sec.  230.95] by splitting it into
two paragraphs. Paragraph (a) states that the approved mitigation plan
must contain performance standards to assess whether the compensatory
mitigation project is achieving its objectives. The last sentence of
Sec.  332.5(a) [Sec.  230.95(a)] has been modified to clarify that
other applicable metrics, such as acres, could be used to evaluate
compensatory mitigation projects. In Sec.  332.5(b) [Sec.  230.95(b)]
we have modified the first sentence to state that performance standards
must be objective and verifiable. We have also added a sentence to
paragraph (b), to require ecological performance standards to be based
on the best available science that can be measured or assessed in a
practicable manner. This will help ensure that performance standards
for compensatory mitigation projects are based on ecological outcomes,
not construction tasks or administrative

milestones that may not reflect gains in aquatic resource functions or
services.