[Federal Register: April 10, 2008 (Volume 73, Number 70)]
[Rules and Regulations]
[Page 19593-19705]
[DOCID:fr10ap08-7]

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Part II

Department of Defense

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Department of the Army, Corps of Engineers

33 CFR Parts 325 and 332

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Environmental Protection Agency

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40 CFR Part 230

Compensatory Mitigation for Losses of Aquatic Resources; Final Rule

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DEPARTMENT OF DEFENSE

Department of the Army, Corps of Engineers

33 CFR Parts 325 and 332

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 230

[EPA-HQ-OW-2006-0020; FRL-8545-4]
RIN 0710-AA55

Compensatory Mitigation for Losses of Aquatic Resources

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

ACTION: Final rule.

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SUMMARY: The U.S. Army Corps of Engineers (the Corps) and the
Environmental Protection Agency (EPA) are issuing regulations governing
compensatory mitigation for activities authorized by permits issued by
the Department of the Army. The regulations establish performance
standards and criteria for the use of permittee-responsible
compensatory mitigation, mitigation banks, and in-lieu programs to
improve the quality and success of compensatory mitigation projects for
activities authorized by Department of the Army permits.
    This rule improves the planning, implementation and management of
compensatory mitigation projects by emphasizing a watershed approach in
selecting compensatory mitigation project locations, requiring
measurable, enforceable ecological performance standards and regular
monitoring for all types of compensation and specifying the components
of a complete compensatory mitigation plan, including assurances of
long-term protection of compensation sites, financial assurances, and
identification of the parties responsible for specific project tasks.
    This rule applies equivalent standards to permittee-responsible
compensatory mitigation, mitigation banks and in-lieu fee mitigation to
the maximum extent practicable. Since a mitigation bank must have an
approved mitigation plan and other assurances in place before any of
its credits can be used to offset permitted impacts, this rule
establishes a preference for the use of mitigation bank credits, which
reduces some of the risks and uncertainties associated with
compensatory mitigation. This rule also significantly revises the
requirements for in-lieu fee programs to address concerns regarding
their past performance and equivalency with the standards for
mitigation banks and permittee-responsible compensatory mitigation.

DATES: The effective date is June 9, 2008.

ADDRESSES: Headquarters, U.S. Army Corps of Engineers, Operations and
Regulatory Community of Practice, 441 G Street, NW., Washington, DC
20314-1000. Headquarters, U.S. Environmental Protection Agency,
Wetlands Division, Mail code 4502T, 1200 Pennsylvania Ave, NW.,
Washington, DC 20460.

    The Corps and EPA have established a docket for this action under
Docket ID No. EPA-HQ-OW-2006-0020. All documents in the docket are
listed on the http://www.regulations.gov web site. Although listed in
the index, some information is not publicly available, e.g., CBI or
other information whose disclosure is restricted by statute. Certain
other material, such as copyrighted material, is not placed on the
Internet and will be publicly available only in hard copy form.
Publicly available docket materials are available either electronically
through http://www.regulations.gov or in hard copy at the Water Docket,
EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW., Washington,
DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday
through Friday, excluding legal holidays. The telephone number for the
Public Reading Room is<PHONE_NUMBER>, and the telephone number for the
Water Docket is<PHONE_NUMBER>.

FOR FURTHER INFORMATION CONTACT: Mr. David Olson at<PHONE_NUMBER> or by
e-mail at<EMAIL_ADDRESS>or Mr. Palmer Hough at 202-566-
1374 or by e-mail at<EMAIL_ADDRESS>Additional information can
also be found at the Corps Headquarters Regulatory Program webpage at:
http://www.usace.army.mil/cw/cecwo/reg/index.html or the EPA
compensatory mitigation webpage at: http://www.epa.gov/
wetlandsmitigation.

SUPPLEMENTARY INFORMATION:

I. Background
II. General Comments and Responses
    A. Overview
    B. Most Frequently Raised Issues
    1. Section 404(b)(1) Guidelines
    2. Compensatory Mitigation Standards for Streams
    3. Discretionary Language
    4. Watershed Approach
    5. In-Lieu Fee Programs
    C. Other General Comments
III. In-Lieu Fee Programs
IV. Compliance With Section 314 of the NDAA
V. Organization of the Final Rule
VI. Discussion of Specific Sections of the Final Rule
VII. Administrative Requirements

I. Background

    Compensatory mitigation involves actions taken to offset
unavoidable adverse impacts to wetlands, streams and other aquatic
resources authorized by Clean Water Act section 404 permits and other
Department of the Army (DA) permits. As such, compensatory mitigation
is a critical tool in helping the federal government to meet the
longstanding national goal of ``no net loss'' of wetland acreage and
function. For impacts authorized under section 404, compensatory
mitigation is not considered until after all appropriate and
practicable steps have been taken to first avoid and then minimize
adverse impacts to the aquatic ecosystem pursuant to 40 CFR part 230
(i.e., the CWA Section 404(b)(1) Guidelines).
    Compensatory mitigation can be carried out through four methods:
the restoration of a previously-existing wetland or other aquatic site,
the enhancement of an existing aquatic site's functions, the
establishment (i.e., creation) of a new aquatic site, or the
preservation of an existing aquatic site. There are three mechanisms
for providing compensatory mitigation: permittee-responsible
compensatory mitigation, mitigation banks and in-lieu fee mitigation.
Permittee-responsible mitigation is the most traditional form of
compensation and continues to represent the majority of compensation
acreage provided each year. As its name implies, the permittee retains
responsibility for ensuring that required compensation activities are
completed and successful. Permittee-responsible mitigation can be
located at or adjacent to the impact site (i.e., on-site compensatory
mitigation) or at another location generally within the same watershed
as the impact site (i.e., off-site compensatory mitigation).
    Mitigation banks and in-lieu fee mitigation both involve off-site
compensation activities generally conducted by a third party, a
mitigation bank sponsor or in-lieu fee program sponsor. When a
permittee's compensatory mitigation requirements are satisfied by a
mitigation bank or in-lieu fee program, responsibility for ensuring
that required compensation is completed and successful shifts from the
permittee to the bank or in-lieu fee sponsor. Mitigation banks and in-
lieu fee programs both conduct consolidated aquatic resource
restoration, enhancement, establishment and preservation projects;
however, under

current practice, there are several important differences between in-
lieu fee programs and mitigation banks.
    First, in-lieu fee programs are generally administered by state
governments, local governments, or non-profit non-governmental
organizations while mitigation banks are usually (though not always)
operated for profit by private entities. Second, in-lieu fee programs
rely on fees collected from permittees to initiate compensatory
mitigation projects while mitigation banks usually rely on private
investment for initial financing. Most importantly, mitigation banks
must achieve certain milestones, including site selection, plan
approval, and financial assurances, before they can sell credits, and
generally sell a majority of their credits only after the physical
development of compensation sites has begun. In contrast, in-lieu fee
programs generally initiate compensatory mitigation projects only after
collecting fees, and there has often been a substantial time lag
between permitted impacts and implementation of compensatory mitigation
projects. Additionally, in-lieu fee programs have not generally been
required to provide the same financial assurances as mitigation banks.
For all of these reasons, there is greater risk and uncertainty
associated with in-lieu fee programs regarding the implementation of
the compensatory mitigation project and its adequacy to compensate for
lost functions and services.
    As noted in the preamble for the March 2006 proposal, the majority
of the existing guidance regarding compensatory mitigation and the use
of these three mechanisms for providing compensation exists in a number
of national guidance documents released by the Corps and EPA over the
past seventeen years (sometimes in association with other federal
agencies such as the U.S. Fish and Wildlife Service and the National
Marine Fisheries Service). Since these guidance documents were
developed at different times, and in different regulatory contexts,
concerns have been raised regarding the consistent, predictable and
equitable interpretation and application of these guidance documents.
In November 2003, Congress called for the development of regulatory
standards and criteria for the use of compensatory mitigation in the
section 404 program.
    Section 314 of the National Defense Authorization Act (NDAA) for
Fiscal Year 2004 (section 314) requires the Secretary of the Army,
acting through the Chief of Engineers, to issue regulations
``establishing performance standards and criteria for the use,
consistent with section 404 of the Federal Water Pollution Control Act
(33 U.S.C. 1344, also known as the Clean Water Act), of on-site, off-
site, and in-lieu fee mitigation and mitigation banking as compensation
for lost wetlands functions in permits issued by the Secretary of the
Army under such section.'' This provision also requires that those
regulations, to the maximum extent practicable, ``maximize available
credits and opportunities for mitigation, provide flexibility for
regional variations in wetland conditions, functions and values, and
apply equivalent standards and criteria to each type of compensatory
mitigation.''
    In response to this directive, the U.S. Army Corps of Engineers and
the U.S. Environmental Protection Agency (the agencies) published a
proposed rule in Part II of the March 28, 2006, issue of the Federal
Register (71 FR 15520), with a 60-day public comment period. As a
result of several requests, the Corps and EPA extended the comment
period by an additional 30 days. The comment period ended on June 30,
2006.
    In the preamble to the March 2006 proposal, the agencies noted
their decision, in light of their respective statutory roles in the
section 404 program, to pursue this rulemaking as a joint effort
between the Corps and EPA. The preamble also discussed the Corps's
decision to develop these standards for all DA permits which could
potentially require compensatory mitigation. Thus, in addition to Clean
Water Act section 404 permits, these standards also apply to DA permits
issued under sections 9 and 10 of the Rivers and Harbors Act of 1899.
Finally, the preamble also discussed why these standards should apply
to compensatory mitigation for impacts to streams and other open waters
in addition to wetlands.
    As discussed in the preamble to the March 2006 proposal, in 2001
the National Research Council (NRC) released a comprehensive evaluation
of the effectiveness of wetlands compensatory mitigation required under
section 404 of the Clean Water Act. This report noted concerns with
some past wetland compensatory mitigation and provided recommendations
for the federal agencies, states, and other parties to improve
compensatory mitigation. This report was an important resource in the
development of today's rule.

II. General Comments and Responses

    In response to the proposed rule, approximately 12,000 comments
were received, including about 850 distinct comments and 11,150
additional substantially identical e-mails and letters. Comments were
provided by regulated entities, the scientific community, non-
governmental organizations, mitigation bankers, in-lieu fee program
sponsors, state and local government agencies, and other members of the
public.

A. Overview

    Most of the distinct commenters said that this rule is a necessary
addition to regulations for implementing the Corps Regulatory Program
and some expressed appreciation that the rule incorporates stakeholder
feedback and lessons learned. Many commenters expressed general support
for the proposed rule because: (1) It will promote predictability and
consistency in compensatory mitigation; (2) it will further effective
partnerships with private sector mitigation banks; (3) it responds to
concerns raised by those participating in the development of Mitigation
Action Plan products; (4) many provisions of the rule are consistent
with the 2005 Millennium Ecosystem Assessment; (5) it brings greater
technical clarity to the process of determining appropriate mitigation;
(6) it provides greater focus on accountability through measurable and
enforceable ecological performance standards, monitoring, and
management; (7) it fosters incorporation of aquatic ecosystem science
into compensatory mitigation plans; and (8) it increases public
participation in the compensatory mitigation process. Some of these
commenters also suggested modifications to the proposed rule, which are
discussed in more detail below.
    Some commenters, including most of the form letters, opposed the
proposed rule or suggested extensive revisions to increase the
protection of aquatic resources. The issues most frequently raised,
considering both the individual and form letters, were: (1) Interaction
of the proposed rule with the existing requirements of the Section 404
(b)(1) Guidelines, (2) compensatory mitigation standards for streams,
(3) the amount of discretionary language in the proposed rule, (4) use
of the watershed approach for identifying mitigation projects, and (5)
the proposed phase-out of in-lieu fee mitigation. These five major
issues and our responses to them are discussed below in part II.B. Many
other general issues were raised as well, and a number of these are
discussed in part II.C. Additional detail, and responses to comments on
specific rule provisions, are provided in part VI.

B. Most Frequently Raised Issues

1. Section 404(b)(1) Guidelines
    Many commenters stated that, consistent with existing regulations
and policy, the rule should emphasize impact avoidance and that
compensatory mitigation should not be considered until all efforts have
been made to first avoid and then minimize impacts to streams and
wetlands. Some commenters also asserted that the proposal would expand
the district engineer's existing level of discretion in determining
that an applicant has taken all appropriate and practicable steps to
first avoid and then minimize impacts to the aquatic ecosystem. Some
further asserted that the proposal could be construed to allow permits
to be issued even if they cause or contribute to significant
degradation of aquatic resources, an action prohibited by the Section
404(b)(1) Guidelines (40 CFR 230.10(c)).
    The agencies agree that impacts must be first avoided and then
minimized, and that compensatory mitigation should be used only for
impacts that cannot be avoided or minimized. The agencies disagree that
the rule will weaken or undermine the 404(b)(1) Guidelines, which are
codified in regulation and remain unchanged. These requirements are
essential to meeting the overall objective of the Clean Water Act to
restore and maintain the chemical, physical and biological integrity of
the nation's waters. We have clarified that none of them have changed
by adding a new paragraph at 33 CFR 332.1(c)(1) [40 CFR 230.91(c)(1)]
stating that nothing in these new rules affects the requirement that
all DA permits subject to section 404 of the Clean Water Act comply
with applicable provisions of the Section 404(b)(1) Guidelines. Thus,
this rule does not expand the district engineer's existing level of
discretion in determining that an applicant has taken all appropriate
and practicable steps to first avoid and then minimize impacts to the
aquatic ecosystem. Paragraph (c)(2) of this section has also been
modified to clarify that individual section 404 permits will be issued
only if compliance with all applicable provisions of the 404(b)(1)
Guidelines has been achieved including those which require the permit
applicant to take all appropriate and practicable steps to avoid and
minimize adverse impacts to the aquatic ecosystem. For general permits,
compliance with the Section 404(b)(1) Guidelines is clarified at 40 CFR
230.7.
    In addition, a new paragraph at 33 CFR 332.1(f)(2) [40 CFR
230.91(f)(2)] has been added to the final rule which clarifies which
provisions of the 1990 Memorandum of Agreement (MOA) between the
Department of the Army and the Environmental Protection Agency on the
Determination of Mitigation Under the Clean Water Act Section 404(b)(1)
Guidelines have been superseded by this rule and which provisions
remain in effect. Those that remain in effect include the provisions
related to impact avoidance and minimization, evaluation of the least
environmentally damaging practicable alternatives, and circumstances
where the impacts of the proposed project are so significant that
discharges may not be permitted regardless of the compensatory
mitigation proposed.
    Today's rule is focused on the compensation component of the
mitigation sequence. Its purpose is to develop a comprehensive set of
standards for compensatory mitigation pursuant to section 314 of the
NDAA. Fulfilling this directive necessitates a detailed treatment of
all critical aspects of compensatory mitigation. This does not affect
compliance with other parts of our regulations, including the 404(b)(1)
Guidelines. Additional discussion of this issue can be found in part VI
of the preamble.
2. Compensatory Mitigation Standards for Streams
    Many commenters stated that compensatory mitigation for stream
impacts should not be addressed in this rule. Some stated that there is
no scientific evidence that streams can be established (i.e., stream
creation) or that other approaches taken in this rule such as stream
restoration can compensate for stream losses. They suggested that the
agencies should conduct further research on stream mitigation and
demonstrate its success before including standards for stream
mitigation in the rule. Some also noted that the statutory language in
the NDAA refers only to wetlands.
    On the other hand, other commenters expressed support for applying
the rule to streams and other open waters. These commenters believe
that physical alteration of aquatic resources should be mitigated to
the extent practicable to support the objectives of the Clean Water Act
and that because section 404 of the Clean Water Act authorizes
discharges of dredged or fill material into lakes, streams, and
wetlands, mitigation for those impacts should be required (and
addressed in this rule) as well.
    As noted in the preamble to the March 2006 proposal, we believe
this rule should apply to compensatory mitigation for all types of
aquatic resources that can be impacted by activities authorized by DA
permits, including streams and other open waters. We recognize that the
scientific literature regarding the issue of stream establishment and
re-establishment is limited and that some past projects have had
limited success (Bernhardt and others 2007).\1\ Accordingly, we have
added a new paragraph at 33 CFR 332.3(e)(3) [40 CFR 230.93(e)(3)] that
specifically notes that there are some aquatic resources types that are
difficult to replace and streams are included among these. It
emphasizes the need to avoid and minimize impacts to these `difficult-
to-replace' resources and requires that any compensation be provided by
in-kind preservation, rehabilitation, or enhancement to the extent
practicable. This language is intended to discourage stream
establishment and re-establishment projects while still requiring
compensation for unavoidable stream impacts in the form of stream
corridor restoration (via rehabilitation), enhancement, and
preservation projects, where practicable. District engineers will
evaluate compensatory mitigation proposals for streams, and assess the
likelihood of success before deciding whether the proposed compensation
should be required.
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    \1\ Bernhardt, E.S., E.B. Sudduth, M.A. Palmer, J.D. Allan, J.L.
Meyer, G. Alexander, J. Follastad-Shah, B. Hassett, R. Jenkinson, R.
Lave, J. Rumps, and L. Pagano. 2007. Restoring rivers one reach at a
time: Results from a survey of U.S. river restoration practitioners.
Restoration Ecology 15:482-493.
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    We recognize that the science of stream restoration is still
evolving and that more research is needed; however, the lack of a
fully-developed set of tested hypotheses and techniques does not mean
that stream mitigation (particularly via restoration, enhancement and
preservation) cannot be successfully performed or that it should not be
required where avoidance of impacts is not practicable. As noted by
Bernhardt and others (2005),\2\ ``stream and river restoration can lead
to species recovery, improved inland and coastal water quality, and new
areas for wildlife habitat and recreational activities.'' There is a
growing body of research that documents successful outcomes for stream
restoration projects, examines stream restoration techniques and
provides recommendations for effective stream and river restoration.

Successful outcomes for stream restoration with respect to water
quality, habitat creation, species recovery and recreation, have been
documented by Baron and others (2002); \3\ Buijse and others (2002);
\4\ Muotka and Pekka (2002); \5\ Nakamura and Kunihiko (2006); \6\ and
Petersen (1999).\7\ Criteria and recommendations for ecologically
successful stream restoration have been addressed by Hassett and others
(2005) \8\ Kauffman and others (1997) \9\ Lavendel (2002) \10\ Palmer
and others (2005) \11\ and Whalen and others (2002).\12\ Assessment of
the physical and biological effects of restoration activities has been
performed by Reeves and others (1997); \13\ Slaney and others (1994)
\14\ and Solazzi and others (2000).\15\ The applicability of specific
tools to measure stream restoration success has been investigated by
Paller and others (2000) \16\ and Lester and others (2006).\17\
Somerville and Pruitt (2004) \18\ reviewed existing stream assessment
and mitigation protocols and Roni and others (2002) \19\ reviewed
stream restoration techniques. Shields and others (2003) \20\ discussed
the unique challenges associated with stream restoration research.
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    \2\ Bernhardt, E.S., M.A. Palmer, J.D. Allan, G. Alexander, K.
Barnas, S. Brooks, J. Carr, S. Clayton, C. Dahm, J. Follstad-Shah,
D. Galat, S. Gloss, P. Goodwin, D. Hart, B. Hassett, R. Jenkinson,
S. Katz, G.M. Kondolf, P.S. Lake, R. Lave, J.L. Meyer, T.K.
O'Donnell, L. Pagano, B. Powell, and E. Sudduth. 2005. Synthesizing
U.S. river restoration efforts. Science 308: 636-637.
    \3\ Baron, J.S. et al. 2002. Meeting ecological and societal
needs for freshwater. Ecological Applications 12: 1247-1260.
    \4\ Buijse, A.D. et al. 2002. Restoration strategies for river
floodplains along the large lowland rivers in Europe. Freshwater
Biology 47: 889-907.
    \5\ Muotka, T. and P. Laasonen. 2002. Ecosystem recovery in
restored headwater streams: The role of enhanced leaf retention.
Journal of Applied Ecology 39: 145-156.
    \6\ Nakamura, K. and K. Amano. 2006. River and wetland
restoration: Lessons from Japan. Bioscience 56(5): 419-129.
    \7\ Petersen, M.M. 1999. A natural approach to watershed
planning, restoration and management. Water Science and Technology
39(12): 347-352.
    \8\ Hassett, B. et al. 2005. Restoring watersheds project by
project: Trends in Chesapeake Bay tributary restoration. Frontiers
in Ecology and the Environment 3(5): 259-267.
    \9\ Kauffman, J. Boone, R.L. Beschta, N.O., and D. Lytjen. 1997.
An ecological perspective of riparian and stream restoration in the
western United States. Fisheries 22(5): 12-24.
    \10\ Lavendel, B. 2002. The business of ecological restoration.
Ecological Restoration 20: 173-178.
    \11\ Palmer, M.A. et al. 2005. Standards for ecologically
successful river restoration. Journal of Applied Ecology 42: 207-
217.
    \12\ Whalen, P.J., L.A. Toth, J.W. Koebel, and P.K. Strayer.
2002. Kissimmee River Restoration: A case study. Water Science and
Technology 45(11): 55-62.
    \13\ Reeves, G.H., D.B. Hohler, B.E. Hansen, F.H. Everest, J.R.
Sedell, T.L. Hickman, and D. Shively. 1997. Fish habitat restoration
in the Pacific Northwest: Fish Creek of Oregon. Pages 335-359 in
J.E. Williams, C.A. Wood, and M.P. Dombeck, editors. Watershed
Restoration: Principles and Practices. American Fisheries Society,
Bethesda, Maryland.
    \14\ Slaney, P.A., B.O. Rublee, C.J. Perrin, and H. Goldberg.
1994. Debris structure placements and whole-river fertilization for
salmonoids in a large regulated stream in British Columbia. Bulletin
of Marine Science 55: 1160-1180.
    \15\ Solazzi, M.F., T.E. Nickelson, S.L. Johnson, and J.D.
Rodgers. 2000. Effects of increasing winter rearing habitat on
abundance of salmonoids in two coastal Oregon streams. Canadian
Journal of Fisheries and Aquatic Sciences. 57: 906-914
    \16\ Paller, M.H., M.J.M. Reichert, J.M. Dean, and J.C. Seigle.
2000. Use of fish community data to evaluate restoration success of
a riparian stream. Ecological Engineering 15: 171-187.
    \17\ Lester, R., W. Wright, and M. Jones-Lennon. 2006.
Determining Target Loads of Large and Small Wood for Stream
Rehabilitation in High-Rainfall Agricultural Regions of Victoria,
Australia. Ecological Engineering 28: 71-78.
    \18\ Somerville, D.E. and B.A. Pruitt. 2004. Physical stream
assessment: A review of selected protocols for use in the Clean
Water Act Section 404 Program. Prepared for the U.S. Environmental
Protection Agency, Office of Wetlands, Oceans, and Watersheds,
Wetlands Division (Order No. 3W-0503-NATX). Washington, DC, 213 pp.
    \19\ Roni, P. et al. 2002. A review of stream restoration
techniques and a hierarchical strategy for prioritizing restoration
in Pacific Northwest watersheds. North American Journal of Fisheries
Management 22: 1-20.
    \20\ Shields, F. Douglas, C.M. Cooper Jr., Scott S. Knight and
M.T. Moore. 2003. Stream corridor restoration research: A long and
winding road. Ecological Engineering 20: 441-454.
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    Under this final rule, mitigation plans for all wetland
compensatory mitigation projects must contain the following twelve
elements: Objectives; site selection criteria; site protection
instruments (e.g., conservation easements); baseline information (for
impact and compensation sites); credit determination methodology;
mitigation work plan; maintenance plan; ecological performance
standards; monitoring requirements; long-term management plan; adaptive
management plan; and financial assurances (see 33 CFR 332.4(c) [40 CFR
230.94(c)]). Existing literature regarding stream restoration, as well
as our experience with past stream mitigation projects supports our
decision to require mitigation plans for stream compensatory mitigation
projects to contain the same twelve fundamental elements. Some
commenters noted that aspects of the mitigation work plan will differ
between stream and wetland mitigation projects. Today's rule highlights
some of these potential differences by noting additional elements that
may be necessary for stream mitigation project work plans. These
elements include planform geometry, channel form, watershed size,
design discharge, and riparian area plantings and can be found at 33
CFR 332.4(c)(7) [40 CFR 230.94(c)(7)].
    Another important modification was made to the section of the rule
describing ecological performance standards. Like the proposal, today's
rule requires that every mitigation plan include objective and
verifiable ecological performance standards to assess whether the
compensatory mitigation project is achieving its objectives. Neither
the proposal nor today's rule prescribe the individual variables or
metrics that should be used to evaluate each aquatic resource type
potentially restored, enhanced, established, or preserved in
compensatory mitigation projects. Given the extremely large variation
among the aquatic resource types found across the country, and the
constant advances in the science of aquatic ecosystem restoration,
overly prescriptive requirements would be impractical. However, in
recognition of the need to strengthen this provision and to ensure that
compensatory mitigation project performance standards reflect the
latest advances in the science of stream and wetland restoration, we
have modified the final rule at 33 CFR 332.5(b) [40 CFR 230.95(b)] to
include a requirement that ecological performance standards be based on
the best available science that can be measured or assessed in a
practicable manner.
    As stream scientists have noted, the proportion of stream
restoration projects that have been monitored for performance is low
(Bernhardt and others 2005).\21\ Today's rule, however, requires
monitoring of mitigation projects for a minimum of five years with
longer monitoring periods required for aquatic resources with slow
development rates. This monitoring requirement will provide new data on
stream restoration performance that will serve to increase knowledge
and improve stream mitigation over time. (See 33 CFR 332.6 [40 CFR
230.96]). Also, in response to public comment, we removed a provision
from 33 CFR 332.6(a) [40 CFR 230.96(a)] that would have allowed the
district engineer to waive all monitoring requirements if they were
determined not to be practicable.
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    \21\ Bernhardt, E.S., M.A. Palmer, J.D. Allan, G. Alexander, K.
Barnas, S. Brooks, J. Carr, S. Clayton, C. Dahm, J. Follstad-Shah,
D. Galat, S. Gloss, P. Goodwin, D. Hart, B. Hassett, R. Jenkinson,
S. Katz, G.M. Kondolf, P.S. Lake, R. Lave, J.L. Meyer, T.K.
O'Donnell, L. Pagano, B. Powell, and E. Sudduth. 2005. Synthesizing
U.S. river restoration efforts. Science 308: 636-637.
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    While section 314 of the NDAA refers only to the development of
compensatory mitigation standards for wetlands, we believe that in
order to improve the performance and results of all types of
compensatory mitigation this rule should include compensatory
mitigation standards for all types of aquatic resources that can be
impacted by activities authorized by DA permits, including streams and
other open waters. Section 404(b) of the Clean Water Act authorizes EPA
to develop

the substantive environmental criteria used by the Corps in making
section 404 permit decisions including those associated with all forms
of compensatory mitigation. Also, section 501(a) of the Clean Water Act
provides EPA with broad authority to conduct any rulemaking necessary
to carry out its functions under the Clean Water Act.
    While many stream restoration and rehabilitation activities have
been conducted across the country, we recognize that not all of them
have been successful. Much of the literature suggests that this is due
to a lack of the kinds of comprehensive standards for project planning,
implementation and management included in this rule. Accordingly, we
determined that including stream mitigation in this rule would improve
current standards and practices for compensatory mitigation of streams.
Today's rule, with the addition of the above referenced modifications,
includes the necessary provisions to appropriately treat stream
mitigation. Additional discussion of this issue can be found in part VI
of the preamble.
3. Discretionary Language
    Many commenters expressed concern that the proposal leaves too much
discretion to district engineers. Some commenters objected to use of
``may'', ``should'', and ``can'' in some rule provisions, and/or to use
of the qualifier ``appropriate and practicable'' for some requirements.
Commenters were concerned that such discretion might lead to
authorization of inappropriate compensatory mitigation projects,
inadequate enforcement and oversight, or excessive litigation.
    In contrast, other commenters suggested even greater flexibility,
to allow cost-effective compensatory mitigation based on case-specific
circumstances.
    In response to these comments, we have carefully evaluated all of
the discretionary language in the proposed rule, and replaced it with
binding and/or more clearly articulated requirements where appropriate.
Such modifications were made to a number of key provisions in the rule
including those related to mitigation type, the amount of mitigation
necessary to offset permitted losses, financial assurances, credit
releases, the use of preservation, ecological performance standards,
and long-term site protection and management. Also, a number of
requirements for in-lieu fee programs have been added to the rule, as
part of the decision not to phase them out as originally proposed.
(Note that the preamble to the proposed rule included an extensive
discussion of and request for comment on alternatives to the proposed
phase-out. The new requirements for in-lieu fee programs reflect many
of the comments received.) These specific modifications and additions
are discussed in more detail in part VI of the preamble.
    With these modifications, we believe that today's rule achieves a
proper balance of binding requirements and discretion. The rule will
help improve the quality and success of compensatory mitigation, while
providing flexibility necessary to ensure that compensatory mitigation
requirements for a particular DA permit appropriately offset authorized
impacts. Some discretionary language is necessary for this rule because
resource types, project impacts, and compensatory mitigation practices
vary widely across both projects and regions of the country. District
engineers need to take such variations into account, including
variations in state and local requirements that affect the
implementation and long-term management of compensatory mitigation
projects. For example, laws and regulations governing real estate
instrument and financial assurances vary from state to state. In
addition, practices for restoring, establishing, and enhancing aquatic
resources vary by resource type and by region. For these reasons,
discretionary language is used where appropriate to promote both
regulatory efficiency and project success, and to ensure that required
mitigation is practicable.
4. Watershed Approach
    Many comments addressed the watershed approach included in the
proposal. A majority of commenters expressed support for the use of a
watershed approach to compensatory mitigation. They noted that use of a
watershed approach would improve the sustainability of compensatory
mitigation projects and ensure that they are better integrated with the
needs of the watershed. However, some commenters believed that
additional specificity in the requirements relating to the use of a
watershed approach was needed. For example, commenters requested
clarification regarding use of the watershed approach in the absence of
a watershed plan, parameters needed to implement a watershed approach,
and the definition of the terms ``watershed,'' ``watershed plan'' and
``watershed approach.''
    Other commenters opposed the watershed approach described in the
proposed rule. Some were particularly concerned about use of the
watershed approach in the absence of a detailed watershed plan, arguing
that this could lead to inappropriate compensatory mitigation decisions
and the cumulative loss of wetland functions. Others were more
concerned about the analytical burden on permit applicants of
developing watershed plans or justifying mitigation projects in terms
of wider watershed considerations. Still others thought the concept was
too ambiguous to be included in a regulation.
    The agencies continue to believe that the watershed approach
provides the appropriate framework for making compensatory mitigation
decisions, but have made a number of changes to address specific
comments. The primary objective of the watershed approach included in
today's rule 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. The watershed
approach accomplishes this objective by expanding the informational and
analytic basis of mitigation project site selection decisions and
ensuring that both authorized impacts and mitigation are considered on
a watershed scale rather than only project by project. This requires a
degree of flexibility so that district engineers can authorize
mitigation projects that most effectively address the case-specific
circumstances and needs of the watershed, while remaining practicable
for the permittee. In response to the concern about additional burden
on permittees, the agencies recognize that the level of data and
analysis appropriate for implementing the watershed approach must be
commensurate with the scale of the project, and that there will be
situations, particularly for projects with small impacts, where it
would not be cost-effective to utilize a watershed approach. For this
reason, the regulations at Sec.  332.3(c)(1) [Sec.  230.93(c)(1)],
state that the watershed approach is to be used to the extent
appropriate and practicable, and the regulations at Sec.
332.3(c)(3)(iii) [Sec.  230.93(c)(3)(iii)] state that the level of
information and analysis must be commensurate with the scope and scale
of the authorized impacts and functions lost.
    We recognize that there are many different types of watershed plans
that have been developed for purposes other than aquatic resource
restoration, establishment, enhancement, and/or preservation activities
and that such plans may be of limited use in making compensatory
mitigation decisions. 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 given watershed plan is appropriate for use in the watershed
approach for compensatory mitigation.
    We further recognize that in many areas, watershed plans
appropriate for use in planning compensatory mitigation activities have
not been developed. Therefore, consistent with the 2001 NRC Report, the
watershed approach described in this final rule does not require a
formal watershed plan. Although it would always be preferable to have
an appropriate watershed plan, we believe that implementing a watershed
approach to the degree practicable, even without a watershed plan, can
improve compensatory mitigation site selection and project
implementation. For example, the use of appropriately sited mitigation
banks can support a watershed approach without using watershed plans.
In the absence of an appropriate watershed plan, the watershed approach
should 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. To implement this approach, 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 described in Sec.  332.3(c)(3) [Sec.
230.93(c)(3)].
    In response to public input, we have revised the definition of
``watershed plan'' to clarify the kinds of plans appropriate for use in
making compensation decisions. We have also added definitions for the
terms ``watershed'' and ``watershed approach'' at Sec.  332.2 [Sec.
230.92]. The appropriate watershed scale to use for the watershed
approach will vary by geographic region, as well as by the particular
aquatic resources under consideration. Since using a watershed approach
is not appropriate in areas without watershed boundaries, such as
marine waters, we have also 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. To enhance the use of the
watershed approach, we have added a sentence to Sec.  332.3(c)(2)(iv)
[Sec.  230.93(c)(2)(iv)] stating that the identification and
prioritization of resource needs should be as specific as possible. We
have also added a provision, stating 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)]).
    We have revised Sec.  332.3(c)(3) [Sec.  230.93(c)(3)] to clarify
that district engineers will use available information for the
watershed approach. That available information will address watershed
conditions and needs and include potential and/or priority sites for
compensatory mitigation projects. We have also indicated potential
sources of appropriate information, such as wetland maps, soil surveys,
aerial photographs, local ecological reports, etc. Public input on the
watershed approach and our response to this input including the above
mentioned modifications are discussed in more detail in part VI of the
preamble.
5. In-Lieu Fee Programs
    Many commenters, including many state officials, opposed the
proposed phase-out of in-lieu programs. These commenters indicated that
in certain areas (especially rural and coastal regions, the West, and
Alaska) there are few mitigation banks and little potential for their
development, and that permittee-responsible compensatory mitigation is
often impractical. In-lieu fee programs are therefore the best (or
only) option for compensatory mitigation in these areas. Some
commenters also argued that in-lieu fee programs provide important
benefits that other types of mitigation do not, such as a more thorough
consideration of the needs of a watershed and the most appropriate
locations and mitigation types to sustain and enhance its long-term
health. Some commenters representing in-lieu fee programs stated that
if they were held to all of the same standards as mitigation banks,
particularly the requirement to secure project sites before selling any
credits, they would have to cease operation and these benefits would be
lost.
    Many of these commenters also acknowledged problems in the current
administration and performance of in-lieu fee mitigation, but stated
that these problems were due to existing requirements and policies (or
the lack thereof) rather than the in-lieu fee concept itself. They
suggested that instead of phasing out in-lieu fee programs, the final
rule should include standards that address these problems and ensure
that in-lieu fee programs do in fact deliver mitigation that
compensates for the impacts associated with the credits they sell.
Commenters noted that the NDAA does not require that these standards be
exactly the same as those for mitigation banks but rather
``equivalent'' to the maximum extent practicable. Some standards for
in-lieu fee programs suggested by commenters included: Limiting the
number of credits that in-lieu fee programs can sell before they have
secured sites, limiting the types of organizations that can be in-lieu
fee sponsors, and establishing financial accounting standards to
improve their accountability for credit fulfillment. A number of
commenters acknowledged that even with significant improvements to in-
lieu fee mitigation, mitigation banks would be more likely to minimize
project uncertainties and temporal losses of aquatic resource
functions. They suggested that the final rule should therefore
stipulate that where the service areas of an in-lieu fee program and a
mitigation bank overlap, the mitigation bank should be the preferred
credit provider.
    Other commenters supported the phase-out of in-lieu fee programs as
proposed. These commenters pointed out shortfalls associated with
current administration of in-lieu fee programs noting, for example,
that prices for in-lieu fee credits are often too low and fail to cover
all of the costs necessary to deliver the promised mitigation,
including expenses for program administration, long-term maintenance of
projects, and corrective action. This may result in undercutting of
mitigation bank credit prices, since banks, as commercial ventures,
must charge prices based on the full cost of producing compensation
credits or go out of business. Furthermore, in-lieu fee programs often
require fees from multiple permitted projects before they can initiate
compensation projects, resulting in substantial delays between
permitted impacts and compensation. Several commenters further stated
that it was not fair for in-lieu fee programs to be allowed to continue
to operate with lower or looser standards than mitigation banks and
permittee-responsible mitigation. Commenters also noted that because
credit release schedules for mitigation banks are tied to performance,
they have a financial incentive to produce timely, successful
mitigation that is lacking for in-lieu fee programs.
    After carefully considering all comments received, the agencies
have decided to retain in-lieu fee programs in today's rule as a
separate and distinct mechanism for providing compensatory mitigation
for DA permits. We believe they can fulfill an important role in
providing effective mitigation in circumstances where mitigation banks
and permittee-responsible mitigation are not practicable. At the same
time, we have included a number of new requirements for in-lieu fee
programs to improve accountability and

performance, based to a large extent on existing practice at the most
successful currently-operating in-lieu programs. Specifically, we have
added a requirement for a compensation planning framework at Sec.
332.8(c) [Sec.  230.98(c)] which details how the in-lieu fee program
will select and secure project sites and implement mitigation projects
in a watershed context. The framework is essentially a watershed plan
designed to support resource restoration, and must include an analysis
of historic aquatic resource losses and current conditions, a
description of the general amounts, types and locations of aquatic
resources the program will seek to provide and a prioritization
strategy for selecting and implementing compensatory mitigation
activities. This type of advanced planning will ensure that in-lieu fee
programs are guided by a thorough understanding of the needs,
opportunities, and challenges of the areas in which they operate, which
will allow them to select and design more successful projects and
better estimate full project costs.
    The final rule also requires that the in-lieu fee program
instrument establish a cap on the number of credits that the program
can sell before securing a compensatory mitigation project site and
conducting aquatic resource restoration, establishment, enhancement,
and/or preservation at that site. These are defined as ``advance
credits'' (see Sec.  332.2 [Sec.  230.92]) and the rules for their
establishment and use are provided at Sec.  332.8(n) [Sec.  230.98(n)].
The rule also limits sponsorship of in-lieu fee programs specifically
to governmental or non-profit natural resource management entities (see
definition of ``in-lieu fee program'' at Sec.  332.2 [Sec.  230.92]).
District engineers and Interagency Review Team (IRT) members should
carefully evaluate the capabilities and demonstrated performance of
these natural resource management entities prior to approving them as
in-lieu fee program sponsors in order to minimize the risks associated
with allowing advance credit sales.
    We have added a provision at Sec.  332.8(i) [Sec.  230.98(i)]
requiring in-lieu fee programs to establish a program account,
including criteria for the management of this account. Funds collected
from permittees, including interest on these funds, may only be used
for the selection, design, acquisition, implementation, and management
of in-lieu fee projects, with a small percentage allowed for
administrative costs.
    Provisions at Sec.  332.8(d)(6)(iv)(B)-(C) [Sec.
230.98(d)(6)(iv)(B)-(C)] and Sec.  332.8(o)(5)(ii) [Sec.
230.98(o)(5)(ii)] were included to improve the estimation of in-lieu
fee project costs and the establishment of adequate fee schedules.
Today's rule ensures that the review, approval, and oversight of in-
lieu fee programs is subject to the same level of interagency and
public review as mitigation banks (see Sec.  332.8(d) [Sec.
230.98(d)]). Similarly, today's rule requires in-lieu fee projects to
develop mitigation plans that meet the same standards as those
applicable to mitigation banks and permittee-responsible projects (see
Sec.  332.8(j) [Sec.  230.98(j)]).
    Properly organized in-lieu fee programs which comply with the new
requirements established by today's rule should actively support a
watershed approach to compensatory mitigation, and will help advance
goals for protecting and restoring aquatic resources within watersheds,
especially in areas where there are no mitigation banks.
    We recognize that even with these improvements to in-lieu fee
programs, there will likely be less temporal loss of resources
associated with mitigation provided by banks than with mitigation
provided by in-lieu fee programs. We have therefore established a
hierarchy in Sec.  332.3(b) [Sec.  230.93(b)] for selecting the type
and location of compensatory mitigation with an explicit preference for
mitigation bank credits over advance credits from in-lieu fee programs
when appropriate bank credits are available for use. Public input
regarding in-lieu fee mitigation as well as all of these specific
modifications and additions are discussed in more detail in parts III
and VI of the preamble.

C. Other General Comments

    Some commenters stated that the proposed rule should be revised to
incorporate principles of ecological restoration and landscape ecology.
Other commenters said that the proposed rule fails to recognize the
dynamic nature of wetlands and provides disincentives for active
management of wetland resources in ways that would benefit society. A
few commenters remarked that the proposed rule does not adequately
address compensatory mitigation for marine habitats or aquatic species.
    We have revised the final rule to better incorporate principles of
ecological restoration and landscape ecology, for example, at Sec.
332.3(d) [Sec.  230.93(d)], which specifies detailed factors for the
district engineer to use in determining ecological suitability for
mitigation project sites. Section 404 directs the Corps to issue
permits for discharges of dredge and fill material, not to promote
``active management'' of wetlands. To the extent that active management
may provide an alternative to permitted discharges, permit applicants
should consider such approaches as part of the avoidance and
minimization mitigation sequencing. Also, both permitted projects and
compensatory mitigation projects may require on-going active management
to protect resources, and conditions for such management may be
incorporated into DA permits where appropriate. Finally, management of
existing wetlands may itself involve discharges requiring DA permits,
and in this case permit conditions will address issues related to the
management and protection of affected resources, in accordance with
applicable regulations, including this rule. We disagree that the rule
does not adequately address marine habitats and species. While the
specific projects needed to mitigate impacts to marine resources may be
different, the procedural and analytical framework established in the
final rule applies equally well to freshwater and marine resources.
    Several commenters said that the proposed rule did not address
concerns raised in recent reports on compensatory mitigation in the
Corps Regulatory Program that were issued by the Government
Accountability Office (GAO). Some commenters said that the proposed
rule incorporates some of GAO's recommendations, but expressed
skepticism that the Corps has the resources to implement those
provisions of this rule. These commenters asserted that the Corps needs
to make compensatory mitigation compliance a high priority to ensure
effective replacement of wetland acreage and function lost as a result
of permitted activities.
    One GAO report was issued in May 2001, and was entitled ``Wetlands
Protection: Assessments Needed to Determine Effectiveness of In-Lieu
Fee Mitigation.'' Another GAO report, ``Wetlands Protection: Corps of
Engineers Does Not Have an Effective Oversight Approach to Ensure That
Compensatory Mitigation Is Occurring'' was issued in September 2005. We
have incorporated many of the recommendations of these GAO reports into
this rule, by requiring the use of enforceable permit conditions,
performance standards, and third-party agreements. In addition, this
rule states that it supersedes certain agency guidance on compensatory
mitigation, specifically the 1995 mitigation banking guidance, the 2000
in-lieu fee guidance, and Regulatory Guidance Letter (RGL)

02-02. That RGL provides guidance on compensatory mitigation projects
for aquatic resources impacted by activities authorized by DA permits.
This rule also clarifies the requirements for compensatory mitigation,
as recommended by GAO. We agree that taking actions to determine
compensatory mitigation compliance should be a high priority, and have
provided general principles for establishing ecological performance
standards and criteria. Corps districts and EPA regional offices will
continue to work with other federal and state resource agencies to
develop and refine specific performance standards and criteria to
evaluate and ensure success of compensatory mitigation projects in
their geographic areas of responsibility. These performance standards
and criteria will take into account regional variations in aquatic
resource characteristics, functions, and services.
    A number of commenters discussed ad hoc mitigation, which has been
defined in various reports as cash donations made by a permittee to
satisfy their mitigation requirements. The majority of commenters
stated that ad hoc mitigation should not be approved unless it meets
the requirements specified in the rule. One commenter said that ad hoc
mitigation is often unsuccessful because there is no evaluation process
and no oversight for the compensatory mitigation that is to be
completed, and there is no way to track the compensatory mitigation
that was to occur. One commenter proposed that ad hoc mitigation should
be allowed on a one-time basis where a compensatory mitigation
opportunity and need arise concurrently, but are not of such a scale as
to justify going through the review process in Sec.  332.8 [Sec.
230.98]. Two of these commenters discussed ad hoc mitigation
arrangements and stated that the Corps needs to improve record-keeping
for ad hoc mitigation activities.
    The May 2001 GAO report defines ad hoc mitigation as involving
``mitigation payments from developers to third parties that are neither
mitigation banks nor considered by the Corps to be in-lieu fee
organizations.'' For the purposes of this rule, ad hoc mitigation is
considered to be a form of permittee-responsible mitigation. For a
mitigation bank or in-lieu fee program to be used to provide
compensatory mitigation for DA permits, and to have the responsibility
for providing the required compensatory mitigation transfer from the
permittee to the mitigation bank sponsor or in-lieu fee sponsor, there
must be a mitigation banking or in-lieu fee program instrument approved
by the district engineer in accordance with the procedures in this
final rule (see Sec.  332.8 [Sec.  230.98]). Any other compensatory
mitigation arrangements are considered to be permittee-responsible
mitigation where the permittee retains responsibility for providing the
required compensatory mitigation, and this will be reflected in the
terms of the DA permit. Permittee-responsible mitigation also includes
any ad hoc payments made to governmental or non-governmental
organizations that are not in accordance with the terms of an approved
in-lieu fee program instrument. When a governmental or non-governmental
organization accepts an ad hoc payment from a permittee, that
organization is in essence acting as a contractor to provide the
compensatory mitigation for that permittee, and the permittee retains
responsibility for any long-term protection and/or management of the
compensatory mitigation project.
    We also recognize the importance of record-keeping for compensatory
mitigation projects, and have established procedures for using permit
conditions, instruments, and ledgers to track the implementation and
success of those projects. The Corps will also track permitted impacts
and compensatory mitigation through databases, such as the OMBIL
Regulatory Module (ORM-2), which is the primary automated information
system for the Corps Regulatory Program, and the Regional Internet Bank
Information Tracking System (RIBITS). All 38 Corps districts are now
using ORM-2, which will help standardize data collection in the Corps
Regulatory Program. It will also be used to collect data to assess the
performance of the Regulatory Program. RIBITS is an automated
information system with an interactive Web site. It is currently
designed to track the status of mitigation banks and to provide up-to-
date information to mitigation bank sponsors and customers. We are also
considering modifying RIBITS to track the status of in-lieu fee
programs. Use of RIBITS is currently limited to several districts, but
we are planning to make RIBITS the standard tool for tracking sale and
production of compensatory mitigation credits by third parties.
    Several commenters expressed appreciation that the agencies
incorporated many of the recommendations made in the 2001 NRC Report. A
few commenters acknowledged that the proposed rule prioritized the
location and types of compensatory mitigation projects in accordance
with the NRC's recommendations. However, they said that they disagree
with the NRC's recommendations and suggested that the agencies
establish a preference for on-site and in-kind mitigation in the final
rule. They said that a preference for on-site and in-kind compensation
would better support a ``no net loss'' goal for aquatic resources.
    We disagree that the rule should establish a preference for on-site
compensatory mitigation, because the failure rate for such projects is
quite high. On-site compensatory mitigation activities, especially
wetland restoration or establishment, are particularly sensitive to
land use changes. Land use changes often alter local hydrology.
Establishing appropriate hydrology patterns (i.e., duration and
frequency) to support the desired aquatic habitat type is a key factor
in successfully restoring or establishing those habitats. In many
cases, there are circumstances in which on-site mitigation is neither
practicable nor environmentally preferable. Under the watershed
approach, it may be desirable to require some on-site mitigation
measures to address water quality and quantify functions, and to
require off-site mitigation to compensate for habitat functions.
    We do agree that, in general, in-kind mitigation is preferable to
out-of-kind mitigation because it is more likely to compensate for the
functions and services lost at the impact site. The rule states that
the compensatory mitigation should be of a similar type (e.g., Cowardin
and/or hydrogeomorphic class) to the affected aquatic resource, unless
the district engineer determines using the watershed approach described
in the rule (see Sec.  332.3(c) [Sec.  230.93(c)]) that out-of-kind
compensatory mitigation will better serve the aquatic resource needs of
the watershed. The term ``in-kind'' in Sec.  332.2 [Sec.  230.92] is
defined to include similarity in structural and functional type;
therefore, the focus of the in-kind preference is on classes of aquatic
resources (e.g., forested wetlands, perennial streams). However, all
compensatory mitigation projects should provide a high level of
functional capacity, even when compensating for degraded or low-quality
resources. Replacement ratios may be used to adjust for the relative
quality of impact sites and mitigation projects, where appropriate.
With this rule, we are moving towards greater reliance on functional
and condition assessments to quantify credits and debits, instead of
surrogates such as acres and linear feet. We believe that more frequent
use of such assessment methods will help improve the quality of aquatic
resources in the United States.

    For example, in a case where a project proponent is proposing to
fill a degraded three acre wetland that provides one unit of wetland
function per acre (as determined by a rigorous functional assessment
method), the loss of that wetland may in some cases be offset by a
compensatory mitigation project that provides fewer acres of high-
functioning wetlands (as determined by the same functional assessment
method). Conversely, where the impact is to a high-value resource, more
than one-to-one replacement on an acreage basis may be necessary just
to achieve functional equivalence between the impact and mitigation
sites. Note that replacement ratios may also be greater than one-to-one
for other reasons, such as to address uncertainty of success or
temporal losses.
    One commenter said that the Corps should be the principal agency
administering the 404 wetlands regulatory program. The commenter stated
that the involvement of multiple agencies in wetlands regulation only
hinders the overall efforts of the Corps Regulatory Program. This
commenter also stated that the Corps should build a stronger, more
predictable compensatory mitigation program to both enhance
environmental protection and provide a measure of certainty to both
regulatory staff and permit applicants.
    While we agree that the section 404 regulatory program should be as
streamlined and efficient as possible, we do not agree that the
involvement of other agencies necessarily hinders that efficiency.
Today's rule will foster greater efficiency and predictability in the
interagency process by providing clear deadlines for action on all
types of compensatory mitigation, particularly banking and in-lieu fee
program instruments. We note that the participation of other agencies
in the section 404 permit process is required by various laws,
regulations, and legally-binding agreements. For example, section
404(b) of the Clean Water Act specifically authorizes EPA to develop
guidelines for the identification of disposal sites for dredged or fill
material (the 404(b)(1) Guidelines), which provide substantive
environmental criteria for avoidance, minimization and compensatory
mitigation. The EPA is authorized by section 501(a) of the Clean Water
Act to conduct any rulemaking necessary to carry out their functions
under that act. As another example, the Fish and Wildlife Coordination
Act and other statutes require consultation with the U.S. Fish and
Wildlife Service and the National Marine Fisheries Service for
activities that control or modify waterbodies.
    Many commenters stated that the proposed rule is inconsistent with
existing national regulations, and one commenter said that the proposed
rule is inconsistent with regulations at 33 CFR 320.4(r), as well as
the ``Mitigation'' general condition for the nationwide permits and
other compensatory mitigation guidance documents that apply to the
Corps Regulatory Program. This commenter also stated that the 404(b)(1)
Guidelines provide no authority for requiring compensatory mitigation
for unavoidable adverse impacts after all appropriate and practicable
minimization has been required.
    The agencies disagree with these comments. The Corps general
mitigation policy at 33 CFR 320.4(r) describes types of mitigation,
including avoiding, minimizing, rectifying, reducing, or compensating
for resource losses. Since that provision was last promulgated in 1986,
there have been policy changes that have resulted in the Corps
requiring compensatory mitigation for more activities, not just those
that result in significant resource losses. For example, when the
nationwide permit regulations were revised in 1991, a provision was
added (33 CFR 330.1(e)(3)) which stated that compensatory mitigation
could be required by a district engineer to ensure that an NWP activity
results in minimal adverse environmental effects. The final rule issued
today also specifically states that it does not alter the regulations
of 33 CFR 320.4(r), and that it supersedes certain guidance documents
on compensatory mitigation. What is generally understood to be
compensatory mitigation today (i.e., the restoration, establishment,
enhancement, and/or preservation of aquatic resources) is in the
404(b)(1) Guidelines as an action to minimize adverse effects on
populations of plants and animals (see 40 CFR 230.75(d)). Compensatory
mitigation may also be required to satisfy other legal requirements, as
a result of the public interest review process, or to compensate for
other resource losses. As indicated in the preamble to this rule,
today's rule does not affect the determination as to when compensatory
mitigation is required, only the requirements for conducting such
mitigation once the district engineer determines that it is necessary.
As stated in the preamble to the March 28, 2006, proposed rule (71 FR
15524-15525), this rule does not change the threshold for determining
when compensatory mitigation is required; instead it focuses on where
and how compensatory mitigation will be provided. The threshold for
determining when compensatory mitigation is required for DA permits is
generally addressed through 33 CFR 320.4(r) and specifically for the
nationwide permits at 33 CFR 330.1(e)(3).
    A number of commenters stated that the proposed rule gives
preference to certain groups. One commenter said that the proposed rule
promotes the interests of non-profit organizations, government
agencies, and academics, instead of restoration practitioners and
entrepreneurs. One commenter remarked that wetland mitigation and
market-based approaches have the potential to expand land conservation
practices through private investments and to provide additional
economic incentives to help retain working farms and forests. Another
commenter said that a market-driven approach will help small developers
and allow for increased entrepreneurship in compensatory mitigation.
One commenter said that the proposed rule would damage the economic
viability of wetland mitigation banking and encourage losses of
wetlands in floodplains, which would exacerbate property damage caused
by flooding.
    Under this rule, any entity, whether a non-profit group, government
agency or commercial entrepreneur, has the opportunity to develop and
implement compensatory mitigation projects. We believe we have complied
with the statute requiring the promulgation of this rule, by maximizing
available credits while raising requirements and standards to help
ensure ecological performance. When evaluating compensatory mitigation
options, district engineers will consider what would be environmentally
preferable to offset the authorized impacts. In many instances, the
environmentally preferable compensatory mitigation will be in the form
of mitigation banks or in-lieu fee programs because they usually
involve consolidating compensatory mitigation projects and resources,
and providing financial planning and scientific expertise. They may
also reduce temporal losses of functions and reduce uncertainty over
project success. We have added a provision that in-lieu fee sponsors
must be governmental or non-profit organizations. We believe this is
appropriate in light of the fact that only in-lieu fee programs are
allowed to sell advance credits, before a site has been secured or a
specific mitigation project reviewed and approved.
    We disagree that the rule will adversely affect the economic
viability of mitigation banks and encourage

losses of wetlands in floodplains. By further clarifying the
requirements and timelines for mitigation bank approval, and by
establishing a preference for mitigation bank credits we believe the
final rule will in fact enhance the economic viability of mitigation
banks. Since the focus of this rule is on compensatory mitigation,
avoidance and minimization of impacts to wetlands located in
floodplains is more appropriately addressed through the application of
Subpart B of the 404(b)(1) Guidelines, compliance with Executive Order
11988 (Floodplain Management), and compliance with the floodplain
management requirements of the Federal Emergency Management Agency and
state and local governments.
    One commenter said that the rule will slow down the permitting
process for new energy projects. Three commenters stated that section
1221 of the Energy Policy Act of 2005 (Pub. L. 109-58), through section
216(h) of the Federal Power Act, requires federal permit decisions
associated with transmission facilities to be made in one year, unless
it is not possible under other laws. These commenters said that the
one-year time frame applies to DA permits.
    This final rule will not have an adverse effect on processing times
for DA permits that authorize the construction of transmission
facilities. The rule promotes the development of mitigation banks and
in-lieu fee programs, which can be used to provide compensatory
mitigation for energy projects that require DA permits. Securing
credits from third-party mitigation providers can help shorten permit
processing times, because there is no need to review and approve site-
specific mitigation plans for permittee-responsible mitigation. In
cases where appropriate third-party mitigation credits are not
available, the review and approval of permittee-responsible mitigation
projects should be more timely, because this rule establishes clear
guidelines and requirements for those compensatory mitigation projects.
This rule does not change the circumstances under which compensatory
mitigation is required, so additional compensatory mitigation will not
be required for energy projects.
Wetland Protection
    Many commenters said that the proposed rule does not adequately
protect the Nation's wetlands, does not support the goal of ``no net
loss'' of wetlands, does not support the objective of the Clean Water
Act to maintain the chemical, physical, and biological integrity of
wetlands, and will result in a significant loss of wetland acreage
across the country. Several commenters recommended that the final rule
include provisions to make it more difficult to fill wetlands to ensure
no net loss of wetland acreage and functions. However, one commenter
said that although current federal regulations could be improved, those
regulations are sufficient to ensure no net loss of wetlands in
Florida. One commenter stated that over 33,000 acres of wetlands have
been lost last year alone, and, with this much destruction, it is
obvious that the agencies are not requiring enough avoidance of wetland
impacts. Two commenters said that of the three goals stated in the
proposed rule (i.e., to improve quality of mitigation, improve
regulatory efficiency, and ensure opportunities for federal agency
participation in mitigation banks), only one goal is focused on natural
resource protection. These commenters also stated that regulatory
efficiency should not be pursued at the expense of wetland protection.
    A primary objective of the Clean Water Act is to restore and
maintain the chemical, physical and biological integrity of the
Nation's waters. Through its permit program, the Corps helps protect
the aquatic environment by requiring project proponents to avoid and
minimize regulated impacts to wetlands and other waters of the United
States to the extent practicable. This rule was specifically
promulgated to address compensatory mitigation. For activities that
require a section 404 permit, avoidance and minimization are addressed
through application of Subparts A through H of the 404(b)(1) Guidelines
at 40 CFR part 230. Prior to issuing a permit, the Corps must evaluate
the proposed work and its impacts on the aquatic environment and other
public interest review factors, and determine whether the proposed work
is in the public interest. Compensatory mitigation may be required to
ensure that the proposed work is not contrary to the public interest
and, if the activity involves discharges of dredged or fill material
into waters of the United States, is in compliance with the 404(b)(1)
Guidelines. The rule does not change or weaken existing regulatory
requirements to avoid and minimize impacts to wetlands.
    In fiscal year 2005, the Corps authorized 20,754 acres of wetland
impacts, and required 56,693 acres of compensatory mitigation through
wetland restoration, establishment, enhancement, and preservation to
offset those unavoidable impacts. From fiscal years 2001 to 2005, the
mean annual wetland impacts authorized were 23,000 acres, and the mean
annual wetlands compensatory mitigation required was 50,000 acres.
    This rule incorporates many of the recommendations of the 2001 NRC
Report, as well as appropriate recommendations from other evaluations
of wetland compensation, to provide measures to help improve the
success of wetland compensatory mitigation projects. By improving the
success of these projects, the Corps Regulatory Program will help
support the Administration's goal of increasing wetland acreage and
quality. We believe that the rule will both improve the quality and
success of compensatory mitigation and increase predictability and
efficiency in the regulatory program.
    Three commenters recommended adding a provision to the rule from
the 1990 mitigation Memorandum of Agreement (MOA) between the Army and
EPA stating that no overall net loss of wetlands may not be achieved
for each and every permit action, but the Corps would achieve this goal
programmatically. One commenter noted that the ``no net loss'' goal for
wetlands is required by statute for the Corps Civil Works Program (see
33 U.S.C. 2317(a)(1)).
    That specific provision of the 1990 Mitigation MOA has not been
superseded by this final rule. It is important to understand that the
1990 Mitigation MOA applies only to standard permits. It is not
practicable or appropriate to require compensatory mitigation for every
standard permit, or for every general permit authorization. The
requirements of 33 U.S.C. 2317(a)(1) are more accurately presented as
achieving an interim goal of ``no overall net loss'' of the nation's
remaining wetlands base as measured by acreage and function, with a
long-term goal of increasing the quality and quantity of the nation's
wetlands. That provision of the United States Code applies to water
resource development projects undertaken through Corps Civil Works
program, not to activities authorized by DA permits.
    Two commenters stated that developers should not be able to provide
wetlands compensatory mitigation through mitigation banks or in-lieu
fee programs. One commenter said that wetland buffers reduce adverse
impacts of human disturbance on wetland habitats. Two commenters
recommended emphasizing voluntary economic incentives and balancing
economic needs with those of wetlands protection.
    Under this rule, developers will be able to provide compensatory
mitigation through mitigation banks, in-lieu fee

programs, or permittee-responsible mitigation. In many cases, the
environmentally preferable compensatory mitigation will be provided
through mitigation banks or in-lieu fee programs because they typically
involve consolidating compensatory mitigation projects and resources,
and providing financial planning and scientific expertise. For a
particular activity requiring a DA permit, the Corps may consider any
appropriate form of compensatory mitigation, as long as it complies
with these regulations. We agree that wetland buffers often help ensure
the long term viability of wetlands, and the rule promotes the use of
such buffers. There are some federal programs that provide economic
incentives to protect wetlands, but those programs have limited
availability. Section 404 of the Clean Water Act is not structured to
provide voluntary economic incentives for avoiding regulated activities
in wetlands. Instead, it relies on a regulatory approach to wetland
protection.
Aquatic Resource Functions, Services, and Values
    A number of commenters discussed the concepts of ``functions,''
``services,'' and ``values'' that were in the proposed rule. Two
commenters suggested removing ``values'' and ``services'' from the
rule. One commenter said there is disagreement on the definitions of
these terms, and the rule should instead require a minimum one-to-one
acreage ratio. One commenter said that functional capacity appears to
represent natural wetland potential better than society-driven values
and services and should be emphasized more. Another commenter said that
the rule should explicitly require replacement of lost ``values,''
because a shift from a broad concept of ``function and value'' to a
narrow concept of function alone ignores social services and values
that are important to the public interest, such as protection from
natural hazards. One commenter said that the phrase ``non-use values
such as biodiversity'' will subject the regulatory agency and the
regulated community to uncertainty and litigation as opponents who
object to a project challenge the details of an impact. One commenter
suggested that functions, values, and services found in a given wetland
can best be measured after the wetland conditions are established using
biological indices, and that a framework or methodology is needed.
    The terms ``functions,'' ``services,'' and ``values'' have been
used in various documents to describe the attributes of aquatic
resources that are being replaced through compensatory mitigation. We
included definitions for all three terms in the proposed rule. After
considering the comments received in response to these concepts, we
have eliminated the term ``values'' from the final rule because the
term ``services'' is currently being used in the ecological literature
to relate to the human benefits that are provided by an ecosystem. The
concept of ecosystem services provides a more objective measure than
``values'' of the importance of the functions performed by the
ecosystem to human populations. Ecosystem services is a useful concept
for assessing the public interest, an important consideration in the
Corps Regulatory Program. Consideration of ``services'' provided by
aquatic resources is usually qualitative, and can be accomplished
through evaluations of compensatory mitigation options, including
siting those projects near human populations.
    Using the concept of ``services'' also allows us to focus on how
the general population benefits from ecological functions, instead of
whether potentially affected parties may or may not ``value'' a
particular aquatic resource and the functions it provides. The term
``values'' is more subjective, since a particular ecosystem service may
be perceived to be valuable by some individuals but not others. The
term ``values'' can also be read to imply monetary valuation, which is
difficult for most aquatic resource functions and is not generally
practical for most decisions. Therefore, we believe the regulatory
program is appropriately focused on protecting ``functions'' (the
physical, chemical and biological processes that occur in aquatic
resources) and ``services'' (the benefits to humans that result from
these functions). Accordingly, we have eliminated the term ``values''
from the rule, including the reference to ``non-use values such as
biodiversity.'' However, biodiversity is a potential service that some
resources may provide.
    The agencies have a long-standing policy of achieving no overall
net loss for wetland acreage and function. Simply requiring one-to-one
acreage replacement may not adequately compensate for the aquatic
resource functions and services lost. Presently, there are methods that
can be used by district engineers to assess aquatic resource functions
or condition, such as hydrogeomorphic assessment methods and indices of
biological integrity. There are efforts being undertaken to develop
methods to assess ecosystem services, such as those that use indices of
wetland function to reflect the services provided by wetlands.
    A number of commenters expressed concern that offsite mitigation
can lead to transfer of wetland ecosystem services from urban to rural
areas. However, one commenter said that the rule should not be written
for the purpose of preventing urban wetland values from migrating to
rural areas because local jurisdictions have other means for preventing
this (e.g., zoning ordinances, eminent domain). Another commenter
stated that because of a shortage of suitable sites in populated areas,
it may not be possible to establish ecologically viable mitigation
banks in certain heavily urbanized areas. This commenter said that
mitigation banks in urban areas should be allowed to generate more
credit per unit of restored resource to make these sites financially
feasible.
    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, or to obtain suitable compensatory mitigation project
sites. However, in certain situations self-sustaining and ecologically
successful aquatic resource restoration or establishment projects may
not be feasible in urban areas because of changes in land use and the
resulting impacts to local surface hydrology and groundwater. In these
types of situations, the rule allows compensatory mitigation for
impacts to urban wetlands to be conducted in rural areas if the
applicable requirements of the rule and the Section 404(b)(1)
Guidelines are met. Under the watershed approach adopted in the final
rule, district engineers may require compensatory mitigation at more
than one site. For example, compensatory mitigation may be required on-
site to offset losses of water quality and flood storage functions,
while off-site compensation may be required to offset losses of habitat
functions. The siting of mitigation banks is dependent upon potential
mitigation bank sponsors securing land suitable for compensatory
mitigation projects. Such land may not be available in urban areas at a
price, and a rate of return on that investment, that is acceptable to
the sponsor. Credit valuation must be based on the ecological functions
and services provided by the compensatory mitigation project, not the
difficulty or cost of siting and constructing it. However, where
appropriate, district engineers may consider the relative

ecological value of scarce aquatic resources in urban areas (at both
the impact and mitigation sites) in determining appropriate
compensation ratios. While preservation may be the most appropriate
form of compensatory mitigation in urban areas in some cases, we
encourage district engineers to look for opportunities to restore or
establish aquatic resources in appropriate areas.
Mitigation Effectiveness
    Many commenters stated that compensatory mitigation projects do not
effectively replace natural wetlands, because created wetlands do not
support the variety of native biota found in natural ecosystems, and
there is no guarantee that they will function as natural wetlands. A
large number of commenters also said that the rule fails to address the
fact that many aquatic systems cannot be created. The commenters stated
that there is no scientific data showing that the functions of
headwater streams, and wetlands such as bogs and fens, can be
reproduced, and the proposed rule would weaken protections for these
waters by sanctioning uncertain mitigation practices. Several
commenters stated that the rule does not include major improvements
suggested by the scientific community to improve wetlands compensatory
mitigation.
    We have carefully considered reviews and criticisms of compensatory
mitigation projects, especially the 2001 NRC Report, during the
development of this rule. We recognize that there are compensatory
mitigation projects that do not fully succeed in replacing the
functions and services of aquatic resources that are lost or altered as
a result of permitted activities. In an effort to improve compensatory
mitigation practices in the Corps Regulatory Program, we have
incorporated recommendations made in the 2001 NRC Report and other
reports. We believe that this final rule accomplishes that objective
and will help increase the success and quality of aquatic resource
restoration, establishment, and enhancement activities by focusing on
effective site selection at a landscape and watershed scale, requiring
enforceable permit conditions (including ecological performance
standards), requiring monitoring of compensatory mitigation, and
undertaking adaptive management to help ensure success. We recognize
that some types of aquatic resources are difficult to replace, such as
bogs, fens, vernal pools, and streams. In response to these comments,
we have added Sec.  332.3(e)(3) [Sec.  230.93(e)(3)], which emphasizes
avoidance and minimization of impacts to difficult-to-replace
resources, and if such avoidance and minimization is not practicable,
requires that compensatory mitigation be provided through in-kind
preservation, rehabilitation, or enhancement to the extent practical.
Mitigation Mechanisms
    Several commenters said that the rule inappropriately treats
permittee-responsible mitigation, mitigation banks, and in-lieu fee
programs as though they are a single vehicle. Two commenters stated
that in cases where a mitigation bank is successfully established, it
should be preferred over permittee-responsible mitigation, but with the
caveat that movement of aquatic resources from urban areas to rural
areas should be monitored and possibly prevented. One commenter
recommended that consolidated mitigation be allowed for linear
facilities such as transmission lines. One commenter suggested the
following clarification be included in the preamble to the final rule:
``This rule is not intended to inhibit market-based opportunities for
trading environmental credits beyond those required for compensatory
wetland mitigation.'' According to that commenter, this would allow
private landowners to sell credits for environmental services gained
beyond those required for compensatory mitigation for DA permits.
    This rule establishes, to the extent practicable, equivalent
standards for all types of mitigation, as required by section 314. The
administrative and procedural requirements in the final rule vary,
because there are fundamental differences among mitigation banks, in-
lieu fee programs, and permittee-responsible mitigation. It is not
possible to impose exactly the same requirements on these three sources
of compensatory mitigation, and fulfill the other requirement of
section 314, which is to ``maximize available credits and opportunities
for mitigation.'' To maximize available credits, it is necessary to
recognize the differences among the three sources, and impose
equivalent standards and requirements to the extent practicable. Where
it is not practicable to impose identical requirements, the rule adopts
comparable alternative requirements to help ensure the ecological
success of all types of compensatory mitigation. It is also important
to emphasize that the rule applies equivalent ecological standards to
all three types of compensatory mitigation; the differences are in
procedures and timing of requirements. Site selection for third-party
mitigation should focus on the ecological benefits that the mitigation
banks or in-lieu fee projects will provide to the watershed. This may
or may not result in migration of aquatic resources from urban to rural
areas within that watershed.
    For linear projects, such as roads and utility lines, district
engineers may determine that consolidated compensatory mitigation
projects provide appropriate compensation for the authorized impacts,
and are environmentally preferable to requiring numerous small
permittee-responsible compensatory mitigation projects along the linear
project corridor. We do not believe it is necessary to explicitly state
that this rule is not intended to inhibit market-based environmental
credit trading, as the rule only applies to compensatory mitigation
required for DA permits. The ability of private landowners to sell
credits for environmental services gained beyond those required for
compensatory mitigation for DA permits is more appropriately addressed
through other applicable programs.
General Comments on Mitigation Banking
    Many general comments were received regarding mitigation banking.
Some commenters encouraged broader use of banks, many others criticized
a perceived preference for mitigation banks in the proposed rule.
Several commenters recommended providing greater incentives for Corps
districts to process commercial mitigation bank requests. One commenter
suggested that this rule include incentives to private landholders to
participate in wetland mitigation banking. Many commenters said the
rule inappropriately promoted the economic needs of the mitigation
banking industry over the needs of watersheds, and that the preference
for mitigation banks over other forms of compensatory mitigation is not
justified.
    We recognize that mitigation banking is an important tool for
compensatory mitigation. In this final rule, we have established a
preference for mitigation bank credits, since mitigation banks must
have an approved mitigation plan and other assurances in place before
credits can be provided to permittees (see Sec.  332.3(b)(2) [Sec.
230.93(b)(2)]). Because of the requirements imposed on mitigation
banks, they generally involve less risk and uncertainty than in-lieu
fee programs and permittee-responsible mitigation. This preference is
based on administrative criteria, not ecological criteria. To the best
of our knowledge, there have been few studies by independent parties of
the ecological

performance of mitigation banks. The studies that we have reviewed have
shown that mitigation banks have experienced many of the same problems
as permittee-responsible mitigation (see the environmental assessment
completed for this rule for summaries of those studies). The ecological
success of mitigation banks, in-lieu fee programs, and permittee-
responsible mitigation is dependent on many of the same factors, such
as selecting appropriate sites and establishing the proper hydrology.
We are not aware of any independent studies on the ecological
performance of in-lieu fee projects. As discussed below, in response to
comments received as a result of the proposed rule, we are retaining
in-lieu fee programs as another form of third-party mitigation, with
robust requirements to help ensure that they provide effective
compensatory mitigation.
    The timelines in this rule for processing proposed mitigation banks
and in-lieu fee programs will promote timely decisions on instruments
for these third-party mitigation activities. Participation in
mitigation banks is not limited to entrepreneurs; private landowners
can also submit proposed mitigation banks for consideration. We
recognize that mitigation banks are not currently available in many
areas of the country, or will be able to provide in-kind compensation
for some types of aquatic resources. Therefore, to support a watershed
approach for compensatory mitigation, we are retaining in-lieu fee
programs as a separate form of third-party mitigation in this final
rule, because in-lieu fee programs can provide ecologically beneficial
compensatory mitigation in areas not served by mitigation banks. The
preference for mitigation banks can be overridden by district engineers
on a case-by-case basis if, for example, an approved in-lieu fee
program has released credits available, or the permittee is proposing a
compensatory mitigation project that will restore an outstanding
resource.
    Several commenters said that references to economic factors should
be removed from consideration of the mitigation service area and there
should be a greater consideration of the watershed approach, in order
to be more consistent with other forms of compensatory mitigation.
Several commenters stated that overdependence on mitigation banks will
promote less successful compensatory mitigation projects. They cited a
recent study in Ohio that showed that mitigation banks have not
provided successful mitigation for permitted impacts. Several other
commenters noted that there are too many areas in the country that are
underserved by mitigation banks. One commenter recommended non-profit
management of mitigation banking, because non-profit entities can do
more work for the actual cost and their ultimate goal is stream
restoration, not maximizing the amount of profit.
    Mitigation banks and in-lieu fee programs must be sited in such a
way as to effectively replace lost aquatic resource functions and
services and address key watershed needs within their service areas.
However, consideration of economic factors is also important in
determining the service area, to make it possible for third-party
mitigation sponsors to develop and implement these projects. If service
areas are too small to support economically viable mitigation banks or
in-lieu fee programs, then we would have to rely on permittee-
responsible mitigation. As discussed in the environmental assessment
for this rule, permittee-responsible mitigation is generally less
likely to be a successful source of compensatory mitigation. However,
to ensure the benefits of third-party mitigation, economic factors
should not supersede ecological considerations in the final service
area determination. The benefits of mitigation banks and in-lieu fee
programs are discussed in Sec.  332.3(a)(1) [Sec.  230.93(a)(1)].
    The agencies agree that there are certain advantages to non-profit
and governmental agencies as third-party mitigation sponsors. They do
not need to earn a profit, and are more likely to act in the public
interest. However, commercial banks also have certain advantages. They
have a strong financial incentive to provide effective, timely
mitigation that may be lacking for non-commercial entities. Under
today's final rule, mitigation bank sponsors may be either commercial,
non-profit, or governmental entities, while in-lieu fee program
sponsorship is limited to governmental and non-profit entities.
    Some commenters supported the mitigation banking rules, while
others disagreed with the proposal to eliminate in-lieu- fee programs.
Several commenters said that the cost of bank credits should be
established in the context of the marketplace. One commenter stated
that over-promoting mitigation banks could lead to a monopolistic
pricing structure. Numerous commenters asserted that the process of
establishing a mitigation bank should be streamlined. Some commenters
supported the termination of wetland mitigation banks that do not
comply with the Clean Water Act.
    In this final rule, we have established criteria and standards for
both mitigation banks and in-lieu fee programs, to maximize the
available credits for use in the Corps regulatory program, as well as
the Corps Civil Works Program and military construction activities.
Credit costs for mitigation banks will be determined by their sponsors.
The rule does attempt to streamline the process for establishing both
mitigation banks and in-lieu fee programs, while recognizing the need
for thorough and effective IRT and public review before credit sales
can begin. To accomplish these goals, the final rule establishes
reasonable deadlines for each step in the review and approval process.
To continue operating, approved mitigation banks and in-lieu fee
programs must comply with the terms of their instruments and these
regulations, and district engineers will take appropriate actions if
credits are not produced in accordance with approved credit release
schedules. This ensures compliance with the Clean Water Act.
Regional Issues
    A number of commenters expressed concern about how the rule will be
implemented at the district or regional level, or with regard to
specific issues such as coal mining and port facilities. One commenter
welcomed the improved consistency in Corps implementation of a federal
mitigation regulation with similar standards, timelines, and laws
across states, for administrative reasons rather than biological/
ecological differences. One commenter expressed concern that Corps
districts will develop stricter requirements than those in the rule and
another commenter stated that the rule places too much authority with
the district engineer and not enough with state and local officials who
are more familiar with local needs. Other commenters stated that the
rule could conflict with state or local programs, and if the state
enacts stricter standards for mitigation, the Corps must adopt those
standards into DA permits. Many commenters noted that mitigation
banking is being given preference over other types of mitigation
despite state agency efforts to develop rules to encourage site-
specific in-kind mitigation. In this way, the proposed rule fails to
account for existing state and local regulations. Numerous commenters
stated that coordination between state, local, and federal
administrators is necessary or the rule may undermine functioning state
and local mitigation plans.

    The rule provides district engineers the flexibility to address
permit-specific situations, while ensuring clear and consistent
national standards and requirements. While we expect district engineers
to work closely with their state and local partners, particularly on
Interagency Review Teams, it is essential that this rule is consistent
with Congressional intent as provided by section 314. This rule must
also be consistent with the other Corps regulations at 33 CFR parts 320
through 331, which govern the implementation of the Corps Regulatory
Program. Of course, it would be desirable to have consistent
compensatory mitigation requirements across the various levels of
government that have regulatory authority over a particular project,
but there are usually differences because of variability among agency
authorities, missions, and objectives. State and local governments may
impose different requirements to address local or regional needs or
concerns. Compensatory mitigation decisions made by district engineers
must address federal concerns and authority, and must focus on
compliance with the Clean Water Act and other federal requirements.
There are likely to be cases where the compensatory mitigation
requirements imposed by the Corps are different from those imposed by
state or local governments, but in most cases they are likely to be
similar. All section 404 permits require section 401 water quality
certification by states and tribes. Where states feel that federal
requirements are not stringent enough, they may impose more protective
requirements in accordance with their water quality standards.
    In this final rule, preference is given to mitigation banks, if the
authorized impacts occur in the service area of a mitigation bank that
has the appropriate number and resource type of credits available. If
permittee-responsible mitigation is required by a state or local
government with regulatory authorities that are similar to the Corps
under section 404 of the Clean Water Act or sections 9 or 10 of the
Rivers and Harbors Act of 1899, and the mitigation project will
appropriately offset the permitted impacts, then the district engineer
may determine that the permittee-responsible mitigation is acceptable
for the purposes of the DA permit. We encourage coordination among
federal, state, and local governments to avoid duplicate or conflicting
compensatory mitigation requirements, as long as those requirements are
consistent with federal requirements.
    Several commenters cited various successful state programs and said
that these programs should not be subject to the additional
administrative burden of IRT review and approval of each separate
mitigation project, and that their success could be disrupted by
application of the rule. A number of commenters discussed the unique
regulatory scheme that applies to mining, stated that the rule does not
recognize the temporary nature of coal mining impacts on streams, and
that the agencies must reconsider application of some of the proposed
requirements, particularly those addressing monitoring and long-term
assurances, in the context of the mining industry's regulatory
environment.
    District engineers will continue to work with successful state
programs to streamline the review process to the maximum extent
possible under these regulations. Third-party mitigation projects will
be reviewed by district engineers and other interested members of the
IRT. That interagency review is often helpful in providing different
areas of expertise to evaluate the potential that each compensatory
mitigation project has for successfully offsetting functions lost as a
result of impacts authorized by DA permits. Established relationships
between state programs and their federal counterparts will not be
disrupted by this rule. Corps oversight is necessary to ensure the
continued success of these programs. To help take advantage of
established relationships, we have added a provision to the final rule
that allows the district engineer and any member of the IRT to enter
into a memorandum of agreement to perform some or all review functions
(see Sec.  332.8(b)(5) [Sec.  230.98(b)(5)]). However, the district
engineer cannot delegate his or her authority for final approval of
instruments or other documents.
    As for mining activities, this rule does not change how the Corps
will evaluate permit applications or assess the need for compensatory
mitigation for those activities. What constitutes a temporary impact,
and the need for compensatory mitigation, is determined on a case-by-
case basis, depending on the specific circumstances of the project. The
district engineer will determine the appropriate time interval for
distinguishing between temporary and permanent impacts. Monitoring of
compensatory mitigation sites is required and monitoring reports must
be submitted to the district engineer in accordance with the special
conditions of the DA permit or the terms of the mitigation banking or
in-lieu fee program instrument. However, the content and level of
detail of monitoring reports is commensurate with the scale, scope, and
type of the compensatory mitigation project. Requirements relating to
financial assurances and long-term management are determined on a case-
by-case basis, depending on the specific circumstances of the project.
Need for Clarification
    Several commenters stated that the proposed rule does not
specifically state whether it applies to general permits. Most of these
commenters argued that the rule should apply solely to individual
permits, and that nationwide and regional general permits should
continue to be governed by 33 CFR part 330, because the requirements of
the proposed rule conflict with the more flexible standards that apply
to the nationwide permits and will greatly limit their utility. Two
commenters stated that the proposed rule should also apply to general
permits. One commenter said that the rule should include provisions
that would eliminate all general permits that do not comply with the
Clean Water Act.
    The rule applies to compensatory mitigation required by all DA
permits, including individual and general permits. We have made changes
to this rule to clarify those provisions that are applied differently
to individual permits and general permits. With these modifications,
this rule does not conflict with the regulations at 33 CFR part 330, or
the NWP general condition governing mitigation (i.e., general condition
20 of the 2007 nationwide permits, as published in the March 12, 2007,
issue of the Federal Register (72 FR 11193)). District engineers will
determine specific compensatory mitigation requirements for each
permitted activity based on case-specific considerations, including
whether the activity is being authorized under a general or individual
permit. This rule does not alter the circumstances under which the
district engineers require compensatory mitigation or the threshold for
determining when compensatory mitigation is required for a particular
activity. The compliance of general permits with section 404(e) of the
Clean Water Act is addressed through application of the Corps
regulations governing the issuance of general permits, as well as the
criteria in the 404(b)(1) Guidelines for issuing general permits (40
CFR 230.7) and concerns about those permits that do not relate to
compensatory mitigation are outside the scope of this rule.
    One commenter recommended that the rule specify when the term
``project''

refers to an authorized or permitted activity. One commenter
recommended that the agencies reconsider use of the term
``ecological.'' Many readers may view this only in terms of species
habitat, while in some cases other functions, such as flood control or
water quality improvement, may be as or more important than habitat.
    To provide clarity in the final rule, we have used the term
``project'' to refer to compensatory mitigation projects, and used the
terms ``permitted impacts'' and ``authorized impacts'' when referring
to the activities that adversely affect waters of the United States and
may require compensatory mitigation. The term ``ecological,'' as used
in this rule, is intended to be interpreted broadly as dealing with
interrelationships of organisms (including humans) and their
environment. The term ``ecological'' can refer to other features and
functions of aquatic systems besides species habitat. For example,
ecological functions provided by aquatic resources also include
biogeochemical functions, which can help improve water quality. The
agencies agree that water quality and flood control are important
ecological services that should be compensated for when adversely
impacted by permitted activities.
    One commenter stated that the proposed rule has implications for
USDA program participants who perform conservation or other activities
in wetlands and for wetland activities conducted on National Forest
System (NFS) lands. The USDA is exploring how it may facilitate its
constituents' involvement in wetland mitigation activities.
    This rule specifies compensatory mitigation requirements for DA
permits. Compensatory mitigation projects may be conducted on
agricultural lands and NFS lands. District engineers will consider the
number and type of compensatory mitigation credits that may be provided
through aquatic resource restoration, establishment, enhancement, and/
or preservation activities on these lands, over and above any
environmental improvements that result from USDA programs (see Sec.
332.3(j) [Sec.  230.93(j)]). Resources that are restored, established,
enhanced or preserved to satisfy the requirements of other federal
programs may not also be used for compensatory mitigation for DA
permits, although district engineers may evaluate and approve on a
case-by-case basis situations where a consolidated project is used to
satisfy more that one set of requirements, provided the same resource
is not ``double counted.'' For example, if 10 acres of wetlands were
needed as compensatory mitigation for a DA permit, and 10 acres were
needed for some other federal program, a 20 acre project could be
authorized to fulfill the requirements of both, but the same 10-acre
project could not.
    One commenter said that the agencies should use ``District
Commander'' instead of ``district engineer'' when referring to the
person that will implement this rule. The term ``District Commander''
refers to the person in charge of a particular Corps district. The term
``district engineer'' refers to the District Commander and any of his
or her designees (i.e., persons who are authorized to take actions on
his or her behalf). This rule uses the term ``district engineer''
because most day-to-day regulatory decisions are made by the District
Commander's designees.
    One commenter stated that subsurface impacts are not addressed,
including subsurface extraction (mining) of oil, gas, ground water, and
the aquifer matrix (e.g., rock, sand, shell). The commenter cited an
example where a Corps permit involved the removal of thousands of acres
(surface area) of aquifer matrix (in that case, limestone), resulting
in greatly increased groundwater flow occurring in the vicinity of
these mine pits despite erroneous assumptions of low flow by the
regulatory agencies.
    It is not possible in this preamble to address the details of the
particular case the commenter cites. To the extent that DA
authorization is required for subsurface extraction activities,
district engineers will determine the need for compensatory mitigation
on a case-by-case basis.
Transition to the New Rule
    Several commenters recommended that the agencies clarify that the
new regulations apply only to applications submitted after the
effective date of the rules. One commenter added that the rule should
recognize that applicants in the permitting process have expended
substantial resources needed to obtain permits under the current rules,
and those resources have been committed in reliance on the current
rules governing compensatory mitigation. Therefore, the new
requirements should not be applied retroactively to permit applicants
who have invested substantial effort in developing data and plans under
the previous rules and guidance. One commenter requested a clear
statement that the rule does not apply to existing compensatory
mitigation projects under Corps permits.
    This final rule will apply to permit applications received after
the effective date of this rule, unless the district engineer has made
a written determination that applying these new rules to a particular
project would result in a substantial hardship to a permit applicant.
In such cases, the district engineer will consider whether the
applicant can fully demonstrate that substantial resources have been
expended or committed in reliance on previous guidance governing
compensatory mitigation for DA permits. Final engineering design work,
contractual commitments for construction, or purchase or long-term
leasing of property will, in most cases, be considered a substantial
commitment of resources. Permit applications received prior to the
effective date will be processed in accordance with the previous
compensatory mitigation guidance.
Need for Additional Guidance
    Four commenters requested more detailed guidance on how and when
riparian areas and upland buffers can be used as compensatory
mitigation. Several commenters requested further guidance from agencies
to implement the watershed approach consistently across the nation, on
issues such as determination of watershed boundaries, information
needed in watershed plans, and how to identify the needs of a
particular watershed. Other commenters recommended that the agencies
develop guidance on compensatory mitigation for open and navigable
waters, performance standards, mitigation ratios, financial assurances,
the implementation of adaptive management, and credit determination
methods. Another commenter suggested that the agencies prepare regional
reference manuals that provide guidance on how to best design
compensatory projects appropriate to meet the needs of watershed units
in that region.
    Many of these questions, such as how to determine watershed scale
and boundaries, must be answered by district engineers at a regional or
local level, to address landscape variability and other factors. Other
questions must be answered on a case-by-case basis, after considering
the impacts and the compensatory mitigation that may be necessary to
offset those impacts. However, we recognize the need to provide more
information to the public and agency personnel, and we will continue to
develop guidance, as necessary, outside of this rulemaking.
Economic Issues
    Two commenters expressed concern over the increase in mitigation
costs that will result from more stringent

performance standards and the delay of credit releases until
performance is achieved. One commenter stated that the requirements of
the rule will overly complicate the permitting process and ultimately
impact the availability of affordable housing. If the costs of
purchasing credits from a mitigation bank are too high, the district
engineer should take that into account and allow other off-site or out-
of-kind mitigation.
    In some cases, the cost of performing compensatory mitigation may
increase as a result of implementation of this rule. Since this rule is
generally based on existing practice, with improvements to enhance
performance and efficiency, we do not believe that it will cause a
substantial increase in compliance costs. We believe that ecological
performance standards and other aspects of this rule are necessary to
improve the success of compensatory mitigation in the Corps Regulatory
Program. District engineers will take costs into account when
evaluating compensatory mitigation options, since practicability is one
consideration when determining compensatory mitigation requirements for
DA permits.
    One commenter strongly objected to adding any provision in the
final rule that would require the Corps to ``determine what an adequate
price might be'' of compensatory mitigation credits as suggested in the
discussion section of the proposed regulation.
    The Corps will not determine the price of compensatory mitigation
credits. The rule states that the cost of compensatory mitigation
credits is determined by the sponsor of a mitigation bank or in-lieu
fee program. However, the district engineer may evaluate fee schedules
for in-lieu fee programs to determine whether those fees satisfy the
criteria in Sec.  332.8(n)(5)(ii) [Sec.  230.98(n)(5)(ii)], and are
sufficient for providing the required compensatory mitigation.
Implementation Issues
    A number of commenters stated that the requirements of the proposed
rule will place an enormous burden on the Corps' staff and resources
and may further delay implementation of projects. Numerous commenters
asserted that additional resources must be allocated to reviewing
monitoring reports, conducting site visits, and taking enforcement
action when permittees and mitigation banks do not perform their
prescribed mitigation requirements. Other commenters stressed the need
to educate potential sponsors on how to operate wetland mitigation
banks. Commenters also stated that the rule would place a
disproportionate burden on permittees. However, another commenter
stated that project proponents must consider mitigation requirements
early in the project planning cycle to implement mitigation in advance
of, or concurrent with, a project.
    This rule will not place a large incremental burden on Corps staff
and other resources because it builds on existing requirements and
practices and promotes those that have been successful in the past. To
develop this rule, we have considered the recommendations from the 2001
NRC Report and the 2001 and 2005 GAO reports, as well as other studies
of compensatory mitigation projects, to establish regulations that will
help ensure that compensatory mitigation successfully replaces
functions that are lost as a result of permitted activities.
Monitoring, site visits, and compliance activities are essential
actions for ensuring compensatory mitigation success but they are not
new. What is new is the greater clarity and consistency of requirements
in these areas that the rule provides. The Corps already conducts
compliance inspections on compensatory mitigation projects, including
mitigation banks and in-lieu fee programs, as its resources allow and
will continue to do so.
    We believe that the rule will increase regulatory efficiency by
providing clear, consistent requirements, improving the third-party
mitigation review process, and encouraging compensatory mitigation
planning to be performed in advance of permitted activities through the
use of mitigation banks and in-lieu fee programs. We do not believe
that this rule will place a substantial burden on permittees. As more
credits are generated by third-party mitigation providers, burdens on
permittees should be reduced. This rule does not change the
circumstances under which compensatory mitigation is required. As in
the past, the district engineer will require compensatory mitigation to
the extent appropriate and practicable. This rule appropriately
balances the need for consistency with the need for flexibility,
including its requirements for permittee-responsible mitigation.
District engineers will continue to determine on a case-by-case basis
what is required to satisfy the requirements of the 404(b)(1)
Guidelines and other aspects of the Corps Regulatory Program.
    One commenter recommended that permit review staff go to each site
before making a decision. Another commenter recommended that the
agencies clearly define their roles ahead of time to reduce interagency
conflicts, and that if such conflicts should occur, the Corps should
work to resolve them rather than the applicant.
    Because of resource constraints, site visits cannot be conducted
for each permit application. Districts must prioritize their site
visits to determine which sites require on-site evaluations. The Corps
is the decision-maker for activities that require DA authorization. The
Corps fully considers agency views when making its decisions regarding
whether to issue or deny permits. This rule further clarifies the roles
and responsibilities of the Corps and other agencies, including the
Interagency Review Team, in the review and approval of compensatory
mitigation, and provides realistic deadlines for each step in the
process. The rule also contains a dispute resolution procedure through
which disagreements among Federal agencies regarding third-party
mitigation proposals will be addressed expeditiously.
    A number of commenters discussed enforcement and compliance with
mitigation permit conditions and claimed that there are insufficient
staffing levels for these activities. Several commenters recommended
that the Corps and state agencies place a stronger emphasis on staffing
in order to increase permit compliance and enforcement of mitigation
requirements. Several commenters cited the 2005 GAO report's finding
that compliance with mitigation performance standards has been
inadequate, which provides a disincentive for parties to comply with
mitigation requirements. They stated that third-party mitigation
instruments and/or permit conditions often do not adequately specify
the mitigation activities to be performed, the standards to be
achieved, and the time frames for performance. Several commenters
requested clarification of the Corps' compliance authorities related to
mitigation requirements.
    The agencies agree that vigorous enforcement and compliance
activities are necessary for the success of the regulatory program,
including compensatory mitigation. The Corps believes that it has
adequate resources in these areas. In the Corps Regulatory Program's
performance measures required by the Administration's Program
Assessment Rating Tool (PART), enforcement and compliance metrics
comprise six of the eight performance measures. These performance
measures relate to compliance inspections on activities authorized by
individual permits and general permits, field inspections of active
mitigation sites, compliance inspections or audits on active

mitigation banks and in-lieu fee programs, resolution of non-compliance
issues, and resolution of enforcement actions. The inclusion of so many
metrics in the PART reflects the high priority placed on enforcement
and compliance activities by the Corps regulatory program, which will
help address the concerns raised in the two GAO reports. This rule will
also address compliance and enforcement issues by more clearly
specifying the required information for both permittee-responsible
mitigation and third-party mitigation instruments plans. This rule also
includes new requirements related to ecological performance standards,
monitoring and credit release schedules.
    We have clarified the language in the rule that addresses non-
compliance with compensatory mitigation permit conditions or third-
party mitigation instruments and plans. Permittees responsible for
mitigation as a permit condition will be subject to the compliance and
enforcement provisions at 33 CFR part 326. If the district engineer
determines that a mitigation bank or in-lieu fee program is not meeting
performance standards or complying with the terms of the instrument,
appropriate actions will be taken, such as requiring adaptive
management, decreasing available credits, suspending credit sales
altogether, and/or directing that financial assurance resources (e.g.,
escrow monies) be used to perform remediation or alternative
mitigation. As a last resort, if a sponsor does not comply with the
terms of its instrument, the district engineer can take appropriate
legal action to compel compliance.
    Three commenters suggested emphasizing that compliance with new
mitigation requirements fully meets requirements of section 404 of
Clean Water Act, therefore, there is no need for supplemental
mitigation to address the uncertainty of mitigation outcomes.
    Although this rule provides standards and requirements for
compensatory mitigation for DA permits, there are provisions that allow
district engineers to require additional compensatory mitigation when
necessary to address the risk and uncertainty associated with
compensatory mitigation projects. For example, adaptive management may
involve requiring additional compensation if the original compensatory
mitigation project does not perform as well as expected. As another
example, higher amounts of compensatory mitigation may be required if
the aquatic resource restoration, establishment, enhancement, and/or
preservation activity is conducted after the permitted activity, to
account for both temporal losses and the risk of failure associated
with the prospective mitigation.
    A few commenters expressed concern that if developers are
responsible for developing watershed plans, and those plans are used by
others to implement a watershed approach, this might create an
incentive to develop a plan that meets future development expansion
needs rather than watershed needs.
    This rule does not require prospective permittees to develop
watershed plans. District engineers will determine whether an existing
watershed plan is appropriate for use in determining compensatory
mitigation requirements (see Sec.  332.3(c)(1) [Sec.  230.93(c)(1)]).
In general, watershed plans will be developed by governmental and/or
non-profit resource planners, in consultation with watershed
stakeholders. The purpose of a watershed plan is to maintain and
improve the quality and quantity of aquatic resources within a
watershed, not to facilitate development. District engineers will
ensure that watershed plans used to determine compensatory mitigation
requirements for DA permits have been developed through appropriate
processes to satisfy this purpose.
Transfer of Responsibility
    In the proposal, we requested comments on the appropriate legal
mechanism for transferring the responsibility for providing
compensatory mitigation from the permittee to a mitigation bank or an
in-lieu fee program. We proposed an option of using parallel permit
conditions and instrument provisions, that would acknowledge the
transfer of responsibility from the permittee to the sponsor. Another
option we solicited comments on was co-permitting, where the sponsor
would sign the DA permit and assume responsibility for providing
compensatory mitigation credits.
    Two commenters expressed support for co-permitting, but several