October 28, 2002

The Honorable Governor Scott McCallum
State of Wisconsin

Secretary George Lightbourn
Department of Administration
Russ Brock, Chair
Land and Water Conservation Board

Dear Gentlemen:

Enclosed is the fourth report and executive summary of the progress and status of the pilot projects in the trading of water pollution credits program. As required by s. 283.84, Stats., (Act 27, Laws of 1997), the Department is to submit a report to the Governor, the Secretary of Administration and the Land and Water Conservation Board detailing the progress each pilot has made in achieving water quality goals and coordinating state and local efforts to improve water quality as it relates to the trading of pollution credits.

This report marks four years of effort to identify a framework for trading, and to evaluate the feasibility of individual trades in two of the pilot areas. This has allowed us to answer some of the questions related to the technical, economic, legal and administrative issues for trading in these basins. This report outlines the progress of the pilots. A more complete documentation of the issues and recommendations for future trading in the state will be completed prior to September 1, 2003.

This legislation has provided the Department with the opportunity to study and potentially implement trading in select watersheds in the state. While financial support will not be continued in the next budget, your past support has enabled us to evaluate and consider a pollutant trading program for the future. Thank you for your interest.

Sincerely,

Darrell Bazzell
Secretary

FOURTH PROGRESS REPORT ON THE TRADING OF WATER POLLUTION CREDITS

Prepared by: Wisconsin Department of Natural Resources October 2002

This Report is submitted to the Governor, the Secretary of Administration and the Land and Water Conservation Board according to the provisions of s. 283.84(5), Stats.

Executive Summary

The following is the fourth report to the Governor, the Secretary of Administration and the Land and Water Conservation Board on the trading of water pollution credits. The report describes the progress and status of each pilot project in coordinating state and local efforts to improve water quality through trading.

In 1997, the Legislature enacted Wisconsin Act 27 to provide regulated facilities an additional tool to achieve water quality. The Department of Natural Resources is directed by s. 283.84 Wis. Stats., to "administer at least one pilot project to evaluate the trading of water pollution credits". Under this law, a permitted point source of water pollution can discharge pollutants at levels above what would otherwise be authorized in the WPDES discharge permit, if another entity removes an equal or greater pollutant load. This is allowed provided certain agreements are reached with the other discharger and the Department or with other units of government if necessary.

Department staff have been working with a variety of stakeholders to address the issues associated with watershed based trading. Significant progress has been made on developing local participation, creating a framework with associated sideboards for the trading process, evaluating the costs and associated phosphorus loading reductions of best management practices, and distributing funding. Permits have been modified that allow delays in the implementation of ch. NR 217, Wis. Adm. Code, for phosphorus removal. Currently, the program has three project areas for exploration of the issues associated with watershed based trading. They are: the Red Cedar River, the Fox-Wolf Basin, and the Rock River.

The Red Cedar River Watershed is in west central Wisconsin and within the Lower Chippewa River Basin. Since 1994 the Red Cedar Steering Committee has explored new ways of addressing the water pollution issues in the watershed. This partnership group has completed a monitoring and modeling effort that is the basis for the development of a conceptual phosphorus management plan for the basin. The overall watershed goal is to remove enough phosphorus from the surface water to make a significant difference in the occurrence of algae blooms in impoundments within the watershed. The City of Cumberland has actively pursued phosphorus trading options with the assistance of the Barron County Land Conservation Department. They are in their second year of implementation. The Village of Colfax, as a requirement of their application for an alternative effluent limit due to economic hardship, has evaluated the feasibility of trading to meet their economic liability. Their analysis has shown that trading is probably not feasible when the administrative costs are included. Dunn County Land Conservation Department has not been able to provide the same level of technical support as Barron County did for Cumberland, and this has increased the cost significantly.

The Fox-Wolf Drainage Basin covers a large area in the northeast part of the state and includes watersheds that drain to Lake Winnebago and the Fox River at Green Bay. In this area, Fox-Wolf Basin 2000 convened partners from the public and private sector interested in the use of watershed based trading to address some of the water quality problems in the basin. Fox-Wolf Basin 2000 is a not-for-profit organization dedicated to achieving high-quality surface waters in Wisconsin's Fox-Wolf River Basin through cost-effective public policy and private action. While phosphorus is still a pollutant of concern, many of the point source dischargers have already installed the necessary equipment to remove phosphorus to a limit of not greater than 1 mg/l. However, still greater reductions in phosphorus are needed to achieve the water quality that residents of the basin desire. Watershed based trading is a potential tool to use when identifying the most cost-effective means of achieving that goal. Under the direction of Fox-Wolf Basin 2000, an aggressive information and education effort, including workshops on trading tools such as NutrientNet, was undertaken to elicit interest. The economic times and the lack of regulatory drivers have resulted in very little trading activity in this basin. Fox-Wolf Basin 2000 continues to work on projects that may ultimately lead to the development of a Total Maximum Daily Load (TMDL) for phosphorus for this basin.

The Rock River Basin is located in south central Wisconsin. Nutrient trading has been under discussion in this basin since 1996. The development of ch. NR 217, Wis. Adm. Code, encouraged dischargers to look at a basin approach to phosphorus management. The Rock River Watershed Partnership was formed and funding was collected to implement a detailed workplan. The Partnership completed a modeling and monitoring effort, the drafting of a trading framework, a literature review of best management practices (costs and effectiveness), and an analysis of in-stream results from implementing phosphorus management. Ten of the over 60 original participants in the Partnership pursued trading to the point of completing feasibility analyses to meet their permit effluent limits. No trades have resulted, primarily for economic reasons. One participant may still complete a point to point trade, although the details of the agreement have not yet been completed. The remaining participants in the Partnership will meet the effluent limitations by providing phosphorus removal at the treatment plant.

Although the last four years of implementing these trading pilot projects have not resulted in actual trades, they have created a greater understanding of why trading may or may not be successful. The report provides additional detail, but the following points summarize what has been learned to date:

• Most wastewater treatment plants can more economically meet an effluent limit of 1 mg/l phosphorus through plant upgrades than through trading.
• For trading to be effective, a broker, such as the County Land Conservation Department or the Department, should assume the administrative costs. The broker will need a source of funds to function in this capacity.
• Trading is more likely to be economical if the phosphorus load to be traded is relatively small.
• The effluent limit of 1 mg/l phosphorus is not an adequate driver to support trading in most instances. A TMDL, performance standard or water quality based limit is needed to elicit interest based primarily on cost considerations.
• An agreed-upon set of tools is needed to quantify phosphorus reduction loads from nonpoint sources.

Fourth Report to the Governor

Introduction

Efforts to encourage trading in Wisconsin began with Act 27 of the Laws of 1997, passed October 14, 1997. Section 283.84, Wis. Stats., authorized the Department of Natural Resources (Department) to administer at least one pilot project to evaluate the trading of water pollution credits. By November of 1997 the Department had selected three pilot areas; the Red Cedar River Basin, the Rock River Basin and the Fox-Wolf Basin. Since 1998 these pilot project areas have undertaken the task of defining a framework, monitoring and modeling pollutant loads, developing partnerships and identifying possible trading situations. In the last year, actual trades have occurred in the Red Cedar River Basin and several Publicly Owned Treatment Works (POTWs) in the Rock River Basin have conducted feasibility analyses for their individual trades. This report constitutes the fourth report to the Governor on the progress and status of these three pilot areas. With the recent budget constraints, a decision was made to no longer request funding for the pilot projects. This does not mean that trading in these areas will stop. However, support for studies, monitoring and modeling that had been provided in the past will be discontinued. This decision coincided with a general sense that the pilots had served their purpose and it was now time to evaluate the process and draw some conclusions. While individual trades will continue, the majority of the proposed trading partners have evaluated their situation and decided not to trade. This report summarizes the primary lessons learned, and reports on the progress of each of the pilot project areas. In addition, the report contains a summary of EPA proposals regarding trading, an analysis of the tools available to the modeler of nonpoint source loads, and a table that records the administrative costs, to date, of undertaking a trading program.

Lessons Learned

Since the selection of pilot projects, efforts have been underway, both by the municipalities involved and by the state, to explore watershed based trading. The intent was not to measure success of the pilots by how many trades were made, but rather, to identify under what scenarios watershed based trading could be successfully used to improve water quality. This last year in particular, the pilot projects provided answers to many of the questions proponents for trading have had. For example, as of the date of this report, only one POTW, out of an original 60 participants in the Rock River Basin, continues to assess trading as a potential means to attain phosphorus reduction. There are several reasons for the dramatic decline, but most are related to economics. As the details of a site-specific trade are assessed, the feasibility most often falls on the side of upgrades at the plant.

Economics

When pollutant trading was first considered as a possible means of improving water quality, there was clearly a misconception that the cost to control phosphorus at a POTW was much greater on a per pound or mass basis than reduction of phosphorus from a nonpoint source. Early projections suggested that it would cost approximately $20-25/lb to reduce phosphorus to the 1 mg/l limit at treatment plants compared to $3-6/lb for P reduction on agricultural lands. These were unrealistic expectations, as most of the potential traders have since learned. The economics for trading are far less favorable than originally presented.

Pollutant Load

A second misconception was that the point sources did not contribute a significant amount of the phosphorus load to the watershed as a whole. While this was true in the Red Cedar River where the point sources are only 7% of the load, in the Rock River Basin (after extensive monitoring and modeling), some sub-basins were found to be point source dominated and others were nonpoint source dominated. For the basin as a whole, the phosphorus contribution from point and nonpoint sources was approximately 40% and 60% respectively. In some cases, the mass of P that must be removed at the POTW, was substantial. Under conditions requiring a trade ratio of close to 2:1, the mass of P to be controlled from nonpoint sources was more significant than first thought. The number of acres needed to meet this reduction was more than could easily be found nearby. Since the original estimates for P reduction on agricultural lands had been inflated and the costs had been underestimated, as individual POTWs sought trades in their area they found that, at the field scale, trades were not economical.

Brokering

A third obstacle was the difficulty point sources experienced when trying to contact nonpoint sources and identify potential opportunities for trades. It is evident that a facilitator (or broker) is needed. For the City of Cumberland, the broker was the Barron County Land Conservation Department (LCD). The county used the trading opportunity as a means of implementing their County Land and Water Resource Management Plan. Barron County was already offering state and federal conservation funding programs to landowners in the Red Cedar River basin. Trading allowed them to add another option for landowners, particularly ones with land in close proximity to surface water. The landowner could select which funding package to take. Since Cumberland matched the cost sharing of the other programs, it was up to the farmer to select whether trading or agency funding support was more desirable. Many selected the trading dollars. The county then offered technical assistance (as they would have for the agency funding) for designing the best management practices for the trading proposals. The county, in effect, took on the administrative costs of trading, while Cumberland paid for the best management practices (BMPs). Without this free assistance, trading may not have been economical or administratively possible for Cumberland. For the Village of Colfax a very different scenario played out. Colfax did not have the cooperation of the Dunn County LCD and, as a result, they needed to take on the administrative costs themselves. The solution was to hire someone for the county (possibly a crop consultant) who would then contact landowners on behalf of the Village. Interested landowners have not yet materialized, but estimates indicate that administrative costs will be almost as expensive as the cost to put in the practices.

Political Acceptance

For the local units of government involved (cities, villages and counties), trading is not easily implemented. Municipal governing bodies are reluctant to use city funding to purchase easements or construct best management practices on lands outside the municipal boundary. For the counties to be involved, LCD staff must convince their boards that it is a good use of their time and money. Under current budget limitations, these concepts have not been readily received by local elected officials.

Drivers Needed

Most of the point sources in the Fox-Wolf Basin already expended the monies needed to meet the 1 mg/l technology-based phosphorus limit of NR 217. In the near future, the facilities likely to initiate discussions about trading are new or expanding facilities. The Department may, through enforcement of the permit limits, require a non-compliant or struggling POTW to look at trading as part of an upgrade, or as a safety cushion. One more category of possible traders in this basin are the small number of permittees that were granted an alternative limit when their permits were last reissued. Department wastewater engineers and specialists in the basin have been instructed to look at trading as an option to an alternative limit for facilities whose permits expire in 2002 or later. From the Fox-Wolf Basin pilot the message is simple. In spite of an aggressive educational effort on the part of Fox-Wolf Basin 2000, there will be no incentive for the majority of point sources in the basin to consider trading until a Total Maximum Daily Load (TMDL) or water quality based effluent limit is imposed.

Agricultural Interests

The agricultural community has not exhibited much interest in watershed based trading. Since their involvement is entirely voluntary, incentives and education have been used to make landowners aware of this opportunity. One local land conservation department was successful when they included a trading incentive with other conservation programs. One disincentive of trading for farmers has been the use value assessment law. If a farmer agrees to convert cropland to prairie, one management practice change that reduces phosphorus runoff, he can no longer claim the lower tax rate for agricultural lands.

Use Outside the Pilot Areas

One industrial wastewater source, outside any of the pilot areas, has expressed interest in trading. Their representative saw trading as an option to insure compliance even though the facility only occasionally exceeds the permit limit. The way the current operating statute reads, in order to consider trading, the Department would need to establish this area as a pilot. To do this would require the identification of a project area, which must be an impaired watershed that contains agricultural and non-agricultural, point and nonpoint sources of pollution, that exhibit adequate interest in trading. A local committee must also be formed for the project. This was an obvious deterrent to a single point source. Before watershed based trading can be used statewide, some modification to the statutory procedure is needed.  

Summary of Pilot Projects

The Rock River Basin

Over the last four years, the trading pilot project for the Rock River Basin, located in south central Wisconsin, centered on phosphorus trading. The Department formally worked with the Rock River Watershed Partnership (RRWP), which has since merged with the Rock River Coalition. However, the Department continues to have status report meetings with a group of municipalities (the primary members of the RRWP) who administer the funds for the pilot project. This group refers to itself as the POTW group and consists of municipalities that have signed an agreement under s. 66.30 Wis. Stats., to share funds from their respective municipalities. At the start of the biennium, there were 10 industries and municipalities that continued to show an interest in trading. Over the course of a year, that number had decreased to seven and is now possibly only one. Those deciding not to trade have done so largely for economic reasons. It has become apparent that the early interest in trading was a result of inaccurate information both on the cost of phosphorus removal at POTWs and on the cost of implementing nonpoint best management practices (BMPs) for phosphorus control. The cost of P removal was overestimated, and the cost of nonpoint BMPs was underestimated. In addition, the administrative cost and complexity of installing nonpoint practices was significantly greater than anticipated.

Trading Ratios

The use of trading ratios is intended to account for the differing impacts from nonpoint and point sources respectively and to assure that implementation of trading "results in an improvement in water quality", as required by statute (s. 283.84(1m)(a)). In the Rock River Basin, Department staff spent considerable time on the administrative framework for the trading program. The POTW group frequently challenged the use and methodology for establishing the trades. For the Rock River pilot, the Department established trade ratios between 1.75:1 to 2.25:1 (nonpoint source to point source) based on a trade ratio formula with the following four factors:

Trade Ratio = 1.75 + A + B + C + D

Where:

"B" is a factor attributed to a watershed. (If the trade is in the same watershed, B = 0. Outside the watershed, B = 0.125)

"C" is a factor attributed to proximity. (If the trade is within 20 miles, C = 0. In all other areas, C = 0.125)

"D" is a factor attributed to upstream vs downstream trades. (If the trade is upstream, D = 0. For downstream trades, D = 0.125)

These trade ratios are well within the range of what has been used in other projects across the country and also within the range of what U.S. EPA has accepted. As more is learned about the economics of nonpoint source phosphorus reduction and the economics of point source phosphorus reduction, it has become apparent that not all entities that wanted to trade will enjoy positive economic results. As this issue became more and more apparent, several members of the POTW group pushed for a reduction in the trade ratio. Two of the seven traders interested in trading last year have indicated that they would need a trade ratio closer to 1:1 to make trading economically viable. In addition to a reduction in the trade ratio, POTWs asked to receive credit for the secondary improvements related to sediment reduction and wildlife habitat enhancement. The Department believes the trade ratio approach developed during the pilot represents the best current science. The Department has met with their "consultant" to explore an alternative logic for trade ratios, but has not received a concrete proposal.

Technical Assistance

The Rock River Basin trading project expected to rely on a third party to act as the technical consultant to bridge the gap between the agricultural industry and the WPDES permit holders. In the course of this project, it became clear that the permit holders have only a rudimentary knowledge of nonpoint pollution, the causes, effects and controls. The Department had hoped that the County Land Conservation Departments (LCDs) would fill this void. However, the LCDs have been somewhat reluctant to dedicate the amount of time necessary to make this project successful. Providing adequate staff time and dollar support are issues that future projects will have to address to make watershed based trading broadly viable.

Status of Specific Trades in the Upper and Lower Rock River Basin

Three potential traders were located in the Upper Rock River Basin: Village of Fall River, City of Waupun, and Alto Dairy. Four potential traders were located in the Lower Rock River Basin: Town of Beloit, City of Beloit, City of Edgerton and the City of Sun Prairie.

Village of Fall River

Fall River is investigating a point to point trade with the City of Beaver Dam. Beaver Dam has upgraded their facility to include chemical removal to meet the 1 mg/l P requirement of NR 217 Wis. Adm. Code. Beaver Dam, because of the size of their plant relative to Fall River's need, feels they will have additional P removal capacity that they can "sell" to Fall River. The two communities have been in negotiations to develop an agreement that will satisfy Fall River's 1 mg/l P effluent limit requirement. This trade appears to be cost effective for Fall River if a suitable trade agreement can be negotiated. Fall River operates a fill and draw lagoon system, which presently discharges in the spring and fall. Since Beaver Dam operates a continuous discharge, the Department agreed to allow Fall River to develop a trade based on a monthly average loading equal to their total discharge. Beaver Dam would be required to submit reports that show the amount of P removed, in addition to their own required removal to meet NR 217. A firm timeline for development of an agreement between Beaver Dam and Fall River has not yet been established. A preliminary agreement has been drafted, but is based on estimates of usage and chemical costs. On May 15, 2002, Fall River requested a delay in the date for an agreement with Beaver Dam to allow time for Beaver Dam's new system to go on line. Using the months of July and August discharge information, Beaver Dam will be able to more accurately estimate the cost of P removal so that an equitable agreement, based on actual costs, can be negotiated between the two communities. They anticipate submitting a draft trade agreement in the near future. The two municipalities are proposing developing an annually renewable trade agreement that would continue until Fall River makes significant upgrades to its existing POTW. Beaver Dam still wants to maintain the option to do a trade of their own, possibly with nonpoint sources, in the future, if this appears to be economically viable.

City of Waupun

Waupun investigated the feasibility of trading and found that the economics do not appear to be favorable for a trade at this time. Waupun had received facility plan approval for an upgrade to add chemical removal to their treatment plant. They had hoped to treat their effluent down to 2-3 mg/l from 6 mg/l and then trade for the balance of their pollutant reduction requirement. Waupun hired a consultant to investigate the feasibility of purchasing tilled lands in fee title and then converting the land to permanent grass cover. This BMP would give the greatest P credit and have minimum administrative costs and problems. Cost calculations, however, indicated that with the current trade ratio requirement (1.75-2.25:1), trading would not be cost effective. The land was too expensive and there wasn't enough to meet the demand. In some areas they were competing with Alto Dairy for the same land. They also investigated possible BMP installation on state prison farm lands adjacent to the Rock River, and possibly urban nonpoint BMP installation to address flooding problems on farm lands adjacent to the city that are being impacted by increasing urban runoff as the city grows. The proposed BMPs did not achieve sufficient P reduction to meet Waupun's NR 217 discharge reduction needs. Costs for installing and maintaining nonpoint BMPs also exceeded the cost of in-plant P removal. To date they have spent approximately $20,000 for consultant services. The agreed on requirements of the Rock River pilot required Waupun to install BMPs by May 15, 2002 if they intended to participate in trading. Their current permit requires them to implement P removal at the plant by April 30, 2003. Waupun is currently in the construction phase to convert their existing facility to achieve the NR 217 reduction. They have requested a one year extension of their construction completion date. They are also requesting a modification of their permit to allow a stepped P discharge reduction to 2.0 ppm by May 2003, and 1.0 ppm by April 1, 2004. The permit is still in public notice.

Alto Dairy

Alto Dairy's permit compliance schedule requires that by September 30, 2002, they complete all actions necessary to achieve 1 mg/l or they receive an alternate limit and/or they implement a Department approved trade agreement. It was recognized that trading could be done in conjunction with treatment options to achieve limits. Alto Dairy considered trading as an alternative, but it does not appear to be a cost effective alternative at this time. Alto Dairy currently discharges in excess of 1 million gallons per day (MGD) at 25mg/l P. After a thorough program of in-plant phosphorus minimization, they are investigating using the Hogan Process, an innovative practice which, in lab tests, achieved removal down to 2 mg/l in discharged effluent. Initial in-plant testing did not achieve the desired result, but additional modifications have been made and continued in-plant testing is being conducted. In-plant removal costs have been estimated between $3.29 -$9.42/lb P depending on the process utilized. The cost of removing P by agricultural BMPs was estimated at $12/lb P. Trading concerns cited by Alto Dairy include the permanency of the trading program and the availability of sufficient land to meet P removal needs. The terrain in the area around Alto Dairy is relatively flat, thereby reducing P removal cost efficiency of BMPs. Even if the trade ratio requirement would be changed, trading is still not economical. Alto Dairy estimates that the best quality effluent they can achieve at the plant is 2 mg/l. With the trading option gone, only an alternative limit request is being considered to meet the NR 217 requirements. Alto Dairy is planning to install the Hogan Process, and an additional process known as the Crystallactor, which they are pilot testing. A permit modification is planned to go into effect January 12, 2003 with a limit of 5 mg/l. By June 2004, that limit will drop to 3 mg/l P. This permit limit will remain in effect until December 2004, at which time their current permit expires. It is estimated that the current P discharge of 151 lbs/day to the receiving stream will be reduced to 15.7 lbs/day; the 463 lbs/day that is land spread will be reduced to 194 lbs/day. The P reduction achieved through the Crystallactor process will be sold as fertilizer or disposed of in a landfill, resulting in a net reduction to the environment.

Town of Beloit

For the Town of Beloit, the incoming phosphorus concentration is about 3 mg/l. At a flow rate of 0.31 MGD that translates to a required phosphorus removal of 1,930 pounds annually. On June 11, 2001, the Town proposed specific parcels to covert to grasses and wildflowers with an expectation that this practice would remove 3,800 pounds of nonpoint source phosphorus. In May of 2002, Department staff met with Town consultants and took a number of in-field soil samples in an attempt to verify the proposed trade. Unfortunately, in-field samples revealed a soil phosphorus content of less than half what was assumed by the consultant. In addition, the methodology the consultant used was applied incorrectly. When the calculations were rerun, using more representative soil phosphorus concentrations, the proposed trades could accommodate only about a tenth of the phosphorus reduction needed. Accordingly, the Town will either need to find more practices in the field or provide phosphorus reduction at the plant to come up with their total needed reduction. Under these circumstances, the Town may find that trading is no longer economically feasible. Expecting the Department to concur with their estimate, the Town has already established a permanent cover crop of alfalfa at the selected sites. However, unless harvested, alfalfa can discharge an excessive amount of P in the spring. Additional management at the sites is needed.

City of Beloit

The City already has an alternative phosphorus limit of 2 mg/l, that became effective on May 31, 2002, based on biological control of P at the plant. The City has generally been able to keep their discharge below 2.0 mg/l P through biological controls. However, during several months in the last two years they have experienced short term increases in their discharge that have temporarily put them in violation of their permit. Their proposal is to acquire a safety margin of 500 pounds of nonpoint source phosphorus load to be used as relief for these temporary digressions. The City was proposing to acquire active farmland and covert it to permanent ground cover in sufficient quantities to establish a 500 pound margin of safety. Since the City is not required to trade or make further plant reductions, there is no incentive to take further action. The City has not advanced a trading concept in 2002.

City of Edgerton

The City's current effluent is at 4 mg/l of phosphorus. At an average flow rate of 0.475 MGD the City will need to remove 4,340 pounds of phosphorus annually to comply with NR 217. The City's preliminary analysis indicates they will need to remove about 9,300 pounds of phosphorus from nonpoint source pollution accounting for the requisite trade ratio. However, the City's current WPDES permit required them to start phosphorus removal in July of 2001. Through chemical addition they have met the 1 mg/l phosphorus limit and they will phase-in nonpoint trades later. As trades come on line and become effective, the chemical addition would be reduced. The City has fallen behind a self-imposed trading schedule discussed with Department staff in June of 2001. Dane County LCD cannot make a commitment to provide administrative support, and they may need to look to the City of Edgerton for the administrative costs. The City has not advanced any trade proposals in the later part of 2001 or in 2002.

City of Sun Prairie

The City's effluent averages 4.5 mg/l of phosphorus. Their most recent calculations indicate that they will need to remove about 26,000 pounds of phosphorus annually to comply with NR 217. At an assumed 2:1 trading ratio, they would need to find 52,000 pounds of nonpoint phosphorus to trade annually. This is a huge amount of phosphorus to obtain from nonpoint source BMP implementation. To put this task in perspective, the Lake Mendota priority watershed project has a goal of 50,000 pounds of phosphorus reduction to be found over the course of a 10-year period, and over a much larger watershed. Sun Prairie was considering restoring wetlands as a BMP, but in this fast growing community, removing developable land is not desirable. Sun Prairie also believes the trade ratio is too great for their situation and has requested that the Department reduce the ratio on a "pilot" basis. City officials believe that a trade ratio of 1:1 would be needed to be economically competitive with chemical reductions at the plant. In response to the Department's negative decision on their request, Sun Prairie has decided to use chemical treatment. They will need to upgrade the plant in five years anyway, but they were hoping to use trading as an interim fix, until the upgrade was in place.

The Fox-Wolf Basin

The Fox-Wolf Drainage Basin, in northeastern Wisconsin, spans 6,640 square miles, and is the largest drainage basin in Wisconsin that drains to Lake Michigan. It drains to Green Bay and includes the watershed around Lake Winnebago. The Fox-Wolf Basin 2000 organization, a non-profit watershed alliance, has convened a team of public and private sector stakeholders who have worked for the past several years to assess the feasibility and effectiveness of trading for phosphorous control in the basin.

Drivers for Trading

To date, a challenge to trading has been the fact that a significant number of point sources in the basin are already complying with the technology-based phosphorous limit promulgated under NR 217. This seems to indicate that in the near term most opportunities for a trade will reside with new or expanding sources, and sources not in or at the margin of compliance. With that in mind, Fox-Wolf Basin 2000 has been in regular contact with Department staff, networking with permit writers and tracking the Department's Compliance Maintenance Annual Reports to identify situations where trading could offer a viable phosphorous-reduction opportunity.

Fox-Wolf Basin 2000 has also asked the Department to collaborate with them on efforts to identify new or expanding facilities. Although some opportunities have appeared to be nearing fruition in recent months, economic conditions and other variables have kept trades from materializing. Fox-Wolf Basin 2000 is prepared to identify and evaluate trading opportunities, working with the Department and its own network of point sources and nonpoint sources, should conditions change.

Need for TMDLs

Fox-Wolf Basin 2000 continues to facilitate the Strategic Data Acquisition Task Force, a group of eminent academic and agency experts doing water quality research in the basin. The organization convened the full task force in August 2001 to assess progress to date and to discuss future plans. For the past year, a sub-group of the task force has been working to develop a "macro," sub-basin-level Total Maximum Daily Load for the Lower Fox. Development of TMDLs is a critical step in establishing the levels of phosphorous reduction necessary in a basin to achieve a desired water quality level. A TMDL may also establish new trading opportunities both because a TMDL can establish a water quality based limit for a specific waterbody that would go beyond the technology-based limits of NR 217, and because each TMDL requires an allocation mechanism.

Fox-Wolf Basin 2000 and United States Geological Survey staff are analyzing existing Lower Fox River data to determine current loads for phosphorous and suspended solids that will not only support the TMDL development effort there, but also help to develop any trading opportunities that may arise. Fox-Wolf Basin 2000 modeler/analyst Paul Baumgart's work has included further refinements to the state-of-the-art Soil and Water Assessment Tool (SWAT), including calibrating the model with newly collected data. SWAT is a public domain basin scale model developed to quantify the impact of land management practices in large watersheds. Interns from the University of Wisconsin-Green Bay have completed the collection of existing background data for the Lower Fox TMDL project, and Geographic Information Systems (GIS) components from the Brown County Land Conservation Department have been added to the process. Fox-Wolf Basin 2000 is also coordinating efforts with the Department and the Lower Fox Basin Partner Team working on the TMDL for the East River in Brown County.

Information and Education

In addition, Fox-Wolf Watershed Alliance has been engaged in numerous information and education initiatives designed to create a fertile ground for trading in the region. They have included "Lessons from the Trading Pilots: Applications for Wisconsin Water Quality Trading Policy" on their website at: Frequently Asked Questions [PDF 112KB]

NutrientNet Workshop

In concert with its Watershed Based Trading Task Force, Fox-Wolf Basin 2000 hosted a trading workshop in northeastern Wisconsin that included a hands-on demonstration of NutrientNet, a computer model used first by the State of Michigan to track trades within its participating watersheds. In Michigan, the data is made available to the public so that they too can see where trades are made. This demonstration involved potential traders in simulated trades (using Michigan scenarios) as a way to help familiarize them with the concept. This tool has already been used successfully in Michigan, Idaho and the Chesapeake Bay to help facilitate trading. Over 35 people participated in the trading exercise as well as the meetings preceding and following the simulated trading. The exercise generated questions for the Department on what the state's framework would look like. It also received a favorable response from the attendants as a hands-on approach to trading, which to date has been more conceptual.

The Red Cedar River Basin

The Red Cedar Watershed is in west central Wisconsin and is part of the Lower Chippewa River Basin. It drains approximately 1800 square miles and includes parts of Barron, Chippewa, Dunn, Polk, Rusk, Sawyer, St. Croix, and Washburn Counties. Northern parts of the watershed are predominantly forested and agriculture is a dominant land use in the rest of the basin. Municipalities in the watershed include Menomonie, Glenwood City, Downing, Boyceville, Wheeler, Colfax, Prairie Farm, Ridgeland, Dallas, Chetek, Turtle Lake, Almeana, Barron, Cameron, Rice Lake, Cumberland, Haugen, and Birchwood. There are two major impoundments in the lower part of the watershed, Tainter Lake and Lake Menomin. These two impoundments exhibit seasonally extreme impacts from phosphorus delivery, with more than 700,000 pounds of phosphorus contributed to them on an annual basis.

Watershed-wide, water quality management activities started in 1994 with the formation of the Red Cedar Steering Committee. This group has become the partnership team for the trading project. They have been active in monitoring and planning for implementation of phosphorus controls. The group obtained Wisconsin non-profit incorporation as the Red Cedar River Basin, Inc. under s. 181, Wis. Stats., with a three-person board of directors.

Monitoring

There has been, and continues to be, extensive monitoring within the Red Cedar Watershed to establish water quality parameters and to gather public perception on goals to be set. In the past, information was gathered to develop and calibrate the Simulator for Water Resources in Rural Basins (SWRRB) water quality model, the predecessor of the SWAT model, for an impoundment in the lower part of the basin. This model approximated loading rates for total suspended solids and total phosphorus, and allocated these loads to different land uses. This information was useful to set water resource goals and source reduction rates for the impoundments. The partnership met late in the spring of 2001 and suggested that a 55% and 63% reduction in phosphorus should be the goal for the impoundments of Tainter and Menomin, respectively. Additional monitoring is now underway to provide information for calibration of the SWAT model for other impoundments in the watershed. Monitoring or modeling projects are designed for Rice Lake, Lake Chetek and Red Cedar Lake in this basin. When this work is completed, the results will provide goals at intermediate points farther up in the watershed. For landowners located in those upper reaches of the watershed, goals for "their" impoundments may help generate local interest and cooperation.

Status of Specific Trades in the Red Cedar River Basin

The two communities that remain active in the watershed based trading program are the City of Cumberland and the Village of Colfax.

City of Cumberland

The City of Cumberland has completed their first year of trading and has started into their second year. They completed this with the help of the Barron County LCD. The county Land and Water Resource Management Plan has established an incentive program for soil conservation. Cumberland was able to use this program to identify landowners interested in changing practices for purposes of the phosphorus trading program.

The LCD advertised the trading program along with their soil conservation program and took sign-ups at the same time. The City agreed to pay the same incentive rate as the county was paying and they added approximately $20,000 to the County's $32,000 program. The County held a sign-up period for both programs in March 2001. All landowners in the county were urged to sign up for incentive payments for installing BMPs. Thirty landowners that preliminarily met the criteria for the City's trading dollars signed up within the Hay River watershed. After closer review, 22 landowners met the criteria and signed cost share agreements.

The criteria for trading credits was:

• Land must be in the Hay River watershed above the Prairie Farm impoundment.

• The majority (greater than 50%) of treated fields must be within 400 feet of channelized flow.

• The BMPs must be verified by the LCD.

• Soil testing must be provided for erosion control BMPs.

The incentive payments by the City are the same as other county or federal EQIP programs. The incentive payment is made by only one program so landowners cannot be paid from the City and another program. The sign-up and payment is made on an annual basis and the first payments were made in July 2001. The City paid the 22 landowners a total of $14,526. The City will not pay for one BMP for more than three years. After three years, other BMPs or landowners will be found and it is hoped that the original BMPs will continue without the incentive. This way the City hopes to have improvements to the watershed much greater than the required 4,400 pounds of P annually. The main practice used was some type of reduced tillage on fields with an excessive phosphorus soil test. The total trades resulted in a 5,000 pound phosphorus credit, at a 2:1 trade ratio. The Barron County Land Conservation Department is contributing the administrative costs for finding the landowners, designing the practices, and inspecting the installations.

Village of Colfax

The Village of Colfax has had some changes in municipal elected officials, which slowed the implementation of trading. They have continued to work with Dunn County LCD and have hired a crop consultant to work with local landowners. The LCD has worked with the University of Wisconsin College of Agriculture and Life Science to develop more general trading factors for the whole county. Until these factors have been agreed upon, it cannot be determined if trading is economical to implement. A few landowner contacts have been made, but no incentive costs have been agreed to or BMPs planned. The Village needs to trade for 1,570 pounds of phosphorus for less than $23,500 annually. Based on Cumberland's experience, it seems that this is achievable, although Cumberland is receiving administrative assistance from Barron County while Colfax must absorb these costs. The administrative costs of hiring a crop consultant may equal the cost of installing practices.

EPA Revises Position on Trading

On May 15, 2002, EPA announced the start of a 45-day public comment period on a draft policy statement on water quality trading. The policy was made available on their web site and a final policy should be released later in 2002. The intent is to allow States and Tribes the option of using trading for watershed based initiatives that go beyond the Clean Water Act. The policy identifies the context for trading that will still result in a water quality improvement and be consistent with the Clean Water Act.

EPA has indicated in their preliminary draft policy statement that a water quality trading program should:

• Identify the authority under which trading will occur.

• Identify the unit of trade.

• Identify the models or tools used to quantify the pollutant reduction.

• Identify how compliance will be monitored and enforced.

• Allow public participation in the process and access to the information.

• Conduct program evaluations.

More specifically, they have indicated that the trading framework should include:

• Identification of how trading will occur within a watershed or if a TMDL is established.

• Requirements to attain all necessary permits before entering a trade, including permit language that identifies the trade, provides notice to the public and indicates any modified permit limit.

• Non-allowance of trading to comply with federal technology-based effluent limits or if it results in a localized degradation of water quality.

• Methods and procedures to determine compliance such as the use of a baseline condition and how credits are generated beyond the baseline.

• Identification of when backsliding or anti-degradation are triggered in the context of a trade.

• Trade ratios above 1:1 except for special cases.

• Provisions for how trading fits into the state's program for improving water quality (this may mean developing a rule).

Administrative Costs/Time Spent

For the past four years the Department staff, both in the regional offices and central office, have spent many hours developing the watershed based trading projects. For the Red Cedar River, the administrative costs were of particular interest and the entities participating in trading were asked to record their hours. Appendix A lists the staff hours by project. It is not surprising that the majority of the effort was expended in the first two years, while the framework for trading was being established for each project area. In the last two years, the time has been spent evaluating individual trade options.

Models to Analyze Potential Trades

To date, various methods have been proposed for calculating the phosphorus credit of certain BMPs that may be used in a trade. Two of the pilot project areas, the Rock River and the Red Cedar River have proposed approaches to estimate these values. For example, parties within the Rock River Basin have been using a spreadsheet developed by Dane County that relies on the Universal Soil Loss Equation (USLE) to estimate the phosphorus reduction in buffers of varying widths. The Department has evaluated these methods and compared the results against another computer model, the Revised Universal Soil Loss Equation, version 2, (RUSLE 2), an enhancement of USLE. The results have been significantly different. A standardized assessment model needs to be established before more trades are proposed. To most accurately calculate the sediment delivered to the receiving waterbody, the Department is proposing taking into account the soil erosion, the delivery factor and the enrichment of the soil as it is delivered.

Soil Erosion

The Department proposes using RUSLE 2 to calculate the soil erosion and resulting sediment delivered to the edge of the field. The USLE, was developed empirically in the late 1950's. It was a modification of earlier equations that were too localized for general use. In the early 1990's, in response to requests from farmers, conservationists, and erosion scientists, modifications were made to the original USLE and the Revised USLE (RUSLE) was developed. The subsequent addition of upland deposition to RUSLE has led to the current state-of-the art model RUSLE 2. Data collection for this model includes the previous year's crop and tillage practices.

The convenience of RUSLE 2 is that it has a Windows interface and users familiar with RUSLE should have no problem operating RUSLE 2. RUSLE 2 is currently being finalized by experts at the NRCS Wisconsin office and will be distributed for widespread use at the end of the year (2002). While P reductions for no-till, reduced tillage, contour farming, strip cropping and buffer strips can all be calculated within RUSLE 2, RUSLE 2 still remains limited in its ability to predict delivery of sediment to a stream or water body located some distance from a field.

Delivery

To calculate the sediment delivered from the field to a stream, the Department proposes a simple delivery model that uses a sediment routing function developed by Dr. Jimmy Williams of the Agricultural Research Service Blacklands Research Center. The procedure is based on the assumption that sediment deposition is dependent upon particle settling velocities, length of travel time and amount of sediment in suspension. Initial calibration of the model was conducted on a test watershed near Riesel, Texas. The Williams sediment routing equation requires minimal input data. The user simply needs to enter the surface roughness conditions using an average curve number, the average slope and a flow path length to obtain the amount of P delivered.

Funding has been provided through an EPA grant to the University of Wisconsin to conduct additional research on the effects and movement of phosphorus on the land. Until additional calibration and analysis is completed for application of this model to sites in Wisconsin, this seems to be the best available tool to reflect a delivery function. In cases where the field is adjacent to the stream, a delivery model will not be needed and RUSLE 2 will suffice.

Enrichment

The phosphorus levels in the soil must be adjusted to reflect the enrichment that occurs during the transport of soil particles. Testing of agricultural soils in Wisconsin has resulted in typical values ranging between 0.3 and 1.0 lb. of P per ton of soil. As this soil moves from the field to the channel it goes through an enrichment process and increases in phosphorus content to ranges averaging between 1.0 and 4.0 lb. of P per ton of soil. In the absence of a base soil concentration, the following correlation has been developed relating soil values of particulate phosphorus levels to BrayP-1 test values:

(The BrayP-1 test is an indicator of plant available P, measured in mg/kg.)

Additional research is needed to establish a credible and consistent model to quantify the P reduction from nonpoint source BMPs. However, the current tools, and those being beta tested, establish a framework for these studies. The POTWs would like to have a relatively simple model that can allow them to quickly determine the pollutant reduction load for a trade in their area. This would greatly reduce the amount of time it takes to complete a feasibility analysis.

Summary

• Most wastewater treatment plants can more economically meet an effluent limit of 1 mg/l phosphorus through upgrades at the plant than through trading.

• For trading to be effective, a broker, such as the County Land Conservation Department or the Department, should assume the administrative costs. The broker will need a source of funds to function in this capacity.

• Trading is more likely to be economical if the phosphorus load to be traded is relatively small.

• The effluent limit of 1 mg/l phosphorus is not an adequate driver to support trading in most instances. A TMDL, performance standard or water quality based limit is needed to elicit interest based primarily on cost considerations.

• An agreed-upon set of tools is needed to quantify phosphorus reduction loads from nonpoint sources.