The Virginia Chesapeake Bay Watershed Nutrient Credit Exchange Program. *CH2M HILL, 1100 Wayne Ave, Suite 670, Silver Spring, MD 20904

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1 The Virginia Chesapeake Bay Watershed Nutrient Credit Exchange Program Cy, Jones*, M. Haley 1, G. Harvey 2, and E. Bacon 3 *CH2M HILL, 1100 Wayne Ave, Suite 670, Silver Spring, MD City of Hopewell, VA 2 Alexandria Sanitation Authority, Alexandria, VA 3 CH2M HILL, Herndon, VA ABSTRACT In 2003, the Chesapeake Bay Program adopted new annual mass load goals for nitrogen and phosphorus entering the Chesapeake Bay and allocated these loads by river basin and state. To help implement and achieve the point source allocations, and at the urging of the Virginia Association of Municipal Wastewater Agencies and the Virginia Manufacturers Association, the Virginia General Assembly passed legislation in 2005 establishing a nutrient trading program. The General Assembly believed that a market-based point-source nutrient credit trading program would: (1) assist in meeting the combined wasteload allocations of the 125 significant point source dischargers more quickly cost-effectively than requiring every one of them to install and operate advanced nutrient removal technology; (2) help accommodate continued economic growth and development; and (3) provide a foundation for establishing market-based incentives to help achieve nonpoint-source nutrient reduction goals. The statute also directed the State Water Control Board to issue a Watershed General Virginia Pollutant Discharge Elimination System ( VPDES ) Permit for dischargers of nitrogen and phosphorus in the Chesapeake Bay watershed and to develop a regulation governing this permit. The General Permit, when issued, will include a list of the significant dischargers governed by the permit, the nutrient wasteload allocations for total nitrogen and total phosphorus expressed as annual mass loads established by regulation, and a schedule for compliance with the combined wasteload allocations for each tributary (i.e., the aggregate loads of all the dischargers) as soon as possible. It also requires the dischargers to submit a plan for complying with the allocations. Finally, the legislation authorized creation of the Virginia Nutrient Credit Exchange Association as a private, nonprofit organization comprised of municipal and industrial dischargers. The main purposes of the Exchange are to facilitate nutrient trading among its members and to provide input to the regulatory process. Since its incorporation in August, 2005, the Exchange has appointed a governing Board and slate of officers, adopted bylaws, obtained grant funding from the state, hired a technical consultant, prepared education and outreach materials, held meetings for prospective members, conducted an intensive data gathering effort, developed a trading optimization model, and produced Compliance Plan Options and Construction Schedule Compliance Report Draft Report (April 2006). This paper describes these activities and the findings of the Draft Report. 5673

2 KEY WORDS Nutrient trading, Chesapeake Bay, watershed permit, optimization model, compliance plans INTRODUCTION In June, 2000, the Chesapeake Bay partners signed Chesapeake 2000, a milestone on the way to restoring the Chesapeake Bay. The Agreement presented a strategic plan to achieve the vision of the Chesapeake Bay as a rich natural resource blessed with abundant living resources and healthy tributary rivers and streams, and as a vital contributor to sustaining strong local economies and the quality of life unique to the Bay region. As a result of Chesapeake 2000, the Chesapeake Bay Program adopted new annual nitrogen and phosphorus loading goals for the Chesapeake Bay watershed in To further support this vision, Maryland and Virginia also adopted new water-quality standards for dissolved oxygen, clarity, and chlorophyll a. To implement Chesapeake 2000, Virginia developed and adopted tributary strategies in 2005 for each of its five basins tributary to the Bay the Potomac/Shenandoah, Rappahannock, York, and James Rivers, and the Eastern Shore. The tributary strategies contain both point and nonpoint components. The guiding principles for the point source strategy in all basins as set forth in the strategies is to: (1) achieve the nutrient reductions necessary to restore the Chesapeake Bay and its tidal tributaries in the timeframe set by the Chesapeake Bay 2000 Agreement; (2) provide for the full use of existing design capacity at each of the significant municipal and industrial wastewater treatment plants; and (3) apply currently available, stringent nutrient technologies at these treatment plants. Based on these principles, and Bay-wide and local water-quality requirements, Virginia adopted wasteload allocations for nitrogen and phosphorus in 2005 for 125 significant municipal and industrial dischargers (design capacity of 0.5 mgd and above) by amending the state Water Quality Management Plan. The allocations are based on existing design as of 12/31/2010 and nitrogen and phosphorus concentrations that vary by basin, as shown in Table 1. Table 1 Concentration Basis for Nutrient Allocations River Basin Nitrogen mg/l Phosphorus mg/l Potomac-Shenandoah (Above Fall Line) Potomac-Shenandoah (Below Fall Line) Rappahannock York James Eastern Shore If existing phosphorus limits are lower (e.g.0.18 mg/l), they were used to calculate the WLA. WLAs for industries were established on a case-by-case basis. 5674

3 CHESAPEAKE BAY NUTRIENT CREDIT EXCHANGE PROGRAM ACT OF 2005 Recognizing the significant nutrient control requirements that would soon be placed on Virginia s point sources, and the potential value of a nutrient trading program, the Virginia Association of Municipal Wastewater Agencies (VAMWA) approached members of the Virginia General Assembly in 2005 about legislation that would create a nutrient trading program for the Chesapeake Bay watershed. VAMWA enlisted support for the legislation from the Virginia Manufacturers Association (VMA), which became a partner in helping to create the trading program. Support for the legislation was also garnered from the environmental community, notably the Chesapeake Bay Foundation. The General Assembly was supportive and in 2005 it passed legislation that memorialized its determination that adoption and utilization of a watershed permit and market-based point source nutrient credit trading program would assist in: Meeting the combined wasteload allocations cost-effectively and as soon as possible; Accommodating continued economic growth and development; and Providing a foundation for establishing market-based incentives to help achieve nonpoint source nutrient reduction goals through a broader trading program. The full text of the legislation is available at: The statute required the State Water Control Board to issue a Watershed General Virginia Pollutant Discharge Elimination System (VPDES) Permit (General Permit) for dischargers of nitrogen and phosphorus in the Chesapeake Bay watershed. Among other things, the General Permit must include: Wasteload allocations for total nitrogen and total phosphorus expressed as annual mass loads for all significant municipal and industrial wastewater dischargers. A schedule requiring compliance with the combined wasteload allocations for each tributary as soon as possible taking into account: Opportunities to minimize costs to the public or facility owners by phasing in the implementation of multiple projects; The availability of required services and skilled labor; The availability of funding from the Virginia Water Quality Improvement Fund, the Virginia Water Facilities Revolving Fund and other financing mechanisms; Water quality conditions; and Other relevant factors. A requirement that within nine months after the initial effective date of the General Permit, permittees shall either individually or through the Exchange (see below) submit compliance plans. The compliance plans shall contain, at a minimum, any capital projects and 5675

4 implementation schedules needed to achieve nitrogen and phosphorus reductions sufficient to comply with the individual and combined Waste Load Allocations of all the permittees in the tributary. The compliance plans may rely on the acquisition of point source credits from other permittees. ESTABLISHMENT OF THE GENERAL WATERSHED PERMIT In response to these statutory requirements, the Virginia Department of Environmental Quality promulgated the General Virginia Pollution Discharge Elimination System (VPDES) Watershed Permit Regulation for Total Nitrogen and Total Phosphorus Discharges and Nutrient trading in the Chesapeake Bay Watershed in Virginia. It is anticipated that the regulation will be approved by the State Water Control Board in the fall of The effective date of the General Permit will be January 1, Both the regulation and the General Permit will contain basin-level compliance deadlines. Currently, the draft General Permit sets a tentative strawman deadline of January 1, 2011 for each nutrient in all five watersheds (effectively ten different compliance dates). The draft regulation also requires that compliance dates for significant dischargers already capable of complying with their allocations without further upgrade be set as January 1, For the first time in the context of the Chesapeake Bay program, the schedule for achieving nutrient reductions will become a binding legal requirement for point sources. Significant dischargers must submit compliance plans to DEQ within nine months following the issuance of the General Permit. Under current scheduling assumptions (nine months from approval of the General Permit regulation by the State Water Control Board) this would require the submittal of compliance plans by June, Dischargers may satisfy this requirement either by developing and submitting an individual Compliance Plan, or by jointly submitting a Compliance Plan with other permittees through the Exchange. CREATION OF THE VIRGINIA NUTRIENT CREDIT EXCHANGE ASSOCIATION Following the signing of the legislation by Governor Mark Warner in March, 2005, the Virginia dischargers wasted little time in taking the next steps in creating the nutrient trading program. In May, members of the Board of Directors of VAMWA and VMA met to began discussions on jointly creating the Exchange. In July, an initial Exchange governing Board comprised of seven VAMWA and two VMA members was appointed. In August, the Board retained legal counsel, filed articles of incorporation as a private, nonprofit corporation and adopted bylaws. A technical consultant was also selected in August. These steps were followed in October by the appointment of an Implementation Committee to guide the technical work of developing the trading program, and the holding of the first general Exchange membership meeting. The Exchange also secured a commitment from DEQ to provide grant funding to support the Exchange s activities in FY06. Approximately 130 people attended the October kick-off meeting, indicating a high degree of interest among Virginia dischargers. While there were few answers at that point about how 5676

5 trading would actually work, the Exchange presented a set of simple guiding principles for the trading program: Membership in the Exchange is voluntary; Trading is voluntary, even if a discharger is a member of the Exchange; and The trading program will produce benefits for all. DEVELOPMENT OF THE TRADING OPTIMIZATION MODEL The Exchange next began the tasks of collecting the data and creating the tools that would be needed to develop basin-level Compliance Plans that utilize trading for up to 125 dischargers in five basins. An electronic survey of dischargers was undertaken as the main method of collecting the necessary data, and a sophisticated trading optimization model was developed. An Excel-based data survey was sent to all 125 significant dischargers. Among the data it requested were: Current and future flows (2004, 2010, 2015, 2020, 2025, 2030); Current average annual (2004) concentrations for N and P; Short description of current treatment technology; and, Nutrient removal upgrades already in progress, resulting nutrient concentrations (average annual mg/l), and effective year. Cost estimates and expected effluent concentrations for possible future nutrient removal upgrades, including capital expenditures and incremental operation and maintenance costs (per MGD) related to wastewater treatment and biosolids management attributable to nutrient removal for the following possible projects: 1. Upgrades in Progress (projects already in the planning, design, or construction phase); 2. Optimization through minor capital upgrades, operational changes, and/or chemical addition; 3. Upgrade to Basis of Wasteload Allocation (average annual mg/l); 4. Upgrade to Limit of Technology (treatment levels defined by owner); and 5. Additional Upgrades (up to two different treatment levels defined by owner). The trading optimization model is a set of advanced Excel workbooks that organize survey responses and other data into a comprehensive database and establish a framework for developing trading scenarios and alternate Compliance Plans. Visual Basic (VB) programming is used to create a customized, uniquely flexible planning tool to support cost comparisons, evaluate basin-wide nutrient reductions, and generate compliance schedules and expected grant requests through The model also will be used to assess the impact on the construction market (project cost and schedule) of the large number of wastewater projects that will be required under the Compliance Plans 5677

6 Detailed instruction is provided for various fields, indicated by In addition, '+' and '-' signs in the left margin of orange shading & red tags in the upper right corner of some Excel can be used to expand or collapse various cells. Place the cursor over the red tag to view the instruction. sections of the survey once completed. f Contact Information Owner James York & Company Facility Address 3245 S. West 81st Street, Somewhere, VA NPDES Permit Number VA Primary Contact Mr. Cy Jones, Janitor Phone / / cy.jones@ch2m.com Flow Information Year : Actual Flow (MGD) Projected Flows (MGD) Design Flow (Capacity in MGD) Explain methodology used to project flows (annual escalation rate, population-based, etc) and cite specific studies: Projected flow s are based on a 2003 Master Plan study for the Uintah River Basin conducted by CH2M HILL w hich used population grow th projections to estimate future flow s for the Alexandria facility. Explain timing and magnitude of capacity expansions (incremental capacity and year upgrade is effective ): In order to accommodate projected grow th, a construction project to expand plant capacity from 27.0 to 35.1 MGD w ill begin in 2014 and should conclude by The additional capacity w ill be available at the beginning of calendar year Current Nutrient Removal Processes Conc. Capital O&M Cost Ye ar (m g/l) Cost Increment Description of Removal Process (if applicable) Effective? Existing Process & Concentration Limits Nitrogen The removal process currently consists of 11 NA NA NA Phosphorus 1.4 NA NA NA Upgrades in Progress (identify average annual design concentrations) Nitrogen 8 $ 27,500 $ Phosphorus 0.0 $ - $ - 0 WEFTEC.06 Figure 1 illustrates the basic components of the model. Data from the survey and other sources, coupled with key assumptions, drive the optimization module, as well as the cost and loading modules. Basin-specific schedules and facility-specific summaries are automatically generated. Aggregated costs and projected demands on the grant program are also generated. These results are then input into the constructability analysis across all basins. Figure 1 Conceptual Representation of the Trading Optimization Model and Constructability Analysis S u r v e y Facility Name: Fill in the blank ASSUMPTIONS CONSTRUCTABILITY AGGREGATE GRANTS ANALYSIS DATA ENGINE OPTIMIZATION COST LOADING PRICING O U T P U T S BASIN SCHEDULES FACILITY SUMMARIES The Model is designed to develop trading scenarios (and later, draft compliance plans) and to track associated capital and operating costs in each basin through This is done in an interactive manner. To construct trading scenarios for a basin, the user selects from among available plant upgrade options using criteria selected for that scenario (e.g. always select lowest annual cost per pound of nitrogen reduction, or always try and match annual number of credits generated to the number needed in the basin.) The model results shown here are from the April 2006 model runs as presented in the Compliance Plan Options Report/Construction and Schedule Compliance Report Draft 1 (VNCEA, 2006). A base case of no trading and a set of trading scenarios achieving compliance with the overall allocations in each basin were produced. They constitute the first of many planned iterations of model scenarios before final Compliance Plans are produced in Development of the trading scenarios for each basin started with the assumption that nutrient removal upgrades reported by owners to be in progress would be completed. Then, the most cost-effective optional upgrades were selected in sequence through the planning period to keep the nutrient loads in each basin under the collective caps. These upgrades were 5678

7 selected after an evaluation and comparison of relative unit costs ($/lb/yr) for the reductions, as well as the magnitude of reductions they would provide. The resulting trading scenarios reflect an attempt to achieve the most cost-effective plans among mathematically feasible options. The first year of compliance was targeted at 2011, consistent with the draft General Permit. While these trading scenarios are a set of upgrade combinations that would achieve the necessary loadings, a number of data limitations and caveats prevent them from being considered anything other than initial strawman trading scenarios. These caveats include: The data have limitations due to incomplete survey response, data quality issues, and the use of surrogate data; Uncertainty about the specific status of some upgrades in progress ; For industries that did not respond to the data survey (numbering 20), data were adjusted so that they were neither a buyer nor a seller (in reality, some could have significant impact if they participated in trading); All municipal dischargers were treated as potential traders (some may ultimately choose not to participate); and, Nitrogen and phosphorus upgrades were selected independently in the scenario building (in practice, upgrade decisions for the two pollutants could be linked). As such, these scenarios are merely the first step in a year-long process of data refinement, owner decision-making, and Compliance Plan development and selection. AGGREGRATE RESULTS NO TRADING VERSUS TRADING This section presents the aggregated results of the individual basin trading scenarios (the Compliance Plan Options Report Draft 1 presents results at the Basin and aggregate levels). As discussed above, there are important caveats associated with the data and cost estimates underlying the trading scenarios for the individual basins. Those considerations also apply to these aggregated results. In addition, the following explanations (and caveats) apply to the summary aggregate results presented in Figures 2, 3, and 4. Compliance Without Trading This is defined on an individual facility basis. The Year Last Facility Meets its WLA is the year by which all facilities in the basin are under their own WLA, based on the flow projections and upgrade options reported by owners or assumed in the Model. The Year First Facility May Exceed its WLA is the first year after all facilities are in compliance with their own WLA that one or more facilities may begin to exceed its own WLA, again based on data in the Model. These figures exclude those facilities that, due to data gaps, are calculated by the Model as never complying with their own WLAs. The Year Last Facility Meets its WLA actually is anticipated to be later than reported, due to constructability and construction market factors not yet accounted for. The Year First Facility May Exceed its WLA also may be later than reported because: (1) the figures include those facilities that have reported an insufficient number or level of upgrades to maintain compliance with their WLA 5679

8 through 2030, when in actuality they may have such options; and/or (2) these figures do not account for owners that may bubble multiple facilities and extend their compliance period. Compliance With Trading This is defined on a collective basis. The Year Collective Basin Cap Attained is the year by which all facilities together are under the Basin-wide loading cap, calculated as the sum of the individual WLAs, based on the flow projections and upgrade options reported by owners or assumed in the Model. The Year Cap Maintained Through is the year until which all facilities remain under the collective loading cap through the Model forecast period, again based on data in the Model. As provided for in the legislation enabling The Exchange and in the forthcoming General Permit, the group is compliant with the collective cap so long as each individual facility is below its own WLA, or has secured sufficient credits to offset any loadings above its own WLA. Total Upgrade Projects, General This number can exceed the total number of facilities because a facility may have more than one upgrade project during the forecast period (e.g., to WLA mg/l, and to LOT mg/l). Total Upgrade Projects, Without Trading These figures likely significantly understate the number of projects facilities will need to implement to stay below their own WLA for the modeled period. As stated above, not every owner provided data about upgrade options beyond their WLA level Target Year Section :14 of the Code of Virginia requires that the watershed General Permit for nutrients include a compliance schedule. The current draft General Permit establishes 2011 as the strawman year by which facilities must meet their WLAs either by being under basin collective loading caps if participating in the Exchange s trading program, or under their own individual WLA if not working with The Exchange. For this reason, 2011 was the target year evaluated in the Draft Report. Figure 2 Aggregate Results for All 5 Basins: WLA Compliance or Cap Attainment, Upgrades, Facilities Involved Without Trading With Trading N = 127 Nitrogen Phosphorus Nitrogen Phosphorus Design MGD = 1,266 Year Last Facility Meets its WLA / Year First Facility May Exceed its WLA Year Collective Basin Cap Attained / Year Cap Maintained Through Potomac-Shenandoah 2014 / / / / 2030 Rappahannock 2011 / / / / 2028 York 2013 / / / / 2030 James 2014 / / / / 2030 Eastern Shore 2011 / / / / 2030 Total Upgrade Projects Upgrades in Progress Future Upgrade Projects Facilities Involved Nitrogen Only

9 Phosphorus Only 7 20 Both Nutrients Neither 7 20 COMPLIANCE SCHEDULES Without trading, the 2011 target date for 100% compliance with individual WLAs is unattainable in at least six of the 10 basin-parameter scenarios. The story for nitrogen without trading is identical to that with trading. For phosphorus, owners in James, York, and Potomac-Shenandoah may need at least until 2014, 2013, and 2012, respectively, for every facility to get below its individual WLA. In contrast to the trading scenarios, some owners in all basins may have difficulty maintaining their loadings below their WLAs for both parameters. As discussed above, the years shown in Figure 2 likely under-estimate the time compliance can be maintained because the Model does not contain upgrade options beyond WLA levels for many facilities, does not account for increased reuse (or other facility-based options in addition to treatment), and does not account for owners that bubble their facilities for WLA compliance purposes. Even so, the years reported in Figure 2 are a signal of the very real limitations of a compliance strategy without trading in the face of population growth and limits of technology. With trading, the 2011 target date for compliance with collective caps is unattainable in at least five of the 10 basin-parameter scenarios. With respect to nitrogen, the Potomac-Shenandoah and the James each appear to need until at least 2014, while the York appears to need until at least With respect to phosphorus, the York appears to need until at least 2013 and the James appears to need until at least For the most part, it appears that trading will allow the group to stay under their collective cap throughout the forecast period, funding and construction market factors notwithstanding. Where basins could not meet the 2011 target date with or without trading, the reason can be attributed to the reported completion date of one or more upgrades in progress; and/or the length of time one or more facilities reported it would need to complete a future upgrade. In some cases, it may be possible to accelerate cap attainment with trading by a year or two, but not without scheduling so many more upgrades (e.g., a much larger number of smaller projects) that the short term benefit is significantly overwhelmed by the costs, assuming it is even possible to get those additional facilities constructed under current and future market conditions. These analyses have not yet accounted for future construction market conditions, which when factored in, may extend WLA-attainable dates by several years. It does however, reflect ownerreported or assumed upgrade implementation periods. CAPITAL COSTS As shown in Figure 3, total capital cost through the planning period is $1.79 Billion under the trading scenario, as compared to $2.2 Billion under the no-trading scenario. The trading scenario requires $410 Million less in capital expenditures over the planning period than does the non-trading scenario, a reduction of 23 percent. During the peak construction period of , the estimated capital costs under the two scenarios are $1.1 Billion for trading and $1.6 Billion for no trading. A comparison of annual construction spending is shown in Figure

10 Figure 3 Aggregate Results for All 5 Basins: Estimated Capital Costs and Grant Requests N = 127 Without Trading With Trading Design MGD = 1,266 Nitrogen Phosphorus Nitrogen Phosphorus Capital Costs and Peak Period Nitrogen Only $1.80 Billion $1.54 Billion Phosphorus Only $0.40 Billion $0.25 Billion TOTAL / Peak $2.20 Billion /$1.62 Billion $1.79 Billion / $1.10 Billion WQIF $ / Peak $1.08 Billion / 0.82 Billion $0.89 Billion / $0.56 Billion Figure 4 Comparison of Annual Construction Spending Trading vs. No Trading 550 Comparison of Annual Construction Spending Trading Case vs. Non-Trading Case Millions of Dollars (in 2006$) YEAR Annual Construction $, Non-Trading Case Annual Construction $, Trading Case CONCLUSIONS As noted above, these trading scenarios are to be considered strawmen that illustrate what may be achievable with trading. They show however, that there may be significant benefits form trading, including cost and schedule. The results are just the first step in developing the trading program and the Compliance Plans that will ultimately be submitted to the state. A number of steps are planned that will result in improvements in the database and the scenario modeling. They include 5682

11 Providing additional opportunity for owners to provide and/or correct data and provide input on upgrade plans; Holding meetings in the five basins to obtain owner preferences and allow hands on trading scenario building; and A regional construction market analysis that will assess impact on construction costs and schedules of the large number of construction projects slated for the mid-atlantic region over the next five to seven years. The Exchange is currently assessing credit pricing mechanisms, a question of great interest among potential traders. In addition, the Exchange intends to develop trading rules and procedures that will govern how trading will actually be conducted by the Exchange and its members. REFERENCES Virginia Nutrient Credit Exchange Association, Compliance Plan Options Report/ Construction and Schedule Compliance Report Draft 1. Available at: (User Name: Exchange, Password: Bank_It) 5683