Summary

INTRODUCTION

Nutrients such as nitrogen and phosphorus have long been known to cause degradation of surface waters, as manifested by harmful algal blooms, the loss of submersed aquatic vegetation, and fish kills in waterbodies around the country. Stemming from agricultural operations, urban landscapes, wastewater, and atmospheric deposition, nutrients pollution often is addressed under the Clean Water Act through the use of narrative standards. However, States have recently been pushed toward numeric nutrient criteria under the assumption that this will accelerate and standardize the restoration of nutrient-impaired waters. In Florida, numeric criteria for nitrogen and phosphorus were proposed by the U.S. Environmental Protection Agency (EPA) following a 2009 lawsuit maintaining that Florida’s narrative standard was not protective of Florida’s waters.

Replacing the narrative standard with numeric nutrient criteria may result in new Florida waters being listed as impaired and the reevaluation of the Total Maximum Daily Load (TMDL) calculations for waters that are currently listed as impaired. These actions may lead to new or revised discharge permits for point sources such as municipal and industrial wastewater treatment plants, and/or nutrient control requirements for nonpoint sources of nutrients. Because of these implications, EPA produced an economic analysis of the potential incremental implementation costs that might be incurred if numeric nutrient criteria replaced Florida’s narrative standard for nutrients. In late 2010, EPA estimated the incremental cost to range from $135.5 to $206.1 million per year. Other stakeholder groups



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Summary INTRODUCTION N utrients such as nitrogen and phosphorus have long been known to cause degradation of surface waters, as manifested by harmful algal blooms, the loss of submersed aquatic vegetation, and fish kills in waterbodies around the country. Stemming from agricultural opera - tions, urban landscapes, wastewater, and atmospheric deposition, nutrients pollution often is addressed under the Clean Water Act through the use of narrative standards. However, States have recently been pushed toward numeric nutrient criteria under the assumption that this will accelerate and standardize the restoration of nutrient-impaired waters. In Florida, numeric criteria for nitrogen and phosphorus were proposed by the U.S. Environ- mental Protection Agency (EPA) following a 2009 lawsuit maintaining that Florida’s narrative standard was not protective of Florida’s waters. Replacing the narrative standard with numeric nutrient criteria may result in new Florida waters being listed as impaired and the reevalua- tion of the Total Maximum Daily Load (TMDL) calculations for waters that are currently listed as impaired. These actions may lead to new or revised discharge permits for point sources such as municipal and indus- trial wastewater treatment plants, and/or nutrient control requirements for nonpoint sources of nutrients. Because of these implications, EPA produced an economic analysis of the potential incremental implementation costs that might be incurred if numeric nutrient criteria replaced Florida’s narrative standard for nutrients. In late 2010, EPA estimated the incremental cost to range from $135.5 to $206.1 million per year. Other stakeholder groups 1

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2 EPA’S ECONOMIC ANALYSIS OF NUTRIENT STANDARDS IN FLORIDA produced their own estimates of the cost of implementing the numeric nutrient criteria, with some estimating annual costs as high as $12 billion. Shortly after producing its cost estimate, EPA requested that a commit- tee of the National Research Council review the Agency’s economic analysis of the incremental costs of state implementation of numeric nutrient criteria for lakes and flowing waters in Florida. Specifically, the Committee was asked to review and comment on the implications of 1. EPA’s assumption that costs should be determined only for waters that will be “newly impaired” as a result of the numeric nutrient criteria 2. EPA’s decision to estimate the costs of only those sources of pollu- tion that would directly affect a “newly impaired” water—in particular the number of wastewater treatment plants, the acreage of agricultural land, the acreage of urban areas, and the number of septic systems included in the EPA analysis 3. EPA’s assumptions about the levels of control that could be used by certain point and nonpoint sources, such as wastewater treatment plants, industrial point sources, agricultural activities, and septic systems. Examples of these assumptions could include a decision to seek a regulatory exemption, implement reverse osmosis technology, or use conventional best management practices (BMPs) rather than more expensive water treatment options. Item #1 is addressed primarily in Chapter 3 of this report, while Chapter 2 addresses the second and third items. Several constraints were placed on the Committee that were necessary in order for it to produce its report by March 2012. First, the Committee was not asked to review the numeric nutrient criteria themselves. Second, the Committee was not asked to address the benefits of implementing the numeric nutrient criteria, such as potential improvement in water quality, nor the indirect costs associated with implementing the criteria, such as the number of jobs lost or gained, or how certain sectors of the economy will fare under the numeric nutrient criteria. Finally, the Committee was not asked to produce its own cost estimate. Rather, the report tackles the validity of the assumptions found in the EPA report (and those of various stakeholders) and provides findings and recommendations on the methods to be used in any future cost analyses. The Committee concluded that EPA was correct to calculate the costs of meeting the numeric nutrient criteria on an incremental basis. However, the Committee questioned how the incremental effect of the rule was defined by EPA, as described in detail in this report. Although determining the incremental cost of the rule change (from narrative to numeric) was the correct analytical focus for EPA to have taken, presentations made to the Committee and later communication from

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3 SUMMARY stakeholders often confused the incremental costs of the rule change with the total costs to meet the designated uses of impaired waters, under any rule. Many of Florida’s thousands of river miles and lakes and hundreds of springs already suffer from chronic nutrient pollution because of high population growth rates and resulting demands for water, land use changes from wetlands and forests to agriculture and urban areas, the state’s tropi- cal climate and flat topography, the potential for soil and geologic materi- als to serve as sources of nutrients, and the buildup of legacy nutrients. These factors have made and will continue to make nutrient management in Florida an important but formidable and costly challenge, regardless of the regulatory paradigm used. Indeed, the total costs to meet Florida water quality goals will exceed the reported incremental costs of the EPA analysis and also may exceed the costs of implementing the suite of practices cur- rently used to control point and nonpoint source dischargers of nutrients. A statement to this effect from the FDEP could further the public’s under- standing of the scope of nutrient pollution in Florida and the challenges to its management, and overcome misunderstandings that have arisen during debate about EPA’s numeric nutrient criteria. Florida is in the process of trying to develop its own numeric criteria for nutrients that would supersede EPA’s, if approved by the Florida Envi- ronmental Regulatory Commission, the Florida legislature, and EPA. As of the writing of this report, the FDEP has developed a hybrid approach that includes aspects of both the narrative and the numeric criteria. Although it is unclear whether the newly proposed Florida rule for nutrients will be accepted, the recommendations in this report should be useful regardless of what rule is ultimately adopted. REVIEW OF EPA’S COST ANALYSIS Chapter 2 provides the Committee’s assessment of the EPA cost analy- sis, focusing on the efforts made by EPA to (1) identify permitted point sources that would be incrementally affected by the numeric nutrient cri- teria (NNC) rule, (2) define incrementally impaired waters and their as- sociated watersheds, and (3) estimate the costs of reducing nutrient loads from those point sources and/or to those waters. Costs to comply with the NNC rule were estimated for the following sectors: municipal wastewater facilities, industrial wastewater facilities, agriculture lands, urban storm- water, and on-site septic systems. The associated costs of governmental administration were also estimated. Key assumptions made by EPA include the following: • The definition of the incremental effect of the NNC rule was de- fined and limited to (1) waterbodies that would be newly listed and deter-

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4 EPA’S ECONOMIC ANALYSIS OF NUTRIENT STANDARDS IN FLORIDA mined to be stressed by nutrients and (2) municipal and industrial sources that would receive certain concentration limits in their discharge permits. • EPA assessed the incremental effect of the NNC rule at a single point in time, assuming no further changes would occur under the narrative process, rather than comparing the future outcomes of both processes over time. • Waters currently listed as impaired based on the narrative criteria (either with or without a TMDL) were not considered in the cost analysis, because it was assumed that a TMDL exists or would be developed, and that this TMDL would serve as the basis for a site-specific alternative cri- teria (SSAC) determination. • Municipal and industrial wastewater treatment plants discharging at 3 mg/L for total nitrogen (TN) and 0.1 mg/L for total phosphorus (TP) were considered in compliance with the NNC rule. Incrementally Impaired Waters and Watersheds One component of how EPA defined the incremental effect of the NNC rule was to estimate the number of new waterbodies that would be in non- compliance with the numeric nutrient criteria, as well as to estimate the location and amount of land area that would need attention in the form of runoff controls to return those waterbodies to compliance. The following findings are made regarding this portion of the EPA analysis: It is not valid to assume that the percent of unassessed waters that would be incrementally affected is zero. A more defensible approach would take into consideration the characteristics of the unassessed waterbodies and their drainage areas to predict the likelihood that they would fail to meet the narrative criteria or the numeric nutrient criteria. This conclusion has implications for the urban stormwater, agriculture, septic system, and government sector analyses. The HUC10 delineation used to assess the acreage of various land uses that contribute to the potential impairment is too coarse. EPA should use the more refined HUC12 delineation to generate a more precise estimate of the acres to consider for BMPs in the agricultural and urban stormwater sectors. Sector Analyses For each sector that discharges to inland waters, EPA’s method for de- termining the incremental cost of the NNC rule was based on calculating the product of (1) the number of newly affected units (or area) and (2) the unit cost to “treat” the discharge in those additional units. For municipal and industrial point sources, EPA identified the number of point sources that would have to improve treatment in response to the NNC rule, made

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5 SUMMARY assumptions about the technological upgrades that would be necessary, and assigned a cost for the upgrades. For the stormwater and agricultural sources, EPA estimated the corresponding acreage draining to the poten- tial incrementally impaired waterbodies, reduced the acreage considered based on BMP programs that were already in place, selected a set of BMPs deemed to be adequate and cost-effective to comply with the NNC rule, and then assigned a unit cost to the resulting acreage to estimate the total cost for the two sectors. For septic systems, EPA determined the number of sys- tems within 500 feet of a potential incrementally impaired waterbody and multiplied this number by the unit cost to upgrade septic systems to reduce their nutrient loads. Government costs were based solely on estimates of the administrative costs of developing additional TMDLs. Municipal Wastewater Treatment Plants There is significant uncertainty in the cost estimate for municipal wastewater treatment plants. First, the assumption that no plant will be required to treat to levels more stringent than 3 mg/L TN and 0.1 mg/L TP is unrealistic. Although it is uncertain what proportion of plants will be permitted to treat to 3 mg/L TN and 0.1 mg/L TP, it appears likely that at least some plants will have to treat to more stringent levels. Second, there is significant uncertainty in the cost estimate for municipal wastewater treat- ment plants because the unit treatment costs were not thoroughly verified by comparison to the existing and extensive Florida advanced wastewater treatment experience. Efforts should be made to compare the unit costs used by EPA with cost data from Florida, and also to better estimate the percentage of plants that will be required to reach discharge limits more stringent than 3 mg/L TN and 0.1 mg/L TP by performing mass balance and dilution calculations for at least a representative proportion of plants, if not for all of the plants included in this analysis. Industrial Plants There is significant uncertainty about the incremental cost of the NNC rule for industrial plants for several reasons. EPA based its estimates on one or two selected facilities from each sector. This extrapolation led to some low-flow facilities exerting a disproportionate influence on the overall industrial costs. Furthermore, the same cost model and treatment processes were used for industrial facilities as were employed for municipal plants. For facilities with highly variable flows, flow equalization may be a more cost-effective solution than mechanical/chemical treatment, such that EPA may have overestimated costs for these facilities. On the other hand, some industrial facilities have higher unit costs than municipal plants. Finally, industries covered under general permits were not investigated, raising the

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6 EPA’S ECONOMIC ANALYSIS OF NUTRIENT STANDARDS IN FLORIDA question of whether there may be costs from those facilities that were not captured in EPA’s estimates. Given the small number of industries involved, the cost analysis should be improved by analyzing each plant rather than extrapolating the results of one or two plants to the entire sector. As with the municipal wastewater treatment plants, efforts should be made to com- pare the unit costs used by EPA with cost data from Florida and to better estimate the percentage of plants that will be required to reach discharge limits more stringent than 3 mg/L TN and 0.1 mg/L TP. Urban Stormwater For the urban stormwater sector, the costs of complying with the NNC rule in those watersheds determined by EPA to be incrementally impaired are expected to be higher than EPA estimates. However, high uncertainty is prevalent throughout all aspects of this sector analysis. Published studies indicate that most traditional Florida urban BMPs will not be sufficient to comply with the numeric nutrient criteria. Furthermore, the per-acre costs of such BMPs are highly variable. EPA estimates of the affected land area are highly dependent on unverified existing BMP performance and compliance with urban stormwater rules. To improve the analysis, higher-efficiency BMPs should be considered, which have higher costs than traditional BMPs. The costs of retrofitting BMPs on developed land should also be considered. Agriculture For the agricultural sector, the costs of complying with the NNC rule in those watersheds determined by EPA to be incrementally impaired are likely to be higher than EPA estimates. The incremental land area need- ing treatment was likely underestimated, individual costs for the BMPs assumed to be sufficient were underestimated, and the more effective and costly BMPs and regional treatment systems likely required to meet numeric nutrient criteria were not included in the analysis. The need for more strin- gent BMPs and treatment systems has been demonstrated in many of the Basin Management Action Plans (BMAPs) developed for impaired waters in Florida. Other critical omissions that could lead to increased costs include the degree of actual BMP program participation by agricultural producers and the costs of maintaining BMPs over time. Septic Systems For septic systems, the costs of complying with the NNC rule in those waterbodies determined by EPA to be incrementally impaired are likely

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7 SUMMARY to be substantially higher than EPA estimates. The exclusion of septic systems in springsheds is a significant deficiency of EPA’s analysis. EPA received cost estimates from vendors of equipment capable of meeting a TN of 20 mg/L and TP of 10 mg/L, values which are much higher than EPA’s numeric nutrient criteria. Efforts should be made to consider septic systems in springsheds and a wider range of treatment systems includ- ing permeable reactive barriers, which are known to be more effective in removing nutrients to levels consistent with the numeric nutrient criteria. Government Costs The incremental costs for the government sector are expected to be higher than EPA estimates. Unit costs were based on low-end estimates of costs from a 2001 study that focused on a broad range of TMDL work not specifically related to either Florida TMDL development or nutrient TMDL development. Efforts should be made to quantify costs for Florida- specific and/or nutrient-specific TMDLs to provide more accurate unit costs for TMDL development. Additional government costs should also be considered, including costs for developing or approving SSACs and variances, costs associated with downstream protective values effectively reducing upstream criteria, and consideration of additional waters becom- ing impaired in the future. A FRAMEWORK FOR INCREMENTAL COST ANALYSIS OF A RULE CHANGE In Chapter 2, the Committee accepted the EPA definition of the incre- mental effect of a rule change and provided a critique of the methods by which the incremental costs were estimated. Chapter 3, in contrast, pro- poses an alternative framework for cost analysis. In accordance with what is required in EPA guidelines for preparing economic analyses, the chapter first provides a comprehensive analysis of the differences between the nar- rative and numeric nutrient criteria rules, organized by five broad stages of water quality management. Indeed, discrepancies in the cost estimates of EPA and other analysts can be traced to different assumptions about how the rules would affect actions taken in each of those five stages. That discussion is followed by presentation of the alternative framework for predicting the incremental costs of the various rules. Use of the framework can highlight differences in assumptions, help to narrow differences in the cost estimates if similar assumptions can be agreed upon, and highlight how uncertainties can be reduced analytically or by clarification of ambiguities in the rules.

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8 EPA’S ECONOMIC ANALYSIS OF NUTRIENT STANDARDS IN FLORIDA Comparing the Narrative and Numeric Nutrient Criteria Rules For the purposes of comparison, water quality management was di- vided into five stages: (1) listing waters as impaired, (2) establishing the stressor as nutrients, (3) defining the level of nutrient load reduction and calculating the TMDL, (4) TMDL/BMAP implementation, and (5) the determination of use attainment. Table 3-1 summarizes the differences in how these five stages occur under the narrative rule (which is considered the baseline), under the EPA’s NNC rule that was the motivation for this report, and, for completeness, under the recently proposed Florida rule. The following broad findings regarding these differences are made: • Administrative costs for listing and TMDL development will be lower under the NNC rule than under the narrative or proposed Florida rules because there would be no biological assessment. • Compared to the narrative and proposed Florida rules, under the NNC rule the pace of listing and the number of waters listed will increase, but the rate at which TMDLs and BMAPs are developed and implemented will not necessarily increase. • Municipal and industrial wastewater dischargers may face substan- tial near-term increases in cost under the NNC rule. • Over time, there is significant uncertainty in nonpoint source load control costs under all three rules because of uncertainty about the incre- mental increase in the number of listed waters, about the nutrient target levels for N or P, and about cost and effectiveness of nonpoint source load control actions. How the Alternative Cost Analysis Works A more comprehensive cost analysis requires comparing the future time paths of costs at each stage of water quality management under either the NNC rule or proposed Florida rule vs. the narrative rule (the baseline). The analysis would be composed of several tasks: Task 1 is to predict the decisions that would be made in each stage, for each rule. The predictions would be for specified time intervals, such as for five-year increments. The differences among the rules can lead to different decisions at each stage of water quality management, such as which waters are impaired. Prediction of these decisions requires making assumptions about both the likelihood of any particular decision and the relationship of that decision to others that follow in sequence. Task 2 is to estimate the administrative and load control costs under each rule and for each future time period. Chapter 2 provides a detailed

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9 SUMMARY review of the EPA estimate of unit costs and lengthy discussion of the ef- fectiveness of the load control methods. In the broader framework, there should also be at least a narrative statement of the predicted water quality outcomes at each point in time. Task 3 is to characterize the uncertainties in Tasks 1 and 2 to determine if the costs of uncertainty are likely to be high. If so, formal probability analysis or scenario analysis should be conducted. Scenario analysis re- quires describing different combinations of uncertain future conditions that, taken together, can create different outcomes. Building scenarios can be a group activity that facilitates knowledge exchange and mutual understand- ing of central issues important to the results of the analysis. Task 4 is to calculate the incremental difference in total costs (costs of proposed rule minus the costs of narrative rule) and relate this to the incre- mental differences in water quality outcomes at each time period. All of the metrics mentioned above can be recorded in a decision-mak- ing template (such as Figure 3-1). The template can be used, for example, to describe when and how many waterbodies would be listed over a fixed time period, some metric of stressor evaluation, the number of TMDL plans developed, some metric of plan implementation, and the number of waterbodies meeting the designated use. The basis of the metrics should be explained (i.e., derived from trend analysis of historical records, predic - tive models, statistical equations, expert judgment) and should be based on how the rule governs these stages and the available funding. Costs are calculated by multiplying the load reduction effort by the cost per unit of effort and are also recorded in the template. Once complete, the tem- plate will reveal the total cost difference of a rule change, which could be compared to the incremental differences in water quality outcomes and interpreted in light of the uncertainty of the cost estimates. This can be done for each time period and would provide information important to formulating annual public budgets and forecasting when water quality results might be realized. Findings about the Alternative Cost Analysis The incremental costs of the NNC rule are attributable to more than an increase in waterbodies listed and a requirement that all NPDES-permitted municipal and industrial sources discharging to surface water have certain effluent concentration limits. In computing the incremental effect, the ap- propriate baseline should have been defined as what would have occurred over time under the existing (narrative) rule. Thus, an incremental cost is the difference in implementation costs between two (or more) alternative future implementation time paths.

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10 EPA’S ECONOMIC ANALYSIS OF NUTRIENT STANDARDS IN FLORIDA Future cost analyses of rule changes would more fully represent areas of possible costs differences if they were more explicit in describing the differences between the rules over time. Administrative, load control, and water quality opportunity costs could be analyzed and reported as a cash flow over time, showing what sectors bear the costs as nutrient load reduc- tions at different levels are pursued. Comparing the rules over time also can provide an opportunity to present a realistic picture of how the timing of water quality improvement actions might unfold with alternative rules, by illustrating the time lags between listing and achievement of water quality standards. Most importantly, reporting on timing would provide useful information for predicting annual budgetary requirements. Uncertainty is pervasive in estimating the incremental cost of imple- menting the NNC rule and is inadequately represented in the EPA analysis. In future analyses, reporting the difference in the time paths for implemen- tation of water quality management rules, and associated uncertainties, would provide a more transparent and realistic way to compare costs of the different rules and provide more useful information about where, when, and how costs diverge. Some Florida stakeholders viewed the EPA cost analysis as being su- perficial or of limited scope, leading to reduced credibility. The result was to foster disagreement about embedded assumptions rather than using the analysis to isolate and possibly reconcile sources of disagreement. Cost analysis as outlined above can help convey cost estimates in a more trans- parent way and thus facilitate learning, reduce misunderstandings among stakeholders, and increase public confidence in the results. Conducting an alternative cost analysis, with increased attention to careful assessment of rule differences, stakeholder engagement, and uncer- tainty analysis, might not have been possible with the budget and time EPA spent on its cost analysis. Any critique of the existing EPA cost analysis should recognize that some deficiencies may be traced to time and budget limitations.