[Senate Hearing 113-700]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 113-700




                               BEFORE THE


                                 of the

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE


                             FIRST SESSION


                              MAY 22, 2013


  Printed for the use of the Committee on Environment and Public Works


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                             FIRST SESSION

                  BARBARA BOXER, California, Chairman
MAX BAUCUS, Montana                  DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JAMES M. INHOFE, Oklahoma
BENJAMIN L. CARDIN, Maryland         JEFF SESSIONS, Alabama
BERNARD SANDERS, Vermont             MIKE CRAPO, Idaho
SHELDON WHITEHOUSE, Rhode Island     ROGER WICKER, Mississippi
TOM UDALL, New Mexico                JOHN BOOZMAN, Arkansas
JEFF MERKLEY, Oregon                 DEB FISCHER, Nebraska

                Bettina Poirier, Majority Staff Director
                  Zak Baig, Republican Staff Director

                   Subcommittee on Water and Wildlife

                 BENJAMIN L. CARDIN, Maryland, Chairman
THOMAS R. CARPER, Delaware           JOHN BOOZMAN, Arkansas
FRANK R. LAUTENBERG, New Jersey      JAMES M. INHOFE, Oklahoma
JEFF MERKLEY, Oregon                 JEFF SESSIONS, Alabama

                            C O N T E N T S


                              MAY 22, 2013
                           OPENING STATEMENTS

Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland     1
Boozman, Hon. John, U.S. Senator from the State of Arkansas......     4
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma, 
  prepared statement.............................................     5
Vitter, Hon. David, U.S. Senator from the State of Louisiana.....     6


Shapiro, Michael H., Deputy Assistant Administrator, Office of 
  Water, U.S. Environmental Protection Agency....................     7
    Prepared statement...........................................     9
    Responses to additional questions from:
        Senator Cardin...........................................    19
        Senator Vitter...........................................    21
        Senator Boozman..........................................    27
McGee, Beth, Senior Water Quality Scientist, Chesapeake Bay 
  Foundation.....................................................    37
    Prepared statement...........................................    40
    Responses to additional questions from:
        Senator Cardin...........................................    46
        Senator Vitter...........................................    47
    Response to an additional question from Senator Boozman......    48
Hawkins, George, General Manager, D.C. Water.....................    73
    Prepared statement...........................................    75
    Responses to additional questions from Senator Cardin........    82
    Response to an additional question from:
        Senator Vitter...........................................    82
        Senator Boozman..........................................    83
Matlock, Marty, Professor, Department of Biological and 
  Agricultural Engineering, Area Director, Center for 
  Agricultural and Rural Sustainability, University of Arkansas..    84
    Prepared statement...........................................    85
    Responses to additional questions from Senator Vitter........    90
    Response to an additional question from Senator Boozman......    91
Bodine, Susan, Partner, Barnes & Thornburg, LLP..................    92
    Prepared statement...........................................    94
    Responses to additional questions from Senator Vitter........   108
    Response to an additional question from Senator Boozman......   111



                        WEDNESDAY, MAY 22, 2013

                               U.S. Senate,
         Committee on Environment and Public Works,
                        Subcommittee on Water and Wildlife,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room 406, Dirksen Senate Building, Hon. Benjamin Cardin 
(chairman of the subcommittee) presiding.
    Present: Senators Cardin, Vitter, and Boozman.


    Senator Cardin. Let me welcome you all to the Subcommittee 
on Water and Wildlife. I particularly want to thank Senator 
Boozman, the ranking Republican member of the Subcommittee, for 
his help in putting together today's hearing. The two of us had 
a conversation about how we thought it would be helpful to have 
an open discussion about nutrient trading, to learn more as to 
how it could be a useful tool to help clean up our waters, as 
well as provide certain incentives, particularly to farmers, to 
help us in meeting our environmental needs.
    So with that in mind, we decided to have this hearing. We 
have two panels, and I want to thank all the panelists for 
their participation and being here. I am going to ask consent 
to put my full statement into the record. I will just summarize 
very briefly because I really want to get to the witnesses and 
to the discussion on nutrient trading and how it can work.
    Nutrient pollution is well documented, its harm on our 
waters and our environment. We have had hearings in the 
Subcommittee on nutrient pollution. It comes from nitrogen and 
phosphorus and creates deadly algal blooms. We have dead zones 
that we know about throughout the globe.
    It was interesting, the staff gave me the numbers which I 
find to be shocking. There are over 400 dead zones today, 
globally. But if you go back to 1995, there were about 305. So 
we have increased dramatically just in the last 15, 20 years. 
If you go back to 1980, there were 162 dead zones. And back to 
the 1960s, there were 49 dead zones. So we have seen an 
alarming increase in the number of dead zones caused by too 
much of the nitrogen and phosphorus pollutants going into our 
    I am particularly aware of this, since one of the dead 
zones is the Chesapeake Bay, which I think the members of this 
committee have heard me talk about on more than one occasion, 
as to what we need to do to help the Chesapeake Bay. We have 
been working on cleaning up the Chesapeake Bay in a formal way 
with cooperation among the various States, including the 
Federal Government, for now over 30 years. We have made 
tremendous progress in cleaning up the Chesapeake Bay.
    But we still have tremendous work ahead of us. And the 
expansion of dead zones is one of the major problems that we 
have to deal with from the nutrients that are going into the 
Bay that are causing these dead zones. They come from farming, 
they come from storm runoff, they come from the way we handle 
our wastewater. All that produces nutrients that go into our 
waters. So we need to deal with all of those issues.
    The largest single source is from farming. And it is one of 
the areas that has the greatest promise for reduction, because 
the cost issues associated with reducing nutrient pollution 
going into our waters from farming are manageable from the 
point of view of cost with some of the things that can be done. 
So what we are looking at is how we can make progress in 
reducing the nutrient levels in the most cost-efficient way. If 
farmers do more than is required, then they could have credits 
that could be sold in a nutrient trading program which seems to 
be a win-win situation. Less costly ways of dealing with 
pollutants, a revenue source for farmers, and we are all 
working together. Simple enough. I am sure there are more 
complications than that.
    And that is the reason for this hearing. The reason is to 
learn from the experts how a nutrient trading program could be 
organized. I know States do have nutrient trading programs. But 
if you are talking about a multiple-State trading program, it 
gets more complicated. And how would that be done, how would we 
evaluate to make sure that indeed we are achieving the 
reductions that we think are right?. How are we dealing with 
the equity issues to make sure that we are not creating zones 
of pollution at the cost of other areas? How do we make sure 
that we have achieve our objectives in the most cost-effective 
way, do it in a fair way, and make sure that at the end of the 
day we really have served the public interest the way that we 
    We need a national discussion, my last point on this. 
States can do a limited amount, Maryland can be as aggressive 
in the Bay as any entity could be. But the Bay involves six 
States and the District of Columbia. You need to have the 
Federal guidelines on how we can work together on these large 
regional bodies of water, so that we can make the type of 
progress that we need.
    With that, let me turn it over to Senator Boozman, then we 
will hear from our witnesses.
    [The prepared statement of Senator Cardin follows:]

                 Statement of Hon. Benjamin L. Cardin, 
                U.S. Senator from the State of Maryland

    Good afternoon. Thank you to my colleagues and to our 
witnesses for your participation today. During the last 
Congress, this subcommittee held a hearing concerning nutrient 
pollution and the incredible harm it is inflicting upon our 
Nation's waterways. The goal of today's hearing is to explore 
the potential of market-based nutrient credit trading as a tool 
for addressing that pollution.
    Nutrient pollution from nitrogen and phosphorus has 
consistently ranked as one of the top causes of degradation in 
some U.S. waters for more than a decade. It results in 
significant water quality problems including harmful algal 
blooms, hypoxia (low oxygen levels), and declines in wildlife 
and wildlife habitat. These, in turn, harm the fishing, 
recreation, and service industries that are dependent on the 
health of those waterways. Nutrient pollution is a notable 
problem throughout the Nation, but it is particularly acute in 
the Chesapeake Bay.
    Excess runoff and discharges of nutrients from farms, paved 
surfaces, wastewater treatment plants, and other sources are 
responsible for creating the excess algal growth that degrades 
water quality and harms the ecology of impacted water bodies. 
Algal growth in turn fosters aquatic dead zones, destroying 
fisheries and recreational waterways. There are more than 400 
dead zones around the globe today, up from 305 in 1995, 162 in 
the 1980s, and just 49 in the 1960s. The Chesapeake Bay 
contains one of the most famous of these zones.
    In the Bay, in the past two decades, the number of working 
oystermen has decreased 92 percent. Oystering once supported 
over 6,000 Maryland families. Today only 500 oystermen remain. 
This is just one example of not only the environmental, but 
also the economic devastation that nutrient pollution can 
    Agricultural runoff represents the largest proportion of 
nutrient pollution and offers the greatest opportunity for 
achieving meaningful nutrient reduction through trading. 
Nutrient trading may provide a cost-effective market-based 
mechanism for accelerating water quality improvements. As such, 
it would also have the added benefit of incentivizing farmers 
to contribute actively toward water clean-up efforts.
    With nutrient trading, entities that are able to reduce 
runoff of nutrients, such as nitrogen, below target levels are 
able to sell their surplus reductions as credits to entities 
facing higher nutrient reduction costs, reducing the overall 
nutrient load in the watershed. Today's hearing will help us to 
understand the extent to which ongoing nutrient trading 
programs are effective, and to explore the possible outlines of 
a Federal, interstate nutrient trading framework.
    From our witnesses, we will seek information about what 
standards of measurement and verification must be in place for 
a nutrient trading scheme to be reliably effective and 
environmentally sound. Further, we will seek to understand how 
to build fairness into a nutrient trading system, and how to 
avoid unfairly burdening some communities with added pollution.
    To these ends, we have invited two panels of witnesses to 
today's hearing. They will report on the functions of current 
State level nutrient trading programs, the authorities of the 
Government to create an interstate trading program, and the 
challenges of ensuring transparency and verifiability in any 
program of that sort.
    On our first panel, Mr. Shapiro, Deputy Assistant 
Administrator of the Environmental Protection Agency Office of 
Water, will present the EPA's role in supporting current 
trading programs. He will also discuss the role of nutrient 
trading in an overall water quality improvement strategy. He 
will address what authorities or resources the EPA has or needs 
in order to create an interstate trading program or to expand 
trading to other watersheds. Mr. Shapiro will be able to give 
insight into what a federally managed interstate program might 
    In the second panel, we will hear from several experts in 
the field about how an interstate nutrient trading program 
might be beneficial, and the challenges inherent in 
administering such a framework effectively. Our witnesses 
represent the perspectives of those involved in current 
nutrient trading programs, those who would be potential buyers 
of credits if an interstate market were to develop, and those 
who have concerns about the potential effectiveness of nutrient 
trading. We will also hear from an academic who has extensively 
studied market-based approaches to improving water quality.
    The Water and Wildlife Subcommittee has a duty to ensure 
that the Nation's water quality laws are actually working and 
producing results. There is an ongoing debate about the 
appropriateness of the Federal role in nutrient reduction. Some 
argue that policing this runoff is an issue best left up to the 
States. Well, in Maryland, the State has spent $100 million a 
year over the past decade on nutrient reduction and improving 
the Bay. In spite of the State's concentrated efforts, the 
health of the Bay is still diminished.
    The key to the Bay's restoration lies in recognizing that 
the Bay is merely the most obvious part of a much larger 
watershed. The Chesapeake Bay's watershed encompasses six 
States and the District of Columbia. Maryland's efforts alone 
cannot address runoff that originates across its borders. We 
must address the pollution in the Chesapeake by dealing with 
all the pollution in the entire watershed. This is a watershed-
wide problem and the only real remedy lies in watershed-wide 
solutions. Thus, the State specific nutrient trading programs 
currently in existence may not be sufficient. A coordinated 
effort is necessary to restore this national treasure. The same 
is true of other water bodies across the Country, ranging from 
the Great Lakes to the Gulf of Mexico, and from Long Island 
Sound to San Francisco Bay.
    Today's hearing will explore whether nutrient pollution can 
be mitigated by collaborative efforts and a coordinating role 
for Federal agencies. I want to thank our witnesses for joining 
us today to assist in our efforts to understand and assess the 
possibilities of nutrient trading programs.


    Senator Boozman. Thank you, Mr. Chairman. It really is an 
honor to serve with you on this Committee. We were visiting 
earlier, this is not the most glamorous work in the world, but 
it is so important. It really does affect so many of our 
constituents throughout America.
    I appreciate your holding the hearing today on nutrient 
trading and water quality, and I do appreciate your efforts for 
us to work together on a bipartisan effort to try and address 
these very, very important problems. We were able to come 
together and reintroduce legislation to reauthorize the Water 
Resources Research Act last week. Our bill would continue 
support for water resources research institutes located at land 
grant universities in each State. The work at these institutes 
continues to be critical for our States that seek to implement 
nutrient trading and other innovative approaches to water 
quality and quantity challenges.
    The Water Resources Research Act is one of the most 
effective Federal research programs when it comes to leveraging 
investment. Each Federal dollar must be matched with 2 dollars 
of non-Federal support. Back at home we have the Arkansas Water 
Resources Center at the University of Arkansas. Dr. Brian 
Haggard is the director, and he has performed a lot of work 
with one of today's witnesses, Dr. Marty Matlock.
    Today I am eager to hear from each of our witnesses, but I 
very much look forward to Dr. Matlock's testimony. In our 
State, people across the political spectrum and diverse 
backgrounds know that Dr. Matlock is a go-to expert if you want 
a fair and impartial assessment of water quality challenges. I 
also want to thank Mr. Shapiro, Dr. McGee, Mr. Hawkins, and Ms. 
Bodine for being here today. I have known Susan for 12 years. 
When I served on the House and was on T&I, she was the staff 
director of the Water Resources and Environment Subcommittee, 
kept me straight. So again, we appreciate her being here, and I 
appreciate her expertise. Her knowledge and professionalism 
were well respected by members on both sides of the aisle. 
Again, I very much look forward to your testimony.
    The topic of today's hearing, nutrient trading, is 
complicated, and it is interesting. Efforts over the last 20 
years or so to promote nutrient trading have revealed both 
significant potential and serious pitfalls. On the upside, 
nutrient trading has the potential to help achieve reasonable 
water quality goals at the lowest possible cost. On the 
downside, landowners and point sources that have witnessed 
various EPA actions may be skeptical about the long-term 
benefits and costs of participating in nutrient trading 
programs. The lack of cooperative federalism between EPA and 
the States has created a spirit of distrust in many of our 
communities. Today, I believe that these distinguished 
witnesses may offer us insights on ways to promote cost-
effective solutions to legitimate water quality concerns.
    Finally, I want to acknowledge that Senator Inhofe can't be 
here today, but I know he has a very serious interest in this 
subject. So I ask unanimous consent that Senator Inhofe's 
statement be included in the record.
    Senator Cardin. Without objection, it will be included.
    [The prepared statement of Senator Inhofe follows:]

                  Statement of Hon. James M. Inhofe, 
                U.S. Senator from the State of Oklahoma

    As an avid sportsman and water enthusiast, water quality is 
of particular concern to me. And it is to Oklahoma as well.
    Fortunately, Oklahoma is the leader in managing waterway 
nutrient content levels. The Oklahoma Water Resources Board, 
Oklahoma Department of Environmental Quality, and the Oklahoma 
Conservation Commission all work well together to pair 
conservation programs to reduce the number of impaired water 
bodies around the State.
    Knowing how successfully Oklahoma has managed its 
waterways, I am always concerned that EPA is working to set a 
national standard for nutrient levels across the country. While 
no one will deny the fact that high nutrient levels can cause 
problems, establishing a one-size-fits all policy does not make 
any sense.
    National standards may be appropriate for toxic substances, 
but nitrogen and phosphorus are naturally occurring in widely 
varied concentrations. They are necessary components of healthy 
ecosystems, and different ecosystems will be healthy with 
different water nutrient levels. A fair comparison is the 
caloric intake of different people. My grandsons who play 
football and tennis should have a higher caloric intake than I 
do; it would be silly to set a caloric intake standard that is 
the same for both of us. Similarly, a single number for 
nitrogen or phosphorus levels is not often an accurate 
indicator the health of the ecological or the water's quality.
    A national standard for nutrient levels in water bodies 
could be a disaster if applied in Oklahoma. States should be 
making decisions about appropriate standards. In Oklahoma, 
having this discretion is of utmost importance because our 
State is so diverse. With so many lakes, we have more shoreline 
than any other State in the country; but the western part of 
our State is relatively dry, and the eastern part of our State 
gets a lot of rainfall. The soil changes as you move across the 
State, and the land uses do as well. All of these things impact 
nutrient levels in Oklahoma's waterways. Knowing this, even 
having a nationally mandated State-wide standard would be 
inappropriate. Each waterway is unique, and the State of 
Oklahoma has proven that it is well equipped to consider 
different waterway factors like biology, sunlight, optimal 
stream substrate, stream flow, temperature, and background 
water chemistry to determine appropriate nutrient levels and 
then use conservation programs to manage any pollution problems 
that exist.
    These efforts have resulted in nutrient loading reductions 
of between 60 percent and 70 percent in Oklahoma's highest 
priority watersheds. Many waters have been taken off of the 
303(d) list of impaired waters, and we've been ranked as one of 
the top five States in the Nation for estimated nutrient load 
reductions due to the implementation of the Clean Water Act's 
319 program. In addition, Oklahoma has established numeric 
nutrient criteria for some waterbodies since it was the best 
approach to address nutrient loading in those specific 
instances. It is this combination of approaches that makes 
Oklahoma successful in addressing nutrients.
    EPA's decisions to reduce funding for programs that 
actually work--like the 319 program and the SRF--in exchange 
for increased funding for global warming activities, have put a 
strain on Oklahoma's ability to expand on the good conservation 
work that has already been done.
    Nutrient reduction credit trading may be an innovative and 
helpful program to help large metropolitan areas with 
significant point source polluters address their problems; 
while there has been some interest in this concept in Oklahoma, 
again, one size does not fit all and it is not applicable or 
workable in all instances. To my knowledge, there is nothing 
preventing any State from setting up this kind of arrangement 
should it so choose.
    But to the extent that we are talking about expanding this 
type of proposal, we need to take it one step at a time, not 
rush to judgment, and certainly should not use it as an 
opportunity to impose any national nutrient standards or even 
force the States to establish and maintain State-wide 
    As I said before, I strongly believe that States should be 
in the driver's seat when it comes to considering the nutrient 
levels of their waterways. But States should not be forced to 
impose certain standards, nor should they be required to 
implement credit trading schemes if they will not serve the 
interest of the State.
    I thank the Chair for allowing the opportunity to make 
opening statements, and I look forward to hearing from the 

    Senator Boozman. His schedule, as we all know, has been 
severely interrupted by the devastation in Oklahoma. I know 
that our thoughts and prayers are with those people that have 
suffered such a tragedy.
    On that somber note, again, I want to thank the Chairman 
and say that I look forward to our witnesses' testimony today. 
I yield back.
    Senator Cardin. Senator Boozman, thank you very much. Our 
prayers and thoughts are with the people of Oklahoma. As many 
of us have already said, we are going to do everything we can 
to help as a Federal partner in that regard.
    Senator Vitter.


    Senator Vitter. Thank you, Mr. Chairman. I thank you and 
the Ranking Member of the Subcommittee for this important 
hearing. I will submit my full opening statement for the record 
as well as some questions.
    I just want to underscore what the Ranking Member said. 
This is a pretty new idea. It could offer some potential and 
benefits. But I fully understand if the ag community in 
particular is skeptical. There has been a real attack on ag 
producers by the EPA in many regards. Most recently with the 
Agency's release of personal and confidential business 
information of certain operations, and a litany of regulations 
in an effort to expand the Agency's jurisdiction.
    So there is a high level of distrust. Given that, I think 
we need to fully vet any ideas like this, because there is that 
natural skepticism. But I want to learn more, and thank you for 
the hearing.
    Senator Cardin. Without objection, your statement will be 
made part of the record.
    [The prepared statement of Senator Vitter follows:]

                    Statement of Hon. David Vitter, 
                U.S. Senator from the State of Louisiana

    Mr. Chairman, I would like to thank you for calling today's 
hearing. I would also like to thank our witnesses for 
testifying before us this afternoon.
    Today, we are here to discuss whether nutrient trading can 
be a cost-efficient mechanism to help meet water quality goals.
    In theory, nutrient trading has the potential to provide 
point sources with the flexibility needed to achieve water 
quality goals in a more cost-efficient manner, while at the 
same time providing incentives to nonpoint sources to reduce 
their pollution loads. The emphasis on potential savings is 
    While I support the overall goal of reducing costs 
associated with meeting water quality goals, nutrient trading 
is a relatively new idea and more information is needed to 
assess the effectiveness of these programs. In practice, 
programs tend to work differently than in theory and we need to 
make sure that we fully understand the risks and rewards before 
moving forward. This is why we are here today.
    The potential benefits from nutrient trading programs can 
only be realized if programs are appropriately structured and 
implemented. Regulators should not impose rigorous standards at 
the outset that would discourage or inhibit States and 
communities from pursuing nutrient trading options. Rather than 
a ``one-size-fits-all'' Federal approach, States should be 
given sufficient time and flexibility to develop these programs 
and to figure out what works best for local communities.
    I can fully understand if the agricultural community is 
skeptical. There has been a consistent attack on our 
agricultural producers by the U.S. Environmental Protection 
Agency (EPA), most recently with the Agency's release of 
personal and confidential business information relating to 
concentrated animal feeding operations (CAFOs). A litany of 
regulations and an effort to expand the Agency's jurisdiction 
under the Clean Water Act have all led to distrust of our 
Federal agencies, and in particular the EPA.
    I look forward to today's discussion and learning more 
about how we might address the scientific and practical 
obstacles involved in implementing successful nutrient trading 

    Senator Cardin. With that, let me turn to Michael Shapiro, 
the Deputy Assistant Administrator for the Office of Water, 
United States Environmental Protection Agency. Mr. Shapiro, 
thank you very much for your public service, and thank you for 
being here.


    Mr. Shapiro. Thank you. Good afternoon, Chairman Cardin, 
Ranking Member Boozman and Senator Vitter.
    I am pleased to be here today to discuss water quality 
challenges posed by nutrient pollution and the promise that 
water quality trading tools hold for helping to reduce nutrient 
pollution in a more flexible and cost-effective way.
    I have submitted my full statement for the record, and I 
will summarize it here.
    As you noted, Senator Cardin, nutrient pollution caused by 
elevated levels of nitrogen and phosphorus is a major threat to 
clean water. It has been extensively documented in the 
scientific literature and confirmed by monitoring data 
collected at the Federal, State and local levels. States have 
identified more than 15,000 waters nationwide that have been 
degraded by excess levels of nutrients. An increasingly 
troubling result of nutrient pollution is the proliferation of 
harmful algal blooms, where waters are choked with algae that 
produce toxins, that threaten public health, aquatic life, food 
sources and drinking water quality.
    In general, the primary sources of nitrogen and phosphorus 
pollution in urban and suburban areas are stormwater runoff and 
municipal wastewater treatment systems. In rural areas, in 
towns and cities continue to be an important contributor, but 
the predominant sources are waste from agricultural livestock 
activities and excess fertilizer from row crops.
    EPA recognizes the Nation's significant nutrient pollution 
challenge and is committed to finding collaborative solutions 
that protect and restore our waters and the health of the 
communities that depend on them. To reaffirm EPA's commitment 
to partner with States and collaborate with stakeholders to 
reduce nitrogen and phosphorus loadings to the Nation's waters, 
Acting Assistant Administrator Nancy Stoner sent a memorandum 
to EPA's 10 regional offices in March 2011. The memo lays out a 
framework for guiding EPA's work with States and stakeholders 
to achieve nutrient reductions.
    EPA recognizes that States need room to innovative and 
respond to local water quality needs and that one-size-fits-all 
solutions to nitrogen and phosphorus pollution are neither 
desirable nor necessary.
    An approach with significant potential to help reduce 
nutrient pollution is water quality trading. EPA has promoted 
and supported the concept of water quality trading as an 
innovative approach for achieving water quality standards with 
flexibility and economic efficiency. Water quality trading 
allows one source to meet its regulatory obligations by using 
pollutant reductions created by another source that has lower 
pollution control costs.
    In 2003, EPA published a water quality trading policy which 
sets the stage for our State partners to include trading as a 
flexible compliance pathway for Clean Water Act permitted 
sources. As outlined in the policy, EPA believes that water 
quality trading and other market-based programs should be 
consistent with the Clean Water Act; that water quality trading 
should occur within a watershed or a defined area for a total 
maximum daily load, or TMDL, where such has been approved; that 
nutrients and sediments are pollutants most amenable to 
trading; and that the baselines for generating pollution 
reduction credits should be derived from and consistent with 
water quality standards established by the States or tribes 
under the Clean Water Act.
    The trading policy supports trading among point sources, 
such as municipal wastewater treatment plants, industrial 
facilities and municipalities covered by stormwater permits, as 
well as between point sources and non-point sources, such as 
farmers and other landowners. In the latter circumstances, EPA 
believes that it is important that these non-point sources have 
clear baselines for pollution contributions, such as what would 
be allocated under a TMDL, and that the pollution reductions 
that take place are clearly measured and documented.
    In addition to the Agency's 2003 trading policy, the EPA 
has developed a toolkit for water quality trading that can help 
identify possible approaches that States, the regulated 
community and other sources can use to encourage water quality 
trading. In addition, the EPA has supported States' trading 
efforts through grants. We have held workshops on water quality 
trading and offer online training for States, tribes and other 
interested parties. The EPA is also working closely with the 
Department of Agriculture to help agricultural producers 
participate in trading programs.
    Water quality trading programs are in various stages of 
implementation across the Country. There are a few very 
noteworthy cases, such as the Connecticut example, where 79 
municipal wastewater plants trade among themselves to meet 
nitrogen reduction targets for the Long Island Sound. There are 
other programs that have been developing within the Chesapeake 
Bay. All of the States that contribute to the Bay and are 
covered by the TMDL are planning to use offsets, which is a 
form of trading, to deal with new growth. And several have 
developed trading programs that are designed to assist point 
sources and allow both point to point as well as point to non-
point source trades.
    This concludes my statement. I will be happy to answer any 
questions you might have.
    [The prepared statement of Mr. Shapiro follows:]
    Senator Cardin. Thank you very much for your testimony.
    I take it from your testimony that it is the 
Administration's position that nutrient trading is a tool that 
is available, that can be used under the Clean Water Act?
    Mr. Shapiro. That is correct.
    Senator Cardin. So the legal authority for that, you 
believe, is clear?
    Mr. Shapiro. We believe that it is consistent with the 
Clean Water Act. Obviously the type of trading and the 
conditions under which it is done would affect its 
acceptability under the Clean Water Act. But we believe 
properly constructed trading is absolutely consistent with the 
Clean Water Act.
    Senator Cardin. And there are many States moving forward 
with various types of trading programs that you have mentioned. 
In the Chesapeake watershed, I believe Pennsylvania was the 
first to proceed with non-point source, and dealing with 
trading in that regard. What is the role for the Federal 
Government in the strategy for a multi-jurisdictional body of 
water, such as Chesapeake Bay? What do you see the role for the 
EPA or the Federal Government in facilitating or coordinating 
how nutrient trading is done or whether it should provide 
further incentives for the effectiveness of nutrient trading?
    Mr. Shapiro. Senator, as you know, EPA has had a very 
active role in developing the Total Maximum Daily Load, the 
TMDL framework, which is the kind of construct for achieving 
water quality improvements in the Bay watershed. We did that 
collaboratively with the seven Bay jurisdictions. The framework 
in that TMDL document lays out trading as it is clearly 
allowable and often a desirable component of State programs to 
achieve the nutrient reductions that are needed.
    We don't necessarily see that EPA would lead an effort to 
develop an interstate trading program. But if the States that 
are participating in the work on the Bay are interested in it 
and believe that there are some opportunities to move forward, 
we will be happy to work with them, provide technical support 
as well as other forms of support to ensure that an interstate 
trading program would be effective and would be able to meet 
the requirements of the TMDL.
    Senator Cardin. So today, if the States of the Chesapeake 
watershed wanted to set up an interstate trading program, it 
could do that, they have the authority to do that currently 
under the Clean Water Act and the implementation of the plans? 
They could do it without, they don't need additional guidance 
from the Federal Government in order to set that up?
    Mr. Shapiro. We would want to work with them very closely 
to make sure that as they move forward the training program 
they are developing continues to meet the requirements of the 
Clean Water Act and the pollutant reduction goals of the TMDL. 
But yes, we believe they have the authority to do that. The 
TMDL as well as the Clean Water Act would allow them to proceed 
in that direction.
    I don't want to overstate the ease by which that could be 
done. It would be a challenging institutional effort to work 
across different State programs, try to align State programs in 
a way that a purchaser in one State and a seller in another 
State could do that effectively, meeting the requirements of 
both States as well as continuing to stay within the scope of 
the TMDL.
    So it would be, I think, a challenge, but it is certainly 
something that can be done.
    Senator Cardin. I know there is concern by the individual 
States that without some direct guidance from the Federal 
Government that is a challenge to try to organize an interstate 
trading program. There is also the concern as to how you do 
this in a fair manner that, yes, we have TMDLs as the overall 
goal, but how do we ensure that the different sectors are being 
treated fairly?
    This is the point that I think Senator Vitter and Senator 
Boozman mentioned earlier about the concern of agriculture, 
they want to make sure that this is not just a way of asking 
the agriculture sector to do more than their fair share in 
cleaning up Chesapeake Bay watershed.
    How do the States move forward with that, without some 
additional guidance from the Federal Government on interstate 
trading programs?
    Mr. Shapiro. I think the basic kind of fairness issues that 
you referred to in terms of the allocations, they are called 
load allocations in the TMDL, have already been decided upon by 
the individual States. EPA did not dictate specific controls, 
nor could we, for non-point sources, such as agricultural 
communities. We, working with the States, established load 
allocations and each State has developed its proposal, which we 
have reviewed, for achieving those load allocations, including 
contributions that they would be gaining from the agricultural 
sector as well.
    A trading program wouldn't change what I called earlier 
baseline allocations. A trading program would merely set up 
rules, either within a State, as has already been occurring, or 
across States that would allow a farmer who wishes to reduce 
pollution further than what is already allocated in the State's 
implementation plan, that increment of reduction that would 
provide them a vehicle for selling that increment to someone 
who finds it more expensive to control their pollution.
    So it does not change the basic equities of the allocation. 
It merely creates some vehicles to harness the economy to work 
more effectively for the environment.
    Senator Cardin. Let me just mention one other concern that 
has been brought to my attention from the agricultural 
community, and the reason why they believe that Federal action 
may be necessary for an interstate nutrient trading program. 
They don't know what the market will bring. There is no 
certainty as to what the values will be of the credits. You are 
asking primarily farmers under nutrient trading to do more, 
because that is usually the area where you look at where you 
can get the most credits. Without the Federal Government 
providing some assurance that there will be a market for the 
credits, there is a concern as to whether this in fact will 
work in the real world.
    Do you share that concern and do you see a role for the 
Federal Government in perhaps providing more certainty as to 
the market parameters of a nutrient trading program?
    Mr. Shapiro. Well, a couple of points in response. First, 
it should be obvious but I want to make it clear, no one would 
be forcing anyone to participate in a trading program. A farmer 
could elect to wait to see what other people do. They could 
just decide it is not worth their attention.
    And so it is not that we are saying farmers or anyone else 
has to make investments in producing what are referred to as 
credits, nutrient reductions in excess of their requirements. 
It is something they can elect to do. And as in any market, 
someone who is making a market-based decision is facing some 
degree of uncertainty. You don't know that there will be 
guaranteed demand for your product, although some trading 
programs can be set up in a way that allows the transaction to 
occur before any investment is really made.
    There are State programs, I think Virginia is an example, 
that has encouraged the creation of pools of credits ahead of 
the market, and therefore provided some facilitation to the 
market. There are other kinds of strategies, I think, that we 
could work with the States to identify that might lower the 
degree of uncertainty and facilitate other aspects of trading 
activities. But at the end of the day, it is a market and it is 
going to be ultimately subject to some degree of uncertainty as 
markets are. Someone comes up with a new whiz-bang wastewater 
treatment plant technology that reduces the cost of removing 
nutrients at wastewater treatment plants by a factor of 10, 
nutrient reduction might be much easier to do than trading.
    So those are uncertainties. But I think overall we believe 
that the studies we have looked at indicate that there is a 
substantial savings that can be achieved today by encouraging 
trading, especially point to non-point source trading, and that 
there will be a market. But the design of the institutions and 
the structures around the trading program is an important 
element that can help ameliorate some of the uncertainties that 
farmers might face.
    Senator Cardin. Senator Boozman.
    Senator Boozman. Thank you, Senator Cardin.
    I would like to follow up. I think the certainty issue 
really is a major issue. Let's consider a small rural 
wastewater treatment facility that faces a choice on the one 
hand, participating in a nutrient trading program, and then on 
the other, purchasing the technology, the control technology. 
If they purchase the control technology they would have the 
feeling that they have acquired something tangible, and as we 
know, these are expensive propositions.
    An EPA permit writer that comes back to review their permit 
in 5 to 10 years will see the technology as a real asset, 
making it quantifiable improvements. However, if they instead 
choose to purchase an offset from a large municipal wastewater 
treatment plant, the results may be quantifiable, but the 
offset purchaser may not feel like they truly have something to 
show for their investment. I think that this can be overcome 
and can be addressed through a well-structured trading program 
developed at the State level in cooperation with EPA.
    Can you talk about that? What does EPA do in these kinds of 
situations to provide assurances that the permit recipients, 
that these cost-effective options will be recognized on an 
ongoing basis?
    Mr. Shapiro. Well, in the case you are talking about, it 
would be a point source to point source trade, which means some 
of the uncertainties that we deal with in a non-point situation 
wouldn't be present. And the trade would be reflected in the 
permits of the two facilities. As you know, and this is the 
point I think you were making about uncertainty, under the 
Clean Water Act, permits are on a 5-year cycle. They come up 
for renewal. I think as long as the effluent limits are being 
met and the load allocations under the TMDL are being met, 
there would be no Federal basis for forcing a change in the 
    I think that some of the uncertainty that a small plant 
might face at some point in time is that as, if population, for 
example, grows, at some point a larger facility may feel like 
it needs to use more of its capacity to meet its own population 
demands, in which case at some point the smaller facility might 
lose the opportunity to continue to purchase credits. That is 
one of the uncertainties. There are certainly ways of, through 
contractual arrangements, dealing with those uncertainties. It 
is not something that the Federal Government necessarily could 
commit to in terms of locking people into certain permit 
    Senator Boozman. Regarding participation from agriculture, 
would you support arrangements that would enable, for example, 
USDA and State conservationists to take the lead in 
verification of best management practices being implemented by 
non-point sources?
    Mr. Shapiro. We want to work very closely with the 
Department of Agriculture. We are working very closely with 
them. I can't speak to the details of the specific arrangement 
you just mentioned, but certainly those are the kinds of 
options we would want to look at. We realize that they have a 
lot of expertise, they have field capacity to support it. 
Again, though, these are largely programs that are going to be 
implemented by the States, so the working relationships would 
be, in our view, largely relationships between the Department 
of Agriculture or the local or the State agricultural agencies 
and the State regulatory agencies that have the implementation 
responsibility for the TMDL. EPA would not routinely be doing 
the direct verification and implementation in that kind of a 
    Senator Boozman. Good, thank you. These are things that 
again, in talking to the farm community, come up.
    Another thing, do you believe that onsite water quality 
monitoring would discourage participation by non-point sources? 
Just having, again, the onsite come out to your place?
    Mr. Shapiro. Well, again, we talk about some of the 
uncertainties that we are dealing with and trying to give 
predictable, defined credits to non-point sources. And in order 
to do it in an effective way, there has to be some ability to 
verify that the activities that are committed to under the 
trading arrangement are absolutely being implemented. One way 
of doing that in some cases is not necessarily the right 
approach in all cases. In some cases, it is to do onsite or 
nearby water quality monitoring. Other types of verification 
include making sure that if a certain buffer strip, for 
example, has been committed to as part of the agreement, that 
buffer strip is actually there, that it is being maintained 
over time and so forth.
    So there are a variety of arrangements that could be 
developed to verify particular non-point source control 
approaches. But onsite monitoring in some cases might be the 
most effective in terms of actually demonstrating the ongoing 
effectiveness of a particular type of technology.
    Senator Boozman. Right. You mentioned in your testimony 
that Virginia's program is phased, requiring point sources to 
trade among themselves before they begin trading with 
landowners. Do you have an opinion on that? Do you see any 
merit one way or the other?
    Mr. Shapiro. Well, EPA doesn't have a strong opinion. I 
would say that Virginia is out ahead, but like a lot of States 
they are still relatively new at implementing major trading 
programs. As indicated earlier, trading between point sources 
is a little bit easier because of the fact that everyone is 
under a permit already, they have a monitoring history, they 
have what is called a waste load allocation, which is a 
particular requirement under the TMDL.
    So the job of figuring out the trades and verifying them is 
a little bit easier. It is a good way of getting a program 
working and starting. And then adding non-point sources to the 
program a little bit later gives you the chance to have the 
basic machinery in place as you are dealing with some of the 
more challenging issues.
    But I think you will be hearing later about some of the 
work that has been done in Virginia. It does look like people 
have put a lot of thought into creating pools of credits from 
non-point sources. Again in Virginia, even though that piece of 
the program is a point to point, growth has to be handled 
through offsets with non-point sources, or not has to, but it 
can be handled through non-point sources. So there already is a 
mechanism for doing some trading in Virginia for offsets.
    Senator Boozman. And very quickly, final thing, what can 
EPA do to help the States that are looking at this situation? 
What kind of resources can you all offer a State that is 
looking at the Virginia model or some other model? Are there 
particular resources that EPA can help in that regard?
    Mr. Shapiro. Well, some of the grant funding that has been 
made available to States under our Section 106 Clean Water Act 
funding, under Section 319, which is specifically for non-point 
source planning and control, as well as some of the money that 
has been made available specifically through the Chesapeake Bay 
program and resources for implementation can be used by States 
to develop some of these tools and processes. So there are 
resources already available.
    As I indicated, we are also willing and able to provide 
technical assistance to States, especially in dealing with 
novel issues that may come up. We feel that we have an 
important stake in the TMDL, in the Chesapeake Bay TMDL 
succeeding, and in it succeeding in a way that is as effective 
and efficient and beneficial to the communities involved as 
possible. So we want trading to work. We think it, as I 
indicated earlier, we think it is an important tool, an 
important element of successful undertaking in the Chesapeake 
Bay. So we are willing to provide technical assistance as we 
    Senator Boozman. Thank you.
    Senator Cardin. Just for clarification, did you say 
Virginia does permit non-point trading?
    Mr. Shapiro. For offsets. It is my understanding that they 
current allow that for offsets. That is the issue of dealing 
with new growth. If you are a developer coming in or you are 
expanding an existing development, the pollution associated 
with that, if there is runoff caused by your site or other 
activities that lead to increased nutrient pollution, that has 
to be offset. One way of achieving those offsets is to, at 
least in the tributaries to the Bay specifically, is by 
purchasing offsets from non-point sources.
    Senator Cardin. From non-points, they can purchase from 
    Mr. Shapiro. Yes, sir.
    Senator Cardin. Thank you very much for your testimony. We 
appreciate it very much.
    Mr. Shapiro. Thank you.
    Senator Cardin. The second panel, let me introduce them and 
invite them up. We have Dr. Beth McGee, who is the Senior Water 
Quality Scientist for the Chesapeake Bay Foundation; Mr. George 
Hawkins, the General Manager of D.C. Water; Dr. Marty Matlock, 
Professor, Department of Biological and Agricultural 
Engineering, Area Director, Center for Agricultural and Rural 
Sustainability, University of Arkansas; and Ms. Susan Bodine, 
Partner, Barnes & Thornburg. Welcome, all.
    Senator Boozman has already acknowledged two members of our 
panel. We appreciate all four of you being here. Your full 
statements will be made part of the Committee record, and we 
will start with Dr. McGee.


    Ms. McGee. Good afternoon, Mr. Chairman, Ranking Member 
Boozman. Thank you for inviting me on behalf of the Chesapeake 
Bay Foundation to participate in today's hearing.
    You have my written testimony, and what I would like to do 
is build upon Mr. Shapiro's testimony and draw from our 
experiences in the Chesapeake Bay watershed. You have heard 
that we have a Bay-wide TMDL in the Chesapeake Bay for 
nitrogen, phosphorus and sediment. The States and jurisdictions 
are relying on nutrient trading to achieve and maintain the 
pollution limits that are called for in the TMDL.
    I want to emphasize this issue of maintain. It came up in 
the last comments from Mr. Shapiro, which is that the trading 
markets are likely going to involve not only trading among 
existing sources, but the market will also probably come from 
new sources that are going to need to offset these new loads.
    So critics of nutrient trading will argue that trading 
allows point sources to pay to pollute, that trading may lead 
to localized water quality hot spots, that the reductions might 
not be real or verifiable. CBF shares some of this skepticism. 
But we actually believe that there is a way to design it and 
implement trading programs in a way that ensures that they are 
cost-effective and environmentally beneficial.
    The key to success is to have the necessary safeguards in 
place. These include things like a standardized process to 
evaluate permits to ensure that they don't result in 
degradation of local water quality, third party verification of 
credit-generating practices, a transparent process so that the 
public can have access to information about trades, and review 
and provide comments on them.
    The Bay States have actually worked on trading programs for 
nearly 10 years now. Unfortunately, they evolved independently 
and for that reason, there are very significant differences 
among the State trading programs within the Chesapeake Bay. EPA 
is developing technical memoranda that will help level the 
playing field and provide some regulatory certainty. But we 
think there are other reasons why a trading program hasn't 
really taken off in the Chesapeake, and Congress might be able 
to help here.
    The most costly and challenging aspect of implementing the 
Bay-wide TMDL will be reducing stormwater pollution. That is 
the most expensive thing that we need to do. And because of 
this high cost of compliance, the trading experts actually say 
that is probably where the demand is going to come from. It is 
going to be the local governments holding stormwater permits.
    A recent study by a group called RTI International found 
that local governments with stormwater permits could save, and 
this is within the Chesapeake, could save millions of dollars 
if they purchased credits to meet at least a portion of their 
pollution reduction targets. However, they face several 
challenges. For one thing, most local governments don't have 
the resources or staff time to figure out how trading could 
actually work for them. There are pretty significant legal, 
technical and policy issues that need to be identified and 
    Congress has provided some support for addressing these 
issues through the Conservation Innovation Grant Program in the 
Federal Farm Bill. In addition, I mentioned that EPA's 
technical memoranda that they are developing for the Chesapeake 
Bay should help provide some regulatory certainty. But in 
particular, we think the technical memoranda dealing with urban 
stormwater sources should specifically clarify that stormwater 
permittees can trade. Right now, the policy that is governing 
point source trading is the Permit Writers Water Quality 
Trading Tool Kit. From our read of that, it is really geared 
toward more traditional point sources and not stormwater 
    As we have talked about, farmers are viewed as the likely 
sellers in nutrient trading markets, because the cost of 
reducing pollution from agriculture tends to be cheaper than 
from other sources. That said, and we have heard a little bit 
about this, there are a variety of reasons why agricultural 
producers aren't stepping up to the plate on trading. Some of 
it is, quite frankly, just a lack of knowledge about the 
trading programs. Some of it is lack of knowledge about what 
conservation measures they need to implement on their farm in 
order to participate, and whether that might change over time. 
There are concerns about third party verification, concerns 
about data privacy. And we have also heard that farmers, quite 
frankly, don't want to be viewed as allowing someone else to 
pay to pollute.
    Again, Congress has helped in this regard by providing 
funding to the Conservation Innovation Grant Program that is 
helping overcome some of these obstacles. So we urge Congress 
to continue their support for this program and others like it. 
We also encourage them to continue to encourage EPA and the 
USDA to work together on nutrient trading.
    Last, I want to highlight that Federal programs like the 
Clean Water Act Section 319 program, the Clean Water State 
Revolving Loan Funds, the conservation programs in the Federal 
Farm Bill, are really important for trading. They are going to 
help farmers get up to the compliance level they need to be in 
order to participate in these markets.
    So with that, I would encourage this Committee to increase 
its support for these programs and extend thanks to Chairman 
Cardin for his leadership on this issue. While trading is 
developing throughout the Country, there are a lot of eyes on 
the Chesapeake region. So we really need to do it right here.
    With that, I will end and thank you and take questions at 
the end.
    [The prepared statement of Ms. McGee follows:]
    Senator Cardin. Thank you, Dr. McGee.
    Mr. Hawkins, welcome back to the Committee.


    Mr. Hawkins. Good afternoon, Chairman Cardin, Ranking 
Member Boozman. My name is George Hawkins. It is a delight to 
be back before you again to speak about nutrient trading.
    I have the honor and pleasure of being the General Manager 
of D.C. Water, which among other things, like responding to a 
sinkhole at 14th and F this morning, runs the Blue Plains 
Advanced Wastewater Treatment Plant, which is the largest 
advanced wastewater treatment plant on Earth.
    I sit before you fundamentally because of a remarkable 
success. It is the success of the point source discharge 
program under the 1972 Clean Water Act Amendments that has 
generated the need for today's hearing. That success risks 
failure today, or what I would say is grasping defeat from the 
jaws of victory. Let me put the point in very clear terms. Take 
nitrogen removal, what we are speaking of today. Blue Plains, 
the largest facility in the Country doing this kind of work, 
which serves both the District, 70 percent of Montgomery 
County, Prince George's County in Maryland, Fairfax, Loudon and 
Arlington County in Virginia, removed nutrients from 14 
milligrams per liter to 7.5 milligrams per liter up to the year 
2000. That is equivalent to 7.3 million pounds of nutrients for 
a cost, remarkably small, of $16 million.
    The next phase of our reductions was for 7.5 milligrams per 
liter to 5 milligrams per liter. So now two and a half 
additional milligrams per liter, for $130 million. So one-third 
the level of protection for 10 times the price.
    What we are currently undertaking at Blue Plains is 
reducing nutrients one more milligram per liter, 1.1 actually, 
from 5 milligrams per liter to 3.9. That is equivalent to 1.2 
million pounds of nutrients in a year, at the cost of $1 
billion. Let me say that again, $1 billion. The price of 
removing a pound of nutrients at Blue Plains has risen 600 
times since we started this work originally. That by itself 
should justify a look at what is most economically efficient.
    If you compare the sources for nutrients to the Chesapeake 
Bay by State, the District of Columbia is 1 percent of the 
nutrient load to the Chesapeake Bay. If you do it by source, 
agriculture, runoff from land and air deposition is 80 percent 
of the nutrient load to the Bay. Blue Plains, the largest 
single point source, is 2 percent.
    Put these numbers in comparison, the billion dollars we are 
spending currently at Blue Plains is allocated between the 
District of Columbia, Maryland and Virginia. In fact, because 
of flows coming to the plant, 60 percent is borne by 
constituents in Maryland and Virginia, including some of yours, 
Senator, perhaps yourself, and 40 percent is borne by District 
residents, which together is just about 2 percent of the 
nutrient source for the Bay.
    So that means $400 million is being spent by D.C. 
ratepayers today, now, to reduce less than 1 percent of the 
nutrients to the Bay, and $600 million, because a larger 
percentage of the flow comes from our suburban customers, are 
paying for slightly more than 1 percent, totaling 2 percent. 
And I don't have the facts in front of me, but you compare the 
expenditure of our ratepayers, hundreds of millions of dollars, 
to reduce less than 1 percent in each case of the nutrients to 
the Bay, and it raises three fundamental questions.
    First in equity, I just finished the eight rate hearings I 
do in the District regarding our rate increases. I had to have 
police officers go with me to a number of them. Because the 
rates have gone so high for our ratepayers, many of whom are 
fixed income, low income, unemployed from throughout the city. 
Costs to urban ratepayers are not conjecture, they are not 
perhaps in the future, they are not requirements that might 
come to a farm someday, they are right now, and they are 
enormous. Our rates have doubled over the last 4 years.
    Second is economic. The rate curve that we are on and the 
cost of reducing at Blue Plains is so great that we are 
spending a billion dollars of public funds for such a small 
outcome. On a straight economic basis is that a rational 
expenditure of public funds?
    And third, is it a sound investment fundamentally on an 
environmental basis? Blue Plains is 2 percent of the source to 
the Chesapeake Bay. We are spending a billion dollars to remove 
a fraction of that 2 percent. Our engineers do not know how we 
would get to zero discharge, but they tell me with enough money 
they could do it. But the question of whether or not, if we did 
get to zero, 98 percent of the source of nutrients to the 
Chesapeake Bay would still exist despite that enormous 
    So the notion, would Blue Plains and D.C. Water be 
interested in a trading program where we could get better 
reductions at lower costs? Absolutely yes. Every question here 
that has been asked is a legitimate one. We would want 
certainty to know that we are not going to have ratcheted down 
in the future what we paid in the short run.
    And the second is that we want to know everybody has skin 
in the game. If D.C. ratepayers have spent hundreds of millions 
of dollars in reductions, even if it is less expensive than the 
next treatment increment at D.C. Water, spending money to 
reduce someone else's pollutants on top of it if they don't 
also have skin in the game would be a challenge to sell to our 
ratepayers here at home.
    Nonetheless, I think the economic, environmental and 
equitable potential of trading I think requires that it be on 
the agenda and why this hearing is exactly the right step 
today. Thanks very much.
    [The prepared statement of Mr. Hawkins follows:]
    Senator Cardin. Thank you, Mr. Hawkins, for your testimony. 
You are the person who can make a wastewater treatment plant 
sound very exciting. We very much appreciate that.
    Senator Cardin. Dr. Matlock.


    Mr. Matlock. Thank you, Honorable Chairman Cardin, Ranking 
Member Boozman, distinguished members of the Committee, 
Subcommittee and diligent staff for this great opportunity to 
testify on this very important issue.
    I have been chasing nutrients around watersheds for 20 
years, trying to identify sources, trying to find solutions, 
trying to measure their impacts. It is a very difficult and 
complex process. I have worked with ag producers, with 
industries, with municipalities, with our regional EPA, State 
and local agencies, to try to understand and find a better way. 
Mr. Hawkins was very eloquent in defining our opportunities and 
our challenges economically.
    Through this process I have come to believe that if we are 
to achieve increased productivity from the land and prosperity 
from the land, and improve water quality for future prosperity, 
we have to find a better way to manage our nutrients. We all 
live in watersheds. We all contribute to the problem. The 
nutrient problem belongs to all of us. So should the solutions. 
We all should have skin in the game, as Mr. Hawkins said.
    So in the past, our approach to reducing undesirable 
outcomes has been focused on top-down management, finding the 
polluters and making the polluters pay. It has been very 
effective, history shows that. But it is not going to work 
here, it hasn't worked here. EPA has been trying for 20 years 
to find a better way to define nutrient trading strategies. 
Many of those strategies have been effective at some level. But 
we have not been able to replicate them well, because they are 
all context-specific.
    So I believe that our challenge today is largely associated 
with uncertainty in the trading process. The fact is that the 
participants, especially land-based producers, agricultural 
producers, have high uncertainty about engaging in trading 
processes, high uncertainty associated with the regulatory 
risks that are associated with participating, and then our 
point source discharges, the permitted discharges, have equal 
uncertainty, or maybe even greater, because they are the ones 
with the regulatory sword over their heads, as it were.
    Those uncertainties dramatically inhibit our ability to 
innovate our strategies. So again, I will close fairly quickly, 
because much of what I have in my written statement has already 
been covered. But it is my judgment the primary barriers to 
uncertainty can be reduced through collaborative and innovative 
and flexible strategies. But it is going to require 
collaboration at the Federal level, not just State and local 
    Thank you.
    [The prepared statement of Mr. Matlock follows:]
    Senator Cardin. Thank you very much for your testimony. We 
appreciate it very much.
    Ms. Bodine.


    Ms. Bodine. Thank you, Chairman Cardin, Ranking Member 
Boozman. Thank you for inviting me. And thank you for holding 
this hearing.
    You have heard the testimony from all the witnesses. 
Everyone here, I think, supports trading. And that is a good 
    In my written testimony, I did spend a section talking 
about the legal authority for trading under the Clean Water 
Act. I am not going to repeat that here. But I do want to say 
that that authority has been challenged in a pending lawsuit, 
and I am sure you are aware of that. On that issue, I am not 
going to go into the legal details, but I do want to talk a 
little bit about the policy issue behind a challenge to 
trading. I think Mr. Hawkins was most eloquent about the 
potential for trading in terms of cost savings and some of the 
numbers involved. And they are enormous, and the potential for 
savings is enormous as well. There are studies, in the context 
of the Chesapeake Bay, there are studies that the Chesapeake 
Bay Commission has done on cost and cost savings as well as the 
University of Maryland School of Public Policy has done and I 
have cited those in my written testimony.
    But for the people who oppose trading, I can only imagine 
that they believe that they will get greater water quality 
improvements without trading. That is just a fundamentally 
misconceived notion. Because of the cost that Mr. Hawkins spoke 
about, and the cost of implementing something like the 
Chesapeake Bay TMDL. If you can't make this more affordable, it 
will be unachievable. And if water quality standards are 
unachievable, the Clean Water Act provides a mechanism for 
changing them.
    So if people manage to get a court to agree that trading 
isn't allowed, the ultimate result won't be increased water 
quality, it will be a lowering of standards through use 
attainability analyses. So that policy issue I think is 
important to bear in mind when people are talking about whether 
trading is viable or not. I think all your witnesses here agree 
that it is viable. So that is important.
    In my testimony I do address some of the issues, some of 
the barriers I think you have raised. And there are concerns 
about issues like what is the baseline, what are the 
verification practices. And also what the expectations are in 
terms of instant results. I want to talk a little bit about 
that. Senator Cardin and Senator Boozman, I think you both 
talked a little bit about certainty. Mr. Matlock talked about 
certainty. There is a concern I have heard actually in the 
context of Maryland about shifting baselines, moving the 
goalpost, more regulatory programs coming on board that change 
the baseline. And that is a concern.
    There is a question about how programs establish baselines 
and whether they can be flexible so that there is at least a 
certainty that, for example, an agricultural producer that 
undertakes conservation measures will in fact generate a credit 
that they can later sell. But if the baseline keeps changing 
because the regulations keep changing, that may not be the 
    We have heard concerns about privacy. Senator Vitter 
alluded to a concern that has arisen recently about EPA 
releasing personal identifiable information about farmers. That 
type of activity only raises the distrust. There is a distrust 
from the agricultural community of regulators.
    On the issue of verification, it is certainly better to 
have ag community people deal with ag community people, whether 
it is an NRCS, or whether it is the soil and water conservation 
districts, those organizations are involved in trading programs 
at various levels. That certainly gives a level of comfort.
    Monitoring I think was raised. Mr. Matlock talked about 
onsite water quality monitoring. One issue I wanted to raise 
with monitoring is the privacy issue of whether somebody is 
going to come onsite if it is a farm. But the other issue is 
something that is even more important; water quality monitoring 
is very expensive. When you are talking about non-point source 
reduction, monitoring is best done at a watershed basis. There 
has been a lot of good work done by Dr. Deanna Osmond down at 
North Carolina State University. She has written a book on 
this; she has given a lot of talks on this issue. Her point is 
that the monitoring is best done on the watershed basis. They 
have shown some really good, significant results down in North 
    Finally, I want to address the role of Congress. Having 
this hearing today is important to show congressional support 
for trading. That helps States with their programs and helps 
EPA support the programs. I would caution against legislation 
that would dictate any details of trading, because as you have 
noted, there is an enormous variety. EPA's 2003 policy, as well 
as the Permit Writer's Tool Kit, allow that and acknowledge 
that there is room for a great deal of variety. So I want to 
caution against any legislation that would tell States how to 
do trading.
    But as Dr. McGee pointed out, the 319 program funding is 
very valuable. Senator Boozman, you talked about your land 
grant college. The land grants have been tremendously helpful 
in addressing nutrient issues. In fact, for Iowa's nutrient 
reduction strategy, all the technical aspects of that strategy 
were performed at no cost to the State; but it was performed by 
the land grant college.
    So funding the land grants, like in the legislation you are 
introducing, as well as funding for what is called the CEAP 
program, Conservation Effects Assessment Project, in NRCS, is 
important. The CEAP program does watershed scale monitoring, 
the kind of monitoring that can demonstrate the success of 
conservation practices. To continue to support that also is 
tremendously important. Thank you.
    [The prepared statement of Ms. Bodine follows:]
    Senator Cardin. Ms. Bodine, I just want to underscore a 
point that you made, and I think it is a very valid point. That 
is, Mr. Hawkins' cost of getting that last percent down and how 
much that is of the overall game plan on nutrient reduction. He 
didn't talk about how difficult it was for him to get all the 
financing, but it was not easy.
    With cost benefit analysis becoming so much in the 
spotlight, we will not be able to sustain those types of 
investments for that type of growth in the future. But those 
who believe that we are going to get that type of reduction in 
the future, we are not.
    I would point out to Mr. Hawkins, I am sure he agrees with 
this, that storm runoff is our No. 1 growth area of problems. 
We have to deal with storm runoff. And the investment being 
made at Blue Plains is an incredible infrastructure improvement 
to deal with storms, basically, so you have the flow that 
doesn't overflow and cause the nutrients to go untreated into 
our waters and streams and rivers. So the trade off is 
important. But I think you are absolutely right, we are not 
going to be able to sustain that kind of investment going 
forward for that type of marginal gain. So we have to look at 
other ways to be able to accomplish this.
    I want to ask Dr. McGee and perhaps Ms. Bodine, you 
specifically mentioned the evaluation process, third party 
transparency, you mentioned doing it local and making sure that 
there is credibility. Can you both elaborate a little bit more 
how the evaluation process should be supported by EPA, 
supported by us to make sure that in fact, the credits are 
there, that the progress is being made? What do you mean by 
independent third party? What do you mean by transparency?
    Ms. McGee. Sure. I think EPA's role in this is to establish 
what verification looks like, does it include photographs, how 
often should that be done, what should the documentation look 
like. I don't think right now they have a role in doing the 
    When we say third party verification, we are talking about 
an independent person, not associated with the government. 
Senator Boozman said something about conservation districts or 
USDA employees. We would not support that, but the reality is 
that third party verifiers who know farms are probably retired 
from those organizations. So what we are looking for is an 
independent third party to come in and verify on a farm that 
yes, I did plant those trees and here is the documentation, 
here are the photographs and that would all be set by EPA.
    Another layer of verification would be that the State 
regulating entity would be doing some spot checks on that 
verification. So they wouldn't necessarily be going out to 
every farm, but they might check 10 percent of them, or a 
certain percent of the farms, sort of verifying the third party 
verifier, if you will. So that is, when we talk about 
verification, that is what our intention is.
    Senator Cardin. Ms. Bodine, would the farmers think that is 
a positive step?
    Ms. Bodine. I would suggest that it is not really EPA's 
role to get into that level of detail, to establish what is a 
specific State verification process. And the States do have 
different approaches. In Maryland, for example, the State 
Department of Agriculture does go out and inspect 10 percent of 
the trades. And the trades also do require an annual third 
party inspection.
    You have programs, for example, in Pennsylvania where you 
have aggregators, like the Red Barn Trading Company that 
testified before this Subcommittee a number of years ago. They 
serve as a verifier. They aggregate credits. But they can also 
be a verifier on the other side and interact.
    My point is that there are different models out there and 
that one model isn't necessarily better than the other. Yes, 
the BMPs have to be in place, there is no dispute on that.
    I know I am over your time. There is another kind of 
verification, I just want to make sure you distinguish between 
the two. One is that the conservation practices are taking 
place. The other is the shift in water quality. That is a 
programmatic verification; that is not an on-farm, onsite 
verification. It is the ambient water quality that gets 
monitored over time, whether it is through the CEAP program or 
whether it is through the State's ambient water quality 
monitoring. That is at a programmatic level and not on a trade 
by trade level.
    Senator Cardin. Mr. Hawkins, you can respond to that. I was 
going to ask you.
    Mr. Hawkins. Very quickly, and I certainly understand that 
we want flexibility with States. But at an enterprise that 
might be purchasing credits, I think a bottom line, uniform, 
you at least must do these three steps. There might be 
additions that States ask, so that when we are buying in the 
market, we know that no matter where we are buying from, or 
where the credits are coming from, there is going to be uniform 
baseline of how we establish that we know we are getting the 
credit we think we are buying, if we are purchasing them, 
rather than needing to verify any particular place that there 
is a baseline that we can count on across a multi-State Bay.
    Senator Cardin. That is the question I was going to ask. 
You have to deal in an interstate program, located in the 
    Mr. Hawkins. Correct.
    Senator Cardin. There is not enough in the District, you 
are going to need to have multiple jurisdictions that you have 
to deal with, which requires, I think, some degree of Federal 
    Mr. Hawkins. To me, it is not one way or the other. The 
advantage of some baseline uniform system is across the board 
why many, in my judgment, environmental programs have succeeded 
or failed. You get economies of scale, you get consistency of 
purpose, you get a professional group that can go from one 
place to another and know that there is a common set of steps 
that can be taken. Nonetheless, in a particular State or with a 
particular agricultural industry, it may be modified in 
addition to that. But knowing there is a baseline, so if you 
are buying on the market, you have confidence that where the 
credits are coming from, you know that there is a core that you 
can rely on, I think it would be important for the purchaser of 
the credit.
    Senator Cardin. I agree with that. Dr. Matlock, did you 
want to add?
    Mr. Matlock. What we are talking about here is watershed 
level adaptive management, where we have the flexibility to 
evaluate what works, implement it, change what doesn't work, 
but do it without penalty, do it transparently, do it in the 
open, eyes open. Ms. Bodine laid it out very effectively, I 
think, you cannot manage practices, you have to manage 
outcomes. The outcomes are water quality. If the water quality 
is getting better, we are doing things right. Let's figure out 
what is working best and keep doing it. Let's fix what is not 
working so well.
    If the water quality is not getting better, we have to 
change something. So we have to have flexibility for that sort 
of adaptation in our process. Monitoring should be focused at 
the watershed level, not at the farm level. There are a number 
of reasons for that; it is too expensive, it breeds 
uncertainty, you are chasing ghosts all the time, because what 
happened yesterday won't happen tomorrow. And trying to find 
causality is just difficult, if not downright impossible. It is 
better to manage process and measure outcomes.
    Senator Cardin. Let me ask one final question. That deals 
with hot spots. You have mentioned that. What can be done to 
prevent those that are making the efforts, don't want to be 
responsible for areas that are subpar, even though you may meet 
the TMDL standard, you may meet the overall standard. But how 
do you avoid the criticisms that you are letting polluters off 
the hook and affecting some communities much more adversely 
than we should?
    Ms. McGee. I will take the first shot at that and others 
can hop in. Under the Clean Water Act, there are provisions 
both in the regulations and the law that says a permit cannot 
be issued that will cause or contribute to the degradation of 
water quality standards. Theoretically, it is there. How that 
is done, I think is the challenge. How would a permit writer 
who is going to issue permits, whether it is Mr. Hawkins' plant 
or an urban stormwater area, when they see a credit in a 
permit, how are they going to evaluate that, what does that 
look like?
    We are actually hopeful that EPA, they have provided some 
guidance in their Tool Kit, but we think more clarity needs to 
be given in that regard, there needs to be sort of a stepwise 
process. You would look, for example, at local impairments, 
local problems with waters and how that might affect your 
ability to trade. So we think one way to do it is to lay out a 
very methodical process, so that is transparent and then people 
can evaluate it for themselves.
    Senator Cardin. Ms. Bodine.
    Ms. Bodine. I agree with Dr. McGee, a localized impairment 
of water quality is not allowed under the statute. But I would 
say that I think that this hot spot issue, when you are talking 
about nutrients, is a bit of a red herring. Hot spots, when a 
pollutant is a bioaccumulative toxic, yes, hot spots are an 
issue. Nutrients, though, you have to remember, are already so 
variable. The effect of nutrients in particular water bodies is 
variable with respect to temperature, water velocity, habitat. 
The issue that you would have a local hot spot as a result of a 
trade I personally view as highly unlikely. And it would have 
to be an extreme situation that a permit writer would be able 
to identify. So I know it is being thrown out there as a 
concern, but I would suggest it is not as big a concern as 
perhaps it is being portrayed.
    Senator Cardin. Thank you all very much. Senator.
    Senator Boozman. Thank you, Mr. Chairman.
    Mr. Hawkins, you mentioned that you are in a situation to 
go from five to four and it is going to cost you a billion 
dollars. And yet it has really become very, very questionable 
that you are going to get a billion dollars' worth of bang for 
the buck in that reduction. Is that correct?
    Mr. Hawkins. Measuring the value of the pounds is a harder 
question to answer. There is no question that the cost per 
pound of removal has gone up.
    Senator Boozman. But when you put that in relation to the 
watershed, you mention the 1 percent, 2 percent affecting, when 
you put that billion dollars in relation to what five to four 
is actually going to do to the watershed, if you figure that 
out, it is really pretty minimal, isn't it?
    Mr. Hawkins. It is easy to argue that you could spend half 
as much money and get twice as much reduction.
    Senator Boozman. That is my point. A billion dollars is a 
lot of money. And there is no assurance that they might not 
come back a few years from now and say, you need to go from 
four down to three or two or whatever. But to take that billion 
dollars and then again put it with all kinds of other projects 
that would directly relate to the watershed, working with Dr. 
McGee or whoever, that to me makes no sense at all. And that is 
the problem, I mentioned the uncertainty, Dr. Matlock mentioned 
the uncertainty, and you live with this every day, Mr. Hawkins.
    How do you, and you guys can chime in, Dr. Matlock and Mr. 
Hawkins, if we talk about a wastewater plant doing some sort of 
trading scheme or whatever, how do you get some certainty in 
the system through maybe going to a new permitting system? How 
do you get where they can do that?
    The other thing is, I would say, in hearing your testimony, 
I know you come from the perspective of the large district, and 
you have a tremendous job to do, and you are doing a great job 
with it. But the scenario that you are giving is going on all 
over America. It might not be a billion dollars, but if you 
live in a town of 1,500 and it is $10 million, it is a big 
    So we have to get a handle on this. There has to be some 
sort of common sense and scientific backing as those decisions 
are made. That is a whole different topic.
    But talk to us about how, if we enter into this game, you 
and Dr. Matlock, how do you come up with some new permitting 
system so you can have some certainty, so you are not going to 
come back and essentially not only perhaps do your trading 
scheme, and then again the demand, it should go down to four to 
three, with the trading scheme, and you have all this other 
stuff in place, too?
    Mr. Hawkins. It is a great question. In our judgment at 
D.C. Water, by the way, you are exactly right, proportional to 
the community, ours happens to be quite large, but the cost 
relative to smaller towns may be just, per capita, the same 
kind of extremely high cost for protections at the margin. That 
is an issue, and I agree with Senator Cardin that at some point 
the public rebels and all of a sudden does not support any 
longer which is otherwise such a positive step, which is what 
Blue Plains has done for the last 4 years. It is an enormous 
success. We all should celebrate it.
    As I have said, the best bass fishing in the Potomac River 
is downstream from our plant.
    Mr. Hawkins. That is amazing. But the question, and this is 
what it goes back to, where I think we all agree that having a 
system with rules set up that are understandable and clear, it 
is why at least at the moment, absent having seen something 
otherwise as a potential prejudicer, if there is a baseline 
system, the Federal Government doesn't necessarily have to run 
it. But that there are some baseline circumstances that we know 
will be firm and certain across the watershed, even with 
watershed monitoring, a well-run watershed association, I agree 
with that approach, there could be flexibility in each State.
    And that does call for some principles that are 
established, that are very clear from the onset. I don't think 
the market will work. We wouldn't want to put ratepayer money 
into the market unless we are certain that we can count on 
those reductions wherever they may be coming into the future. 
That is going to be the market rules, as opposed to what we can 
or can't do.
    Senator Boozman. Dr. Matlock.
    Mr. Matlock. So the common thread here is that there needs 
to be some baseline ``thou shalt nots'' on the landscape. There 
are standard practices that are acceptable for agricultural 
producers, whether it is row crop, animal ag, specialty crop, 
et cetera. We all understand those in the ag community very 
    We also understand that the Pareto principle works. 
Sometimes 90 percent of our problems come from 10 percent of 
our landscape. So we have tools to evaluate where our problem 
children are, as it were. That sounds paternalistic, it is not 
intended that way. Probably a poor choice of phrase. But we 
understand where the biggest possible impacts could be met 
through implementation and intervention with the landowners' 
and ag producers' participation.
    So we need a set of baseline practices, the first three or 
four tiers of activity that must be certain. You turn the 
manure spreader off when you go across the creek. There are 
some things you can do that just make sense. And all good 
producers know that. We need some level of assurance that those 
practices are being implemented.
    But you can't do that through a command and control system. 
Part of this is just helping each other become better neighbors 
through more transparency and higher communication and 
understanding. Frankly, the monitoring will tell ultimately 
where the problems persist. Monitoring at the watershed level, 
not at the edge of field level, because it is just too 
expensive. But you can cascade up to the field level if you 
have persistent problems in an area.
    So you can have triggers for engagement. So simple 
threshold triggering of response system, which is consistent 
with adaptive management strategies, makes sense. That way you 
start with a broad stroke, broad approach within the watershed 
and then you focus where you need to, as you need to. Because 
the other challenge we have, as you alluded to and Mr. Hawkins 
responded to, is the targets may change. Because our watersheds 
are always changing. And as our targets change, and today we 
are trying to hit 37 parts per billion total phosphorus in the 
Illinois River in Oklahoma and Arkansas, it might be 20 next 
year. We have to have the tools to adapt there too.
    Senator Boozman. Let me ask Dr. Matlock and Ms. Bodine 
about a lot of our States have narrative nutrient criteria. Is 
it possible to do a trading program to set it up in a State 
like that and have the narrative nutrient criteria of water 
    Ms. Bodine. Definitely yes. Most States still have 
narrative criteria. EPA has been pushing States to adopt 
numeric and some are resisting that. So water quality based 
effluent limitations are based on meeting water quality 
standards. That is a determination that is made in the 
receiving water, in the river or stream, in the ambient 
condition of the river or stream. Even outside of trading 
today, yes, water quality based effluent limitations are placed 
in permits, where they interpret the narrative. EPA has models 
that would support the interpretation of a narrative into a 
number, and then it becomes simply a number that could be 
    The other way of looking at it, though, is in determining 
whether or not you need a limitation on that plant, because you 
only have a water quality based effluent limitation if the 
discharge has a reasonable potential, and I am using all kinds 
of Clean Water Act terminology here, but a reasonable potential 
to contribute to a violation of a water quality standard. And 
if that reasonable potential is removed because you have 
trading, because the nutrients are being addressed elsewhere, 
then that is another way you can address it in the context of a 
narrative as opposed to a numeric water quality standard.
    Senator Boozman. Dr. Matlock.
    Mr. Matlock. Yes, echoing what Ms. Bodine said, yes, 
narrative criteria can be effective in a nutrient trading 
framework for establishing some end point. But ultimately you 
have to have some end point and that ultimately goes to 
something you can measure. So whether it is algal biomass 
accumulation or whether it is turbidity or some other surrogate 
for that narrative criteria, ultimately it goes to a number. 
Because we manage for numbers. Otherwise it is too subjective.
    Senator Boozman. Anybody that knows, what is the ratio of 
States now that have narrative versus a numeric? Do we have any 
idea? Half or two-thirds? Aha, I have stumped the panel.
    Ms. Bodine. You have stumped us. But many more States have 
narratives than have numeric standards. And you have seen the 
controversy in Florida over numeric standards.
    Senator Boozman. Thank you, Mr. Chairman.
    Senator Cardin. Let me thank all of you. This has been an 
extremely helpful panel in understanding the technical and the 
practical problems. My local paper today had headlines 
concerning water rates locally. It is becoming more and more a 
political issue. One of my first introductions to the people of 
Smith Island, which is about 350 people that live on the last 
inhabitable island in the Chesapeake Bay was how we were going 
to take care of their water needs. And we did. But Mr. Hawkins, 
my guess is that the costs there are about the same per capita 
as what you were dealing with to get that marginal progress 
    So we have a responsibility to find the most efficient ways 
to accomplish our objectives. I think that is what the public 
is demanding. We are going through a lot of budget debates, but 
they want us to do our job in the most cost-effective way.
    I understand the suspicions that are out there, and that is 
why I think the Federal Government does have a responsibility 
to give the predictability that you all are talking about, so 
that you know, A, that the results will be there and B, that 
the market is fair and that people want to participate, because 
it is the right thing and it is going to create a fairer system 
and a more cost-effective system.
    Our States are doing it, and I think EPA is cooperating and 
it is working. But as has become apparent by the testimony 
today, we can make this more effective. I think that is what 
this hearing has helped us focus in on. I thank you all for 
your participation. As I mentioned already, Senator Boozman and 
I are working very closely together to try to see where we can 
work in a non-partisan way to advance a good policy. This is 
one area that we will certainly be looking at.
    Before we adjourn, without objection, we will introduce 
statements from the Virginia Conservation Network, Conservation 
Pennsylvania, the National Association of Clean Water Agencies 
and the Chesapeake Bay Nutrient Land Trust, LLC. We have 
statements for the record from all those groups that will be 
included in the record. Thank you.The Subcommittee is 
    [Whereupon, at 3:52 p.m., the Subcommittee was adjourned.]
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