5 The Actors in Stream Mitigation Banking

The market for streams in the United States includes a wide cast of characters, but across the many states where stream mitigation banking occurs, it centers on three primary actors: permittees, who trigger the whole process by proposing to damage a river or stream; regulators, who require the permittee to provide compensatory mitigation, and approve mitigation banks; and mitigation bankers, who produce stream credits (figure 5.1). Key secondary groups are landowners, without whose cooperation there could be no stream mitigation banks; designers, who set up what actually happens to streams in mitigation banks; investors, who provide the funds that enable mitigation bankers’ work; and scientists, whose input is primarily indirect, through critiques of mitigation banking practice (figure 5.1). Each of these groups has different goals for mitigation banking, and different levels of concern with whether or not their work produces equivalence between streams impacted by development and those restored to offset those impacts. Each is also attempting to manage very different sets of uncertainties.

The structure and practice of mitigation banking generally (at the national scale) and locally (within a particular Corps district) are the result of the negotiations between these groups. And these national and local negotiations have increasingly profound impacts on fluvial systems in the United States as mitigation banking spreads.

Primary Actors: Their Roles and Goals

Permittees

No one ever bought a mitigation credit without a gun to their head.1

Permittees catalyze the mitigation process by proposing a project, be it widening a road or building a new housing development, which would negatively affect a river or stream in a way that triggers Section 404 review, such as by straightening or moving its channels. Once a project is proposed, a regulator will review it and visit the potential impact site to evaluate its aquatic features. Based on information permittees are required to collect, regulators will determine the quantity of streams on the impact site. They will also characterize the quality of those streams (e.g., whether they are of high existing value or already degraded), and their flow permanence (e.g., perennial, ephemeral, or intermittent).2 Regulators and permittees thus negotiate not only the official determination of the physical condition of existing streams on the impact site, but also whether or not they require mitigation, and if so, how much. All of this is decided without the benefit of biological or chemical sampling in almost all cases. Instead, the overall quality of the aquatic resources is evaluated visually on the basis of geomorphology and fairly obvious ecological measures, such as the presence or absence of large woody debris, which are readily estimated. Based on this site visit and the permittee’s proposed development plans, the regulator will assign a quantity of compensatory mitigation deemed to be equivalent to the unavoidable loss from the proposed project. Permit applicants must provide that compensation—in quantity and type—or they will not be granted a permit to damage streams at the impact site.

A crucial point, then, is that permittees are not in the market for restored streams: they are in the market for a permit that will allow their project to damage a stream (see chapter 2). It does not matter to them whether the stream credits they purchase are produced via preservation of an existing high-quality stream, enhancement of a somewhat damaged stream, or total reconstruction of a poor-quality stream. Nor does it matter to them whether the ecological quality of the credits they purchase is higher or lower than other available credits. From the permittee’s point of view, credits are binary: they fulfill their permit obligation or they do not. Thus, unlike almost any other commodity a permittee purchases, quality differences among mitigation credits (be they for streams, wetlands, or habitat) are irrelevant. And as some observers note, given the prevalence of a single restoration approach, Natural Channel Design, in many states there may not be that much difference between the quality of different credits in the first place; restoration practitioners have a strong tendency to design the same stream (see chapter 3). In the words of one restoration educator:

Consultants are somewhat interchangeable because you get the same design approaches throughout the state. . . . There is an informal network of designers. They all seem to know each other fairly well. Many companies hired from other companies and public agencies, so at any given time there are a number of consultants who have worked for other companies and agencies.3

Instead of quality, permittees typically prioritize certainty of obtaining their Section 404 permits to avoid regulatory uncertainty. While the economics literature suggests that lower cost and increased efficiency will be the primary reasons why permittees choose to purchase mitigation credits rather than doing the restoration themselves,4 data from mitigation banking suggests instead that certainty about their ability to satisfy their Section 404 permit obligations can be a bigger factor for permittees than cost per se.5 As one of our interviewees noted:

Most permittees don’t care what the cost is. They’ll write a check for just about any amount, just to shed the responsibility of mitigation. And that, I hear that from almost everybody: developers, Departments of Transportation, railroads. . . . I’m sure there’s some threshold at which they’d start caring, but . . . [no one] seemed to bat an eye at writing a $100,000 check to shake a mitigation responsibility.6

Regulators

We don’t have time to stop our regulatory permit program and say, “Ok everybody, we’re just going to stop issuing permits nationwide until we figure out what’s the best possible thing we can do when it comes to stream restoration.” It just does not work that way. And so, when we’re dealing with an evolving science—which this is in my mind—you know, you try to incorporate lessons learned. And I think in [my state] we’ve done a pretty good job of that. There’s some things we used to do that we wouldn’t do today. . . . [C]ould we do better? Maybe, yeah.7

Permittees may catalyze the mitigation process, but across the United States it is the regulators, particularly staff in the regulatory offices of the Corps of Engineers, who control it. For mitigation banks, the negotiation is formally between the mitigation banker and an Interagency Review Team, which is comprised of relevant regulatory representatives (e.g., USFWS, EPA, and the state department of environmental protection). The Corps of Engineers is the lead agency on any IRT (because the Corps implements the CWA and issues permits), but other agencies will be relevant to the project and express opinions and advice on its specifics. Nevertheless, in the end, the permitting decisions fall on the Corps of Engineers, and thus, we refer to the Corps and regulators interchangeably.

Regulators strongly shape both supply and demand in mitigation banking, requiring permittees to purchase credits to discharge their permit obligations, as well as setting and enforcing the standards mitigation bankers must follow to produce those credits for sale. Regulators work at the state and national level through guidance documents and industry-wide criteria that affect all mitigation bankers, and at the level of individual projects via specific criteria included in the legal documents guiding those projects (see chapter 6).

Because stream mitigation banking occurs under the auspices of the Clean Water Act, the primary goal of the regulator is the goal of the CWA: to restore and maintain the chemical, physical, and biological integrity of the nation’s waters. But regulators are also required to serve those whose actions trigger the CWA: the regulated public (permittees). Thus, regulators cannot demand the highest ecological quality to reduce uncertainty, or define credits in carefully specified ways to increase equivalence. If the regulators’ position were that simple, the Corps of Engineers would likely be enforcing the CWA through preventing harm rather than pricing it via compensatory mitigation. Instead, regulators have to walk a delicate line, balancing ecological and economic concerns, as well as demands on their own time and resources.

Thus on a day-to-day basis, the regulator works with the permittee to assess the presence or absence of aquatic resources (i.e., streams, wetlands) on a proposed impact site; the type, quantity, and quality of those resources; and the required type and quantity of compensatory mitigation required to offset the proposed impacts. The regulator also ensures that the permittee actually purchases the required credits, and that those credits are equivalent in the eyes of the Corps of Engineers to the damage from the proposed project.

On the credit production side, the regulator works with the mitigation banker to review and negotiate the specifics of the proposed Mitigation Banking Instrument (MBI; the legal document that sets the conditions for a mitigation bank, addressed in chapter 6) for any new bank to address potential sources of uncertainty, and to ensure equivalence between the stream credits produced and the impacts they are intended to address. This process can take months or even years depending on the complexity of the proposed project. Once the bank is approved and constructed, the Interagency Review Team reviews the “as-built” surveys to ensure that what was built matches what was proposed in the MBI, and evaluates the monitoring data provided via the mitigation banker to determine whether the bank is meeting the agreed-upon success criteria, the legally binding performance standards a mitigation bank must meet to receive their credits (intended to address uncertainty and equivalence, among other issues).

It is important to remember that the functions laid out in the previous paragraph are fairly new for all of the public agencies involved, including the Corps of Engineers’ regulatory staff. Because of the initial focus of CWA implementation on wetlands (see chapter 3) there has been limited expertise in stream restoration generally, and even less expertise in stream mitigation banking within regulatory agencies. For example, of fifteen Corps staffers across the United States we interviewed, only two had educational backgrounds relevant to the predominantly physical focus of stream restoration (in civil engineering in both cases); the vast majority had degrees in fields such as fisheries biology, aquatic ecology, or botany. As one regulator put it, “Obviously, it’s not the [Army] Corps of Biologists, but most of the people in Regulatory are biologists.”8 Along with limited directly relevant formal education, many regulators also had limited opportunity for on-the-job training: while a few Corps districts have almost two decades of experience with stream mitigation, most districts have surprisingly little.

This lack of formal educational background, training, and experience in fluvial systems is compounded by the fact that managing and regulating stream mitigation is an additional role for Corps of Engineers staff, expanding their already extensive responsibilities to regulate stream and wetland impacts. Thus, almost to a person, regulators report that that they feel stretched thin, with limited capacity and resources to fulfill this new regulatory function. One Corps staffer from the southern Midwest spoke for many of his colleagues when he said, three years after the publication of the 2008 Mitigation Rule:

The hardest thing’s finding time to work on it. . . . I’m the chief of the division and I’m sitting in PDTs workin’ on stream method! But, I mean it’s what you gotta do. We would have revised it [the district stream mitigation banking policy] before now. I mean the [Mitigation] Rule came out in 2008! But it’s just putting it into a place where you can work on it when everybody has multiple jobs they’re trying to do.9

Mitigation Bankers

It’s a market. There’s money to be made . . . via mitigation banking.10

The role of a mitigation banker sounds very simple: provide stream credits. Doing so requires a wide range of efforts, however (as described in more detail in chapter 6). Stereotypically, mitigation bankers’ primary motivation is making a profit. In practice, however, most mitigation bankers chose this particular career path from among a vast array of entrepreneurial options because they care about the environment. Thus while making money is clearly a priority, bankers typically are not driven solely by economic concerns.

Bankers begin by assessing the likely credit demand in a particular area (the geographic service area) and thus the potential market into which they would eventually be able to sell the credits generated from a project.11 Along with assessing credit demand from current and potential future permittees, bankers must also assess the competition (i.e., other mitigation banks either existing or potential/proposed), which will impact credit value or potential to sell credits. As the founder of a design and mitigation banking firm that works in several Southeastern states explained to us, there are a number of important sources of uncertainty in calculating potential demand for stream credits:

When you model a mitigation bank, you have to guestimate what the credit prices are gonna be for like 7 to 10 years. You gotta guestimate what the market’s gonna be like for the next seven years. You gotta guestimate what competition’s gonna be. That’s the other thing. . . . You could start a bank and it could be the best bank in the world, it could be in a great basin, with you know, a ton of demand for credits. And you could get a year into doing your mitigation plan and all of a sudden five other public notices [for new rival mitigation banks] could come out. And all of a sudden you realize, “Oh my god. The supply vs demand in this basin is 3:1. What the hell.”12

Once bankers believe there is sufficient demand, they conceptualize and propose a project. Because the product they are producing—the stream credit—is a function of regulation, regulatory uncertainty is a make or break issue for them. Bankers typically have significant command of the nuances of relevant regulations at the federal level (e.g., CWA, 2008 Mitigation Rule), as well as the specifics of local regulations. They must also find and acquire property rights to a potential bank site. Mitigation banking firms typically have personnel who scour real estate databases to find degraded streams. In regions with a great deal of development activity and thus a high demand for stream credits, appropriate sites for stream mitigation may be mostly exhausted, creating competition between bankers for the particularly good remaining sites and another crucial source of uncertainty.

Once an appropriate site has been secured, the banker has to develop a proposed Mitigation Banking Instrument. This typically requires hiring a stream restoration design firm to develop a specific restoration and construction plan. The MBI is then negotiated and eventually (the banker hopes) approved by the regulator. Because the MBI is effectively the contract that lays out the economic potential of the project (e.g., what must be done and how many credits it will potentially generate), a cynical view would suggest that the goal of the banker in this process is to maximize credit potential while minimizing effort (e.g., costly obligations) within the MBI by starting high and then negotiating downward with the regulators as little as possible, adapting the document along the way until the parties reach something both can agree on.

However, it is important to note that all of the time and effort leading up to the approval of the Mitigation Banking Instrument is speculative from the banker’s perspective: no revenue is generated for the banker until the document is approved. And there are significant costs that go into any MBI including mitigation bankers’ time, attorney costs (as this is a legal document), and design costs. Thus, the more time and effort that is put into negotiating the MBI, the more up-front capital must be spent by the banker. This gives the banker a powerful incentive to submit a proposed MBI that is as likely as possible to receive quick regulatory approval rather than starting with an aggressive negotiating position and then spending months (or even years) incrementally revising the document until it gains approval. The banker benefits by having a highly efficient process, as does the regulator. The more known and “standard” the proposed project approach is, the more the uncertainty is reduced for the regulator. Further, standard approaches and practices already incorporate and address regulators’ concerns about the equivalence of impacts and restoration. Finally, the more standard the project, the more efficient the process is for both banker and regulator overall. Thus an innovative approach, even one that might actually increase equivalence, may be avoided by both bankers and regulators in favor of an established approach.

Only once the MBI is negotiated can the banker get the actual project built. At different points during that process, depending on the credit release schedule negotiated in the MBI, the bankers will have blocks of credit to sell. At that point, they need to find buyers, another source of uncertainty for bankers. This can range from an individual developer needing only a few credits to a highway department needing to mitigate a large road-building project running across multiple regions. The key point is that selling stream credits is not as simple as selling a sofa on Craigslist: stream credits are a very specialized commodity in a heavily regulated market for which there are relatively few buyers.

Finally, it is important to realize that this entire process depends on mitigation bankers’ ability to assemble the capital to fund their work, which is yet another source of uncertainty for them. With financing secured, they must manage outlays and potential incoming revenue from credit sales in a way that allows them to compensate investors and to generate profits. The costs of mitigation banks can range from tens of thousands to tens of millions of dollars, and thus the sources of capital can vary dramatically (as described in the Investors section to follow).

Each mitigation banking firm develops a particular philosophy and approach to their industry, which is reflected in the actual projects they develop. Some mitigation bankers respond to the many sources of uncertainty in mitigation banking conservatively: they choose to serve the market that exists, developing projects that are in close agreement with locally accepted practices in terms of size, location, approaches, and concepts. For example, they may only develop mitigation banks that are just large enough to meet immediate credit demand, thus reducing financing costs and the uncertainty of long-term credit demand. Other mitigation bankers become “market makers”: they develop novel types of projects in terms of location (new geographic service areas), scale (i.e., very large banks), or approach. For example, Restoration Systems in North Carolina pioneered the use of dam removal for stream mitigation banking, along with large-scale coastal restoration projects in Louisiana to mitigate levee-building projects by the Corps of Engineers. These types of novel mitigation banks require longer and more uncertain negotiations with regulators, and are thus more expensive and riskier. But they have less competition compared to standard approaches and practices, and thus the potential for higher rates of return.

Secondary Actors: Roles and Goals

Designers

There is a lot of consistency. . . . I won’t say rubber stamp, but many of the designs are very similar in their approach now anyway.13

Like any building or road, stream restoration projects must be designed. As described in chapter 3, stream restoration design firms originated in the 1980s, often serving private landowners or grant-funded projects. In a few cases, stream designers adapted their business model to become mitigation providers themselves, taking on the tasks described in the previous section. More commonly, a mitigation banker has a project concept, project site, and budget already in hand and then selects a designer. The banker and designer sign a contract laying out the deliverables the designer must provide. The designer then works with the banker to develop a concept for the restoration site, an actual design (subject to local standards of practice, if they exist), and construction specifications (e.g., design sheets, cost specifications, construction schedules). These are the types of documents and specific input that regulators consider as part of the MBI package (see chapter 6 for more detail). Once those documents are approved as part of the MBI negotiated between the mitigation banker and the regulators, the designer will develop implementation plans and, if also contracted for such work, oversee the actual construction of the project. The heart of the designer’s role is ensuring equivalence between the stream credits produced through the restoration project they design and the impacts that need to be to offset.

Like mitigation bankers, designers’ motivations initially appear to be completely economic: to meet the goals of their client—the mitigation banker—so that they get paid for their work and potentially hired again for other projects in the future. But again the picture here is more complex. Designers could have chosen to specialize in many different areas of engineering or construction; those who have chosen to focus on stream restoration almost to a person do so because they have a deep interest in streams and rivers. Further, they are bound by professional standards: like the designer of a bridge or a highway, their goal is not only to satisfy their client’s needs, but also to develop the most appropriate design for the particular setting based on then-existing professional standards of practice.14

An indication of this adherence to standards is that stream restoration designers typically do not alter their approach based on the client. If they were primarily focused on profit generation, they would use one approach for streams designed for mitigation banks and another for grant-based work, where profit is not a goal. Instead, designers insist, and data on constructed projects confirm, that they use the same design approach, with the same goal of restoring stream health, regardless of whether they are working for mitigation bankers, private clients, or government grants (see chapter 7).15 As one designer put it, “No, there are no real differences in the design process [between mitigation and grant-funded restoration projects]. . . . You take the same stuff into consideration as far as stream mechanics.”16 Or as three designers at another firm said, when we asked whether there was a difference in the designs they prepared for grant-funded vs. mitigation projects:

D1: No

D2: Not really . . .

D3: You’re still trying to get to the end product, the same end product.17

Even if designers tried to change their approach to squeeze more credits out of a particular site (often referred to as credit chasing), this departure from standard practice would raise red flags for regulators. In effect, the designer’s client is not simply the mitigation banker but also the regulator, without whose approval the project cannot proceed. The design cannot simply optimize ecological characteristics of the eventual stream, nor can it only optimize market returns for the banker; it must also optimize (or at least be efficient) its ability to pass regulatory review.

Over time, designers have come to use an approach that is the same for bankers as it would be for a grant- or NGO-funded project; broadly accepted standards of practice are forceful in what is acceptable as a stream design. Indeed, this reflects the additional role that designers have played: that of educator. Throughout many regions of the United States, stream designers were early entrants to the field of stream restoration, certainly well in advance of regulators and long before the rise of stream mitigation banking (see chapter 3). As regulators and new entrants became interested in, and compelled to understand stream restoration, a few prominent stream designers (e.g., Dave Rosgen, Inter-Fluve, and Will Harman) began developing short courses on stream restoration design (see chapter 3). Along with staff from consulting firms and agency personnel interested in moving into stream restoration, regulators were common attendants at such courses. Designers thus educated the rest of the stream restoration community, becoming the developers and purveyors of best practices. Regulators eventually drew on such courses in developing the standards of practice to be used in their jurisdiction (e.g., district or state), which then play a crucial role in negotiating Mitigation Banking Instruments. Thus, stream designers have leverage with bankers because designers are the ones with expertise on whether a particular design is appropriate or is overly influenced by profit seeking. In sum, because of their early role in stream restoration and mitigation, designers are, in many ways, the arbiters of how compensatory mitigation affects restored streams.

Scientists

There has been a lot of work done . . . in North Carolina and the Southeast on physical components of restoration, the channel morphology and width/depth ratio and sediment transport and all that sort of stuff. . . . [But] how do you know a project is in fact successful . . . ? By looking at the benthos, by looking at the aquatic insects. So I spent a great deal of time selecting projects and sampling the benthos and trying to develop success criteria . . . [that have] not been accepted by any of the regulatory agencies.18

Many of the people involved in stream mitigation banking are trained as scientists or engineers, and would describe themselves as scientists.19 We define the role of scientist more narrowly here: people who work for organizations whose role is the provision of data and interpretation only, and whose work is not drawn on for any specific mitigation transaction or negotiation. Thus, scientists as discussed here are those employed in academic or government research lab settings. Their focus is on studying streams, almost always without consideration of regulatory or market priorities.20 When they do pay attention to mitigation banking, scientists tend to be critics, as they are hyperaware of the pit of uncertainty over which stream restoration hangs, as well as the enormous challenges of claiming, much less creating, equivalence between physically distant aquatic ecosystems.

One central role of scientists in mitigation banking has been in shaping the thinking of regulators about what stream restoration is. The development of stream restoration from the discipline of geomorphology, and the lack of engagement through the early to mid-2000s by the academic ecological community (see chapter 3), meant that the regulatory community was primarily interacting with geomorphologists and hydraulic engineers. Negotiations about what would “count” as stream restoration thus centered primarily on channel form and on equilibrium, a key concept advocated in early geomorphic work on stream restoration.21 As the engineering and geomorphic scientific community engaged in stream restoration, early designers were largely drawn from this community. And this emphasis on the science of stability translated to designers emphasizing stability as criteria for successful stream restoration (see chapter 3). Thus, in the early development of stream mitigation, regulators were confronted by scientists emphasizing stability, and designers who could not only provide stable channel designs, but were also educating regulators on the benefits of such designs.22

While scientists have had some influence on regulators, they have been far less effective in their role as potential educators; that role has been seconded almost entirely to stream designers (as noted earlier).23 That said, when existing frameworks of restoration have become unworkable, scientists have been called upon as purveyors of expertise and education. For example, when a mitigation bank proposed to use dam removal as a mechanism for generating stream restoration credits, regulators were unable to draw on stream designers because most of them had little experience with such projects. Instead, regulators called in scientists to assist with thinking through how this new type of restoration might be grafted into the existing framework of mitigation banking. Similarly, when more mitigation banks were being proposed in the extraordinarily flat eastern region of North Carolina—the outer Coastal Plain—it became clear that existing policies (i.e., guidance documents) were less relevant in this unusual physiographic region, where fluvial systems were very unlike streams in the rest of the state (as well as areas where much of stream restoration practice was developed, e.g. the inter-Mountain west, Pacific Northwest, and California). Scientists were one of the groups that regulators called on to help develop new guidance:

In the work that XX and I did in the coastal plain, we met multiple times with . . . the Wilmington Corps District . . . [and] helped them devise some new language for the restoration of headwater streams. Because up to that point they had been applying definitions that were based on Piedmont and mountain systems where you needed a clearly visible valley, which doesn’t make any sense in a coastal plain. So we did get involved in how to delineate a stream in that kind of setting. . . . And it was really interesting sitting down at a conference beside the lead Army Corps decision maker who in the first meetings had been saying, “Oh well, these are the rules, we can’t change them.” And then a year and half later sitting down beside him at a stream restoration conference and somebody was talking about a curvy channel on the coastal plain, and he was saying, “That’s just silly, that’s not how streams look out there.” So we were able to actually . . . change minds (laughs). And that was a positive development.24

Another role of scientists has been to critique the practices and results of stream restoration, whether grant-funded or for mitigation banking.25 The predominance of a particular approach to restoration design—Natural Channel Design—drew the ire of many stream scientists, and led to long-term animosity between scientists and designers (i.e., practitioners). However, this was largely limited to the community of physical stream scientists, specifically geomorphologists (see chapter 3). As the broader scientific community—ecologists, water quality chemists—began to engage stream restoration, the claimed benefits and results of stream restoration came under increasing scrutiny. The academic community along with state and federal scientists began systematically studying restoration projects and raising questions about whether restoration as a practice was able to deliver on its presumed goals and ambitions, most notably the recovery of water quality improvements or aquatic insect community recovery. However, much of this science has not distinguished between restoration projects done for mitigation versus those for traditional mechanisms such as grant funding. That is, the engagement of the science community has been through the practice of restoration generally, not through mitigation banking specifically. Thus, scientists’ critiques have been primarily of stream restoration as a whole, not of mitigation banking in particular.

Regardless of the focus of scientists’ critiques, however, they have been largely ineffective once guidance documents are in place. Every scientist we interviewed described their input being ignored. For example, when a Southeastern state developed a new assessment technique for evaluating streams, they disregarded the critiques of a respected aquatic ecologist they asked to beta test it, who recounted:

I was part of the beta testing of XX method, and honestly didn’t think it was very good. I really had some heartburn and wrote a blazing response and I haven’t really heard much about where—I think it is going to be approved. . . . [M]y position was that we are in a great position to really collect some data, some real data, and [the new method] is . . . very qualitative, very subjective. And I just really hope that at this point we could have come up with something better. . . . I think they were so invested in the process that they couldn’t stop. They couldn’t just say, “Well, it didn’t work. Let’s just not do it.” They had to have something, and this is the product.26

Another stream scientist described being given funds to evaluate a particular agency’s projects, but then being ignored when the subsequent evaluations were negative:

I would say that [the agency] was pretty eager to have us doing evaluation of their projects. They gave us a little bit of money that got us started. But then there’s . . . no feedback. . . . [W]hen they find out that something isn’t working, it’s not really clear that anything happens at that point.27

Landowners

“Hey, I got a cow farm. Let’s do a mitigation bank.”28

All stream mitigation banking projects must be located somewhere. While this may seem like a mundane observation, it is surprisingly salient to the feasibility of mitigation banking as a whole because finding appropriate project sites is perhaps the most significant obstacle bankers face.29 Private landowners are not required to provide land for mitigation bankers. Even when they agree to do so, they rarely sell land outright; easements are more common so that the landowner retains the ability to access the land and use it for other purposes (e.g., hunting, fishing), and to ensure that the mitigation project does not compromise the traditional uses of the land. For instance, a farmer will want to ensure that a mitigation project does not negate their ability to clean culverts for roads that go over restored streams.

Sometimes landowners contact mitigation banking firms. Most of the time, however, it is the other way around. As one mitigation banker described it:

We sometimes get a phone call from a landowner, [who] says, “I’ve heard about this mitigation stuff. Could you please come out and look at my land.” Most of the time we look quickly at Google Earth, and it’s got like 20 acres and 400 feet of a stream, and we’re like “Yeah . . . no.” But every now and then we get a landowner that actually brings a project to the table. So that’s the one extreme. And then the other extreme [is when we have found a site and are trying to convince the landowner to work with us. We have an employee [who is] . . . really good at tracking down who’s who. He’ll call neighbors, find out who Joe Smith is. “Oh, he lives in Delaware and his cousin farms the property. And his cousin hangs out at Joe’s bar at 6 o’clock every night.” So he’ll go up there and go to the bar and find cousin Joe and . . . find out who the guy is in Delaware that he really needs to talk to. Other times, you can find their phone number and give them a call. Or you drive up to the site and he’s out there on his tractor, and you say, “Can I have a minute?” It’s amazing: most people are really nice, and totally willing to give you a few minutes to talk and hear you out. You don’t get near as much, “Son, I’ve got a gun. Get off my property” as you would think you would. But you get a lot of immediate no. Like they hear you for a minute and they’re like, “Nah, nah, not interested in that.”30

The goal of private landowners is to extract profit from their property at the least cost possible to themselves, and with the least encumbrance of their future land rights. They are unaffected by, and thus unconcerned with, the questions of equivalence and uncertainty at the heart of stream mitigation banking. But even with landowners the motivation is not entirely financial. Particularly when parcels have been in a family for some time, there are emotional attachments that can either support or undercut landowners’ willingness to sign on for a proposed project. For example, a mitigation banker described a “stream that was blown out, that needed restoration; a no-doubter. But there was one spot where for 50 [feet] it was fairly stable. But once you start restoring a whole system it’s really hard to leave one piece out, and there was this tree that hung over it with a swing and [the landowner’s] grandkids would swing into this pool.”31 In this case, the landowner didn’t raise the issue of preserving the swimming hole until it was too far into the process to stop, but in other cases, loss of a special stretch of stream can be a dealbreaker, regardless of the potential profit.

Investors

You go to the National Mitigation Banking Conference [these days], and there are more investors than practitioners. A lot of business meetings and discussions about return on your investment, not how to build a good mitigation site. It’s a big industry.32

Investors play a crucial but largely unrecognized role in mitigation banking. Their primary goal is to generate at least market-rate return on their capital, so financial uncertainty is their central concern. While “impact investors” committed to alternative/green investing opportunities have begun to invest in (i.e., finance) mitigation banks, most of the capital for stream mitigation banking is provided by investors who are far less interested in environmental than in financial returns or investing in alternative opportunities to diversify their portfolios.33 As one mitigation banker told us, investors are

guys that come in with private equity type money or they build a fund for ecosystem services. They want to see at least the projection for their returns to be anywhere from 15–25%. . . . [I]f you show ’em a pro forma that says, “Hey investor, we’re gonna need peak equity investment of $1.6m, and over the 7-year period of this project we’re projecting your rate of return is gonna be 12.7%,” they’re gonna be like, “No thanks. On a risky market like mitigation banking?!?”34

There are a wide variety of investors in mitigation banking. For small, relatively simple projects with short turnaround times (and thus less risk to capital), mitigation bankers have often obtained capital via loans from local financial banks. In this debt-financing approach, investors are shielded from the potential risks of mitigation banking: the mitigation banker must pay back the loan and interest regardless of whether he makes a profit. Traditional loans thus carry far lower interest rates than the equity finance model (discussion follows). The ability of a mitigation banker to secure such a loan is dependent on whether the investor understands the mitigation industry business model sufficiently to have some level of confidence that the loan will be repaid. Because of the novelty of mitigation as an industry, many financial banks won’t provide loans. Those that have made loans, however, are often willing to make a loan again in the future, as their familiarity increases their confidence. In fact, familiarity can come from a range of interactions between financial banks and mitigation banks. One mitigation banker noted that a local bank was more willing to finance a mitigation project after being required to purchase stream credits itself:

The traditional challenge of mitigation banking is the [financial] bank ain’t going to understand it. . . . I mean they ain’t ever done one of those. . . . [But we work with a financial bank that] had to pay a nutrient fee [for a new building] and they were aware of [mitigation requirements], some of the senior management. . . . They’re a small commercial [financial] bank here in [my state] and they’re building their new headquarters and they’d had to pay some 24,000 dollar thing [to compensate for their impacts]. I think it [that fee] went to us now that I [think about it], you know?35

Other mitigation bankers noted that they received investments from local investors, friends, family, or colleagues.

There are also more sophisticated larger investors who invest in big mitigation banking projects or provide the capital for multiple mitigation projects. Larger projects typically have long development or construction times, or both, and thus carry significant financial risks, which makes it more likely that mitigation bankers will have to rely on equity financing for projects. In equity financing, the investor gets a portion of the economic return from the mitigation bank, but also is exposed to all the risk of the venture as well. From the mitigation banker’s perspective, bringing in an outside investor can reduce the financial risk of a mitigation bank, but it also greatly dilutes the potential profit. As one mitigation banker described it:

You bring in an investor for one project, they’ll either reimburse what you got to that point (in this case everything we had pretty much done), give you that. You know, there’s usually some other money, it’s not just your costs. You’ll get a little . . . I guess you could call it profit at that point. But then when it [the mitigation bank] starts producing money every penny goes back to those people until they’re paid back, right? When they’re paid back then you start splitting the proceeds.36

In addition to small-scale local investment and larger equity investors, investing funds dedicated to mitigation banking have begun to emerge, most notably the fund raised by Ecosystem Investment Partners—$200 million—to be deployed in mitigation banking. In this approach, the investment fund is used to capitalize mitigation bank projects whether these are developing projects de novo or buying out existing (or partially developed) mitigation banks. The goal of the fund is to raise and then deploy capital on projects that can generate return for the investors. This means that the fund manager must identify projects that will not only be profitable, but that match the timeline for fund investors, often five to seven years.

Sources of Uncertainty for Actors

If you don’t have standards, then the ability of private capital to come in and start developing banks in expectation of future markets is really limited, because there’s, it’s so much risk. So standards are crucial to that, and quality standards to the long-term public acceptance of compliance of mitigation and offset programs as a realistic and viable compliance alternative. And if you don’t have standards, the public will lose trust and we’ll get those nasty reports in Newsweek and all the other places and while you may have had some people make . . . a lot of money, the effect on the environment will—we won’t realize all of the opportunity that we have right now to drive dollars that would otherwise be spent badly into being spent well.37

As this quote and the first half of this chapter illustrate, there are forms of uncertainty, and thus risk, for all of the actors in mitigation banking. If things go well, then investors and mitigation bankers can make money, permittees can proceed with projects, regulators can be confident of compliance, and the environment can be restored. But when things go awry, there can be a cascade of consequences; in such cases, there can be significant winners and losers. There are multiple sources of uncertainty embedded throughout the mitigation process, and many are interrelated. Here we consider regulatory, financial, implementation, reputational, ecological, and random uncertainties.

Regulatory uncertainty affects several groups of actors in different but highly interrelated ways. The regulatory uncertainty for permittees is that compliance with the CWA will be so unpredictable, time-consuming, or expensive that it substantively raises their costs or derails the entire project. Similarly, for bankers, regulatory uncertainty describes the possibility that regulators will take a long time to negotiate a Mitigation Banking Instrument or even refuse to approve a proposed bank, thus costing the mitigation bankers a great deal of money by extending the period of time before they can recoup their upfront costs, or simply rendering those costs unrecoverable. The risks associated with this uncertainty are greater if there are no specified standards guiding what is required in an MBI for approval, or if those standards are ambiguous.

Regulators are confronted with the flipside of these concerns: they face uncertainty as to how their two key partners in mitigation—permittees and bankers—will work under the constraints that regulators believe they need to impose. If permittees or bankers feel that they are being treated unfairly, then regulators face the risk of accusations of regulatory overreach or of litigation for arbitrary and capricious enforcement. Since part of their mandate is to make stream mitigation work for the regulated public, regulators are highly motivated to minimize regulatory uncertainty by making the process of CWA compliance as standardized and clear as possible. As one regulator in the Midwest put it:

[Now] there’s a set process and there’s a little more certainty. . . . People are more likely to take the risk if they know: “Okay, there’s not just this black box and we don’t know if this is gonna take five years.” . . . [I]t’s still time consuming, but at least they have a better idea of how it’s gonna go.38

In fact, the desire for certainty in the approval process discourages both bankers and regulators from proposing project types or approaches that fall outside accepted standards of practice. A regulator in the Southeast described this dynamic to explain why it has been so difficult to expand success criteria beyond physical stability to address chemical and biological factors:

If you go to a new technique there’s a certain risk of explaining it, and if you have somebody who is very versed in chemistry or aquatic biology, that’s a very easy thing for them to do. But if you have a project that’s administered by people that it’s not their field or discipline . . . , that’s very frightening.39

Similarly, a scientist described presenting data that mitigation projects were not creating ecological lift, and having a senior regulator override the presentation by saying that no permits had been delayed, sending the clear message that avoiding regulatory uncertainty was the most important criteria for success:

I got up and gave a presentation about . . . how we had yet to see a single restoration project in the state with demonstrable improvements in biological condition or any kind of ecological function. . . . This was a total of something like 35 or 40 evaluated projects. So a pretty comprehensive—and I was very careful in my tone and I talked a lot about how difficult it is and how we’ve really got to begin to get creative and then immediately after that, the director of [the lead agency] . . . began his presentation by saying that [his agency] was a complete success because [since] they had begun there had never been a single DOT [Department of Transportation] permit that had been slowed down by the mitigation requirement. And I said, “Oh, I guess I understand what the major criteria for this is.”40

For bankers and investors, multiple sources of uncertainty can create financial uncertainty, which is another crucial consideration. The costs of developing a mitigation bank are primarily upfront, while the returns typically are several years in the future. This long timeline exacerbates the unavoidable uncertainty about what price credits will bring when they are finally released, or if there will be any demand for them at all. As one banker described the financial uncertainty he faces, “a lot of money is gonna go into something and then you hope you’re gonna get it back. You’re pretty sure. . . . [Y]ou hope you’re gonna get it back fairly soon, but it could be longer.” He continued:

Starting to do mitigation banks is getting tougher because you’re putting out money a lot earlier, a lot more of it, it’s much more at risk, and then you’re waiting to get your credit release. Then you’re waiting to sell those credits. . . . When you’re doing mitigation banking the cost of capital, the risk cost is so much more.41

There is also a tremendous amount of uncertainty about the science and technology of restoration (see chapter 3), which leads to implementation uncertainty that the stream restoration project at the center of a mitigation bank might fail to meet the success criteria specified in the MBI. For regulators, this would be a disaster, as a failed project is very clearly not equivalent to the ecosystem services and functions provided at impacts sites. For bankers, project failure forces them to choose between losing credits (and thus profits) or going back to the project to make costly repairs.42 Bankers seek to control implementation uncertainty in part by carefully assessing where they locate their projects: part of bankers’ liking for headwater sites (discussed in more detail in chapter 7) is that such sites allow bankers to control what is flowing into their project. The greater the control, the less the potential for project failure, and thus implementation and reputational uncertainty (discussion of the latter follows).

Banker #1: If we have an unprotected stream coming in, that immediately is a big risk point for us.

Banker #2: Case in point [is] our XX project, you know. Adjacent upstream landowner built a pond, . . . and a totally huge amount of sediment came in and took out one of our trib[utarie]s. And there’s really no recourse. We lost all the credit for that tributary. And the landowner, I’m not sure if was ever decided whether they did anything wrong, illegal or not. That’s kind of a moot point. What happened, regardless: something occurred off-site and took out our stream.43

By contrast, larger streams are obvious sources of uncertainty and associated implementation risk because of that lack of control. Larger streams are more powerful (as a function of discharge) and can physically degrade very quickly. Also, they will be more heavily affected by tributaries and adjacent activities, as compared to small streams where much of the entire contributing watershed might be owned, and thus controlled, by the same landowner. As one banker succinctly put it, higher uncertainty and risk of failure are an inevitable part “of doing the big streams: . . . a lot more flow, a lot more shear stress, a lot more uncertainty on stability.”44

Bankers and designers also try to minimize reputational uncertainty by going to great lengths to avoid project failures or other actions that might cause regulators to distrust them. Designers must maintain their reputations within the mitigation banking community to ensure they continue to get work, and bankers must maintain their reputations to reduce regulatory uncertainty for future projects. Indeed, this is one of the interesting aspects of a regulatory market: credit providers care more about their reputation with regulators than with their customers (permittees). As one banker explained it, the IRT “trusts and respects what we do and so that goes a long way. If they [the IRT members] discover that you tried to . . . cut a corner or get around a rule and they lose that trust, I mean that sets you back years, so we never want to do that.”45 As the same banker noted in a later interview, they save their reputational capital for moments when they want to propose an action that “we believe in, . . . but we know it’s a little iffy for the IRT because it’s hard for them to go outside their box. But if we’ve . . . never tried to push it, if we’ve never tried to get one over on them, then they’re more likely to just have that trust in us. And so I feel like you save your political capital for that.”46

Compensatory mitigation is supposed to ensure equivalence between the ecosystem damaged and the one restored, and yet it’s not clear that we are any good at restoring fluvial systems. There is thus substantive ecological uncertainty about whether projects might fail to provide environmental improvement, or even cause degradation (see chapter 3). This is very much on the minds of many participants in mitigation banking. For regulators and scientists, ecological failure to meet their goals for stream mitigation banking undermines the whole premise of market-based approaches to environmental protection. For bankers and designers, ecological failure has a somewhat broader impact, carrying not only environmental, but also financial and reputational consequences. For investors, the consequences of ecological failure are primarily financial.

Where bankers, regulators, and designers depart from scientists is in how potential ecological degradation is measured: channel stability. As discussed earlier and in chapter 3, channel stability is used as a proxy measure for ecological degradation in stream mitigation banking. The result is an imperative to avoid physical change to the channel. For example, when we showed a mitigation banker two figures, one of which showed a view from above of the planform (i.e., alignment) of an unrestored stream, and one of which showed the planform of a stream restored for mitigation purposes, he immediately noted the potential for erosion (and thus channel instability) in the unrestored stream:

When I look at that [pointing to the two big irregular bends at the end of the unrestored stream plan] I look at the potential for erosion and a cut through. And that’s something that we would get dinged [for] with the IRT. This is a lot less risk averse than that [pointing to the large radius, very even meander bends on the mitigation figure] because [of] erosion. It’s just a shame that you can’t, that everybody views erosion as just a terrible thing when it’s a completely natural thing with streams. Again, until the success criteria gets shifted to where that is not a big deal, you’re going to see people staying away from it, which makes all the sense in the world.47

The key thing to note here is that the banker is well aware that a dynamic channel would be preferable, ecologically speaking, but cannot put that awareness into practice because of the current regulatory emphasis on stability. The banker could propose a project that would incorporate channel instability and associated ecological benefits, but this would introduce considerable regulatory uncertainty as the MBI would have to be based on new success criteria. And because of the novelty of the approach, the banker would be uncertain that the designer could actually achieve the stated goals of known/acceptable levels of channel migration and controlled instability. These regulatory and implementation uncertainties are simply too risky for a mitigation banker to take on when the existing approach already carries significant uncertainty.

From the point of view of regulators and scientists working for government agencies, the risk of ecological failure is particularly concerning, because their primary mission is environmental protection. Regulators will thus intervene if in their evaluation the ecological risk (and thus the uncertainty of achieving equivalence) is too high:

If we feel like it’s [the proposed sinuosity] inappropriate for whatever reason, then we can say, “Well, we’re not going to approve it because we think it’s too great a risk.” There’s a gray area in there where we may think it’s too much, but that’s where we let them go forward with it. It’s their risk to make a successful project. . . . Then there’s this kind of black area, where we know it’s not appropriate. And there’s risk to us, too, because we’re investing time and money in the mitigation plan to try to get compensatory credits on the market that we can use. So we don’t want to approve a project we know has problems. So there’s this kind of scale in there where we would say, “Hey, you might want to look at this. We think it’s too high.”48

The last form of uncertainty is a whole group of unpredictable aspects that are unavoidable in stream mitigation banking. These are the random uncertainties that participants in mitigation banking have to account for in their decisions in some way, from mercurial landowner behavior to extreme weather events such as hurricanes or droughts. We talked to one banker in early October 2015 when heavy rains had deluged the Southeast:

We have a project in construction right now in XX. In our rain gauge, which is there at the site, we have 24 inches of rain in the last five days. The project is 50% done in construction. It’s been underwater to the point that you don’t even know if the channel is still in existence. I mean, it’s [the water has] been 300 [feet] wide, probably 6 [feet] deep over the floodplain, for the last five days. When the water finally recedes we’re gonna go out there and see what’s left. I mean I’m taking it lightly right now but it’s frightening. It could be . . . $50,000–100,000 that we need to put back into the project just to get back to where we were.49

Conclusion

Collectively, the actors involved in stream mitigation banking make choices that create the practice of stream mitigation banking. There are significant trade-offs among the forms of uncertainty they face: it isn’t possible to minimize all types of uncertainty at the same time. Instead participants in stream mitigation banking have to choose which sources of uncertainty to try to counter and which to ignore, which has direct consequences for the equivalence between impact and restoration sites. For example, a mitigation banker described prioritizing financial uncertainty over ecological uncertainty in deciding how strongly to stabilize the banks of a new project:

There’s also the stability thing which is, I think, in the ecological interests of the . . . site, . . . [and] is also in our economic interests. We do not want to return to it [to a restored site to repair damage]. We do not want it to look ugly, right? . . . The biggest problem now . . . is gun-shy engineers probably giving you the right sinuosity but building a plank road down the thing . . . literally with logs running down the whole thing, you know? . . . And we just got another like that down there and we told them. . . . “[C]ool it, man. We’ll take the risk.” We’ll take the risk of it blowing out before we’ll take the expense of the armoring. . . . Cause the armoring is very, very . . . expensive.50

In creating a particular stream mitigation bank, in a particular place, over a particular time period, the actors make choices about which types of uncertainty to emphasize, and thus about whether ecological equivalence will be prioritized or not. A series of events, actions, and decisions have to be made as part of any mitigation bank. These are what take mitigation banking from theory to practice, and it is to those realities that we now turn.