Entrepreneurs jump-start market-based cleanup system

CRANSTON'S MILL POND, Va. -- There are signs of success at last in the long, hard push to restore the Chesapeake Bay.

Crab populations are rebounding. Restored oyster reefs are taking hold. And dead zones -- areas so devoid of dissolved oxygen that they cannot support aquatic life -- are shrinking slightly.

But federal and state budget problems pose a threat to the cleanup. Budget cuts have forced a search by bay advocates for ways to draw private money into the massive environmental restoration.

And that's why so much depends on a 50-acre impoundment hidden in woods here 45 miles east of Richmond.

Cranston's Mill Pond looks like a handsome, hidden fishing spot, but it's a nutrient offset bank, one of the first for-profit projects aimed at keeping excessive nitrogen and phosphorus out of the bay -- considered key to restoring water quality across the 64,000-square-mile bay watershed.

This is how it works: The offset bank developers -- in this case Richmond, Va.-based Chesapeake Bay Nutrient Land Trust (CBNLT) and Raleigh, N.C.-based Restoration Systems LLC -- perform an environmental restoration project designed to reduce nutrients washing into the bay from farmland, lawns, roads or parking lots.

In return, regulators grant the bankers a certain number of nutrient credits. Each credit represents 1 pound of phosphorus and 2 pounds of nitrogen that would otherwise flow into the bay or its tributaries every year.

Credits can be resold -- typically to developers or government agencies that are required under stormwater regulations to reduce or offset every pound of pollution that will be generated by their construction projects.

The table was set for Cranston's Mill Pond to be turned into a nutrient offset bank in 2006, when Hurricane Ernesto breached the earthen dam and spillway that had for decades kept water in the pond, a pollution sink for a surrounding 5,000 acres.

When the dam failed, that built-up pollution, as well as any new pollution from the surrounding land, flowed freely down Yarmouth Creek to the Chickahominy River and into the James River -- a major tributary of the Chesapeake Bay.


In 2009, CBNLT and Restoration Systems bought the property, rebuilt the 100-foot dam and spillway to modern specifications, and essentially cauterized what had been a wound bleeding pollution.

Regulators awarded them 752 nutrient pollution credits, each listed at $19,000, or $14 million for the whole lot.

"All it took is $1.8 million, and you, too, can try it!" said Brent Fults, CBNLT's heavyset, gregarious managing partner.

Easy money, right? But there's a big problem. So far, nobody's buying.

Only 8 pounds of phosphorus credits have been sold in four separate transactions. Fults and his partners attribute slow sales to sluggish real estate development across the vast James River watershed, where they are eligible to sell their offsets.

Few potential credit buyers understand the system, Fults said; otherwise, they would jump at the chance to pay $19,000 for an offset credit versus paying $30,000 to $50,000 to collect and treat dirty stormwater with underground storage tanks and filtration systems.

"It's the 'Field of Dreams' approach," Fults said the business. "Field of Dreams" refers to the 1989 movie about an Iowa farmer who turns his cornfield into a baseball field in response to a voice in his head that says, "If you build it, he will come." And "he" -- the long-dead baseball player Shoeless Joe Jackson -- indeed shows.

Fults and his partners are confident that similar good fortune awaits them. Fults says he monitors building permits across the region -- each represented by 7,000 data points on a map. That research, he says, helps him forecast and pursue what he says will be a strong market for their nutrient offsets.

"It's a risk, but it's an educated risk," he said.

But CBNLT and Restoration Systems are also working hard to spread good words about their project.

They are pushing, with help of key lawmakers and Obama administration officials, to land a big fish whose patronage could change their fortunes -- and those of the fledgling industry -- almost overnight.

That big fish is the Department of Defense.

'How are we going to pay for it?'

Combating water pollution in the Chesapeake Bay and elsewhere by allowing companies to generate, buy and sell credits for profit has broad support on both sides of the aisle in Congress and among farm, industry and environmental groups alike.

It also has strong support inside the Obama administration.

In his 2009 executive order for the cleanup of Chesapeake Bay, President Obama instructed federal officials "to apply innovative and cost-effective pollution control measures" to the problem.

Federal agencies responded with an action plan that said "USDA, EPA, bay states and other federal partners will develop environmental markets for the Chesapeake Bay."

But the concept of credit trading across environmental markets is also controversial (Greenwire, May 8).

Some environmentalists question whether there are adequate checks to ensure that restoration efforts that yield pollution credits actually produce real benefits to the environment and to water quality.

"Trading sounds ideal on paper, but in practice it is an entirely different story," the left-leaning Center for Progressive Reform wrote in a recent white paper criticizing the idea.

The group argues that oversight mechanisms for such a system are untested and that poor and minority communities could suffer from trading. Polluting facilities in cities, for example, could purchase credits for restoration in far-flung rural areas while they continue to pollute.

"EPA and state governments have simply not had the necessary experience to fine-tune this pollution control tool," the center wrote (E&ENews PM, Aug. 15).

Two groups, Food and Water Watch and Friends of the Earth, announced last week that they were filing a lawsuit aimed at stripping trading provisions from the Chesapeake Bay cleanup plan (Greenwire, Oct. 3).

Jeff Corbin, EPA's senior adviser for the Chesapeake Bay and Anacostia River, is less pessimistic. He says credit trading will not be the entire solution.

"It's going to be part of it," he said. "Some people call this a silver bullet. It's not."

But Corbin echoes what many boosters hold out as the biggest selling point of trading: that it could attract much-needed private investment to the Chesapeake Bay cleanup, a project that is going to stretch on decades longer and cost billions of dollars more, assuming Congress doesn't cut off the money.

"Right now, the biggest question is how are we going to pay for it?" Corbin said. "So when I see people saying, 'We'll do it as long as we can turn a profit on it' -- what's not to support about that?"

Corbin and Fults know each other from Richmond, where Corbin once lobbied in the Legislature for the nonprofit Chesapeake Bay Foundation for the bill that eventually enabled water-quality trading in Virginia.

Fults, meanwhile, lobbied on the same issues as he tried to open doors for the environmental mitigation business.

Corbin later became assistant secretary of natural resources under former Gov. Tim Kaine (D).

Earlier this year in May, at a well-attended briefing on Capitol Hill about the potential cost savings that nutrient pollution credit trading could bring to Chesapeake Bay restoration, Corbin singled out Fults as one of the few in the private sector who had proved willing to take the investment plunge.

"I give him a lot of credit," Corbin said in an interview. "He's the first one to get a bank up and running, and he's playing by all the rules."

Hill, agency ties

It will likely take more than a rebound in the real estate industry for CBNLT and Restoration Systems to cash in on their investment.

It will require the marketplace to gain some certainty -- certainty that the credits they are selling are real and permanent and not just a financial or regulatory gimmick.

What could help the entrepreneurs gain credibility: a bulk sale of credits to the federal government.

"People really want to see some sign from above that this is real, this is good, this is gonna happen," Corbin said. The sale of a pile of credits to the federal government "would send a very strong public signal to the market that these are real."

Fults says that there are about 100 active military installation construction projects at any given time within their credit service area. Those projects, he says, have a need for as many as 250 nutrient pollution credits both now and in the near future.

So far, however, the Pentagon has balked.

When explaining how his nutrient offset bank works to regulators, Fults uses giant sheets of cardboard that he has covered in diagrams, flowcharts, statistics and bullet points -- all hand-drawn in colored marker. Fults proudly calls them his "hillbilly boards."

The cardboard looks like a high school science fair display but reads like a peer-reviewed study. Washington types often compliment him, he says, for avoiding PowerPoint, the Microsoft presentation software that is ubiquitous at meetings.

But Fults' shtick belies a shrewd inside game. In addition to Fults' connections in Richmond and at EPA, the principals at Restoration Systems have ties on Capitol Hill.

The company's principals, John Preyer and George Howard, both worked on the Hill for former Sen. Duncan "Lauch" Faircloth (R-N.C.). Faircloth, who became a Republican after 40 years as a Democrat, also served as North Carolina's secretary of commerce and unsuccessfully ran for governor. Howard worked as Faircloth's legislative assistant on the Senate Environment and Public Works Committee and Preyer as his legislative director.

Using their Hill connections, the two are pushing to overcome what one of their supporters, Rep. Walter Jones (R-N.C.), called "bureaucratic inertia" standing in the way of "obvious benefits."

Those benefits, Sens. Mark Warner (D-Va.) and Kay Hagan (D-N.C.) said in an April letter to Navy Secretary Ray Mabus, are the "significant potential savings" that could be realized through the purchase of nutrient offset credits.

Jones noted in his letter that Deputy Assistant Secretary of the Navy Don Schregardus "has been exploring the 'pooled purchase' of nutrient offsets that could result in significant savings" when compared with on-site stormwater treatment systems.

"However, like any new product, no matter how compelling its benefits, 'the system' is often slow to embrace a new concept over more traditional ones even though they are more expensive and less efficient," wrote Jones, who received $2,500 in contributions from Restoration Systems in 2012, according to the nonpartisan Center for Responsive Politics.

Navy says it has no plans to buy credits

In an emailed response to questions provided to Schregardus, the Navy said it "is not considering a bulk nutrient credit purchase."

"Complying directly with Virginia's stormwater regulations and requirements precludes the need for [the Department of the Navy] to purchase nutrient credits," the statement said. "Federal statutory authority is not available and would need to be enacted before the DoN could participate in any nutrient trading programs."

The Navy also said that while buying credits "appears at face value to be the lowest cost option for reducing phosphorus," it would not meet other requirements to reduce volume, temperature, rate of runoff and nitrogen load in Virginia regulations, Navy policy, and the Energy Independence and Security Act.

The Navy "has not identified a need to purchase nutrient offset credits," the agency said.

Fults and Preyer said the Navy response shows a fundamental misunderstanding of the savings their credits could provide.

Fults said meeting Virginia's water quality requirements often requires building systems for dealing with water quantity -- underground storage tanks or settling ponds -- much larger than they would otherwise have to be built. That, he said, is a waste of government land and money.

Preyer said the real problem was a bureaucracy stuck in old, inefficient ways.

"It is shameful," he said, "that the U.S. Navy, when confronted with an opportunity to save money, is unwilling to do so, and then invents rationales that are not, in this case, the truth to avoid having to do something different than the way they are doing it thus far."

Fults and Preyer are assembling records to continue to press their case.

In the meantime, they say interest in nutrient credits from private-sector buyers has picked up in recent weeks. And they continue to explore deals with other government agencies.

"We're looking at everyone that's a big potential customer," Preyer said. "That includes the Navy. But there are others."

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