No. 13-599

In the

Supreme Court of the United States__________

MINGO LOGAN COAL COMPANY,Petitioner,

v.

UNITED STATES ENVIRONMENTAL

PROTECTION AGENCY,Respondent.

__________

On Petition for a Writ of Certiorarito the United States Court of Appealsfor the District of Columbia Circuit

__________

BRIEF OF NATIONAL ASSOCIATION OFMANUFACTURERS, AMERICAN ROAD AND

TRANSPORTATION BUILDERS ASSOCIATION,ASSOCIATED GENERAL CONTRACTORS OF

AMERICA, ASSOCIATION OF AMERICANRAILROADS, THE FERTILIZER INSTITUTE,AMERICAN SOCIETY OF CIVIL ENGINEERS,

ET AL. AS AMICI CURIAEIN SUPPORT OF PETITIONERS

[Additional amici listed on inside cover]__________

KATHRYN KUSSKE FLOYD

Counsel of RecordJAY C. JOHNSON

VENABLE LLP575 7th Street, NWWashington, DC 20004(202) 344-4000kkfloyd@venable.com

Counsel for Amici Curiae

December 16, 2013

ADDITIONAL AMICI CURIAE:

AMERICAN COALITION FOR CLEAN COALELECTRICITY, METALS SERVICE CENTER

INSTITUTE, AMERICAN COATINGSASSOCIATION, MARCELLUS SHALE COALITION,

LIGNITE ENERGY COUNCIL, INDUSTRIALFASTENERS INSTITUTE, COUNCIL OF

INDUSTRIAL BOILER OWNERS, NATIONALOILSEED PROCESSORS ASSOCIATION,PRESSURE SENSITIVE TAPE COUNCIL,AMERICAN COUNCIL OF ENGINEERING

COMPANIES, AMERICAN FUEL & PETROLEUMMANUFACTURERS, AND ASSOCIATED

EQUIPMENT DISTRIBUTORS

TABLE OF CONTENTSPage

TABLE OF AUTHORITIES ...................................... iii

INTEREST OF AMICI CURIAE................................ 1

INTRODUCTION ....................................................... 7

ARGUMENT............................................................... 9

I. EPA’s claim to unconstrained authority underSection 404(c) will harm the economy .................. 9

A. EPA’s actions have undermined theexpectations of project proponents .................. 9

B. Increasing permit uncertainty will reduceeconomic investment...................................... 12

II. The decision below will stymie investment inareas where it is desperately needed............... 14

A. EPA’s asserted Section 404(c) authority willdisrupt vital infrastructure projects.............. 15

B. If EPA can nullify already-issued permits, itwill strongly deter private investment.......... 16

CONCLUSION.......................................................... 20

CONTENTS OF THE APPENDIX

Page

Appendix A

Economic Incentive Effects of EPA’sAfter-the-Fact Veto of a Section 404Discharge Permit Issued to Arch Coal..................1a

ii

Appendix B

Testimony of Nancy K. Stoner, Acting AssistantAdministrator, Office of Water, United StatesEnvironmental Protection Agency..................... 27a

Appendix C

Letter from William C. Early, Acting RegionalAdministrator, U.S. EPA, to ColonelRobert D. Peterson, District Engineer, HuntingtonDistrict, U.S. Army Corps of Engineers(Oct. 16, 2009)..................................................... 40a

Appendix D

EPA Proposes Veto of Mine Permit Under theClean Water Act ................................................. 51a

Appendix E

2013 Report Card for America'sInfrastructure ..................................................... 54a

Appendix F

Failure to Act: The Impact of CurrentInfrastructure Investment on America’sEconomic Future................................................. 64a

iii

TABLE OF AUTHORITIESPage

Cases

Rapanos v. United States,547 U.S. 715 (2006)............................................ 7, 14

Statutes

33 C.F.R. § 325.7(a)................................................... 10

33 C.F.R. § 325.2(b)(1) .............................................. 10

33 C.F.R. § 325.3(d) .................................................. 10

33 U.S.C. § 1344(a) ..................................................... 9

Regulations

40 C.F.R. § 230.10..................................................... 10

Other Materials

Amy Oxley, No Longer Mine: An ExtensiveLook at the Environmental ProtectionAgency’s Veto of the Section 404 Permit Heldby the Spruce No. 1 Mine, 36 S. ILL. U. L.J.139, 147 (2011)....................................................... 11

ASCE’s 2013 Report Card for America’sInfrastructure..................................................... 3, 15

Economic Incentive Effects of EPA’s After-the-Fact Veto of a Section 404 Discharge PermitIssued to Arch Coal ............................................... 12

Failure to Act: The Impact of CurrentInfrastructure Investment on America’sEconomic Future .................................................... 16

INTEREST OF AMICI CURIAE1

The National Association of Manufacturers(“NAM”) is the nation’s largest industrial trade asso-ciation, representing small and large manufacturersin every industrial sector and in all 50 states. NAM’smission is to enhance the competitiveness of manu-facturers by shaping a legislative and regulatory en-vironment conducive to U.S. economic growth and toincrease understanding among policymakers, themedia and the general public about the vital role ofmanufacturing to America’s economic future and liv-ing standards.

The American Road and Transportation BuildersAssociation (“ARTBA”)’s membership includes publicagencies and private firms and organizations thatown, plan, design, supply and construct transporta-tion projects throughout the country. ARTBA’s in-dustry generates more than $380 billion annually inU.S. economic activity and sustains more than 3.3million American jobs.

Established in 1918, the Associated General Con-tractors of America (“AGC”) is the leading associationin the construction industry. In conjunction with itsnationwide network of 93 chapters, AGC represents

1 Pursuant to Supreme Court Rule 37.6, counsel for amici

represent that they authored this brief in its entirety and thatnone of the parties or their counsel, nor any other person or en-tity other than amici, their members, or their counsel, made amonetary contribution intended to fund the preparation orsubmission of this brief. Pursuant to Rule 37.2(a), counsel foramici represent that all parties were provided notice of amici’sintention to file this brief at least 10 days before its due date.Counsel for Mingo Logan Coal Co. has given its blanket consentto the filing of amicus briefs. Counsel for the EnvironmentalProtection Agency consented via a letter that is on file with theclerk.

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and serves nearly 30,000 of the leading firms in theconstruction industry—including general contractors,specialty contractors and service providers and sup-pliers. Collectively, these firms account for much ifnot most of the public and private infrastructure onwhich the remainder of the nation’s economy has todepend. Their critical work both sustains and en-hances the nation’s productivity and its quality oflife.

The Association of American Railroads is a tradeassociation whose membership includes freight rail-roads that operate 82 percent of the line-haul mile-age, employ 95 percent of the workers, and accountfor 97 percent of the freight revenues of all railroadsin the United States, as well as passenger railroadsthat operate intercity passenger trains and providecommuter rail service. As a group, the railroad in-dustry in the United States operates over approxi-mately 140,000 miles of right-of-way.

The Fertilizer Institute (“TFI”) represents the na-tion’s fertilizer industry. The producers, manufac-turers, retailers, trading firms and equipment manu-facturers that comprise TFI’s membership are servedby a full-time Washington, D.C. staff in various legis-lative, educational and technical areas, as well aswith information and public relations programs.

Founded in 1852, the American Society of CivilEngineers (“ASCE”) represents more than 145,000members of the civil engineering profession world-wide and is America’s oldest national engineering so-ciety. ASCE’s mission is to provide essential value toits members and partners, advance civil engineering,and serve the public good. As part of this mission,ASCE is committed to protecting the health, safetyand welfare of the public, including through the im-

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provement of the nation’s infrastructure. ASCE’s2013 Report Card for America’s Infrastructure pro-vides the most comprehensive and clear picture ofthe state of infrastructure in the United States.

The American Coalition for Clean Coal Electricity(“ACCCE”) is a partnership of the industries involvedin producing electricity from coal. ACCCE recognizesthe inextricable link between energy, the economyand the environment, and supports policies that en-courage the use of coal to ensure a reliable and af-fordable supply of electricity that meets our nation’sgrowing demand for energy.

More than 100 years strong, Metals Service CenterInstitute (“MSCI”) is the broadest-based, not-for-profit association serving the industrial metals in-dustry. As the premier metals trade association,MSCI provides vision and voice to the metals indus-try, along with the tools and perspective necessaryfor a more successful business.

The American Coatings Association (“ACA”) is avoluntary, nonprofit organization working to advancethe needs of the paint and coatings industry and theprofessionals who work in it. Through advocacy ofthe industry and its positions on legislative, regula-tory and judicial issues at all levels of government,the ACA acts as an effective ally in ensuring that theindustry is represented and fairly considered. ACAalso devotes itself to advancing the industry throughproduct stewardship, focuses on advancements inscience and technology, and offers essential businessinformation to its members.

The Marcellus Shale Coalition (“MSC”) was formedin 2008 and is currently comprised of approximately300 producing and supply chain members who arefully committed to working with local, county, state

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and federal government officials and regulators tofacilitate the development of the natural gas re-sources in the Marcellus, Utica and related geologicalformations. MSC members represent many of thelargest and most active companies in natural gasproduction, gathering and transmission in the coun-try, as well as the suppliers, consultants and contrac-tors who serve the industry. MSC member compa-nies have a steadfast commitment to strengthencommunities by making the region a better place tolive, work and raise families—for present genera-tions and for future generations.

The Lignite Energy Council is a trade associationrepresenting North Dakota’s lignite mines, whichproduced 27.5 million tons of lignite in 2012, alongwith nine lignite-based power plants, the DakotaGasification Company’s synfuels plant and morethan 375 companies that supply goods and servicesto the regional lignite industry.

The Industrial Fasteners Institute (“IFI”) repre-sents the North American Manufacturers of the nuts,bolts, screws, pins, rivets and other cold formed partsthat hold together almost everything we drive, fly,work with, work on, live and work within, drive overand use in everyday life. The IFI represents about85% of the production capacity for these products.

The Council of Industrial Boiler Owners (“CIBO”) is abroad-based association of industrial boiler owners, ar-chitect-engineers, related equipment manufacturers,and University affiliates with members representing 20major industrial sectors. CIBO members have facilitiesin every region of the country and a representative dis-tribution of almost every type of industrial, commercialand institutional (“ICI”) boiler and fuel combinationcurrently in operation. Since its formation, CIBO has

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been active in the development of technically sound,reasonable, cost-effective energy and environmentalregulations for ICI boilers.

The National Oilseed Processors Association(“NOPA”) is a national trade association that repre-sents 13 companies engaged in the production offood, feed, and renewable fuels from oilseeds, includ-ing soybeans. NOPA’s member companies processmore than 1.6 billion bushels of oilseeds annually at63 plants located in 19 states throughout the coun-try, including 57 plants that process soybeans.

The Pressure Sensitive Tape Council (“PSTC”) is aNorth American trade association representing pres-sure sensitive adhesive tape manufacturers and theiraffiliate suppliers. PSTC members produce over 90%of the $10 billion dollars of pressure sensitive adhe-sive tapes sold in North America. PSTC provides ed-ucation and training, works with ASTM and globaltrade organizations to harmonize test methods, andmonitors legislative and regulatory activities that af-fect this important industry.

The American Council of Engineering Companies(“ACEC”) is the national nonprofit trade associationof the engineering industry, representing more than5,000 firms throughout the country. Founded in1909, the Council's mission is to advance America’sprosperity, health, safety and welfare through legis-lative advocacy and business education services onbehalf of the engineering industry. ACEC is orga-nized into 51 state and regional member organiza-tions. Member firms employ more than 500,000 en-gineers, architects, surveyors, scientists, and otherspecialists, responsible for more than $200 billion ofprivate and public works annually.

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The American Fuel & Petrochemical Manufactur-ers (“AFPM”) is a national trade association of morethan 400 companies, including virtually all U.S. re-finers and petrochemical manufacturers. AFPMmembers operate 122 U.S. refineries comprising ap-proximately 98% of U.S. refining capacity. AFPMpetrochemical members support about 1.4 millionAmerican jobs, including about 214,000 employed di-rectly in petrochemical manufacturing plants.

Associated Equipment Distributors (“AED”) is thetrade association representing independent, factory-authorized companies involved in the distribution ofconstruction, mining, forestry, energy, industrial,and power generation equipment in the U.S. andCanada. AED’s U.S. dealer members employ approx-imately 47,000 people at more than 2,800 facilities.The estimated $27 billion that U.S. AED membersearn annually from equipment sales, rental, andproduct support generates $86 billion in direct, indi-rect, and induced economic activity nationwide.

Amici and their members are both directly and in-directly affected by federal policies and regulationsgoverning the issuance of Clean Water Act Section404 permits. They regularly engage in a variety ofactivities that require compliance with Section 404permits. They also rely on facilities and infrastruc-ture that operate pursuant to their own Section 404permits. The Environmental Protection Agency(“EPA”)’s unprecedented nullification of a previouslyissued permit has upended the Section 404 permit-ting process, making it more difficult for amici andtheir members to rely on the Clean Water Act per-mits they need to conduct a wide range of economi-cally beneficial activities and to accomplish environ-mental objectives through mitigation.

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INTRODUCTION

Permits issued by the U.S. Army Corps of Engi-neers under Section 404(a) of the Clean Water Acthave long balanced the general interest in protectingthe natural environment with the important econom-ic benefits generated by public and private invest-ment. The Section 404 permitting program authoriz-es hundreds of billions of dollars of investment eachyear, while at the same time requiring permittees toavoid, minimize and mitigate the adverse environ-mental effects of their activities. The program ac-complishes these goals through consistent applica-tion of detailed regulations promulgated by the Corpsand careful compliance with EPA guidelines. Alt-hough “[t]he burden of federal regulation” created bythis permitting regime is surely “not trivial,”amounting to more than $1.7 billion in total costsannually (Rapanos v. United States, 547 U.S. 715,721 (2006)), it has the cardinal virtue of providingpermittees with certainty that compliance with theirpermit means compliance with the law.

EPA’s actions and arguments in this case, as af-firmed by the court below, would overthrow the Sec-tion 404 permitting program as it currently exists,sowing uncertainty among both current permit hold-ers and potential investors whose projects are criti-cally dependent on Section 404 permits. Until it “ve-toed” the Section 404 permit that the Corps had is-sued to Petitioner Mingo Logan Coal Company fouryears earlier, EPA had always played an important,but subsidiary, role in the Section 404 permittingprocess. Now, relying on subsection 404(c), EPA hasset itself up as the unfettered overseer of all Section404 permits, past, present and future.

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EPA’s stunning, newfound authority to nullify aSection 404 permit, even years after it issues, inar-guably increases the regulatory risks faced by publicand private permit applicants. Some number of pro-ject proponents who were previously situated on themargins of the benefit-cost calculation will inevitablybe pushed away from pursuing their plans by thepossibility that EPA will override a Corps permittingdecision. In an effort to quantify this effect, amicidraw on the work of economist David Sunding todemonstrate that even a small risk of adverse EPAaction against a permit dramatically decreases a pro-ject’s benefit-to-cost ratio. As a result, projects thatwould have been built under the existing regime willbe delayed or completely abandoned, causing bothdirect and downstream economic losses.

EPA intends its extraordinary revision to thelongstanding Section 404 permitting regime to applyimmediately and everywhere. The Agency’s websitealready proclaims that its “Section 404(c) authoritymay be exercised before a permit is applied for, whilean application is pending, or after a permit has beenissued.”2 Indeed, EPA’s interpretation of Section404(c) would give it broader authority over already-issued permits than is retained by the Corps, whichaccounts for the permittee’s reliance interests beforemodifying, suspending or revoking a permit. Thispower grab by EPA will significantly reduce invest-ment by creating uncertainty for current and futureSection 404 permittees. It should not be allowed tostand without this Court’s full consideration.

2 See Section 404(c) “Veto Authority” Factsheet, available atwater.epa.gov/lawsregs/guidance/cwa/dredgdis/upload/404c.pdf.

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ARGUMENT

I. EPA’s claim to unconstrained authority un-der Section 404(c) will harm the economy.

Section 404(a) of the Clean Water Act authorizesthe Secretary of the Army to “issue permits . . . forthe discharge of dredged or fill material into the nav-igable waters at specified disposal sites.” 33 U.S.C.§ 1344(a). The Corps, as the Secretary’s delegatee,issues approximately 60,000 discharge permits underSection 404 every year, facilitating an estimated$220 billion of investment in the U.S. economy.App.2a. These investments run the gamut of eco-nomic activity, from vital infrastructure such asroads, pipelines and rail lines, to renewable energyprojects like wind farms and solar arrays, to private-ly owned manufacturing facilities and agriculture re-lated businesses. For the reasons discussed below,EPA’s new claim of authority to disregard reasonableand settled expectations by interfering with theCorps’ permitting process for these investments willhave a direct, adverse effect on the U.S. economythat is worthy of the Court’s attention.

A. EPA’s actions have undermined the ex-pectations of project proponents.

The foundation of a good permitting regime is pre-dictability. The Corps has been permitting projectsunder Section 404 of the Clean Water Act for morethan four decades. As part of its permitting process,the Corps complies with detailed regulations that de-scribe the substantive and procedural requirementsfor obtaining a Section 404 permit. See generally 33C.F.R. Parts 323, 325. In addition, the Corps mustadhere to regulations promulgated by EPA that spe-cifically allow the Corps to consider economic practi-cability when weighing the environmental effects of a

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permit. See, e.g., 40 C.F.R. § 230.10. Importantly,the Corps’ regulations explain the circumstances un-der which a permit may be modified, suspended orrevoked—including, among other things, considera-tion of the permittee’s compliance with the permitterms, and the extent to which a change in the per-mit would adversely impact the permittee’s plans,investments or actions. 33 C.F.R. § 325.7(a).

EPA’s role in the Corps’ Section 404 permittingprocess, which is also well defined by regulation, pro-vides ample opportunity for the Agency to voice itsobjections before a permit issues. See, e.g., 33 C.F.R.§§ 325.2(b)(1); 325.3(d). In addition, EPA and theCorps are parties to a Memorandum of Agreementthat provides a framework for the formal resolutionof EPA’s objections, as well as the exercise of EPA’spower to withdraw a disposal site specification pur-suant to subsection 404(c)—again, before the permitissues. The expectations of permit applicants werebuilt around the costs and risks of these regulatoryprovisions, until EPA acted against the permit at is-sue in this case.3

When EPA decided that it could rely on subsection404(c) to nullify an already-issued permit, it com-

3 EPA asserts that it has withdrawn just 13 disposal specifi-cations since the passage of the Clean Water Act, but the num-ber of times the Agency has formally acted under Section 404(c)represents a “miniscule fraction” of the instances in which ithas “resolved issues” by threatening to act. App.33a. So even ifEPA generally refrains from exercising its Section 404(c) au-thority against already-issued permits in the future, the threatof such authority will still upset the regulatory balance by in-creasing EPA’s influence during—and after—the permittingprocess. Furthermore, if EPA has the power to nullify a permitafter it issues, opponents of the permitted project will have anongoing incentive to lobby for EPA action, removing any sem-blance of finality for the permit holder.

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pletely overthrew the settled understanding of howthe Section 404 permitting regime worked. As EPAitself acknowledged prior to taking action in thiscase, the Agency had “never before used its Section404(c) authority to review a previously permittedproject . . . .” App.42a (emphasis added). The EPApress release announcing the proposed “veto” of Min-go Logan’s Section 404 permit likewise proclaimedthat the Agency had “never” used its Section 404(c)authority against “a previously permitted project.”App.52a. Yet, in the court below, EPA took theastounding position that it can “withdraw any speci-fication” at any time, including after permit issuance,simply by making “the requisite adverse-effect de-termination.” EPA C.A.Br. at 28 (emphasis added);see id. at 30.

Perhaps recognizing the significance of such adramatic change in the regulatory regime, EPA hasargued in the course of litigation that there havebeen other instances in which it exercised its subsec-tion 404(c) authority against existing Section 404permits. Amici disagree with EPA’s convenient rein-terpretation of those other actions.4 But those finedistinctions are ultimately beside the point. AsEPA’s contemporaneous statements clearly establish,the Agency’s action against the permit issued toMingo Logan represents, at the very least, the firstwide public airing of EPA’s alleged authority to nulli-

4 A 2011 law review comment observed that “[o]nly one of theEPA’s previous twelve vetoes has been used after the issuanceof a section 404 permit. Even in that instance, the veto cameonly when the permit was being modified to allow garbage to bethe fill material for the project.” Amy Oxley, No Longer Mine:An Extensive Look at the Environmental Protection Agency’sVeto of the Section 404 Permit Held by the Spruce No. 1 Mine,36 S. ILL. U. L.J. 139, 147 (2011).

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fy already-issued Section 404 permits by “withdraw-ing” a disposal site specification “at any time.” Con-sequently, this is the case that has unsettled theregulated community’s long-held expectations aboutthe Section 404 permitting process.

B. Increasing permit uncertainty will re-duce economic investment.

Uncertainty is the archenemy of project develop-ment. As Professor Sunding explains, “[p]roject de-velopment usually requires significant capital ex-penditure over a sustained period of time, afterwhich the project generates some return.” App.10a.5

One difficulty with projects that require large, up-front expenditures before their benefits can be real-ized is that actions that “increase uncertainty” will“raise the threshold for any private or public entity toundertake the required early-stage investment.”App.10a. Because projects with these characteristicsoften require the project proponent to secure a Sec-tion 404 permit, “EPA’s action [in this case] has achilling effect on investment . . . across a broad rangeof markets.” App.10a.

Professor Sunding mathematically demonstratesthe adverse investment incentive effect of increasingSection 404 permit uncertainty. The decision to in-vest in a project can be readily represented by a ratioof the project’s present-value benefits to the total in-

5 Dr. David Sunding is the Thomas J. Graff Professor in theCollege of Natural Resources at the University of California-Berkeley. His research into environmental and natural re-source economics and the economics of regulation was cited bythis Court in Rapanos, 547 U.S. at 721. Professor Sunding’spaper, Economic Incentive Effects of EPA’s After-the-Fact Veto ofa Section 404 Discharge Permit Issued to Arch Coal (App.1a-26a), was submitted to the district court and the Court of Ap-peals in this case.

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vestment costs. App.10a. If the project benefits ex-ceed the project costs, the ratio will be greater thanone. But both public agencies and private firms alsorequire a certain level of return on their invest-ment—known as the “hurdle rate”—before they willmove forward with a project. Crucially, “[w]hen un-certainty exists on the future benefits and cost of aproject, firms and public agencies often use risk-adjusted hurdle rates.” App.11a. In other words,when agencies and firms perceive greater risk, theydemand greater levels of return before they will moveforward with a project. If the project cannot providethose increased benefits, it will not be pursued.

EPA’s effort to nullify the Section 404 permit is-sued to Mingo Logan will have a particularly perni-cious effect on investment, as Professor Sunding hasshown. The possibility of EPA action against a per-mit causes a distortion in the benefit-cost ratio ofnew investments. Using a formula derived by Pro-fessor Sunding, it can be seen that even a smallchange in the probability that EPA will attempt tonullify a permit causes large changes in investmentincentives. For instance, if investors perceive a 1%chance per year of EPA action against a permit, theexpected benefit-cost ratio of the project decreases by17.5%. App.15a. A mere 2% chance of adverse EPAaction decreases the benefit-cost ratio of the projectby 30%. App.15a. These sharp declines in the bene-fit-cost ratio lead Professor Sunding to conclude thateven “small changes” in the perceived possibility thatEPA will act against a permit “can lead to dramaticreductions in private investment.” App.15a. Andof course, there is no reason to expect the effect onpublic investments to be any different. In each in-stance, as Professor Sunding observes, this “possibil-ity of revocation has the largest deterrent effect on

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large projects,” which generally face a greater “down-side risk” due to the likelihood of stranded capital in-vestment. App.15a.

If a project proponent still wants to invest despitethe additional risks created by EPA’s claims of un-limited authority under subsection 404(c), it may notbe able to obtain necessary financing or public fund-ing, as the case may be. Professor Sunding showshow banks could account for increased uncertaintyby setting higher interest rates on projects that re-quire a Section 404 permit. App.17a. Bond ratingagencies may similarly take into account the newregulatory risks created by EPA when pricing a pro-posed bond issuance. App. 16a-17a. This will makeborrowing more expensive for both public agenciesand private firms whose projects require them to ob-tain a Section 404 permit. Such additional borrow-ing expenses may be the difference between movingforward with a project—albeit at a lower benefit-costratio—and declining to make a capital investment.

II. The decision below will stymie investmentin areas where it is desperately needed.

Permitting a project under Section 404 is alreadyan expensive, time-consuming process. In recentyears, it has taken an average individual permit ap-plicant 788 days and more than $270,000 to completethe process. Rapanos, 547 U.S. at 721. Large-scaleprojects like those undertaken by amici and theirmembers can require even more time and money.Professor Sunding’s study establishes that the threatof EPA permit nullification will dramatically in-crease these costs. In practical terms, that meanspublic and private entities will not invest in projectsthat would have moved forward in the absence ofEPA’s effort to reshape the Section 404 regulatory

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regime. Some of these lost investments could havedevastating long-term consequences.

A. EPA’s asserted Section 404(c) authoritywill disrupt vital infrastructure projects.

Every four years, amicus ASCE publishes a ReportCard for America’s Infrastructure that thoroughlydocuments the condition of the nation’s water, trans-portation, energy and public infrastructure. Themost recent of these reports, released in 2013, paintsa problematic picture. The United States currentlyfaces “a significant backlog of overdue maintenanceacross [its] infrastructure system” and “a pressingneed for modernization.” App.55a.6 Cumulatively,ASCE gave the nation’s infrastructure a “D+”—signaling a serious need to increase public invest-ment in a wide range of infrastructure.

The weaknesses in the U.S. infrastructure systemare glaring. “[F]orty-two percent of America’s majorurban highways [are] congested, costing the economyan estimated $101 billion in wasted time and fuelannually.” App.60a. Eleven percent of the country’sbridges are rated as structurally deficient. App.58a.There are 14,000 high-hazard dams, and 4,000 defi-cient dams, in the U.S. App.56a. The reliability ofthe nation’s massive levee system—which increasing-ly protects developed communities, rather than farm-land—is essentially unknown. App.57a. The list goeson. App.56a-62a.

The fact that these problems exist across the spec-trum of infrastructure has an interactive adverse ef-fect on the U.S. economy. A widespread decline in

6 For the sake of convenience, the Executive Summary fromASCE’s 2013 Report Card for America’s Infrastructure is re-printed in Appendix E. App.54a-63a. The full report is availa-ble at www.infrastructurereportcard.org/.

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the quality of infrastructure prevents shippers fromincreasing efficiency by moving from one mode oftransportation to another. App.65a-66a.7 ASCE es-timates that without additional investment in thenation’s infrastructure between now and 2020, theeconomy could lose $1 trillion in business sales, re-sulting in 3.5 million lost jobs. App.66a. “[I]f currenttrends are not reversed, the cumulative cost to theU.S. economy between 2012-2020 will be more than$3.1 trillion in GDP and $1.1 trillion in total trade.”App.66a.

Fixing these infrastructure deficiencies will not beeasy. ASCE estimates that the infrastructure fund-ing gap will exceed $1 trillion by 2020. App.64a. Thefederal government should be doing everything it canto facilitate vital infrastructure improvements. Rais-ing new obstacles to public infrastructure invest-ment, as EPA has done by claiming the authority tonullify Section 404 permits years after they issue,will have the opposite effect, multiplying the difficul-ty of achieving the necessary spending level. With-out this Court’s immediate attention, the cascade ofharms described in ASCE’s infrastructure reportslooks increasingly inevitable.

B. If EPA can nullify already-issued permits,it will strongly deter private investment.

Private investment that requires Section 404 per-mitting may be even more vulnerable to EPA’s at-tempt to wrest control of the regulatory process awayfrom the Corps. Professor Sunding points out that

7 A portion of ASCE’s study, Failure to Act: The Impact ofCurrent Infrastructure Investment on America’s Economic Fu-ture, is reprinted in Appendix F. The full report is availableonline at www.asce.org/uploadedFiles/Infrastructure/Failure_to_Act/ Failure_to_Act_Report.pdf.

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private firms commonly seek greater returns on in-vestment than public ones, setting hurdle rates thatare three or four times the cost of capital. App.11a.Moreover, private entities tend to be more riskaverse, and face a higher cost of capital, than gov-ernment agencies, further increasing their hurdlerates. App.11a. As explained above, the uncertaintycreated by EPA’s decision to nullify an already-issued Section 404 permit would further increasehurdle rates, thereby reducing the amount of in-vestment by private firms. Supra at 12-14. Becauseof the wide variety of activities that are authorizedby Section 404 permits, the adverse effects on projectproponents would cause a chain reaction of injurythroughout the economy.

Each dollar spent on a largely privately funded ac-tivity like housing construction, which frequently re-quires the builder to obtain a Section 404 permit,produces approximately three dollars in total eco-nomic activity. App.4a. Every $1 billion invested inresidential construction, moreover, creates over10,000 new jobs. App.4a-5a. A reduction in invest-ment—such as what will be caused by EPA’s effort toupset the existing Section 404 permitting regime—would have an equal but opposite effect, eliminatingpotential economic growth. App.4a-9a. What ismore, projects that require a Section 404 permit tendto be the type of projects that spur other investment,or offer broader public benefits. App.5a-6a. Thesebenefit-generating projects include numerous privatesector activities, such as projects that increase thesupply of housing or commercial space, or producefood for public consumption.

To take just one specific example, an Area-WideEnvironmental Impact Statement prepared by theCorps for phosphate mining in central Florida docu-

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ments billions in direct revenues from the proposedpermitted activity over the course of fifty years.8 Butthat is not the full extent of the benefits. Local gov-ernments will also see tens of millions in propertyand severance taxes. EPA’s efforts to nullify theMingo Logan Section 404 permit at issue in this casethreaten all of that.

The uncertainty caused by EPA’s actions againstthe Section 404 permit issued to Mingo Logan mayhave the additional effect of harming landownerswhose property may include jurisdictional waters orwetlands. Professor Sunding notes that in a compet-itive land market, land prices reflect the returns thatcould be generated if property were dedicated to itshighest and best use. App.17a. For undevelopedland, this price reflects the amount that developerswould be willing to pay to acquire the land for a pro-ject. App.17a-18a. Because EPA’s action has, at abare minimum, lowered the expected returns for pro-jects that require a Section 404 permit, a purchaserwould not be willing to pay as much for land wheredevelopment would require it to obtain a Section 404permit. App.18a. This will reduce the equilibriummarket price of land, harming both landowners whomight be interested in selling their land, as well aslong-term landholders (such as farmers) whose landis their primary asset. App.18a.

8 This Area-Wide Environmental Impact Statement is availa-ble on EPA’s website (yosemite.epa.gov/oeca/webeis.nsf/EIS01/F5325DB2198729FC85257BEB001D991D?opendocument). In-formation on the economic effects of phosphate mining is dis-cussed in § 4.12.6, and summarized in Table 4-138 on page 4-311.

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* * *

Amici are asking the Court to grant Mingo Logan’spetition because EPA’s “veto” of an already-issuedpermit turns the Section 404 permitting process onits head. Rather than accounting for applicants’ eco-nomic and reliance interests, as required by theCorps’ regulations, the new regime that EPA hascreated presents substantially more regulatory riskfor project proponents. Professor Sunding has shownthat these risks will dramatically decrease the bene-fits-cost ratio for new projects, leading to reduced in-vestment, and cascading harms throughout the econ-omy. Such a consequential reinterpretation of a vitalregulatory system should not occur apart from thisCourt’s review.

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CONCLUSION

The petition for a writ of certiorari should begranted.

December 16, 2013

Respectfully submitted,

KATHRYN KUSSKE FLOYD

Counsel of RecordJAY C. JOHNSON

VENABLE LLP575 7th Street, NWWashington, DC 20004(202) 344-4000(kkfloyd@venable.com)

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Appendix A

Economic Incentive Effects of EPA’s After-the-Fact Veto

of a Section 404 Discharge Permit Issued toArch Coal

Prof. David Sunding1

UC Berkeley and The Brattle Group

May 30, 2011

1. Introduction

In 2007 the Army Corps of Engineers issued a Sec-tion 404 discharge permit to Arch Coal in connectionwith the Spruce No. 1 Mine located in Logan County,West Virginia. Arch Coal subsequently operated themine in compliance with its permit. Nonetheless,more than three years after the Corps issued the 404permit, EPA proposed to withdraw the discharge au-thorization granted to Arch Coal. Both the Corps andthe State of West Virginia disagreed with the EPAdecision, finding that there was no reason to takeaway the permit. This precedential decision by EPA -- to exercise its limited authority to withdraw a dis-charge authorization so as to effectively revoke thepermit over the objections of the Corps and State hasthe potential to affect a wide range of economic activ-ities that require authorization under Section 404 ofthe Clean Water Act.

1 David Sunding is the Thomas J. Graff Professor in the Col-lege of Natural Resources at UC Berkeley. His research con-cerns environmental and natural resource economics, and theeconomics of regulation. He is a Principal in the LitigationPractice of The Brattle Group.

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This report discusses the economic impacts of EPA’sactions with respect to the Spruce Mine dischargepermit. EPA’s after-the-fact veto of Arch Coal’s per-mit makes it more difficult for project developers torely on essential 404 permits when making invest-ment, hiring or development decisions, and propo-nents must now account for the possibility of losingessential discharge authorization after work on theproject has been initiated.

2. Permitting under Section 404 of theClean Water Act

There are a variety of public and private sector pro-jects permitted under Section 404 of the Clean WaterAct. These activities are vital to the American econ-omy, and include: pipeline and electric transmissionand distribution; housing and commercial develop-ment; renewable energy projects like wind, solar, andbiomass; transportation infrastructures includingroads and rail; agriculture; and many others. TheArmy Corps of Engineers issues roughly 60,000 dis-charge permits annually under Section 404, and es-timates that over $220 billion of investment annuallyis conditioned on the issuance of these dischargepermits. Given the breadth of the statute, a largeshare of public and private infrastructure or devel-opment projects must receive and depend on the cer-tain operation of the 404 permit.

Public and private activities requiring Section 404authorization generate significant indirect and in-duced benefits to affiliated industries. Reduced levelsof investment in projects requiring discharge author-ization translate directly into lost jobs and lost eco-nomic activity across essentially the whole economy.Tables 1 and 1a show the monthly value of new con-struction put in place in the United States, which is

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widely used as a measure of new construction spend-ing. Table 2 gives the direct, indirect and inducedoutput multipliers for key activities typically requir-ing a Section 404 permit.

There are numerous studies in the economics litera-ture detailing the nationwide output and employ-ment benefits various types of construction projects.2

A study by the President’s Council of Economic Advi-sors found that under the American Recovery andInvestment Plan, construction and manufacturingwere likely to experience particularly strong jobgrowth from a recovery package emphasizing infra-structure, energy, and school repair.3 Another studyfound that “greater use of renewable energy systemsprovides economic benefits through investments ininnovation, and through new job creation, while atthe same time protecting the economy from politicaland economic risks associated with [energy depend-ence].”4 The benefits go beyond measures of outputand employment – indeed, “research has shown thatwell designed infrastructure investments can raiseeconomic growth, productivity, and land values,while also providing significant positive spillovers to

2 See Heintz, James, Pollin, Robert and Heidi Garrett-Peltier,How Infrastructure Investment Support the U.S. Economy:Employment, Productivity and Growth, Political Economy Re-search Institute, University of Massachusetts Amherst, Janu-ary 2009.

3 CEA, The Job Impact of the American Recovery and Rein-vestment Plan, January 9, 2009, p. 2.

4 Kammen, Daniel, Kapadia, Kamal and Matthias Fripp, Put-ting Renewables to Work: How Many Jobs Can the Clean EnergyIndustry Generate?, Energy and Resources Group, University ofCalifornia at Berkeley, April 13, 2004, p. 3.

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areas such as economic development, energy efficien-cy, public health and manufacturing.5

As of 2010, commercial construction activity com-prised around 2.5 percent of GDP while residentialconstruction makes up another 2 percent. Spendingin these industries will grow as the economy contin-ues to recover from the recession. Standard & Poor’sforecasts a 14 percent increase (to $44.8 billion) incommercial construction starts and a 1.8 percent in-crease in residential housing investment in 2011.6

The National Association of Home Builders forecastsa 42 percent increase in residential constructionstarts between 2011 and 2012, from 615,000 to873,000.7

In March 2011, public and private investment in theconstruction of residential and commercial structurestotaled over $300 billion for the previous 12 months.8

This economic activity stimulates other sectors of theeconomy. Table 2 shows that every $1 of spending onresidential construction, utility and transportationinfrastructure or commercial construction generatesroughly $3 of economic activity throughout the econ-omy.

Construction spending also generates large numbersof jobs. As shown in Table 3, for each $1 billion spentin new residential construction in the United States,over 10,000 new jobs are created directly and indi-

5 Department of the Treasury with the CEA, An EconomicAnalysis of Infrastructure Investment, October 11, 2010, p.1.

6 S&P, p. 4.

7 A start is defined as excavation (ground breaking) for thefootings or foundation of a residential structure. For a multi-family structure, all units are counted as started when thestructure is started. NAHB/Housing Economics, April 2011.

8 See Table 1.

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rectly (i.e., in industries that support constructionactivity).9 An additional 5,700 jobs are createdthrough induced effects, meaning the economic activ-ity resulting from increased earnings generated bythe direct and indirect economic activity. Thus, intotal every $1 billion of residential construction gen-erates around 16,000 jobs. Spending on commercialand institutional facilities such as shopping centers,schools, office buildings, factories, libraries and firestations has a somewhat larger job-creation effect, ataround 18,000 jobs per $1 billion of spending.

Between 1987 and 2007, public spending on trans-portation and water infrastructure as a percentageof GDP remained steady between 2.3 and 2.6 per-cent.10 In 2009, the federal government spent $39billion on new highway infrastructure.11 On balance,government spending on highway construction hasincreased during the past 30 years in real terms.12

Not only are investments in these kinds of infra-structure critical to quality of life throughout the na-tion,13 the multiplier effect on job creation resultingfrom such investment is substantial. In March 2011,the value of transportation and water infrastructureput in place amounted to roughly $160 billion. Asshown in Table 3, every $1 billion in transportationand water infrastructure construction creates ap-proximately 18,000 jobs total.

9 Direct and Indirect Effects.10 CBO, Public Spending on Transportation and Water Infra-

structure, November 2010.

11 CBO, Spending and Funding for Highways, January 2011.

12 Ibid.13 See for example, Dalenberg, Douglas R. and Partridge,

Mark D., “The Effects of Taxes, Expenditures, and Public In-frastructure on Metropolitan Area Employment,” Journal ofRegional Science, Vol. 35, No. 4, 1995, pp. 617-640.

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Renewable energy is an example of an emerging sec-tor of the economy that also relies on discharge per-mits. The United States spends 0.3 percent of itsGDP on the production of clean technologies.14 Therenewables industry, however, has been expanding ata rate of 28 percent per year since 2008.15 Further, inits 2011 release of the Annual Energy Outlook, theU.S. Energy Information Administration forecaststhat cumulative additions to electricity generatingcapacity16 from renewable sources will exceed 20,000megawatts by 2020.17 With fixed costs ranging fromroughly $15 to $400 per kilowatt for renewable gen-eration plants,18 projected near-term future spendingon infrastructure for renewables will be substantial.

14 Associated Press, “China Leads Push to Go Green,” NewYork Times, May 8, 2011, accessible: http://www.nytimes.com/2011/05/09/business/energy-environment/09clean.html?scp=2&sq=renewable%20energy%20gdp&st=cse.

15 Ibid.16 Net Summer Capacity.

17 EIA, Table 9: Electricity Generating Capacity – ReferenceCase, Annual Energy Outlook 2011, April 2011.

18 EIA, Updated Capital Cost Estimates for Electricity Gener-ation Plants, November 2010.

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3. Direct Economic Impacts of EPA’s After-the-Fact Veto

EPA’s precedential decision to revoke a valid dis-charge authorization alters the incentives to investin projects requiring a permit under Section 404. Pro-ject development usually requires significant capitalexpenditure over a sustained period of time, afterwhich the project generates some return. Actions likethe EPA’s that increase uncertainty, raise thethreshold for any private or public entity to under-take the required early-stage investment. For thisreason, the EPA’s action has a chilling effect on in-vestment in activities requiring a 404 authorizationacross a broad range of markets.

Increasing the level of uncertainty can also reduceinvestment by making it more difficult to obtain pro-ject financing. Land development activities, infra-structure projects and the like often require a signifi-cant level of capital formation. Reducing the reliabil-ity of the Section 404 permit will make it harder forproject proponents to find financing at attractiverates as lenders and bondholders will require higherinterest rates to compensate for increased risk, andsome credit rationing may also result.

Permit Uncertainty and the Hurdle Rate

The decisions to undertake an investment in a pro-ject can be considered as a comparison of the benefit-cost ratio of the project to a hurdle rate. Letting Bdenote the present value of net benefits from the pro-ject and C denotes the investment cost, the invest-ment condition is to undertake the project when

11a

The hurdle rate represents the expected rate of re-turn a firm requires on its investment. When uncer-tainty exists on the future benefits and cost of a pro-ject, firms and public agencies often use risk-adjusted hurdle rates. For private firms, hurdle ratesof three or four times the cost of capital are common(Summers, 1987). For government agencies, with alower cost of capital and less risk aversion, hurdlerates are typically lower, but are usually well in ex-cess of 1.

It is especially common for firms and public agenciesto select high hurdle rates when engaging in a pro-ject that involves irreversible investment. In thiscase, high hurdle rates emerge through inertia as de-cision makers are forced to trade-off the possibility ofmaking an error in an immediate investment deci-sion against the opportunity cost of delaying the in-vestment. The optimal timing of investment in thiscase would occur when the expected benefit foregoneover the interval before the investment is made ex-ceeds the (probability-weighted) downside lossesfrom a wrong investment. Under a present value cri-terion, the hurdle rate reduces to the discount rate,which is denoted here by r.

In uncertain investment settings with irreversibleinvestment, Pindyck (1982, 1991) and Dixit (1992)characterize the optimal timing of an investment asthe tangency between two curves; one describing thevalue of investing and the other describing the valueof waiting. The equation for the value of investing isbased directly on present value calculations: the val-ue of an investment is positive if the discounted pre-sent value of expected returns exceeds the presentvalue of the sunk, irreversible investment cost, C.The expression for the value of waiting is determinedaccording to the value of the option to delay invest-

12a

ment from the present period to subsequent periods.Doing so allows the firm an opportunity to acquirerelevant market information over time, which reduc-es downside risk. The necessary and sufficient condi-tions for an optimal investment decision are the so-called “value-matching condition” and “smooth-pasting condition,” effects that are described in Dixitand Pindyck (1994).

Abel (1983) shows that greater uncertainty over fu-ture market outcomes delays investment in situa-tions where investments are irreversible. This out-come is a common theme in the early literature onquasi-option value (Arrow and Fisher, 1974; Henry,1974; and Conrad, 1980), and the parallels betweenthis literature and the more recent literature on in-vestment under uncertainty have been demonstratedby Fisher (2000). It is also true for the case of uncer-tainty over future regulatory actions.

In the context of an investment decision, delaying in-vestment essentially means reducing the level of in-vestment in any given period. Consider a mine wherethe cost of extracting ore is $40/ton. With permit cer-tainty, and considering the irreversible nature of in-vestment in the mine, suppose the mine the hurdlerate test if the market price of ore were $50/ton.Market prices fluctuate and it may take some timefor the price to hit this trigger point, but once it isachieved, the mine owner will commence investment.If the target price increases to $55/ton, it is less like-ly that the market price of ore will reach this new,higher level, and investment is delayed, meaningthat there is less investment expected in any givenperiod.

It is demonstrated in the appendix to this report thatan increase in the threat of permit revocation in-

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creases the hurdle rate, thereby delaying investment.The reason for this outcome is twofold. First, as inAbel (1983), delaying investment is valuable becausemarket returns can be earned on financial capitalduring each period of delay, and this “outside option”is more valuable to firms the more volatile the ex-pected future market returns from the project in re-lation to returns on the outside asset. Second, andquite unique to the present setting, delaying invest-ment is valuable under the threat of permit revoca-tion because delaying investment reduces the likeli-hood of stranded capital. This effect is strong --evenin the case of small changes in the revocation proba-bility-- as stranded capital can have substantial im-plications on the rate of return of firms relative tocapital that simply earns below-market returns inresponse to adverse market outcomes. For these rea-sons, increasing the threat of permit revocation rais-es the hurdle rate that investors require to engage inprojects, delaying investment.

The possibility of permit revocation has highly perni-cious effects on investment. Investment, in some cas-es, is not only delayed, but entirely deterred. Indeed,under various circumstances in which investmentwould take place absent the threat of permit revoca-tion, investment is deterred, and this is true even forextremely small probabilities of having a permit re-voked. The reason is that firms cannot directly con-trol the probability of having a permit revoked whenrevocation is not based on the firm’s own compliance,and this fact introduces a new source of risk thatmakes investing in sectors of the economy that relyon discharge permits relatively unattractive. To bet-ter understand the deterrence effect of permit revo-cation on new investment, consider the effect of asmall probability of revocation represented by the

14a

variable p. Taking p to represent the expected annu-al probability that a discharge permit is revoked, thebenefit-cost ratio (derived in the Appendix) of an in-vestment with an expected annual net benefit of $Band an irreversible one-time capital investment levelof $K is

First consider the case in which discharge permitsare certain and can be relied on by project propo-nents. In this case, the net present value of the bene-fit stream from the project is B/r and the initial capi-tal outlay for the project is K. These terms, whichappear to the left of the term in brackets, representthe standard benefit-cost ratio used in studies of ir-reversible investment (Dixit and Pindyck, 1994).

Now consider the distortion to the benefit-cost ratioof new investment projects under the threat of per-mit revocation. The term in brackets is the distortionto the benefit-cost ratio created by this threat. Whenp = 0, the distortion vanishes and the benefit cost ra-tio returns to the market value in standard case. No-tice that this term is concave in the threat of permitrevocation; that is, small changes in the threat ofpermit revocation in environments with little regula-tory threat have larger impacts on investment deci-sions than small increments in the revocation proba-bility at higher frequencies of government interven-tion.

An important implication of this result is that smallchanges in the probability that discharge permits arerevoked have large effects on investment incentiveseven when revocation is infrequent in practice. Tosee this result, consider the magnitude of the distor-

15a

tion to investment incentives (the term in the brack-ets of the equation above) in the case of a 5% dis-count rate.

At a 5% rate of discount (r = 0.05), if investors expecta 1% chance per year of permit revocation, the ex-pected benefit-cost ratio of projects involving dis-charge permits decreases by 17.5%. That is,

in the term reflecting the regulatory distortion above.

If an observed regulatory action subsequently causesinvestors to expect a 2% chance per year of having adischarge permit revoked, the expected benefit-costratio of projects involving discharge permits decreas-es by 30%, and, if it turns out investors expect a 5%chance per year of having a discharge permit re-voked, the expected benefit-cost ratio of projects in-volving discharge permits decreases by 52.5%. Thus,small changes in the threat of permit revoca-tion can lead to dramatic reductions in privateinvestment.

It should also be noted that the possibility of revoca-tion has the largest deterrent effect on large projects.This effect is independent of the fact that large pro-jects are the most likely to be controversial and havea higher chance of having their discharge authoriza-tion revoked. Large projects by definition have ahigher level of capital outlay than smaller projects.Permit revocation increases the downside risk asso-ciated with a project, as revocation results in somelevel of stranded investment. This principle isdemonstrated formally in the appendix.

To summarize this mainly conceptual discussion,raising the possibility that discharge permits can berevoked reduces investment incentives in two essen-

16a

tial ways: (i) revoking permits raises hurdle ratesamong private investors; and (ii) revoking permitsreduces the expected benefit-cost ratio of new pro-jects. These effects will dampen investment rates inindustries that rely on Section 404 permits, both bydelaying and by deterring new projects from beingbuilt.

Project Financing

Another issue related to the effect of permit revoca-tion on investment relates to capital formation. It iscommon for both private and public projects to bedebt financed. In this case, corporations and govern-ments raise revenue by issuing bonds. Though someinvestors have developed their own models for meas-uring the probability that the borrower will default,there are three principal rating services that havedeveloped their own corporate and government bondratings: Moody’s, Standard & Poor’s and Fitch.

Debt ratings are based on a combination of quantita-tive and qualitative factors that each rating agencyconsiders to estimate the probability of a bond de-faulting payment. Of particular relevance to theEPA’s actions is that rating agencies typically con-sider regulatory risk as a principal consideration inits bond ratings:

The analysis of credit risk may in-clude, for example, business risk andfinancial risk in the case of rating acorporation or financial institution, orgeopolitical risk in the case of a sover-eign government. When assessingstructured finance issues, the broadfundamental areas we typically con-sider include: asset credit quality, le-gal and regulatory risks, the payment

17a

structure and cash flow mechanics,operational and administrative risks,and counterparty risk (Standard andPoor’s, 2010).

Increased regulatory risks could thus lower a corpo-ration’s or government’s credit rating. This circum-stance in turn could make it much more expensive toaccess capital.

It is possible that some project developers will be un-able to obtain financing due to the increased risk oftheir investment. The practice of a bank that is un-willing to lend money, even when the borrower iswilling to pay higher interest rates, is called creditrationing. There are multiple circumstances that canlead to credit rationing, for example a shortage ofcredit or a temporary, exogenous shock to the creditmarket. But, Stiglitz and Weiss (1981) show thatcredit rationing could be an equilibrium outcomeeven without a credit shortage.

Land Markets and Incidence of Regula-tion

Land is an asset that has a fixed location. Regulationthat affects the returns to land ownership in definedareas thus has the potential to alter the equilibriumprice of land. At present, there are over 100 millionacres of land in the contiguous United States thatcontain wetlands and other waters subject to regula-tion under the Clean Water Act. Many more acresare within the drainage of waters of the UnitedStates and thus potentially come under the jurisdic-tion of the Army Corps of Engineers.

In a competitive land market, land prices reflect thediscounted value of the returns earned from dedicat-ing land to its highest and best use (CapozzaandHelsley, 1998). For undeveloped land, this sum is

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typically equal to the value of rents when the land isin an undeveloped condition, plus the amount devel-opers are willing to pay for land when they initiatetheir project.

Regulation that lowers the profits from future devel-opment will be capitalized into current land values,meaning that the equilibrium market price of landwill be lower as a result. Thus, the EPA’s action will,to a degree determined by local market conditions, beborne by landowners in areas containing wetlandsand other waters of the United States.

4. Conclusions

The EPA’s precedential decision to revoke a validdischarge permit will have a chilling effect on in-vestment across a broad swath of the American econ-omy. Activities ranging from residential and com-mercial development, roads, renewable energy, andother projects rely on discharge authorization underSection 404 of the Clean Water Act. These activitiesprovide needed infrastructure, housing, and otherservices, and are a significant part of the annual val-ue of economic activity in the country. They also gen-erate hundreds of thousands of jobs nationwide, andstimulate economic activities in support sectors.

The types of projects that require discharge permitsare usually capital intensive and involve irreversibleinvestments, meaning that the project proponentcannot recoup costs if the necessary authorization isrevoked by the EPA. Revoking discharge permits in-troduces two essential market distortions: (i) revok-ing permits raises hurdle rates among private inves-tors; and (ii) revoking permits reduces the expectedbenefit-cost ratio of new projects. These effects arelikely to dampen investment rates in industries rely-ing on discharge permits, both by delaying and by

19a

deterring new projects from being built. Importantly,I show that even small changes in the probability ofex post revocation can have a large effect on projectinvestment.

5. References

Abel, A.B., 1983. “Optimal investment under un-certainty.” American Economic Review73(1), 228-233.

Arrow, K.J., Fisher, A.C., 1974. “Envi-ronmental preservation, uncertain-ty, and irreversibility.” QuarterlyJournal of Economics 88(1), 312–319.

Brealey, R., Myers, S., and Allen, F., 2008.Principles of Corporate Finance. NinthEdition, 657.

Capozza, D. and R. Helsley, 1998.“The fundamen-tals of land prices and urban growth.”Journal of Urban Economics 26(1989), 295-306.

Conrad, J.M., 1980. “Quasi-option value andthe expected value of information.”Quarterly Journal of Economics 95,813–820.

Corporate Executive Board Company, The,2010. http://cebviews.com/uploads/2010/11/CEB-Cost-of-Capital-and-Credit-Rating-Myths.pdf

Dixit, A., 1992. “Investment and hysteresis.”Journal of Economic Perspectives 6, 107–132.

Dixit, A.K., Pindyck, R.S., 1994. Investment Un-der Uncertainty. Princeton Univ. Press,Princeton, NJ.

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Fisher, A.C., 2000. “Investment under uncer-tainty and option value in environmentaleconomics.” Resource and Energy Eco-nomics 22, 197-204.

Henry, C., 1974. “Investment decisions underuncertainty: the irreversibility effect.”American Economic Review 64, 1006–1012.

Pindyck, R.S., 1982. “Adjustment costs, uncertainty,and behavior of the firm.” American Econom-ic Review 72, 415-427.

Pindyck, R.S., 1991. “Irreversibility, uncertainty,and investment.” Journal of Economic Lit-erature 29, 1110–1152.

Standard and Poor’s, 2010.Guide to Credit RatingsCriteria.

Stiglitz, J., Weiss A., 1981. “Credit rationing inmarkets with imperfect information.” TheAmerican Economic Review 71(3), 393-410.

Summers, L.H., 1987.“Investment incentives andthe discounting of depreciation allowanc-es.” The Effect of Taxation on Capital Ac-cumulation. Martin Feldstein, ed. Univer-sity of Chicago Press, Chicago, IL.

6. Appendix

This appendix develops the model of expected in-vestment returns under the threat of permit revoca-tion discussed in the report.

Let ct(q) denote the cost of investment in a project ofsize q at time t. Investment costs are considered to bedivided into an initial and irreversible expenditure attime t=0 (the date of project approval), which is de-noted K, and a series of recurring costs associated

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with project operation in the subsequent periodst=1,...,T, denoted by the constant c. The present val-ue of cost for a project of known size is

where r is the discount rate.

The expected return from the project is positive, inthe sense that the expected benefit to the operatorexceeds the sum of investment cost and recurring op-erational costs of the project. Let B denote the ex-pected net benefit of the project in each period of op-eration, which is defined as the gross benefit less op-erational costs, c. For a project with an operatinglifetime of T periods, the present value of the netbenefit of the project is

where costs in equation (1) are subsumed into thenet benefit function. Equation (2) represents thestandard present value criterion for evaluating pro-jects.

Now suppose the regulator introduces threat ofpermit revocation. If firms perceive the likelihood of

having their permit revoked in any given period tobe p, then the net present value of a project with anoperating lifetime of T periods is given byNoting that the factor (1-p)/(1+r)<1, the net presentvalue can be expressed as

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In the case where a permit has no explicit terminaltime, T, it is convenient to treat the discounted netreturn of the project as the present value of an infi-nite annuity from the investment. In this case, equa-tion (4) can be expressed as

Notice that equation (5) reduces to the conventionalformula used by Pindyck (1991) and Dixit (1992) forthe present value of an infinite annuity with ex-pected return B/r.

Next consider the continuation value, or net payoff ofan investment made in period t=1 as opposed to peri-od t=0. To calculate the net payoff from an invest-ment in period t=1, consider a discrete probabilitymodel of the form examined by Dixit and Pindyck(1994) and Fisher (2000) in which the expected netbenefit function is given by

In this expression, q is the probability of a highdraw from the value distribution, in which case thenet value of the project is (1+u)V, and1-q is theprobability of a low draw from the value distribu-tion, in which case the net value of the project is (1-d)V. Thus, if V is defined as net benefit, the value Bin equation (5) can be interpreted as the contempo-raneous expected net benefit of the project at timet=0.

To calculate option value from delaying investmentuntil time t=1, suppose the true value of the projectis revealed at time t=1 as being either V(1+u) or V(1-d) and that the continuation value of the project is

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driven by high-draws from the value distribution. Inthis case, when waiting until time t=1 to make theinvestment decision, the investment is “in the mon-ey” only if a high draw is revealed. Under circum-stances in which the project is worthwhile in bothstates of nature, there would be no option value todelaying an irreversible investment and investmentwould always take place. Irreversibility of invest-ment would not impact the hurdle rate in this wasthe case.

The expected continuation value for the project mustsatisfy (in present value terms of period t=0):

Notice that, by delaying investment it is possible thatthe discharge permit is revoked between periods t=0and t=1. The conditional probability of investment attime t=1 is q(1-p).

The value of the option to delay investment is givenby

The formula for option value in equation (7), whichis analogous to a call option on a share of stock(Dixit and Pindyck, 1994), is the difference betweenthe continuation value and the net present value ofinvestment from the time t=0 perspective.Substitution of terms from equations (5) and (6) andsimplifying gives

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The option value of delaying investment for one peri-od is the sum of two terms. The first term is the fore-gone benefit from development in period t=0. Theterm in the square brackets sums the lost interest onexpected earnings during the period in which in-vestment is delayed and earnings in the non-investment state associated with a low draw. Thisterm is negative. The second term represents thecapital savings from delaying investment. This termis positive, not only because of the one period delayin investment but also because with probability p thepermit was revoked during the period in which in-vestment is delayed, stranding capital in the case ofearly investment. If the first term is larger in magni-tude than the second term, for instance if the capitalinvestment, K, is small or if capital is fully recovera-ble through re-sale in a salvage market, then there isno option value and consequently no return for delay-ing the investment.

In many settings, capital investment levels are suffi-ciently large that delaying investment creates a posi-tive option value for firms. This also delays socialbenefits from arising that are indirectly related tothe investment, for instance employment and in-duced local spending. Introducing the potential forpermit revocation compounds this problem. To seethis, notice that the option value of delaying invest-ment is larger for larger values of the revocationprobability, p:

The implication is that increasing the threat of per-mit revocation delays investment from taking place.Positive option value increases the hurdle rate that

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investors require to engage in projects. A greaterthreat of permit revocation raises the hurdle rate,delaying investment in cases where investment is notdeterred.

The possibility of permit revocation has perniciouseffects on investment. Under various circumstanceswhere investment would have taken place absent thethreat of permit revocation, investment is deterredentirely. To see this, it is helpful to convert net pre-sent value in equation (5) into a benefit-cost ratio,

where the net present value of the future benefitstream from operating the project in an environ-ment without threat of permit revocation is B/r andthe initial capital outlay for the project is K. Theterm in brackets is the distortion to the benefit-costratio created by the threat of permit revocation. If p= 0 the distortion vanishes and the benefit cost ratioreturns to the market rate.

Notice that equation (8) is concave in the threat ofpermit revocation. This implies that small changesin the probability that discharge permits are re-voked for reasons unrelated to compliance greatlyreduce investment incentives. To see this, considerthe magnitude of the distortion to investment in-centives (the term in the brackets of equation (8)) inthe case of a 5% discount rate.

For r = 0.05, if investors expect a 1% chance peryear of permit revocation, the expected benefit-costratio of projects involving discharge permits de-creases by 17.5%; however, if investors expect a 5%chance per year of permit revocation, the expectedbenefit-cost ratio of projects involving discharge

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permits decreases by 52.5%. Accordingly, smallchanges in the threat of permit revocation can leadto dramatic reductions in private investment.

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Appendix B

TESTIMONY OF

NANCY K. STONER

ACTING ASSISTANT ADMINISTRATOR

OFFICE OF WATER

U.S. ENVIRONMENTAL PROTECTION

AGENCY

BEFORE THE

SUBCOMMITTEE ON WATER RESOURCES

AND ENVIRONMENT

TRANSPORTATION AND INFRASTRUCTURE

COMMITTEE

UNITED STATES HOUSE OF

REPRESENTATIVES

May 11, 2011

Good morning Chairman Gibbs, Ranking MemberBishop, and Members of the Committee. I am NancyStoner, Acting Assistant Administrator for the Officeof Water at the U.S. Environmental ProtectionAgency. I am pleased to have the opportunity to dis-cuss EPA’s use of its authority under Section 404(c)of the Clean Water Act to protect water quality. Iappreciate your interest in EPA’s Clean Water Actrole in assuring effective protection of human healthand the environment.

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EPA’s Clean Water Act Role

EPA and our state agency partners work every daytoward the goal of protecting human health and theenvironment EPA’s role in reviewing surface coalmining projects is conducted pursuant to the CleanWater Act, which Congress passed in order to ensurethat our nation’s waters are protected. Appalachiancommunities and all Americans depend upon thesewaters for drinking, swimming, fishing, farming,manufacturing, tourism, and other activities essen-tial to the American economy and quality of life. Ourwork to review permit applications for Appalachiansurface coal mining operations that affect streams isone way in which EPA carries out the mission Con-gress provided to us. We work hard to achieve ourclean water goals in a way that protects publichealth, sustains our economy, and ensures that weprovide clean water to future generations.

Background on Clean Water Act Section 404(c)

Passage of the Federal Water Pollution Control ActAmendments of 1972 (also known as the Clean Wa-ter Act) established a comprehensive program to re-store and maintain the chemical, physical, and bio-logical integrity of the Nation’s waters. The CleanWater Act provided overall responsibility to EPA, inpartnership with the states, to reduce pollution en-tering waters of the United States in order to protecttheir uses as sources of drinking water; habitat foraquatic wildlife; places for swimming, fishing, andrecreation; and for other purposes. As part of the1972 amendments, Section 404 gave specific roles toboth the U.S. Army Corps of Engineers (“the Corps”)and EPA in implementing a federal permitting pro-gram for activities proposing to discharge dredged orfill material in waters of the U.S. Section 404 of the

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Act provides the Secretary of the Army actingthrough the Chief of Engineers the authority for im-plementing the administration of the Section 404regulatory program, including deciding whether toissue or deny permits. The Act authorizes EPA, inconjunction with the Corps, to develop the substan-tive environmental criteria applied in Section 404permit reviews. The Section 404(b)(1) Guidelines, areregulations promulgated by EPA, in consultationwith the Corps, and are set forth at 40 C.F.R. Part230.

Under Section 404(c), the Act authorizes EPA to re-view activities in waters of the U.S. to determinewhether such activities would result in significantand unacceptable adverse effects on municipal watersupplies, shellfish beds and fishery areas (includingspawning and breeding areas), wildlife, or recrea-tional areas, and to prohibit, restrict or deny, includ-ing withdrawal, of the use of any defined area as adisposal site. EPA does not view this authority as anopportunity to second guess the Corps’s decisionmak-ing, but rather as an important responsibility to con-duct an independent review of projects that have thepotential to significantly impact public health, waterquality, or the environment, and which EPA hasrarely used to prohibit or withdraw the use of an ar-ea. Specifically, the Act states:

“The Administrator is authorized toprohibit the specification (including thewithdrawal of specification) of any de-fined area as a disposal site, and he isauthorized to restrict or deny the use ofany defined area for specification (in-cluding the withdrawal of specification)as a disposal site, whenever he deter-

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mines, after notice and opportunity forpublic hearings, that the discharge ofsuch materials into such area will havean unacceptable adverse effect on mu-nicipal water supplies, shellfish bedsand fishery areas (including spawningand breeding areas), wildlife, or recrea-tional areas.” 33 U.S.C. § 1344(c).

The procedures for implementation of Section 404(c)are set forth in EPA regulations at 40 C.F.R. Part231. These procedures provide for a science basedand transparent review of projects, with opportunityfor meaningful dialogue among EPA, the Corps, thepermit applicant or project proponent), the state,and the public. Key aspects of the 404(c) review pro-cess include an opportunity for discussion betweenEPA and the project proponent and opportunities forpublic involvement.

Use of Clean Water Act Section 404(c)

EPA works constructively with the Corps, the states,and other partners to assist applicants in developingenvironmentally sound projects in cases where a dis-charge of dredged or fill material into waters of theU.S. is proposed. EPA takes very seriously our re-sponsibilities under the Clean Water Act, and be-lieves that prudent and careful use of this authorityis an effective provision for encouraging innovation toprotect public health and preserving valuable envi-ronmental resources and our Nation’s economic secu-rity.

EPA has used its veto authority sparingly, complet-ing only 13 final decisions, known as Final Deter-minations, since 1972. To put this in perspective,over the past 39 years, the Corps is estimated tohave authorized more than two million activities in

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waters of the U.S. under the Clean Water Act Sec-tion 404 regulatory program. To emphasize thesignificance of the few projects reviewed by EPAunder Section 404(c), these 13 completed Final De-terminations have protected tens of thousands ofacres of wetlands and other aquatic resources, aswell as more than 35 miles of rivers and streams.

Examples where EPA used its Section 404(c) authori-ty demonstrate the significance of potential projectimpacts and the important role that Section 404(c)plays in protecting human health and the environ-ment. Prior veto actions by EPA include:

The Yazoo Pumps Project1 in 2008 to avoidsignificantly degrading the critical ecologicalfunctions provided by up to 67,000 acres ofwetlands, including bottomland hardwoodforests, in the Yazoo Backwater Area, Missis-sippi. These wetlands provide important habi-tat for an extensive variety of wetland de-pendent animal and plant species, includingthe federally protected Louisiana black bear,and serve as an integral part of the economicand social life of local residents and sports-men from around the Nation;

An action in 1990 on the Two Forks Dam,Colorado, to protect approximately 30 milesof the South Platte River corridor that haveextraordinary aquatic resource values, in-cluding supporting an outstanding recrea-tional fishery that the State of Colorado hasdesignated a "gold medal" trout stream;

1 Discharges associated with these two projects were evaluat-ed under the Corps’ Civil Works program and not under theCorps’ Section 404 permitting program.

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An action in 1985 on the proposed Bayou auxCarpes flood control project1 in Louisiana toprotect a diverse, 3,000-acre coastal wetlandcomplex consisting of forested wetland, shrubwetland, cypress-tupelo swamp, marsh, andopen water; and

An action in 1985 on Jehossee Island, SouthCarolina, to protect 900 acres of productivecoastal marsh habitat.

As the numbers above demonstrate, EPA is able towork with the Corps and permit applicants to resolveissues without exercising its Section 404(c) authorityin all but a miniscule fraction of cases. EPA’s Section404(c) procedures provide an effective, meaningfulopportunity for EPA, the Corps, and the project pro-ponent to discuss opportunities for reducing envi-ronmental impacts and preventing unacceptable ad-verse effects. These procedures also allow for signifi-cant public involvement in EPA’s Clean Water Actreview process to ensure that the agency’s decisionsare scientifically sound and transparent.

Spruce No. 1 Surface Mine

EPA’s recent decision under Clean Water Act Sec-tion 404(c) involved the Spruce No. 1 Surface Minein Logan County, West Virginia, one of the largestsurface coal mining projects ever proposed in theAppalachian coalfields. First proposed in 1997, theproject’s unprecedented environmental impactsraised significant concerns for federal agencies, localcommunities, and the public from the beginning. Theproject was originally authorized under a Clean Wa-ter Act Section 404 general permit (also known as a“nationwide” permit). Litigation commenced imme-diately upon issuance of this permit authorization byenvironmental and community groups and the pro-

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ject was halted by a Federal District Court. TheCorps subsequently agreed to withdraw the permitauthorization as part of a settlement agreement.Under this agreement, the Corps agreed to reviewthe proposed Spruce No. 1 Mine under an individualpermit application and to prepare an EnvironmentalImpact Statement. EPA was a cooperating agency onthe Corps lead EIS.

EPA expressed its concerns about the environmentaland water quality impacts of the Spruce No. 1 Mineconsistently as scientific studies began to suggestthat the associated impacts would be far more signif-icant than initially understood. For example, in 1998and 2002, EPA expressed significant concerns aboutthe project’s potential water quality effects in connec-tion with EPA’s review of draft state Clean WaterAct NPDES permits for the Spruce No. 1 Mine. EPAnoted that preliminary scientific studies were begin-ning to demonstrate the potential for significant neg-ative impacts to water quality and wildlife from min-ing operations similar to the Spruce No. 1 Mine. In2006, EPA expressed concern and provided technicalcomments and recommendations for revision of theproject in connection with our review under the Na-tional Environmental Policy Act.

A second permit for a modified Spruce No. 1 projectwas issued in January 2007 and was quickly chal-lenged through litigation. Under an agreement withplaintiffs in the litigation, the company agreed toproceed with mining on only a portion of the projectsite. The permit would have authorized filling ap-proximately 7.5 miles of pristine mountain streams.The project would have impacted three streams:Seng Camp Creek; Pigeonroost Branch; and Old-house Branch in addition to their tributaries. The

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latter two streams and their tributaries (6.6 milestotal) represent some of the last remaining, least dis-turbed, high quality stream and riparian resourceswithin the Coal River watershed and contain im-portant wildlife resources and habitat. Thesestreams are located within the Coal River watershed,one of the most impacted in all of Appalachia. Morethan 257 past and present surface mining permitshave been issued in the Coal River subbasin, and thecorresponding mines collectively occupy more than13 percent of the land area. Within the smallerSpruce Fork subwatershed in which the Spruce No. 1project is located, more than 34 past and present sur-face mining permits have been issued, and the corre-sponding mines collectively occupy more than 33 per-cent of the land area. The Spruce No. 1 Mine wouldhave occupied a surface area of 2,200 acres, or morethan three square miles.

As limited mining operations proceeded on theSpruce No. 1 site, EPA’s concerns regarding theSpruce No. 1 Mine increased as a growing volume ofscientific studies detailed the adverse water qualityimpacts associated with surface coal mining projectsin central Appalachia and confirmed EPA’s earlierarticulated concerns.

EPA’s Section 404(c) Review of the Spruce No. 1Mine

EPA began its Section 404(c) review of the SpruceNo. 1 Mine in response to significant new scientificinformation that emerged regarding the impacts ofsurface coal mining operations on Appalachian wa-tersheds and on the coalfield communities that de-pend on clean water for their way of life, in additionto the jobs that coal mining provides. This scientificinformation has been published in peer reviewed sci-

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entific literature and supplemented by research byscientists at EPA, FWS and USGS. Peer reviewedscience reflects a growing consensus regarding theimportance of Appalachian headwater streams andthe significant impacts to these streams from surfacecoal mining – impacts that cannot be readily mitigat-ed by methods such as stream creation or restora-tion. These advances in scientific knowledge height-ened EPA’s long standing concerns that the SpruceNo. 1 Mine would result in unacceptable adverse ef-fects on wildlife, adverse water quality impacts, andsignificant cumulative effects.

EPA’s Section 404(c) review began in September2009 with an attempt to work with the Corps and thecompany to modify the Spruce No. 1 Mine permit in away that would reduce environmental impacts, pre-vent the significant environmental effects that sci-ence shows would occur, and allow mining to proceed.EPA was eager to discuss alternative project designsthat would reduce environmental impacts, assure acost-effective mining operation, and preserve coalmining jobs on the project site. Unfortunately, whileEPA offered various alternatives, EPA and the com-pany were unable to reach agreement on changes tothe project that EPA viewed as necessary to reflectbest available science and prevent significant ad-verse effects to the aquatic environment. As a result,EPA Region 3 published a Proposed Determinationunder Section 404(c) in March 2010. EPA took publiccomment on its Proposed Determination, gatheringmore than 50,000 comments, and held a public hear-ing in Charleston, West Virginia. The majority ofthese comments supported EPA’s Section 404(c) ac-tion to prohibit the burial of high-quality streams onthe project site. After evaluating these comments,

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EPA Region 3 issued a Recommended Determinationin September 2010 that recommended to EPA Head-quarters that the filling of two high quality streamsbe prohibited.

Following the EPA Region 3 Recommended Determi-nation, EPA Headquarters invited Arch Coal Com-pany, state representatives, land and mineral rightsowners, and the Corps to meet regarding the Rec-ommended Determination and to discuss mining al-ternatives at the Spruce No.1 Mine that could reduceenvironmental and water quality impacts. Followingan in-person meeting on November 16, 2010, EPAagain reached out to Arch Coal on November 22 toreiterate its interest in finding alternative mine de-signs that might reduce anticipated environmentaland water quality impacts. Again, while EPA offeredvarious alternatives, EPA and the company could notreach agreement on options for redesigning the minein ways that would meaningfully reduce anticipatedunacceptable adverse environmental and water qual-ity effects. After reviewing EPA Region 3’s recom-mendations and comments provided by the public,the West Virginia Department of Environmental Pro-tection, and Arch Coal Company, EPA Headquartersissued a Final Determination on the Spruce No. 1Mine in January 2011, prohibiting new impacts tostreams at the site but allowing significant ongoingmining activities to proceed.

Conclusions of EPA’s Section 404(c) Review

EPA’s Final Determination concluded that by filling6.6 miles of streams on the project site – PigeonroostBranch, Oldhouse Branch, and their tributaries – theSpruce No. 1 Mine would have resulted in unac-ceptable adverse environmental effects on wildlife.EPA’s scientific review revealed that the wildlife

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communities in these streams are of high quality incomparison to other streams throughout the centralAppalachian region and the State of West Virginia.Pigeonroost Branch, Oldhouse Branch, and theirtributaries perform critical hydrologic and biologicalfunctions, support diverse and productive biologicalcommunities, contribute to prevention of further deg-radation of downstream waters, and play an im-portant role within the broader watershed.

In their final determination, EPA concluded impactsfrom the Spruce No. 1 Mine would be unacceptable inseveral ways. The project would have eliminatedmore than 35,000 feet – or 6.6 miles – of high qualitystreams, which would have buried and killed fish,small invertebrates, salamanders, and other wildlifethat live in them. The project would have also result-ed in indirect impacts to stream life below the valleyfills. In addition, in EPA’s judgment, the proposedmitigation, which included in part reliance on sedi-ment ditches at the mine, would not have offset themine’s significant environmental impacts to miles ofhigh quality streams that would be buried and pol-luted by mining at the Spruce No. 1 Mine.

Uniqueness of the Spruce No. 1 Mine

Significant attention has been focused on the factthat EPA took action under Section 404(c) after issu-ance of the Spruce No. 1 Mine’s Clean Water Actpermit by the Corps. EPA’s action on the Spruce No.1 Mine represents only the second time that EPA hasused its authority under Section 404(c) to withdrawauthorization to discharge under a previously issuedpermit in the 39 years since the Clean Water Act waspassed. EPA recognizes that such action should onlybe taken in exceptional circumstances. The Spruce

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No. 1 Mine represents such an exceptional set of cir-cumstances.

Adverse environmental and water quality impactsassociated with the Spruce No. 1 Mine are among themost extensive and significant of any surface coalmining project ever proposed in the Appalachiancoalfields. In the case of the Spruce No. 1 Mine, asthe result of a voluntary agreement between envi-ronmental and community groups and the miningcompany, discharges had only occurred on a portionof the project site at the time EPA initiated and com-pleted its Section 404(c) action. EPA’s action prohib-its only the discharges that had not yet occurred –into Pigeonroost Branch, Oldhouse Branch, and theirtributaries – and did not affect ongoing mining activ-ities elsewhere on the project site.

EPA's Section 404(c) decision explicitly states theAgency’s willingness to work with the Corps and thecompany to evaluate a future mining configurationat the Spruce site that avoids the unacceptable ad-verse effects on wildlife that would have been causedby the Spruce No. 1 Mine. EPA is also committed toworking with others, including the mining industryand the states, under the Clean Water Act to en-courage mining practices that protect Appalachiancommunities and the mining jobs on which thesecommunities depend. EPA’s repeated attempts toreach out to the company were guided by our recentexperience with other mining projects, where it hasbeen demonstrated that we can work together to de-velop innovative, cost effective, and balanced ap-proaches to mining practices that not only protectwater quality, but also create jobs. As EPA has re-peatedly stated, its action on the Spruce No. 1 Minerepresents an exceptional circumstance, and the

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Agency is not contemplating the use of Section 404(c)on any other previously permitted surface coal min-ing projects in Appalachia.

Conclusion

We are committed to work together with our federaland state partners, coal companies, and the public toassure that decisions under the Clean Water Act areconsistent with the law and best available science.We also recognize the significant contribution of coalmining to the Nation’s economic and energy security.I want to assure you that we will use our Clean Wa-ter Act Section 404(c) authority in a responsible andenvironmentally effective manner, and in carefulconsideration of potential environmental justice andeconomic implications. I am confident we can workwith our federal and state partners, the public, andthe Congress to promote the Nation's energy andeconomic security and provide the environmental andpublic health protections required under the law.Appalachian families should not have to choose be-tween healthy watersheds and a healthy economy –they deserve both. We look forward to working withyou to achieve these important goals.

I appreciate the opportunity to be here today. I ampleased to answer any questions you might have.

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Appendix C

October 16, 2009

Colonel Robert D. PetersonDistrict EngineerU.S. Army Corps of Engineers, Huntington District502 Eighth StreetHuntington, West Virginia 25701

Re: Spruce No. 1 Surface Mine Permit 199800436-3 (Section 10: Coal River); Logan County, WestVirginia; Mingo Logan Coal Company

Dear Colonel Peterson:

The U.S. Environmental Protection Agency (EPA)has received your September 30, 2009 response toour September 3 letter denying EPA's request; pur-suant to 33 C.F.R. § 325.7, that you re-evaluate thedecision to issue a Clean Water Act Section 404 per-mit for the Spruce No. 1 Surface Mine, particularlygiven that discharges authorized by the permit havenot occurred while litigation is ongoing in FederalDistrict Court. We recognize the issued permit con-tains several provisions that may be intended to ad-dress water quality and mitigation based upon in-formation and data available at the time. However,in light of new data and information since permit is-suance, EPA remains concerned with much of theanalysis set forth in your letter, particularly as it re-lates to the potential for adverse water quality im-pacts, further avoidance and minimization measures,the potential for cumulative impacts, and identifica-tion and enforceability of success criteria for mitiga-tion.

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Consequently, this letter notifies you that, pursu-ant to 40 C.F.R. § 231.3(a), EPA has reason to believethat the Spruce No I mine, as currently authorized,may result in unacceptable adverse impacts to fishand wildlife resources. We intend to issue a publicnotice of a proposed determination to restrict or pro-hibit the discharge of dredged and/or fill material atthe Spruce No. 1 Mine project site consistent withour authority under Section 404(c) of the Clean Wa-ter Act and our regulations at 40 C.F.R. Part 231. Weare taking this unusual step in response to our veryserious concerns regarding the scale and extent ofsignificant environmental and water quality impactsassociated with the Spruce No. 1 mine, which are ex-plained below. The Spruce No. 1 mine represents thelargest authorized mountaintop removal operation inAppalachia and occurs in a watershed where manystreams have been impacted by previous mining ac-tivities. While we recognize that the project has beenmodified to reduce projected impacts, the project willstill bury more than seven miles of streams and addi-tional analyses by EPA and in a TMDL prepared bythe West Virginia Department of Environmental Pro-tection (WVDEP) and approved by EPA provide evi-dence that there is the potential for its associated dis-charges to cause further stream degradation. In addi-tion to the cumulative adverse water quality impactsthat include those associated with the Spruce No. 1mine, there are 12 additional surface mining projectseither proposed or authorized but not built in thesame watershed. The cumulative impacts on the de-graded sub-basin of Spruce No. 1 together with these12 additional projects, if all built, have not been as-sessed and factored in the regulatory context. In ad-dition, the permit does not contain conditions suffi-

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cient to ensure effective compensation for streamfunctions destroyed by this mining project.

Region III is aware that EPA has never before usedits Section 404(c) authority to review a previouslypermitted project since Congress enacted the CleanWater Act in 1972. That it is necessary in this cir-cumstance to initiate Section 404(c) review reflectsthe magnitude and scale of anticipated direct, indi-rect, and cumulative adverse environmental impactsassociated with this mountaintop removal miningoperation — the largest strip mining operation everproposed in Appalachia when it was first permittedby the Corps. EPA emphasizes that the Spruce No.1represents an unusual set of circumstances we do notexpect to be repeated again.

EPA's regulations on Section 404(c) proceduresprovide for further coordination between EPA, andthe Corps of Engineers and the applicant. Consistentwith EPA regulations at 40 C.F.R. § 231.3(a)(2), EPAis providing the Corps and the applicant with an op-portunity to submit any additional information forthe record to demonstrate that no unacceptable ad-verse effects would occur from this project, eitherstanding alone or in combination with operation ofother mines proposed and/or authorized in the CoalRiver sub-basin, or that satisfactory corrective actionwill be taken to prevent such adverse effects.

EPA is available to meet with you and the appli-cant during the next 15 days to discuss options forfurther reducing adverse environmental impacts as-sociated with the proposed project. We stand ready towork with you and your staff to modify the permit toaddress our concerns. We encourage you to contact usto schedule a discussion as soon as possible.

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Key Background Information

The Coal River sub-basin has approximately 283miles of designated high quality streams, which aredesignated as such because they have five or moremiles of desirable warm water fish populations orhave native or stocked trout populations that are uti-lized by the public. Direct impacts to the macroinver-tebrates, amphibians, and other aquatic fish andwildlife resources of the headikater streams that feedthese systems are extensive and far ranging. In addi-tion, disruptions in the biological processes of first-and second-order streams impact not only aquaticlife within the stream, but also the functions aquaticlife contribute to downstream aquatic systems in theform of nutrient cycling, food web dynamics, and spe-cies diversity (Cummins 1980, Merritt et al. 1984).

The Coal River Sub-basin has approximately 51species listed as endangered, threatened or state rarespecies. Many of these species rely on the aquatic eco-system for either habitat or foraging. Non-aquaticspecies such as avian and bat species rely on aquaticinsects as their food source. Salamanders within thesouthern Appalachians, one of the richest areas ofsalamander faunas in the world (Petranka 1998, Steinet al 2000), require these aquatic systems for habitat.

Based on information available to EPA, the projectas authorized includes construction of six valley fillsfor placement of excess spoil material generatedthrough surface coal mining activities, associatedsediment control structures, and one mine-througharea. Since the project was originally proposed, it hasbeen modified to reduce some adverse impacts toaquatic resources. The project has incorporated fillminimization techniques including a mine designthat utilizes the Approximate Original Contour Plus

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(AOC+) policy. EPA acknowledges the West VirginiaAOC+ policy was adopted as an approved method tominimize impacts to jurisdictional waters. However,the policy sets minimally acceptable methods andevery effort should be employed to maximize avoid-ance to aquatic resources in consideration of safetyand design stability. In addition, EPA believes oppor-tunities exist to incorporate additional methods toavoid and minimize impacts to aquatic resources,such as sequencing fill construction, consideration ofthe direction of mining, use of side hill fills and plac-ing the fill back to back to maximize the backfill.This list is not all inclusive, but rather examples ofadditional minimization considerations.

The Clean Water Act Section 404(b)(1) Guidelinesrequire that "no discharge of dredged or fill materialshall be permitted if it causes or contributes, afterconsideration of disposal site dilution and dispersion,to violation of any applicable State water qualitystandard." In addition, the Guidelines prohibit anydischarge of dredged or fill material that would causeor contribute to significant degradation of the aquaticecosystem, with special emphasis placed on the per-sistence and permanence of effects, both individuallyand cumulatively. Recent scientific studies (refer-ences included) have consistently indicated that sur-face mining with valley fills in Central Appalachiaare strongly related to downstream degradation oftenrising to the level of biological impairment. Thesestudies show that surface mining impacts on aquaticlife are strongly correlated with ionic strength in theCentral Appalachian stream networks. This increasein conductivity impairs aquatic life use, is persistentover time, and cannot be easily mitigated or removedfrom stream channels. Based on available infor-

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mation, EPA is concerned the project may cause orcontribute to a violation of the State's water qualitystandards or antidegradation policy.

With respect to water quality, we recognize theCorps has followed applicable procedural steps; spe-cifically, procuring a certification from the State pur-suant to Section 401 of the Clean Water Act, relyingupon the National Pollutant Discharge EliminationSystem (NPDES) permit, and reviewing analyses ofhydrologic consequences prepared pursuant to re-quirements of the Surface Mining Control and Rec-lamation Act, that are intended to ensure water qual-ity is protected. Nevertheless, EPA believes the anal-yses relied upon by the Corps did not sufficiently con-sider the potential impact of this project with respectto narrative criteria and downstream aquatic life us-es. As described in more detail above, the collectivescience strongly suggests that projects similar to theSpruce No. 1 project are associated with impairmentof downstream aquatic life use.

Water Quality Studies

EPA has worked hard to assess the effects of surfacecoal mining on water quality in streams below miningactivities. What we have learned is compelling andfurther substantiates the scientific literature thatpoints to a high potential for downstream water quali-ty excursions under current mining and valley fillpractices. To assess the potential for each project tocause excursions from water quality standards, wecompared measured water quality data from streamswithin which valley fills are proposed, to the neareststream within which valley fill discharges are al-ready occurring. In over 80% of the cases, we foundtwo results: first, in streams where valley fills wereproposed but not yet constructed water quality was

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within scientifically defensible, acceptable levels tosupport native aquatic life; second, in the streamswhere valley fills or mining disturbances were evi-dent, water quality as Measured by conductivity lev-els was substantially above levels believed to causeexcursion of water quality standards or significantdegradation as that term is defined in the Section404(b)(1) Guidelines. Similar data from nearbystreams associated with existing mining operationsstrongly suggest that construction of the Spruce No.1 mine has potential to cause or contribute to im-pairments downstream.

Once again, scientific literature, including EPA'sown 2008 published study, show clear evidence thatdischarges associated with the construction of valleyfills are very likely to elevate conductivity and thusnegatively affect healthy aquatic communities. That2008 study demonstrates that using West Virginia'sapproved methodology, the West Virginia StreamCondition Index, to assess down stream impacts tobiological communities, EPA found that nearly 65%of the time, narrative water quality standards wereexceeded. Using the more sensitive GLIMPSS, a ge-nus-level multi-metric index methodology, the natu-rally occurring aquatic communities in more than90% of streams below valley fills were degraded. De-spite years of post-mining recovery time, manystreams evaluated were degraded or exhibited an ex-cursion from narrative standards 15 to 20 years afterconstruction of the upstream facility was completed.A clear association of these adverse impacts with up-stream mining and with conductivity measures above500 ttS/cm (frequently less) was discovered.

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Environmental and Water Quality Impacts

Specific to Spruce No. 1, the Little Coal River wa-tershed contains 98 miles of impaired streams, rep-resenting 33% of the watershed, and the Coal Riversub-basin has 743 miles of impaired streams, repre-senting 30% of the sub-basin. Spruce Fork, the LittleCoal River, and Seng Camp Creek have approved to-tal maximum daily loads (TMDLs). Both PigeonroostBranch and Oldhouse Branch are not listed for waterquality impairments and may be providing cleanfreshwater dilution to Spruce Fork which has meas-ured conductivity readings above 500 µS/cm. WestVirginia Stream Condition Index scores indicate thatSpruce Fork is in poor condition. In addition, theTMDL for the Coal River sub-basin provides evidencesupporting this conclusion. When the TMDL was de-veloped, the WVDEP identified several streams asbiologically impaired due to conductivity from miningsources. Two of these streams, Rockhouse Creek andLeft Fork/Beach Creek are in the Spruce Fork water-shed where the Spruce No. 1 mine will be located.This is evidence that mining in this watershed islikely to be associated with elevated conductivity andimpaired biological condition. The TMDL is designedto address then-existing impairment, not potentialfuture impairment. While the TMDL may have con-sidered discharges from the Spruce No. 1 project withrespect to already impaired waters, it did not addressthe potential of the then-proposed Spruce No. 1 pro-ject to cause impairment in receiving waters thatwere not impaired at the time of the TMDL.

Cumulative Adverse Impacts.

We understand there are 12 mining operations ei-ther proposed or authorized but not constructed inaddition to Spruce No. 1 in the Coal River Sub-Basin.

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The potential cumulative impacts from these opera-tions have not been sufficiently analyzed. The Section404(b)(1) Guidelines require consideration of impactsindividually and cumulatively. Our new understand-ing of potential mining-induced cumulative impactswithin the sub-watershed, and even within the larger8-digit HUC sub-basin, compels us to ensure a fullunderstanding of watershed services, resiliency, andmitigation opportunities are achieved before appro-priate decisions can be made to assure protection ofthe environment and public health. In addition to his-toric and ongoing mining, the 12 known additionalmining projects proposed within the Coal River Sub-basin include four pending projects under considera-tion within the enhanced coordination review processestablished in the Memorandum of Understandingsigned June 11, 2009, six other permits that havebeen issued by the Corps but for which work has notyet commenced due to ongoing litigation, and twonew proposals recently issued on Public Notice. TheSpruce No. 1 proposal along with these 12 additionalprojects in the Coal River Sub-basin, if constructed asproposed, would impact approximately 35.6 miles(188,353 linear feet) of stream channels. EPA wantsto ensure that a robust cumulative impacts analysishas been undertaken.

Mitigation

With respect to mitigation, we understand that thepermit conditions include monitoring for biologicaland chemical function, as well as habitat. Neverthe-less, it does not appear that the permit identifies ac-tions to be taken when the monitoring being con-ducted indicates the biological and chemical parame-ters are being adversely impacted. For example,while Special Condition 13 suggests biological scores

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"should" be comparable to baseline scores, SpecialCondition 5 states that the compensatory mitigationobligation is satisfied when the Corps has verifiedthat the mitigation area is "intended" to become ju-risdictional waters functioning ecologically as setforth in the mitigation plan, rather than actuallyfunctioning as intended. In addition, in light of thepotential for the mitigation areas to become conduitsfor exporting poor water quality, we believe that mit-igation success criteria should include appropriatelevels for conductivity and/or total dissolved solids.

Conclusion

Section 404(c) authorizes EPA to prohibit, deny orrestrict use of any defined area for specification as adisposal site. In this instance, while the permit con-tains some provisions designed to address some ofEPA's concerns, further modifications to the permitare necessary if this project is to meet fully the re-quirements of the Clean Water Act and the agencies'regulations. Specifically, the applicant should be re-quired to achieve further avoidance and minimiza-tion of anticipated project impacts, construct the pro-ject sequentially to allow monitoring data from eachportion of the project to inform decisions regardinghow and whether the remainder of the project shouldbe constructed, that the permit should require specif-ic actions in response to monitoring data showingadverse changes in water quality, that there must bea mechanism to respond to monitoring data showingsignificant degradation of waters of the UnitedStates or a violation of water quality standards, thatthe permit should more clearly specify success crite-ria for mitigation, and the permit should identifysteps to be taken if mitigation success criteria are notachieved. In addition, the Coal River watershed

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should be assessed for the potential effects of this,and all other reasonably foreseeable projects, to thewater quality and other ecological services provided.

I appreciate your prompt attention to this matter. Ifyou have any questions or wish to arrange a meeting todiscuss potential project modifications to reduce the ad-verse impacts, please contact me at 215-814-2900, orJohn R. Pomponio, Director of the Environmental As-sessment and Innovation Division, EPA Region III at215-814-2702.

Sincerely,

/s/ William C. Early

William C. Early

Acting Regional Administrator

cc: Peter Silva

Assistant Administrator

Office of Water, EPA

Randy Huffman

Director, West Virginia DEP

Mingo Logan Coal Company

Allegheny Land Company

United Affiliates Corp.

Kelly Hatfield Land Company

Penn Virginia Resources Corp.

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Appendix D

EPA Proposes Veto of Mine Permit Under theClean Water Act

Release Date: 03/26/2010Contact Information: EPA Press Office,press@epa.gov, 202-564-6794, 202-564-7873

WASHINGTON – The U.S. Environmental Protec-tion Agency (EPA) today announced its proposal un-der the Clean Water Act to significantly restrict orprohibit mountain top mining at the Spruce No. 1surface mine in Logan County, W. Va. Spruce No.1mine is one of the largest mountaintop removal oper-ations ever proposed in Central Appalachia. The pro-ject was permitted in 2007 and subsequently delayedby litigation. The Spruce No. 1 mine would bury over7 miles of headwater streams, directly impact 2,278acres of forestland and degrade water quality instreams adjacent to the mine.

EPA’s proposed determination comes after extendeddiscussions with the company failed to produce anagreement that would lead to a significant decreaseof the environmental and health impacts of theSpruce No. 1 mine.

“Coal, and coal mining, is part of our nation’s energyfuture, and for that reason EPA has made repeatedefforts to foster dialogue and find a responsible pathforward. But we must prevent the significant and ir-reversible damage that comes from mining pollution-- and the damage from this project would be irre-versible,” said EPA Regional Administrator for theMid-Atlantic, Shawn Garvin. “This recommendationis consistent with our broader Clean Water Act ef-forts in Central Appalachia. EPA has a duty under

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the law to protect water quality and safeguard thepeople who rely on these waters for drinking, fishingand swimming.”

EPA has used its Clean Water Act veto authority injust 12 circumstances since 1972 and never for a pre-viously permitted project.

The proposed determination, signed today by Re-gional Administrator Garvin, identifies numerouspotential adverse impacts associated with the SpruceNo. 1 project:

Water Quality Impacts: The mine will cause ad-verse impacts to drinking water, native aquatic andwater-dependent communities in the Spruce Forkwatershed. Drainage from the Spruce No. 1 project islikely to include high levels of total dissolved solids(TDS) and selenium which adversely affect the natu-rally occurring aquatic communities. These includebirth defects in fish and other aquatic life and canalso result in toxic effects to embryos, resulting inabnormal development or death for those organisms.

Fish and Wildlife Impacts: Mining waste placedinto headwater streams will impact fish and wildlifewhich depend for all or part of their lifecycles on the-se headwater systems. Ecosystem functions per-formed by headwaters are lost when the headwaterstream is buried or removed. These functions are lostnot only to the headwater stream itself, but also todownstream aquatic ecosystems.

Mitigation Impacts: The project’s mitigation planinadequately evaluates the nature and extent of min-ing related aquatic impacts and therefore fails to re-place streams’ lost ecological services. Naturalstream channels buried by mining will be replaced,in part, by ditches being built to drain stormwater offof the mine, not to compensate for natural stream

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losses. These ditches will also drain water contami-nated by mining into streams adjacent to the mine.

Cumulative Mining Impacts: EPA believes thatthe Spruce No. 1 project, in conjunction with numer-ous other mining operations either under construc-tion or proposed for the Coal River basin, will con-tribute to the cumulative loss of water quality,aquatic systems, and forest resources. The Coal Riverbasin is already heavily mined and substantially im-paired. Landscape and site specific assessments re-veal that past and current mountaintop mining hascaused substantial, irreplaceable loss of resourcesand an irreversible effect on these resources withinthe Coal River basin.

CWA Section 404(c) authorizes EPA to restrict orprohibit placing certain pollutants in streams, lakes,rivers, wetlands and other waters if the agency de-termines that the activities would result in “unac-ceptable adverse impacts” to the environment, waterquality, or water supplies. This authority applies toproposed projects as well as projects previously per-mitted under the CWA. A final decision to restrict orprohibit the Spruce No.1 mine will be made in EPAHeadquarters based on a recommendation from theRegional Administrator, public comments, and dis-cussions with the Army Corps of Engineers and theMingo Logan Coal Company.

The proposed determination is being published in thefederal register and EPA is taking public commentfor 60 days. EPA is also scheduling a public hearingin West Virginia to provide an additional opportunityfor public input.

The proposed determination:http://www.epa.gov/region03/mtntop/spruce1documents.html

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Appendix E

2013 Report Card for America’s InfrastructureAmerican Society of Civil Engineers

Overview: Executive Summary

Every family, every community and every businessneeds infrastructure to thrive. Infrastructure en-compasses your local water main and the HooverDam; the power lines connected to your house andthe electrical grid spanning the U.S.; and the streetin front of your home and the national highway sys-tem.

Once every four years, America’s civil engineers pro-vide a comprehensive assessment of the nation’s ma-jor infrastructure categories in ASCE’s Report Cardfor America’s Infrastructure (Report Card). Using asimple A to F school report card format, the ReportCard provides a comprehensive assessment of cur-rent infrastructure conditions and needs, both as-signing grades and making recommendations for howto raise the grades. An Advisory Council of ASCEmembers assigns the grades according to the follow-ing eight criteria: capacity, condition, funding, futureneed, operation and maintenance, public safety, resil-ience, and innovation. Since 1998, the grades havebeen near failing, averaging only Ds, due to delayedmaintenance and underinvestment across most cate-gories.

Now the 2013 Report Card grades are in, and Ameri-ca’s cumulative GPA for infrastructure rose slightlyto a D+. The grades in 2013 ranged from a high of B-for solid waste to a low of D- for inland waterwaysand levees. Solid waste, drinking water, wastewater,roads, and bridges all saw incremental improve-

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ments, and rail jumped from a C- to a C+. No catego-ries saw a decline in grade this year.

The 2013 Report Card demonstrates that we can im-prove the current condition of our nation’s infrastruc-ture – when investments are made and projects moveforward, the grades rise. For example, greater pri-vate investment for efficiency and connectivitybrought improvements in the rail category; renewedefforts in cities and states helped address some of thenation’s most vulnerable bridges; and, several cate-gories benefited from short-term boosts in federalfunding.

We know that investing in infrastructure is essentialto support healthy, vibrant communities. Infrastruc-ture is also critical for long-term economic growth,increasing GDP, employment, household income, andexports. The reverse is also true -- without prioritiz-ing our nation’s infrastructure needs, deterioratingconditions can become a drag on the economy.

While the modest progress is encouraging, it is clearthat we have a significant backlog of overduemaintenance across our infrastructure systems, apressing need for modernization, and an immenseopportunity to create reliable, long-term fundingsources to avoid wiping out our recent gains. Over-all, most grades fell below a C, and our cumulativeGPA inched up just slightly to a D+ from a D fouryears ago.

We invite you to take a deeper look at the nation’sinfrastructure conditions in the 2013 Report Card –from the states infrastructure facts, to the interactivecharts, to our three key solutions.

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A brief summary of the findings for each category isbelow. Click on any heading to get more detailed in-formation on the category and explore the interactivecontent.

Dams: Dams again earned a grade of D. The averageage of the 84,000 dams in the country is 52 years old.The nation’s dams are aging and the number of high-hazard dams is on the rise. Many of these dams werebuilt as low-hazard dams protecting undeveloped ag-ricultural land. However, with an increasing popula-tion and greater development below dams, the over-all number of high-hazard dams continues to in-crease, to nearly 14,000 in 2012. The number of defi-cient dams is currently more than 4,000. The Associ-ation of State Dam Safety Officials estimates that itwill require an investment of $21 billion to repairthese aging, yet critical, high-hazard dams.

Drinking Water: The grade for drinking water im-proved slightly to a D. At the dawn of the 21st centu-ry, much of our drinking water infrastructure isnearing the end of its useful life. There are an esti-mated 240,000 water main breaks per year in theUnited States. Assuming every pipe would need to bereplaced, the cost over the coming decades couldreach more than $1 trillion, according to the Ameri-can Water Works Association (AWWA). The qualityof drinking water in the United States remains uni-versally high, however. Even though pipes and mainsare frequently more than 100 years old and in needof replacement, outbreaks of disease attributable todrinking water are rare.

Hazardous Waste: There has been undeniable suc-cess in the cleanup of the nation’s hazardous wasteand brownfields sites. However, annual funding forSuperfund site cleanup is estimated to be as much as

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$500 million short of what is needed, and 1,280 sitesremain on the National Priorities List with an un-known number of potential sites yet to be identified.More than 400,000 brownfields sites await cleanupand redevelopment. The Environmental ProtectionAgency (EPA) estimates that one in four Americanslives within three miles of a hazardous waste site.The grade for hazardous waste remained unchangedat a D.

Levees: Levees again earned a near failing grade ofD – in 2013. The nation’s estimated 100,000 miles oflevees can be found in all 50 states and the District ofColumbia. Many of these levees were originally usedto protect farmland, and now are increasingly pro-tecting developed communities. The reliability of the-se levees is unknown in many cases, and the countryhas yet to establish a National Levee Safety Pro-gram. Public safety remains at risk from these agingstructures, and the cost to repair or rehabilitate the-se levees is roughly estimated to be $100 billion bythe National Committee on Levee Safety. However,the return on investment is clear as levees helped inthe prevention of more than $141 billion in flooddamages in 2011.

Solid Waste: In 2010, Americans generated 250 mil-lion tons of trash. Of that, 85 million tons were recy-cled or composted. This represents a 34% recyclingrate, more than double the 14.5% in 1980. Per capitageneration rates of waste have been steady over thepast 20 years and have even begun to show signs ofdecline in the past several years. The grade for solidwaste improved in 2013, and it earned the highestgrade of B-.

Wastewater: The grade for wastewater improvedslightly to a D. Capital investment needs for the na-

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tion’s wastewater and stormwater systems are esti-mated to total $298 billion over the next 20 years.Pipes represent the largest capital need, comprisingthree quarters of total needs. Fixing and expandingthe pipes will address sanitary sewer overflows, com-bined sewer overflows, and other pipe-related issues.In recent years, capital needs for the treatmentplants comprise about 15%-20% of total needs, butwill likely increase due to new regulatory require-ments. Stormwater needs, while growing, are stillsmall compared with sanitary pipes and treatmentplants. Since 2007, the federal government has re-quired cities to invest more than $15 billion in newpipes, plants, and equipment to eliminate combinedsewer overflows.

Aviation: Despite the effects of the recent recession,commercial flights were about 33 million higher innumber in 2011 than in 2000, stretching the system’sability to meet the needs of the nation’s economy.The Federal Aviation Administration (FAA) esti-mates that the national cost of airport congestionand delays was almost $22 billion in 2012. If currentfederal funding levels are maintained, the FAA antic-ipates that the cost of congestion and delays to theeconomy will rise from $34 billion in 2020 to $63 bil-lion by 2040. Aviation again earned a D.

Bridges: Over two hundred million trips are takendaily across deficient bridges in the nation’s 102largest metropolitan regions. In total, one in nine ofthe nation’s bridges are rated as structurally defi-cient, while the average age of the nation’s 607,380bridges is currently 42 years. The Federal HighwayAdministration (FHWA) estimates that to eliminatethe nation’s bridge backlog by 2028, we would needto invest $20.5 billion annually, while only $12.8 bil-

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lion is being spent currently. The challenge for feder-al, state, and local governments is to increase bridgeinvestments by $8 billion annually to address theidentified $76 billion in needs for deficient bridgesacross the United States. However, with the overallnumber of structurally deficient bridges continuingto trend downward, the grade improved to C+.

InlandWaterways: Our nation’s inland waterwaysand rivers are the hidden backbone of our freightnetwork they carry the equivalent of about 51 milliontruck trips each year. In many cases, the inland wa-terways system has not been updated since the1950s, and more than half of the locks are over 50years old. Barges are stopped for hours each day withunscheduled delays, preventing goods from getting tomarket and driving up costs. There is an average of52 service interruptions a day throughout the sys-tem. Projects to repair and replace aging locks anddredge channels take decades to approve and com-plete, exacerbating the problem further. Inland wa-terways received a D- grade once again as conditionsremain poor and investment levels remain stagnant.

Ports: This new category for 2013 debuted with agrade of C. The U.S. Army Corps of Engineers esti-mates that more than 95% (by volume) of overseastrade produced or consumed by the United Statesmoves through our ports. To sustain and serve agrowing economy and compete internationally, ournation’s ports need to be maintained, modernized,and expanded. While port authorities and their pri-vate sector partners have planned over $46 billion incapital improvements from now until 2016, federalfunding has declined for navigable waterways andlandside freight connections needed to move goods toand from the ports.

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Rail: Railroads are experiencing a competitive re-surgence as both an energy-efficient freight transpor-tation option and a viable city-to-city passenger ser-vice. In 2012, Amtrak recorded its highest year ofridership with 31.2 million passengers, almost dou-bling ridership since 2000, with growth anticipatedto continue. Both freight and passenger rail havebeen investing heavily in their tracks, bridges, andtunnels as well as adding new capacity for freightand passengers. In 2010 alone, freight railroads re-newed the rails on more than 3,100 miles of railroadtrack, equivalent to going coast to coast. Since 2009,capital investment from both freight and passengerrailroads has exceeded $75 billion, actually increas-ing investment during the recession when materialsprices were lower and trains ran less frequently.With high ridership and greater investment in thesystem, the grade for rail saw the largest improve-ment, moving up to a C+ in 2013.

Roads: Targeted efforts to improve conditions andsignificant reductions in highway fatalities resultedin a slight improvement in the roads grade to a Dthis year. However, forty-two percent of America’smajor urban highways remain congested, costing theeconomy an estimated $101 billion in wasted timeand fuel annually. While the conditions have im-proved in the near term, and federal, state, and localcapital investments increased to $91 billion annually,that level of investment is insufficient and still pro-jected to result in a decline in conditions and perfor-mance in the long term. Currently, the FederalHighway Administration estimates that $170 billionin capital investment would be needed on an annualbasis to significantly improve conditions and perfor-mance.

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Transit: The grade for transit remained at a D astransit agencies struggled to balance increasing rid-ership with declining funding. America’s publictransit infrastructure plays a vital role in our econo-my, connecting millions of people with jobs, medicalfacilities, schools, shopping, and recreation, and it iscritical to the one-third of Americans who do notdrive cars. Unlike many U.S. infrastructure systems,the transit system is not comprehensive, as 45% ofAmerican households lack any access to transit, andmillions more have inadequate service levels. Ameri-cans who do have access have increased their rid-ership 9.1% in the past decade, and that trend is ex-pected to continue. Although investment in transithas also increased, deficient and deteriorating transitsystems cost the U.S. economy $90 billion in 2010, asmany transit agencies are struggling to maintain ag-ing and obsolete fleets and facilities amid an econom-ic downturn that has reduced their funding, forcingservice cuts and fare increases.

Public Parks and Recreation: The popularity ofparks and outdoor recreation areas in the UnitedStates continues to grow, with over 140 millionAmericans making use of these facilities a part oftheir daily lives. These activities contribute $646 bil-lion to the nation’s economy, supporting 6.1 millionjobs. Yet states and localities struggle to provide the-se benefits for parks amid flat and declining budgets,reporting an estimated $18.5 billion in unmet needsin 2011. The federal government is also facing a seri-ous challenge as well since the National Park Serviceestimates its maintenance backlog at approximately$11 billion. The grade for parks remained unchangedat a C-.

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Schools: Almost half of America’s public schoolbuildings were built to educate the baby boomers – ageneration that is now retiring from the workforce.Public school enrollment is projected to gradually in-crease through 2019, yet state and local school con-struction funding continues to decline. Nationalspending on school construction has diminished toapproximately $10 billion in 2012, about half the lev-el spent prior to the recession, while the condition ofschool facilities continues to be a significant concernfor communities. Experts now estimate the invest-ment needed to modernize and maintain our nation’sschool facilities is at least $270 billion or more.However, due to the absence of national data onschool facilities for more than a decade, a completepicture of the condition of our nation’s schools re-mains mostly unknown. Schools received a D againthis year.

Energy: America relies on an aging electrical gridand pipeline distribution systems, some of whichoriginated in the 1880s. Investment in power trans-mission has increased since 2005, but ongoing per-mitting issues, weather events, and limited mainte-nance have contributed to an increasing number offailures and power interruptions. While demand forelectricity has remained level, the availability of en-ergy in the form of electricity, natural gas, and oilwill become a greater challenge after 2020 as thepopulation increases. Although about 17,000 miles ofadditional high-voltage transmission lines and signif-icant oil and gas pipelines are planned over the nextfive years, permitting and siting issues threatentheir completion. Thus, the grade for energy re-mained a D+.

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Conclusion

Infrastructure is the foundation that connects thenation’s businesses, communities, and people, driv-ing our economy and improving our quality of life.For the U.S. economy to be the most competitive inthe world, we need a first class infrastructure systemtransport systems that move people and goods effi-ciently and at reasonable cost by land, water, andair; transmission systems that deliver reliable, low-cost power from a wide range of energy sources; andwater systems that drive industrial processes as wellas the daily functions in our homes. Yet today, ourinfrastructure systems are failing to keep pace withthe current and expanding needs, and investment ininfrastructure is faltering. We must commit today tomake our vision of the future a reality an Americaninfrastructure system that is the source of our pros-perity.

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Appendix F

Failure to Act: The Impact of Current Infra-structure Investment on America’s EconomicFutureAmerican Society of Civil Engineers

Introduction

Infrastructure is the physical framework upon whichthe U.S. economy operates and the nation’s standardof living depends. Everything depends on thisframework, including transporting goods, poweringfactories, heating and cooling office buildings, andenjoying a glass of clean water. The preceding fourFailure to Act reports compared current and project-ed needs for infrastructure investment against thecurrent funding trends in surface transportation; wa-ter and wastewater; electricity; and airports, inlandwaterways, and marine ports. Our projections in-cluded both the cost of building new infrastructure toservice increasing populations and the cost of ex-panded economic activity; and for maintaining or re-building existing infrastructure that needs repair orreplacement. The total documented cumulative gapbetween projected needs and likely investment inthese critical systems will be $1.1 trillion by 2020.The subsequent analyses focused on the long-termeffects associated with infrastructure investmentsand did not consider the immediate benefits associ-ated with the construction process. The results showthat deteriorating infrastructure, long known to be apublic safety issue, has a cascading impact on the na-tion’s economy, negatively affecting business produc-tivity, gross domestic product (GDP), employment,personal income, and international competitiveness.

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The results show that deteriorating infrastructure,long known to be a public safety issue, has a cascad-ing impact on the nation’s economy, negatively af-fecting business productivity, gross domestic product(GDP), employment, personal income, and interna-tional competitiveness.

The categories of infrastructure systems analyzed inthe preceding Failure to Act reports were reviewed inisolation by each study. However, it is clear thatthere is an interactive effect between different infra-structure sectors and a cumulative impact of an on-going investment gap in multiple infrastructure sys-tems. For example, regardless of how quickly goodscan be offloaded at the nation’s ports, if highway andrail infrastructure needed to transport these goods tomarket is congested, traffic will slow and costs tobusiness will rise, creating a drag on the U.S. econo-my that is ultimately reflected in a lower GDP.

This fifth and final report analyzes the interactiveeffect between investment gaps in the infrastructuresectors addressed in each of the preceding studies. Itpresents an overall picture of the national economicopportunity associated with infrastructure invest-ment and the consequences of failing to fill the in-vestment gap. The overall impact of deficient infra-structure associated with a general failure to investcannot be estimated by simply adding the impactsfound in each report because the degradation of sur-face transportation, water delivery and wastewatertreatment, electricity, inland waterways, and marineports each affect business productivity differently.Shifts to other production methods or modes of infra-structure may be possible given a decline in one sys-tem, which could mitigate the economic impacts offailing to invest in that system. For example, rail, in-

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land waterways, and trucks are used to get goods toretail shelves—deteriorating conditions in one sectortend to make the other sectors more competitive.However, a general decline in infrastructure condi-tions across multiple sectors would preclude suchstrategies. In addition, the consequences of infra-structure shortfalls differ by each system. With de-grading surface transportation, trips can still bemade, but they would take longer and be less relia-ble, and travel could be less safe. Declining airportand marine port infrastructure directly impacts thenation’s ability to import and export goods efficiently,driving up costs to U.S. consumers. Overall, if the in-vestment gap is not addressed throughout the na-tion’s infrastructure sectors, by 2020, the economy isexpected to lose almost $1 trillion in business sales,resulting in a loss of 3.5 million jobs. Moreover, ifcurrent trends are not reversed, the cumulative costto the U.S. economy from 2012–2020 will be morethan $3.1 trillion in GDP and $1.1 trillion in totaltrade.

Often, estimates of economic activity and job creationfocus on the design and construction period for infra-structure projects, such as a project to rebuild an ag-ing bridge. However, this study focuses on the incre-mental and gradual decline of infrastructure systemsunder current investment scenarios, and it showsthat the negative impacts on the nation’s economyare exacerbated over time as needed investments aredeferred. Conversely, this study demonstrates thatthe economic benefits of infrastructure investmentreverberate through every sector of the economy overtime.