DRAFT ECONOMIC ANALYSIS

OF CRITICAL HABITAT DESIGNATION

FOR ELEVEN MOBILE RIVER BASIN MUSSELS

June 2003

DRAFT ECONOMIC ANALYSIS

OF CRITICAL HABITAT DESIGNATION

FOR ELEVEN MOBILE RIVER BASIN MUSSELS

Prepared for:

Division of Economics

U.S. Fish and Wildlife Service

4401 N. Fairfax Drive

Arlington, VA 22203

Prepared by:

Industrial Economics, Incorporated

2067 Massachusetts Avenue

Cambridge, Massachusetts 02140

Send comments on the economic analysis to:

Field Supervisor

U.S. Fish and Wildlife Service

6578 Dogwood View Parkway, Suite A

Jackson, MS 39213

TABLE OF CONTENTS

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ES-1

1        INTRODUCTION AND BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-1

          1.1     Description of Species and Habitat. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

          1.2     Proposed Critical Habitat. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3

          1.3     Framework and Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-10

          1.4     Information Sources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-22

2        SOCIOECONOMIC PROFILE AND BASELINE ELEMENTS. . . . . . . . . . . . . 2-1

          2.1     Socioeconomic Profile of the Critical Habitat Area. . . . . . . . . . . . . . . . .2-1

          2.2     Relevant Baseline Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-12

3        SECTION 7 ACTIVITIES WITHIN THE MUSSEL CRITICAL HABITAT DESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1

          3.1     Categories of Economic Impacts Associated with Section 7 Implementation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-1

          3.2     Activities Potentially Affected by Critical Habitat

                     Designation for the Mussels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-4

4        ECONOMIC IMPACT OF CRITICAL HABITAT DESIGNATION. . . . . . . . . . . 4-1

          4.1     Estimated Total Costs of Section 7. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1

          4.2     Section 7 Activity Details Within Proposed Critical Habitat. . . . . . . . .4-11

          4.3     Estimated Technical Assistance Efforts. . . . . . . . . . . . . . . . . . . . . . . .4-38

          4.4     Other Regulatory Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-41

5        POTENTIAL BENEFITS OF PROPOSED CRITICAL HABITAT. . . . . . . . . . . 5-1

          5.1     Categories of Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-2

          REFERENCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ref-1

          APPENDIX A: State-level Baseline Protections to the Mussels and Habitat. .A-1

          APPENDIX B: Other Regulatory Assessments. . . . . . . . . . . . . . . . . . . . . . . . B-1

          APPENDIX C: Section 7 Costs for the Mussels Per Unit and Activity. . . . . . .C-1

EXECUTIVE SUMMARY

1.                 The purpose of this report is to identify and analyze the potential economic impacts that may result from the proposed critical habitat designation for the 11 Mobile River basin mussels (the mussels). This report was prepared by Industrial Economics, Incorporated (IEc), under contract to the U.S. Fish and Wildlife Service’s (Service) Division of Economics, and was delivered on June 23, 2003.

2.                 Section 4(b)(2) of the Endangered Species Act (Act) requires the Service to designate critical habitat on the basis of the best scientific data available, after taking into consideration the economic impact, and any other relevant impact, of specifying any particular area as critical habitat. The Service may exclude areas from critical habitat designation when the benefits of exclusion outweigh the benefits of including the areas within critical habitat, provided the exclusion will not result in extinction of the species.

Framework for the Analysis

3.                 The primary purpose of this analysis is to estimate the economic impact that will result from the designation of critical habitat for the mussels. This information is intended to assist the Secretary in making decisions about whether the benefits of excluding particular areas from the designation outweigh the benefits of including those areas in the designation. This economic analysis considers the economic efficiency effects that may result from the designation and addresses how the impacts of the designation are distributed, including an assessment of any local or regional economic impacts of the designation and the potential effects of the designation on small entities, the energy industry, or governments. This information can be used by decision-makers to assess whether the effects of the designation might unduly burden a particular group or economic sector.

4.                 OMB guidelines for conducting economic analysis of environmental regulation direct Federal agencies to measure the costs of a regulatory action against a baseline. The baseline includes the currently existing regulatory and socio-economic burden imposed on landowners and managers potentially affected by the designation of critical habitat including, for example, local zoning laws, state natural resource laws, and enforceable management plans and best management practices applied by other State and Federal agencies. Existing laws, regulations, and policies that offer baseline protections to the mussels are described in greater detail in Section 2 and Appendix A of this analysis.

5.                 This analysis describes impacts that are expected to occur above and beyond the baseline. In other words, it measures the costs of compliance with the Act that would not occur in the absence of the currently proposed critical habitat. Importantly, economic impacts associated with section 9 and 10 of the Act, with a few exceptions, are considered to be part of the regulatory baseline and thus are not addressed in this report. These costs are considered to be part of the baseline because they remain unaffected by the designation of critical habitat.

6.                 The measurement of direct compliance costs focuses on the implementation of section 7 of the Act. This section requires Federal agencies to consult with the Service to ensure that any action authorized, funded, or carried out will not likely jeopardize the continued existence of any endangered or threatened species or result in the destruction or adverse modification of critical habitat. The administrative costs of these consultations, along with the costs of project modifications resulting from these consultations, represent the direct compliance costs of designating critical habitat. Importantly, this analysis does not differentiate between consultations that result from the listing of the species (i.e., the jeopardy standard) and consultations that result from the presence of critical habitat (i.e., the adverse modification standard).

7.                 The designation may, under certain circumstances, affect actions that do not have a Federal nexus or are otherwise not subject to the provisions of section 7 under the Act. For example, although technical assistance is not a direct cost of section 7 of the Act, these costs are incorporated into the cost analysis when they are explicitly propagated by consideration of species and habitat conservation. Similarly, a State agency may request technical assistance from the Service as a precaution to ensure that activities without a Federal nexus, such as the issuance of National Pollutant Discharge Elimination System (NPDES) permits, adequately provide for particular species and habitats. In this case, costs of Service review of such activities would be included as a cost of critical habitat designation.

8.                 The analysis examines activities taking place both within and adjacent to the proposed designation. It estimates impacts based on activities that are “reasonably foreseeable," including, but not limited to, activities that are currently authorized, permitted, or funded, or for which proposed plans are currently available to the public. Accordingly, the analysis bases estimates on activities that are likely to occur within a ten year time frame, beginning on the day that the current proposed rule becomes available to the public. The ten-year time frame was chosen for the analysis because, as the time horizon for an economic analysis is expanded, the assumptions on which the projected numbers of projects are based become increasingly speculative.

9.                 This report relies on a sequential methodology and focuses on distilling the salient and relevant aspects of potential economic impacts of the proposed designation. The steps followed in this analysis consist of:

          •         Describing current and projected economic activity within and around the proposed critical habitat area;

          •         Identifying whether such activities are likely to involve a Federal nexus;

          •         For activities with a Federal nexus, evaluating the likelihood that these activities will require consultations under section 7 of the Act and, in turn, result in any modifications to projects.

          •         Estimating the direct costs of expected section 7 consultations, project modifications and other economic impacts associated with the designation;

          •         Estimating the likelihood that current or future activities may require additional compliance with other Federal, State, and local laws as a result of new information provided by the proposed designation;

          •         Estimating the likelihood that projects will be delayed by the consultation process or other regulatory requirements triggered by the designation;

          •         Estimating the likelihood that economic activity will be affected by regulatory uncertainty, and/or property values affected;

          •         Estimating the indirect costs of the designation, as reflected in the cost of compliance with State and local laws, project delays, regulatory uncertainty, and effects on property values;

          •         Assessing the extent to which critical habitat designation will create costs for small businesses as a result of modifications or delays to projects;

          •         Assessing the effects of administrative costs and project modifications on the supply, distribution, and use of energy; and

          •         Determining the benefits that may be associated with the designation of critical habitat.

Key Findings

10.               Exhibit ES-1 provides an overview of the present value of total section 7 costs associated with the listing and designation of critical habitat for the mussels over a ten year period. As the exhibit shows, estimates of the costs associated with section 7 consultations for the mussels, discounted to present value using a rate of seven percent, range from $6.42 million to $23.5 million over a ten year period. This present value range equates to an annualized stream of costs of $914,000 to $3.35 million. This cost range represents the costs of the designation associated with section 7 consultations and resulting project modifications, and technical assistance efforts. The analysis did not identify any broader regional economic impacts or constraints on commerce beyond these costs.

11.               The general distribution of these costs by activity, unit, and party bearing them is as follows:

 •Costs by type of major activity. As detailed in Exhibit ES-2, a range of activities may be affected by the designation of critical habitat for the mussels. The majority of these costs, however, are expected to stem from consultations with the U.S. Army Corps of Engineers (USACE) and related project modifications concerning dredging activities. The primary area of uncertainty concerns water supply dam proposals in Alabama and Georgia. Any of these dam proposals may significantly affect critical habitat. If construction plans proceed on these dams, consultation will be required. Considerable uncertainty exists with respect to the level of project modification that may be recommended with respect to the permitting and construction of these dams, particularly regarding minimum flow recommendations.

•         Costs by unit. As detailed in Exhibit ES-3, Units 16 and 25 are likely to engender the highest costs on a unit-by-unit basis. Within Units 16 and 25, these high costs result from the relatively large project modification costs that are forecast to occur related to the restriction of in-stream activity and infrastructure construction associated with road and bridge maintenance projects (i.e., constructing bridges that span streams in place of using instream pilings). These project modifications add approximately $300,000 each to seven informal consultations in Unit 16 and three informal consultations within Unit 25.

•         Costs by type of entity. Approximately, 56 percent of total section 7 costs will be borne by third parties (e.g., local and State governmental agencies). Of the remaining costs, approximately six percent will be borne by the Service, and 38 percent by other Federal agencies.

•         Costs by category. Administrative costs of consultations will generate a high end estimate of approximately 24 percent of total designation costs. Resulting project modifications are anticipated to account for 73 percent, and technical assistance accounts for approximately three percent of the total costs.

Detail of Section 7 Costs

12.               The following section first outlines costs by major activity affected by critical habitat designation, and then allocates these costs on a unit-by-unit basis. A detailed itemization of this cost information by activity, unit, type of entity, and category is provided in Appendix C.

          Costs By Major Activity

13.               The following discussion summarizes the activities anticipated to experience impacts due to designation of critical habitat for the mussels. Related consultations and project modification costs are summarized in Exhibit ES-2. Federal agencies that may consult with the Service concerning these activities include the Army Corps of Engineers (USACE), Natural Resources Conservation Service (NRCS), the Federal Highway Administration (through State Departments of Transportation (DOT)), Farm Service Agency (FSA), U.S. Environmental Protection Agency (EPA), the Tennessee Valley Authority (TVA), and the U.S. Forest Service (USFS).

•         Road and bridge construction or maintenance. State DOTs and the USACE are expected to engage in 141 to 151 informal and 17 formal section 7 consultations regarding road/bridge construction and maintenance projects at a total cost of approximately $4.8 million to $10.1 million over the next ten years. Modifications to these projects may include such measures as increasing standards for erosion and sedimentation control, restricting in-stream construction, surveying for species, and relocating species for the duration of the project period. It is difficult to predict where these costs will occur throughout the designation. This analysis assumes that the third party (i.e., the local government) will absorb these increased costs.

•         Hydropower. Operation of hydropower dams is anticipated to result in one informal and three formal consultations over the next ten years. Two of the formal consultations stem from the relicensing of hydro dams by FERC. One of these consultations is anticipated to bear project modification costs of approximately $484,000. The informal and remaining formal consultation will engage FERC and the USACE in discussion regarding the operation of a third hydropower dam. The total section 7 costs stemming from hydropower consultations may be up to $1.06 million over the next ten years.

•         Water supply dams. Although it is unclear whether water supply dams will be permitted or constructed within the proposed critical habitat area within the next ten years, it is possible that the Service will consult formally on two proposals for such infrastructure. One of these dams was permitted through a past consultation. Designation of critical habitat within the dam footprint, however, is expected to result in reinitiation of this consultation. Costs for water supply dam consultations are anticipated to range from $515,000 to $546,000. Given the uncertainty concerning the level of project modification that may be recommended, both pertaining to critical habitat and other factors, this analysis does not quantify broader regional impacts associated with these consultations.

•         Utilities Construction/Maintenance. Construction or maintenance of in-stream pipelines, transmission lines and other utility infrastructure is anticipated to result in ten informal and four formal consultations with the USACE and TVA, at a total cost of $358,000 to $3.2 million over the next ten years. This cost estimate is driven by the potential project modifications associated with USACE utility maintenance projects including potential costs for species surveys, mussel relocation, and habitat restoration.

•         Activities in National Forests. This analysis anticipates that land disturbance activities in national forests, such as silviculture, or trail construction and maintenance, may result in 63 informal and four formal consultations over the next ten years. As consultations associated with such activities are not expected to result in project modifications, the total estimated costs of these consultations range from $238,000 to $965,000.

•         Agriculture or Ranching-Related Activities. Agricultural or ranching activities that involve a Federal nexus will result in 35 to 38 informal and 6 formal consultations at a total cost of $239,000 to $748,000 over the next ten years.

•         Water Quality Activities. EPA engages in section 7 consultation with the Service regarding water quality standards, to ensure that they are appropriately protective of endangered and threatened species. Specifically, this analysis anticipates 17 to 29 informal consultations and 20 formal consultations with the EPA related to water quality activities, at a total cost of $485,000 to $1,250,000 over the next ten years. Further, the Service may provide technical assistance for review of NPDES permits 400 to 460 times over the next ten years, adding $260,000 to $713,000 in administrative costs.

•         Recreation and Conservation Activities. Recreation and conservation activities on private land may involve a Federal nexus through Federal funding from the Service’s Partners for Fish and Wildlife program or other beneficial activities, including funding of fish stocking programs. The USACE also anticipated accelerating it’s habitat restoration programs over the next ten years. This analysis accordingly anticipates 145 to 152 informal and one formal consultation with respect to conservation projects at a total cost of $506,000 to $2,500,000 over the next ten years. Although these activities are federally operated and therefore a cost of critical habitat due to the requirements of section 7, such activities are intended to be beneficial to the species and habitat in the long run.

•         Dredging. The USACE anticipates engaging in eight formal and six informal consultations regarding dredging activities over the next ten years. Two of the formal consultations are associated with dredging of the Federal navigation channel on the Alabama River. One of these consultations may bear project modification costs of up to $8,245,000 dependant upon whether the Service will recommend purchase of upland disposal sites for dredge material. Due to potentially harmful geomorphic effects to mussels, however, the Service has stated that it does not intend to recommend upland disposal of dredge material in the Alabama River within the foreseeable future. In this case, project modification costs for dredging would be reduced by $8 million, and the nominal high-end cost of the proposed designation would be reduced to $25.3 million, a 24 percent reduction in total costs.

14.               The mussel critical habitat area is characterized by mostly private rural, and some suburban, lands. Agriculture and ranching are common land uses in the region. Based on extensive review of the consultation history and interviews with Federal and State agencies, however, economic impacts to farmers and ranchers are anticipated to be minimal. Agricultural and ranching-related consultations primarily involve Federal assistance for conservation programs (i.e., the Environmental Quality Incentives Program) and are unlikely to result in project modifications. Similarly, although coal mining and silviculture occur within the designation, these activities are already expected to follow best management practices (BMPs) required by the Action agencies, independent of section 7. Additionally, in the geographic region considered in this analysis, these activities lack a Federal nexus. As such, the designation of critical habitat is not anticipated to impact these activities.

          Costs By Unit

15.               Exhibit ES-3 provides a per unit summary of the consultation, technical assistance, and project modification costs likely to be associated with the proposed critical habitat over a ten year period. A more detailed exhibit of unit costs by activity, unit, type of entity, and category is provided in Appendix C of this report. Note that insufficient information currently exists to associate all costs with explicit units. In instances where certain costs cannot be associated with specific units, the exhibit aggregates these costs across the relevant set of units (e.g., costs attributable jointly to units 18, 19, 20, and 22), or states (e.g., certain costs projected to be incurred across all units in Alabama, Mississippi, Georgia, or Tennessee). The check marks in the exhibit indicate what category of cost (i.e., administrative consultation costs, project modifications, or technical assistance) is forecast to be incurred in each unit.

Benefits Associated with the Designation

16.               Various categories of benefit may derive from the listing of the mussels and the designation of critical habitat. For example, survival and recovery of the species may lead to enhanced existence values. In addition, protection of mussel habitat may produce benefits such as preservation of habitat suitable for recreational uses, improved water quality, and habitat improvement for other species.

17.               Insufficient information exists to quantify the benefits of habitat protection. Several studies published in the economics literature, however, have attempted to estimate the public’s willingness to pay for the designation of critical habitat for endangered species. While these studies do not predict the “willingness to pay” individuals would have for the protections afforded to the mussels’ habitat through critical habitat designation, they support the notion that preservation of mussel habitat may generate substantial benefits to the public.

Key Uncertainties

18.               Exhibit ES-4 presents the key assumptions of this economic analysis, as well as the potential direction of bias introduced by the assumptions. In addition, issues regarding allocation of costs may change. For example, certain consultations are anticipated to occur within a range of units (i.e., critical habitat units within Alabama), but cannot be accurately applied to any one specific unit. This caveat does not have an effect on the total costs anticipated from the designation, but rather the allocation of that cost across units.

19.               The above caveats describe factors that introduce uncertainty into the results of this analysis. The Service therefore solicits from the public further information on any of the issues presented above. Additionally, information pertaining to the following questions is requested.

          •         Are data available to develop more accurate estimates of the costs of project modifications related to the relicensing of Weiss dam and operations at Carters Reregulation Dam(See Sections 3.2.2 and 4.2.2 for further detail concerning this issue)?

          •         Are data available to discern the likelihood that the proposed water supply dams will be constructed within critical habitat (see Sections 3.2.3 and 4.2.3 for additional detail concerning these dams)? Further, is information available regarding the costs of potential project modifications for construction of these dams?

          •         Are data available on additional land use practices, or current or planned activities in proposed critical habitat areas, that are not specifically or adequately addressed in this analysis?

          •         Are data available detailing additional specific benefits of the species or habitat that may be incorporated qualitatively or quantitatively into the discussion of benefits?

INTRODUCTION AND BACKGROUND                                                    SECTION 1

20.               On March 26, 2003, the U.S. Fish and Wildlife Service (Service) proposed to designate 26 river and stream segments (units), totaling approximately 1,760 kilometers (km) (1,093 miles (mi)) as critical habitat for 11 mussels in the Mobile River basin in the States of Alabama, Georgia, Mississippi, and Tennessee. The purpose of this report is to identify and analyze potential economic impacts that may result from the proposed critical habitat designation. This report was prepared by Industrial Economics, Incorporated (IEc), under contract to the Service’s Division of Economics, and was delivered on June 23, 2003.

21.               Section 4(b)(2) of the Endangered Species Act (the Act) requires the Service to designate critical habitat on the basis of the best scientific data available, after taking into consideration the economic impact, and any other relevant impact, of specifying any particular area as critical habitat. The Service may exclude areas from critical habitat designation when the benefits of exclusion outweigh the benefits of including the areas within critical habitat, provided the exclusion will not result in extinction of the species.

22.               Under the listing of a species, section 7(a)(2) of the Act requires Federal agencies to consult with the Service in order to ensure that activities they fund, authorize, permit, or carry out are not likely to jeopardize the continued existence of the species. The Service defines jeopardy as any action that would appreciably reduce the likelihood of both the survival and recovery of the species. For designated critical habitat, section 7(a)(2) also requires Federal agencies to consult with the Service to ensure that activities they fund, authorize, permit, or carry out do not result in destruction or adverse modification of critical habitat. Adverse modification of critical habitat is currently construed as any direct or indirect alteration that appreciably diminishes the value of critical habitat for conservation of a listed species.

1.1     Description of Species and Habitat

23.               The 11 mussels are in the family Unionidae, and are typically found embedded in the bottom of rivers and streams within the Mobile River Basin. These species siphon water into their shells and across their gills, which are specialized for respiration and food collection. Mussel larvae (glochidia) require a parasitic stage on the fins, gills, or skin of host fish species in order to change into juvenile mussels. The following list provides the common and scientific names of the 11 mussels.

          •         Fine-lined pocketbook (Lampsilis altilis)

          •         Orange-nacre mucket (Lampsilis perovalis)

          •         Alabama moccasinshell (Medionidus acutissimus)

          •         Coosa moccasinshell (Medionidus parvulus)

          •         Ovate clubshell (Pleurobema perovatum)

          •         Southern clubshell (Pleurobema decisum)

          •         Dark pigtoe (Pleurobema furvum)

          •         Southern pigtoe (Pleurobema georgianum)

          •         Triangular kidneyshell (Ptychobranchus greenii)

          •         Upland combshell (Epioblasma metastriata)

          •         Southern acornshell (Epioblasma othcaloogensis)

24.               Historically, the mussels were widespread and abundant throughout the Mobile River Basin. Available suitable habitat for the these species, however, has been substantially reduced. Three of the species were listed as threatened, and eight as endangered under the Act on March 17, 1993. The species now primarily exist in isolated populations due to impacts from habitat degradation and modification from dams, dredging, mining, pollution, and introduced predaceous fishes. Habitat fragmentation and modification resulting from siltation, reduced water quality, tributary impoundment, stream channelization, and changes in stream hydrology continue to threaten the species.

25.               In determining which areas to propose as critical habitat, the Service must focus on those physical and biological features that are essential to the conservation of the species and that may require special management consideration or protection. These essential features are referred to as the species’ primary constituent elements (PCEs). The following are the PCEs that the Service has identified as essential to the conservation of the 11 mussels.

          •         Geomorphically stable stream and river channels and banks;

          •         A flow regime (i.e., the magnitude, frequency, duration, and seasonality of discharge over time) necessary for normal behavior, growth, and survival of all life stages of mussels and their fish hosts in the river environment;

          •         Water quality, including temperature, pH, hardness, turbidity, oxygen content, and other chemical characteristics, necessary for normal behavior, growth, and viability of all life stages;

          •         Sand, gravel, and/or cobble substrates with low to moderate amounts of fine sediment, low amounts of attached filamentous algae, and other physical and chemical characteristics necessary for normal behavior, growth, and viability of all life stages;

          •         Fish hosts with adequate living, foraging, and spawning areas; and

          •         Few or no competitive nonnative species present.

The Service considers these PCEs to facilitate delineation of potential critical habitat units for the mussels. One or more of the primary constituent elements must exist in the proposed areas to ensure a potential for the species to exist within each portion of the designation.

1.2     Proposed Critical Habitat

26.               The Service has proposed to designate 26 stream and river segments (units), representing approximately 1,760 kms (1,093 mi) of rivers and streams in the States of Alabama, Georgia, Mississippi, and Tennessee as critical habitat for the 11 mussels. The proposed designation includes portions of the Tombigbee River drainage in Mississippi and Alabama; Black Warrior River drainage in Alabama; Alabama River drainage in Alabama; Tallapoosa River drainage in Alabama and Georgia; and Coosa River drainage in Alabama, Georgia, and Tennessee.

27.               Lands proposed as critical habitat are under Federal, State, local government, and private ownership. Approximately 897 miles (1,440 km), or 82 percent of the proposed critical habitat is bordered by privately-owned lands. The critical habitat units run through portions of 31 counties in the four states.

28.               Within each unit, the Service proposes to designate the stream and river channels within the ordinary high water line. Background information on each critical habitat unit is provided in Exhibit 1-1, followed by further detailed information describing the units.

1.3     Framework and Methodology

29.               The primary purpose of this analysis is to estimate the economic impact that will result from the designation of critical habitat for the mussels. This information is intended to assist the Secretary in making decisions about whether the benefits of excluding particular areas from the designation outweigh the benefits of including those areas in the designation. In addition, this information allows the Service to address the requirements of Executive Orders 12866 and 13211, the Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act (SBREFA), and the Unfunded Mandates Reform Act (UMRA).

30.               This chapter provides the framework for this analysis. First, it defines the economic effects considered in the analysis. Second, it establishes the baseline against which these effects are measured. Third, it describes the measurement of direct compliance costs, which include costs associated with, and generated as a result of, section 7 consultations. Fourth, it identifies potential indirect economic effects of the rule resulting from (1) compliance with other parts of the Act potentially triggered by critical habitat, (2) compliance with other laws, and (3) time delays and regulatory uncertainty. Fifth, it discusses the need for an economic assessment of the benefits of critical habitat designation. Finally, the section concludes by discussing the time frame for the analysis and the general steps followed in the analysis.

          1.3.1  Types of Economic Effects Considered

31.               This economic analysis considers both the economic efficiency and distributional effects that may result from the designation. In the case of critical habitat designation, economic efficiency effects generally reflect the “opportunity costs” associated with the commitment of resources required to comply with the Act. For example, if activities on private land are limited as a result of a designation, and thus the market value of the land reduced, this reduction in value represents one measure of opportunity cost or change in economic efficiency. Similarly, the costs incurred by a Federal Action agency to consult with the Service under section 7 represent opportunity costs of the designation.

32.               This analysis also addresses how the impacts of the designation are distributed, including an assessment of any local or regional economic impacts of the designation and the potential effects of the designation on small entities, the energy industry, or governments. This information can be used by decision-makers to assess whether the effects of the designation might unduly burden a particular group or economic sector.

33.               For example, while the designation may have a relatively small impact when measured in terms of changes in economic efficiency, individuals employed in a particular sector of the economy in the geographic area of the designation may experience relatively greater effects. The difference between economic efficiency effects and distributional effects, as well as their application in this analysis, are discussed in greater detail below.

                     Efficiency Effects

34.               At the guidance of the Office of Management and Budget (OMB) and in compliance with Executive Order 12866 “Regulatory Planning and Review,” Federal agencies measure changes in economic efficiency in order to understand how society, as a whole, will be affected by a regulatory action. In the context of this regulatory action, these efficiency effects represent the opportunity cost of resources used or benefits foregone by society as a result of critical habitat designation. Economists generally characterize opportunity costs in terms of changes in producer and consumer surpluses in affected markets.

35.               In some instances, compliance costs may provide a reasonable approximation for the efficiency effects associated with a regulatory action. For example, a landowner or manager may need to enter into a consultation with the Service to ensure that a particular activity will not adversely modify critical habitat. The effort required for the consultation represents an economic opportunity cost, because the landowner or manager’s time and effort would have been spent in an alternative activity had the parcel not been included in the designation. When compliance activity is not expected to significantly affect markets -- that is, not result in a shift in the quantity of a good or service provided at a given price, or in the quantity of a good or service demanded given a change in price -- the measurement of compliance costs can provide a reasonable estimate of the change in economic efficiency.

36.               Where a designation is expected to significantly impact a market, it may be necessary to estimate changes in producer and consumer surpluses. For example, a designation that precludes the development of large areas of land may shift the price and quantity of housing supplied in a region. In this case, changes in economic efficiency can be measured by considering changes in producer and consumer surplus in the real estate market.

37.               This analysis begins by measuring reasonably foreseeable compliance costs resulting from the designation. As noted above, in some cases, compliance costs can provide a reasonable estimate of changes in economic efficiency. However, if the designation is expected to significantly impact markets, the analysis will consider potential changes in consumer and/or producer surplus in affected markets.

                     Distributional and Regional Economic Effects

38.               Measurements of changes in economic efficiency focus on the net impact of the regulation, without consideration for how certain economic sectors or groups of people are affected. Thus, a discussion of efficiency effects alone may miss important distributional considerations concerning groups that may be disproportionately affected. OMB encourages Federal agencies to consider distributional effects separately from efficiency effects. This analysis considers several types of distributional effects, including impacts on small entities; impacts on energy supply distribution and use; impacts on governments; and regional economic impacts. It is important to note that these are fundamentally different measures of economic impact than efficiency effects, and thus cannot be added to or compared with estimates of changes in economic efficiency.

                     Impacts on Small Entities, Energy Supply, Distribution and Use, and Governments

39.               This analysis considers how small entities, including small businesses, organizations, and governments, as defined by the RFA, might be affected by critical habitat designation. In addition, in response to Executive Order 13211 “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,” this analysis considers the impacts of critical habitat on the energy industry and its customers. Finally, in accordance with UMRA, this analysis considers the effects of the regulatory action on State, local, and tribal governments and the private sector.

                     Regional Economic Effects

40.               Regional economic impact analysis provides an assessment of the potential localized effects of critical habitat designation. Specifically, regional economic impact analysis produces a quantitative estimate of the potential magnitude of the initial change in the regional economy resulting from a regulatory action. Regional economic impacts are commonly measured using regional input/output models. These models rely on multipliers that mathematically represent the relationship between a change in one sector of the economy (e.g., hydroelectric power generation) and the effect of that change on economic output, income, or employment in other local industries (e.g., manufacturers relying on the electricity generated). These economic data provide a quantitative estimate of the magnitude of shifts of jobs and revenues in the local economy.

41.               The use of regional input/output models in an analysis of the impacts of critical habitat can overstate the long-term impacts of a regulatory change. Most importantly, these models provide a static view of the economy of a region. That is, they measure the initial impact of a regulatory change on an economy but do not consider long-term adjustments that the economy will make in response to this change. For example, these models provide estimates of the number of jobs lost as a result of a regulatory change, but do not consider re-employment of these individuals over time. In addition, the flow of goods and services across the regional boundaries defined in the model may change as a result of the designation, compensating for a potential decrease in economic activity within the region.

42.               Despite these and other limitations, in certain circumstances regional economic impact analysis may provide useful information about the scale and scope of localized impacts. It is important to remember that measures of regional economic effects generally reflect shifts in resource use rather than efficiency losses. These types of distributional effects, therefore, should be reported separately from efficiency effects (i.e., not summed). In addition, measures of regional economic impact cannot be compared with estimates of efficiency effects.

          1.3.2  Defining the Baseline

43.               OMB guidelines for conducting economic analysis of environmental regulation direct Federal agencies to measure the costs of a regulatory action against a baseline. In its guidance, OMB states, the "baseline should be the best assessment of the way the world would look absent the proposed action" (i.e., absent the designation of critical habitat). In other words, the baseline includes the currently existing regulatory and socio-economic burden imposed on landowners and managers potentially affected by the designation of critical habitat. The baseline burden may include, for example:

          •         Local zoning laws;

          •         State natural resource laws;

          •         Enforceable management plans and best management practices applied by other State and Federal agencies;

          •         Federal, State, and local protections already in place in the same geographic area for other (Federal and State) listed species; and/or

          •         Statutory protections provided for the species by the Act that exist in the absence of designated critical habitat.

Existing baseline laws, regulations, and policies are described in greater detail in Section 2 and Appendix A of this analysis.

44.               This analysis describes impacts that are expected to occur above and beyond the baseline. In other words, it measures the costs of compliance with the Act that would not occur in the absence of the currently proposed critical habitat. Importantly, economic impacts associated with section 9 and 10 of the Act, with a few exceptions, are considered to be part of the regulatory baseline and thus are not addressed in this report. These costs are considered to be part of the baseline because they remain unaffected by the designation of critical habitat.

          1.3.3  Direct Compliance Costs Associated With Section 7 of the Act

45.               The measurement of direct compliance costs focuses on the implementation of section 7 of the Act. This section requires Federal agencies to consult with the Service to ensure that any action authorized, funded, or carried out will not likely jeopardize the continued existence of any endangered or threatened species or result in the destruction or adverse modification of critical habitat. The administrative costs of these consultations, along with the costs of project modifications resulting from these consultations, represent the direct compliance costs of designating critical habitat.

46.               This analysis does not differentiate between consultations that result from the listing of the species (i.e., the jeopardy standard) and consultations that result from the presence of critical habitat (i.e., the adverse modification standard). Consultations resulting from the listing of the species, or project modifications meant specifically to protect the species as opposed to its habitat, may occur even in the absence of critical habitat. However, in 2001, the U.S. 10th Circuit Court of Appeals instructed the Service to conduct a full analysis of all of the economic impacts of critical habitat designation, regardless of whether those impacts are attributable co-extensively to other causes. Given the similarity in regulatory definitions between the terms “jeopardy” and “adverse modification,” in practice it can be difficult to pre-determine the standard that drives a section 7 consultation. Consequently, in an effort to ensure that this economic analysis complies with the instructions of the 10th Circuit as well as to ensure that no costs of the proposed designation are omitted, the potential effects associated with all section 7 impacts in or near proposed critical habitat are fully considered. In doing so, the analysis ensures that any critical habitat impacts that are co-extensive with the listing of the species are not overlooked. As a result, this analysis likely overstates the regulatory effects under section 7 attributable to the proposed designation of critical habitat.

          1.3.4  Indirect Costs

47.               The designation may, under certain circumstances, affect actions that do not have a Federal nexus or are otherwise not subject to the provisions of section 7 under the Act. The potential exists for several types of such indirect effects: three examples are discussed in this section. First, some landowners may voluntarily elect to complete a habitat conservation plan (HCP) in response to having their land designated as critical habitat. Second, some State laws may require landowners and managers to consider the effects of their actions on sensitive species and habitat. Thus, designation of critical habitat could trigger additional regulatory burden due to new information provided by the designation. Third, the consultation process may result in time delays for upcoming or ongoing projects, and the designation may foster regulatory uncertainty for prospective projects. If such additional efforts would not have occurred in the absence of critical habitat (i.e., “but for” critical habitat), then they are considered by this analysis to be an impact of the designation. The three most common categories of indirect effects are discussed further below.

                     Creation of Habitat Conservation Plans (HCPs)

48.               Under section 10(a)(1)(B) of the Act, a non-Federal entity (i.e., a landowner or local government) may develop an HCP for an endangered animal species in order to meet the conditions for issuance of an incidental take permit in connection with the development and management of a property. The HCP intends to counterbalance potential harmful effects that a proposed activity may have on a species, while allowing the otherwise lawful activity to proceed. As such, the purpose of the habitat conservation planning process is to ensure that the effects of incidental take are adequately minimized and mitigated. Thus, HCPs are developed to ensure compliance with section 9 of the Act and to meet the requirements of section 10 of the Act. HCPs are not necessarily precipitated by a critical habitat designation.

49.               However, a connection may exist between the creation of HCPs and the costs these plans impose and the designation of critical habitat. The Service, being a Federal entity, must formally consider whether an HCP will jeopardize a listed species or adversely modify its designated critical habitat before approving the plan. This review process may be a direct impact under section 7 of the Act. However, in certain circumstances, the effort involved in creating the HCP and associated conservation actions may also generate indirect effects associated with the designation of critical habitat. For example, in one past instance, landowners preemptively developed HCPs in an effort to avoid having their property designated as critical habitat. In this case, the effort involved in creating the HCP and undertaking associated conservation actions were considered to be an effect of designation .

50.               The following scenarios regarding HCP creation provide general guidance regarding the degree to which associated costs should be considered within the context of a critical habitat economic analysis:

          •         In cases in which an HCP existed prior to a proposed designation, the costs of developing the HCP and the added costs of management imposed by the HCP should not be considered in the analysis of the effects of the designation. These costs are appropriately considered to be part of the regulatory baseline, because their creation was driven by the listing of the species and the need to avoid take, which is prohibited under section 9 of the Act. However, in cases where designated critical habitat overlaps with completed HCPs, the economic analysis will need to consider the cost to the Service to re-consult on the plan’s impact to critical habitat and whether or not this process may result in additional conservation actions.

          •         In cases in which an HCP is proposed, or reasonably foreseeable absent the designation of critical habitat, the administrative costs associated with the required internal section 7 consultation should be included in the economic analysis of total section 7 costs, because the Service will need to consider the effects of the plan on designated critical habitat. In addition, if as a result of the designation additional project modifications will be recommended by the Service and incorporated into the HCP in order to avoid adversely modifying critical habitat, the costs of these project modifications should also be included in the economic analysis of critical habitat.

          •         In cases in which development of one or more HCPs can be documented as being precipitated by critical habitat designation (i.e., to avoid designation or to reduce the costs of the designation), the costs of development of the HCP and the added costs of management imposed by the HCP should be included in the critical habitat economic analysis. In such cases the analysis should be presented with appropriate caveats as to the uncertainty regarding the extent to which the HCP would have existed absent critical habitat designation.

                     Other State and Local Laws

51.               Under certain circumstances, the designation of critical habitat may provide new information to a community about the sensitive ecological nature of a geographic region, potentially triggering additional economic impacts under other State or local laws. In cases where these costs would not have been triggered “but for” the designation of critical habitat, they are included in this economic analysis.

52.               For example, the California Environmental Quality Act (CEQA) requires that lead agencies -- public agencies responsible for project approval -- consider the environmental effects of proposed projects that are considered discretionary in nature and not categorically or statutorily exempt. Among other effects, the CEQA statutes specifically require lead agencies to consider a project’s effects on rare or endangered plant and animal communities. To approve qualifying projects, lead agencies must require applicants, who are not “categorically exempt,” to mitigate effects to less than significant levels for projects that are not granted a “statement of overriding considerations.”

53.               In some instances, the designation of critical habitat can have an indirect effect on CEQA- related requirements. This is most likely to occur in areas where the Federal designation provides clearer information on the importance of particular areas as habitat for a listed species. In addition, applicants who were “categorically exempt” from preparing an Environmental Impact Report under CEQA may no longer be exempt once critical habitat is designated. In cases where the designation triggers the CEQA significance test or results in a reduction of categorically exempt activities, associated costs are considered to be an indirect effect of the designation.

54.               In these and other cases in which costs are incurred by landowners and managers above and beyond what would be required under State or local law and policy in the absence of the designation, these costs are considered to be an indirect effect of the designation. As such, these economic effects are reported in the analysis.

                     Time Delays and Regulatory Uncertainty

55.               In addition to the indirect effects of compliance with other laws triggered by the designation, project proponents, land managers and landowners may face additional indirect impacts. These can include costs due to project delays associated with the consultation process or compliance with other regulations, or, in the case of land location within or adjacent to the designation, loss in property values due to regulatory uncertainty, and loss (or gain) in property values resulting from public perceptions regarding the effects of critical habitat. These categories of potential effects are described in greater detail below.

                    Time Delays

56.               Both public and private entities may experience incremental time delays for projects and other activities due to requirements associated with the section 7 consultation process and/or compliance with other laws triggered by the designation. The need to conduct a section 7 consultation will not necessarily delay a project, as often the consultation may be coordinated with the existing baseline regulatory approval process. However, depending on the schedule of the consultation, a project may experience additional delays, resulting in an unanticipated extension in the time needed to fully realize returns from the planned activity. To the extent that delays result from the designation, they are considered in the analysis. Specifically, the analysis considers costs associated with any incremental time delays associated with section 7 consultation or other requirements triggered by the designation above and beyond project delays resulting from baseline regulatory processes.

                     Regulatory Uncertainty

57.               The Service conducts each section 7 consultation on a case-by-case basis and issues a Biological Opinion on formal consultations based on species-specific and site-specific information. As a result, government agencies and affiliated private parties who need to consult with the Service under section 7 may face uncertainty concerning whether project modifications will be recommended by the Service and what the nature of these modifications will be. This uncertainty may diminish as consultations are completed and additional information becomes available on the effects of critical habitat on specific activities. However, a degree of regulatory uncertainty may persist. In some cases, this uncertainty may be incorporated by the project proponent into the costs of completing a proposed activity. For example, mining companies uncertain about potential restrictions to their activities in designated areas of critical habitat may lease mining rights at a reduced rate. Additionally, landowners may incur costs determining whether their property constitutes critical habitat. They may retain outside experts or legal counsel to better understand their responsibilities with regard to critical habitat. Where appropriate, the analysis considers the potential costs associated with regulatory uncertainty.

                     Stigma

58.               In some cases, the public may perceive that critical habitat designation may result in incremental changes to private property values, above and beyond those associated with anticipated project modifications and regulatory uncertainty described above. That is, the public may perceive that, all else being equal, a property that is designated as critical habitat will have lower market value than an identical property that is not within the boundaries of critical habitat. Public attitudes about the limits and costs that critical habitat may impose can cause real economic effects to the owners of property, regardless of whether such limits are actually imposed.

59.               Conversely, the direction of property value effects resulting from critical habitat may be positive rather than negative. For example, property owners may believe that critical habitat designation will increase property values, if they believe that such designation will slow sprawling development in a given community (i.e., protect the rural character of an area) or increase water quality of neighborhood streams and rivers. This perception alone may result in real increases in land values, even in cases where the economic analysis predicts no additional requirements on activities taking place in the area. In either case, as the public becomes aware of the true regulatory burden imposed by critical habitat, the impact of the designation on property markets should decrease. This analysis considers the implications of public perceptions related to critical habitat on private property values within the proposed designation.

          1.3.5  Benefits

60.               The published economics literature has documented that real social welfare benefits can result from the conservation and recovery of endangered and threatened species. Such benefits have also been ascribed to preservation of open space and biodiversity, both of which are associated with species conservation. Likewise, regional economies and communities can benefit from the preservation of healthy populations of endangered and threatened species, and the habitat on which these species depend.

61.               In Executive Order 12866, OMB directs Federal agencies to provide an assessment of costs and benefits of a proposed regulatory actions. However, in its guidance for implementing Executive Order 12866, OMB acknowledges that often, it may not be feasible to monetize, or even quantify, the benefits of environmental regulations. Where benefits cannot be quantified, OMB directs agencies to describe the benefits of a proposed regulation qualitatively. This report provides insight into the potential economic benefits of critical habitat designation based on information obtained in the course of developing the economic analysis. It is not intended to provide a complete analysis of all of the benefits that could result from the designation. Given these limitations, the Service believes that the benefits of critical habitat designation are best expressed in biological terms that can be weighed against the expected cost impacts of the rulemaking.

          1.3.6  Analytic Time Frame

62.               The analysis examines activities taking place both within and adjacent to the proposed designation. It estimates impacts based on activities that are “reasonably foreseeable," including, but not limited to, activities that are currently authorized, permitted, or funded, or for which proposed plans are currently available to the public. Accordingly, the analysis bases estimates on activities that are likely to occur within a ten year time frame, beginning on the day that the current proposed rule becomes available to the public. The ten-year time frame was chosen for the analysis because, as the time horizon for an economic analysis is expanded, the assumptions on which the projected numbers of projects are based become increasingly speculative. As a result, it is difficult to predict not only the numbers of projects, but also the cost estimates for the associated consultations, beyond a ten-year window. Consequently, any attempt to extend the economic analysis beyond the ten-year time window would be speculative.

          1.3.7  General Analytic Steps

63.               This report relies on a sequential methodology and focuses on distilling the salient and relevant aspects of potential economic impacts of the proposed designation. The steps followed in this analysis consist of:

          •         Describing current and projected economic activity within and around the proposed critical habitat area;

          •         Identifying whether such activities are likely to involve a Federal nexus;

          •         For activities with a Federal nexus, evaluating the likelihood that these activities will require consultations under section 7 of the Act and, in turn, result in any modifications to projects.

          •         Estimating the direct costs of expected section 7 consultations, project modifications and other economic impacts associated with the designation;

          •         Estimating the likelihood that current or future activities may require additional compliance with other Federal, State, and local laws as a result of new information provided by the proposed designation;

          •         Estimating the likelihood that projects will be delayed by the consultation process or other regulatory requirements triggered by the designation;

          •         Estimating the likelihood that economic activity will be affected by regulatory uncertainty, and/or property values affected;

          •         Estimating the indirect costs of the designation, as reflected in the cost of compliance with State and local laws, project delays, regulatory uncertainty, and effects on property values;

          •         Assessing the extent to which critical habitat designation will create costs for small businesses as a result of modifications or delays to projects;

          •         Assessing the effects of administrative costs and project modifications on the supply, distribution, and use of energy; and

          •         Determining the benefits that may be associated with the designation of critical habitat.

64.               As noted above, this analysis considers both the efficiency effects and distributional effects that could result from this designation. It begins by considering direct compliance costs associated with the designation, as well as potential indirect effects, such as those effects associated with compliance with other Federal, State, and local laws, project delays, and impacts to property values. As necessary, regional economic impacts are described, as are impacts on significantly affected markets. Impacts on small entities and energy production and consumption are discussed separately, in Appendix B of this analysis. Potential benefits of critical habitat are discussed qualitatively in Section 5.

1.4     Information Sources

65.               The primary sources of information for this report were communications with personnel from the Service, affected Federal agencies, State agencies and counties. Specifically, communication with personnel from the following entities.

          •         Departments of Transportation (DOT);

          •         United States Army Corps of Engineers (USACE);

          •         Natural Resource Conservation Service (NRCS);

          •         Farm Services Agency (FSA);

          •         Federal Energy Regulatory Commission (FERC);

          •         United States Environmental Protection Agency (EPA);

          •         The Nature Conservancy;

          •         Tennessee Valley Authority (TVA);

          •         United States Forest Service (USFS);

          •         Alabama Department of Environmental Management (ADEM);

          •         Alabama Department of Economic and Community Affairs (ADECA);

          •         Alabama Department of Conservation and Natural Resources;

          •         Alabama Forestry Commission;

          •         Georgia Department of Natural Resources (DNR);

          •         Mississippi Department of Fisheries, Wildlife, and Parks (DFWP);

          •         and Columbus Air Force Base.

          Publicly available data were also used to augment the analysis. Please refer to the reference section at the end of this document for a full reference list.

SOCIOECONOMIC PROFILE AND BASELINE ELEMENTS      SECTION 2

66.               This section provides information on the socioeconomic characteristics of areas proposed as critical habitat for the mussels. In addition, this section provides relevant information about regulations and requirements that exist in the baseline (i.e., the "without section 7" scenario).

2.1     Socioeconomic Profile of the Critical Habitat Area

67.               This sub-section summarizes key economic and demographic information for the counties containing proposed critical habitat for the mussels, including population characteristics and general economic activity. County level data are presented to provide context for the discussion of potential economic impacts, and to illuminate trends that may influence these impacts. Although county level data may not precisely reflect the socioeconomic characteristics of the areas immediately surrounding the proposed critical habitat for the mussels, as the units comprise rivers and creeks that cross county barriers, these data provide context for the broader analysis.

2.1.1Population Characteristics

68.               The critical habitat designation spans a diverse array of urban and rural areas within the Mobile River Basin. Exhibit 2-1 lists the population size, per capita income, and population density for all the counties that have critical habitat designated within their boundaries and for the states as a whole. With the exception of Jefferson County, Alabama which represents nearly 15 percent of the state’s population, each county containing critical habitat represents no more than four percent of its respective statewide populations. Of the 31 counties, 27 have a lower per capita income and 20 have fewer persons per square mile than their respective statewide averages. Although these measures vary considerably across states, the data suggest that overall the counties are less densely populated, and have a lower than average income per capita, than respective statewide averages.

         2.1.2 Economic Activity

69.             The predominant land-use activities occurring within the vicinity of the mussel critical habitat are agriculture, water-related commerce and recreation, and development-related activity. Understanding the extent of the various land-use activities in areas in or around critical habitat underscores the activities most likely to experience section 7 impacts. Exhibit 2-2 highlights the annual payroll for various industries in the 31 counties containing critical habitat. In all four states, manufacturing and services sectors maintain the largest payroll.

70.             Exhibit 2-3 provides industry and employment data for all 31 counties that contain portions of the designation. The “Number of Establishments” column displays the total number of physical locations at which business activities are conducted with one or more paid employee in the year 2000. Over 60,000 business establishments operate and employ nearly 900,000 individuals in the 31 counties containing proposed critical habitat for the mussels. These figures provide a measure of the average density of commercial and industrial establishments in the region.

71.             Despite the fact that manufacturing and services account for the greatest economic activity, these industries are not as likely to be directly affected by critical habitat for the mussels as those industries dependent upon or limited by water resources. These industries interact more directly with the stream segments proposed for critical habitat and include agriculture, development, hydropower, and recreational fishing.