EXECUTIVE SUMMARY

The Town has several issues to consider and resolve prior to finalizing a plan for the sale of environmental credits, which are discussed below under “ISSUES” and “RECOMMENDATIONS.”

SUMMARY

As a way of generating revenue from the Town’s Aberdeen Property, the Town submitted to the Department of Environmental Quality (DEQ) an application to obtain and sell nutrient credits generated on the Aberdeen Property.  Nutrient credits are generated by converting existing cropland to forest, and committing to maintain the forest in perpetuity.  The credits may be sold only after the Town (or third party) has well-established trees on the property, at a density of at least 400 trees per acre.  The credits are purchased by developers (including governmental agencies who develop projects, such as roads) who do not meet the state’s environmental standards within the boundaries of the development site, and so purchase environmental credits as a means of satisfying environmental regulations. The Town’s nutrient credit bank application was submitted and accepted by DEQ for processing on March 3, 2020, two days prior to a change in the methodology by which nutrient credits are calculated.  The Town therefore is grandfathered to the more beneficial nutrient credit rates that were in effect on March 3rd.  DEQ has not yet approved the Town’s application, but an email from DEQ on May 22, 2020 indicated that the Town should receive an approval letter in June.

Once the Town’s application is approved, the Town has ample time to determine how it will move forward, as there is no expiration to the approval.  The Town has several issues to consider and resolve prior to finalizing a plan for the sale of these environmental credits, which are discussed below. 

1. New Legislation, SB 747, effective July 1, 2020.

At the same time as the Town was preparing its application to DEQ, legislation was introduced and adopted by the General Assembly that prohibits the Town from selling its own nutrient credits.  The legislation, introduced as SB747, is attached to this staff report.  The effect of the legislation on Purcellville is currently unclear. 

The legislation states, in part:

…nutrient credits or sediment credits generated by a project undertaken by a public body, including a locality, and certified by the Department shall be used only by such public body and only for the purpose of compliance with the provisions of this chapter by such public body's project.

Based on an email to the Town from DEQ dated March 26, 2020 (attached), DEQ appears to interpret the legislation to mean that the nutrient credits generated on the Aberdeen property as a result of the Town’s application may not be sold by anyone, and may be used by the Town ONLY to offset the Town’s own need for nutrient credits, which need is created when the Town constructs something. 

However, additional language in the statute indicates that DEQ’s reading may be too narrow.  The statutory language goes on to provide:

For the purposes of this subsection, the term "public body's project" means a project for which the public body is the named permittee and for which no third party conducts any lease, sale, grant, transfer, or use of the project or its nutrient or sediment credits.      

A simplified rewording of the statute for our purposes might look as follows:

Nutrient credits generated by a public body’s project (Aberdeen) may be used only by the same public body (Town) AND only to achieve compliance with environmental regulations for a project constructed by the same public body.

Under my reading of the statute, the Town’s “project” in this case is the conversion of cropland to forest on the Aberdeen property.  And, so long as the Aberdeen project is undertaken through a lease, sale, or grant to a third party, the Aberdeen project no longer meets the definition of a “public body’s project,” in which case the nutrient credits are no longer limited to use by the public body for compliance purposes. 

However, this favorable interpretation depends on the timing of when a “project” becomes a “project” under the statute.  If the “project” is defined by who is designated as the “applicant” on the DEQ application, or to whom the credits are issued once the application is approved, then it is possible that the “project” in this case is fixed and cannot be altered to include a third-party unless a new application is submitted to DEQ.  On the other hand, if a “project” becomes a “project” when the trees are planted, or when the credits are sold, then it may not be too late to engage a third-party to sell the nutrient credits.  Further discussion with DEQ is needed on this point and, if our interpretations remain in conflict, then an opinion from the Attorney General’s office is needed.

If the final interpretation of the statute is that the Town cannot sell its credits, then the Town has two options:  (a) re-apply to DEQ in partnership with a third party (credits issued will be calculated at the lower rate methodology), or (b) petition the general assembly to amend the law at the 2021 session. 

My understanding is that SB747 was premised on the idea that a locality should not be able to require developers to purchase environmental credits from itself, as a condition of the developer obtaining the locality’s approval on a development project.  While there is merit to that “conflict of interest” argument, the law goes far beyond what is necessary to address that issue.  The sales territory for credits generated at Aberdeen encompasses all of northern Virginia and beyond, as shown on the attached Service Area Map.  Consequently, the law could be more narrowly tailored by prohibiting a locality from selling credits to a development project within its jurisdiction, while still allowing the locality to sell its credits to a development project outside of its jurisdiction.       

2. Water Resource Plan.

The Town’s Aberdeen Property was purchased by the Town as a source of groundwater, to satisfy the Town’s water demands.  The Town is currently searching for new sources of water that can be produced more cost effectively than the water at Aberdeen, however, that search is not yet complete.  Further, even if the Town were to acquire such new sources, it remains unclear whether the water at Aberdeen will nonetheless be necessary to satisfy the Town’s water demands.  These issues should be resolved, and these questions answered, prior to the sale of nutrient credits.  The Town has undertaken a Water Resource Study that will be presented to Town Council upon completion, which will assist to create the Town’s long-range plan for water.

3. Finances

Because of the uncertainty in the legislation discussed above, it is unclear what the financial benefit will be to the Town of selling the nutrient credits.  Therefore, the legislative uncertainty must be resolved before estimations of revenue are calculated.

If the Town pursues the sale of its nutrient credits through a third party, the Town should issue an RFP to enhance competition and obtain the best financial terms.  If the Town were to sell the credits directly to purchasers, without a third party, then the net revenues will depend on how much the Town must first invest to purchase and install the trees on the property.  The largest variable in investment cost is whether the Town plants seeds, or young trees.  More should be known about the risks and benefits of planting seeds, versus young trees, before deciding on an approach.  Consultation with an arborist is recommended. 

In rough numbers:

The total cost to plant and maintain young trees (tubelings) over the first five years, while the trees get established, is:  $11,085 per acre.       

The total cost to plant and maintain seeds over the first five± years while the trees get established is:  $5,135 per acre.

The credit for converting cropland to forest is roughly:  0.83 credits per acre

The market price in early 2020 for selling a nutrient credit was roughly:  $18,600 per credit, or $15,438 per acre (0.83 x $18,600)

The maximum number of acres for which credits can be generated is 93.4 acres.

Depending on the method of planting, and assuming the Town sells credits without Third-Party involvement, the Town might expect to generate somewhere between: $4,500 and $10,000 per acre. 

If the entire acreage is planted and sold for credit by the Town with no Third Party involvement, then the Town might expect to generate between:

$420,300 (93.4 acres x $4,500 per acre) and $934,000 (93.4 acres x $10,000 per acre). 

Numbers With Third Party:

It cannot really be estimated at this time what the revenue might be if the entire acreage were planted and sold for credit by the Town with Third Party involvement.  For context, when ACRE submitted a proposal to the Town to partner on the sale of nutrient credits, they estimated a gross income from converting 83 acres of about $621,000, or about $25,000 per credit – higher than the sale price estimated by the Town of $18,600 per credit.  They further estimated the cost to establish the project to be about $103,000 total, or about $1,240 per acre – far lower than the Town (through its environmental consultant) estimates the cost to be.  Finally, ACRE seems to have assumed it would get roughly 0.3 credits per acre, while the Town appears to have obtained from its application roughly 0.8 credits per acre.  ACRE proposed to take 30% of net revenue and give the Town 70% of net revenue.  Under ACRE’s assumptions, ACRE’s proposal to convert 83 acres of land from crop to forest was projected to yield for the Town a net revenue of between:

$240,000 and $360,000.  (See attached, ACRE Proposal - Option ‘A.’)   

If ACRE’s assumptions were replaced with the Town’s assumptions, and net revenue was split 70-30, then the Town might expect to receive a net revenue from its 93.4 acres of between:

$294,000 (70% of $420,300) and $654,000 (70% of $934,000).      

RECOMMENDATIONS:

1. Town staff should work with DEQ and the Attorney General’s office to establish the state’s interpretation of the legislation going into effect July 1^st.

2. If needed, the Town can seek an official opinion from the Attorney General, which takes about 90 days to obtain. 

3. If the state’s interpretation is that the Town cannot sell the credits at all, even with a third party, then the Town should lobby the General Assembly for changes to the law so that the Town may sell its credits.  Alternatively, the Town could accept this constraint and use the credits only for its own purposes.

4. Once authority to sell credits is established (either through a third-party, or independently), then the Town should evaluate whether it wants to sell independently (if an option) or through a third party.

5. If the decision is to sell through a third party, then the Town should issue an RFP, and review proposals to obtain the best terms.

6. If the decision is to sell independently, then the Town should consult with an arborist to understand the benefits and risks associated with planting seeds, versus young trees. 

7. If the decision is for the Town to sell independently, the Town will need to issue an IFB (Invitation for Bids) for the trees/seeds, and the labor to plant and maintain the trees/seeds through their establishment period.

I move that Town Council authorize staff to take the steps as outlined in this staff report under “RECOMMENDATIONS,” and direct staff to update the Town Council at the completion of each step.