Chairman Crapo and members of the Subcommittee, thank you for the opportunity to testify before you today on the subject of critical habitat and the Endangered Species Act (ESA). My name is Jeffrey Kightlinger, and I am the General Counsel of the Metropolitan Water District of Southern California. I am testifying today on behalf of the Western Urban Water Coalition (WUWC).

The WUWC consists of the largest urban water utilities in the West, serving over 30 million western water consumers in 16 metropolitan areas in seven states, including major urban areas in California. The WUWC represents the following urban water utilities: Arizona – City of Phoenix, City of Tucson; California – East Bay Municipal Utility District, Metropolitan Water District of Southern California, San Diego County Water Authority, City and County of San Francisco Public Utility Commission, Santa Clara Valley Water District; Colorado – Denver Water Department; Nevada – Las Vegas Valley Water District, Southern Nevada Water Authority, Truckee Meadows Water Authority; Utah – Central Utah Water Conservancy District; and Washington – City of Seattle. WUWC members own and operate water management, water supply and hydroelectric projects, including dams, water conduits, reservoirs, and other facilities involved in water supply, transfer, and power generation services. In operating these projects, WUWC members are involved in a number of federal and non-federal activities that are subject to the ESA.

Since its inception in 1992, the WUWC has been very active in ESA legislation, administrative reform and implementation. We have participated actively in numerous Congressional efforts to reauthorize the ESA, as well as proposals for specific legislation. For example, we testified on, and in support of, S. 1180, the Kempthorne/Chafee reauthorization bill. We also participated in a legislative effort including environmental organizations, resource development organizations, and the Western Governors' Association, to develop a consensus ESA reauthorization bill. In addition to these Congressional activities, the WUWC has played a major role in Clinton and Bush Administration efforts to make the ESA work more effectively, including administrative reform efforts such as the No Surprises Policy, guidance on habitat conservation plans (HCPs), candidate conservation agreements, safe harbor agreements, and similar efforts. Many WUWC members participate in HCPs and other species conservation efforts. The WUWC's general approach to the ESA has been to support its goals, seek to improve its implementation, and provide for proactive conservation efforts in a manner that is consistent with the goal of insuring a reliable, long-term supply of high quality drinking water for over 30 million customers in western cities.

WUWC members are directly affected by agency actions that arise under the subject of today's hearing: the designation of critical habitat and its regulatory consequences. The purpose of my testimony is not to complain about critical habitat or its implementation. Instead, the WUWC offers recommendations for constructive reform that will allow critical habitat to play a more effective and meaningful role in achieving the goals of the ESA, without resulting in inefficient and unduly expensive agency action or unnecessary restrictions on water supply activities.

My testimony begins with a summary of the WUWC's experience with critical habitat, including a description of some current issues. In this discussion, I will identify general problem areas that need be addressed by Congress and the Executive Branch. Next, my testimony summarizes several aspects of critical habitat that the WUWC has addressed through recently-released position papers. These issues include how to define the term "adverse modification of critical habitat" under section 7 of the Act and how to conduct an analysis of the economic impacts of critical habitat designation under section 4. In the final section, I set forth the WUWC's specific recommendations. WUWC EXPERIENCE WITH CRITICAL HABITAT

These are several examples of how critical habitat designation is of concern to WUWC members.

One category of regulatory effects caused by designation results from imposing a geographically-defined area for application of section 7. Under section 7, a time-consuming consultation process occurs and all actions that would adversely modify or destroy critical habitat are prohibited. Such designation applies section 7 to actions merely because they fall within the scope of the designation, rather than because they necessarily affect members of the listed species. This is an issue of particular concern when the Services adopt the kind of broad geographic approach for designating habitat relied upon in recent years.

In several instances, federally authorized actions have been stopped because they would modify designated critical habitat, even where the species is not present and would not be jeopardized. In Idaho Rivers United v. National Marine Fisheries Serv., No. C94-1576R 1995 WL 877502 (W.D. Wash. 1995), a no jeopardy biological opinion was invalidated because, although listed fish were absent from an affected stream due to severe mine pollution, the stream was designated as critical habitat and fish might someday use unoccupied critical habitat after mine cleanup.

Most recently, a court enjoined the U.S. Army Corps of Engineers from implementing maintenance dredging for an existing, federally authorized navigation channel on the Snake River. National Wildlife Fed'n v. National Marine Fisheries Serv., 235 F. Supp.2d 1143 (W.D. Wash. 2002). In its analysis of likelihood of success on the merits, the court found it likely that the National Marine Fisheries Service's (NMFS) biological opinion for the project would be found invalid because it concluded that designated critical habitat for Snake River chinook salmon would not be adversely modified. The court criticized NMFS for concluding that the seasonal dredging would have no adverse effect because it would occur when listed migratory fish were not present in the navigation channel. The court reasoned that "the absence of a species from its critical habitat should not provide a basis for the determination that adverse modification is permissible." The court's reasoning indicates that once critical habitat is designated, it is protected in its own right without regard for the presence or absence of the listed species.

These are of concern to WUWC members because of the very broad areas that have been designated in western states. For example, critical habitat designations by the U.S. Fish & Wildlife Service (FWS) have included 513,650 acres in Los Angeles, Orange, Riverside, San Bernardino and San Diego counties, California, for the coastal California gnatcatcher,[1] 6.4 million acres in California, Nevada, Arizona, and Utah for the desert tortoise,[2] 1,980 river miles in Colorado, Utah, New Mexico, Arizona, Nevada, and California for four endangered fishes in the Colorado River,[3] and 599 miles of streams and rivers in southern California, Arizona, and New Mexico formerly designated as critical habitat for the southwest willow flycatcher.[4] Currently pending proposals for critical habitat designations include over 1.6 million acres in California for vernal pool species (4 shrimp and 11 plants),[5] 1.2 million acres in Pima and Pinal counties, Arizona, for the cactus ferruginous pygmy -owl,[6] and 57,446 acres along 657 miles of rivers and streams in Colorado and Wyoming for the Preble's meadow jumping mouse.[7]

The NMFS has taken the same sweeping approach to critical habitat designations. In 2000, NMFS designated critical habitat for 19 evolutionarily significant units (ESUs) of salmon and steelhead to include water bodies, beds, banks, and riparian areas in over 150 watersheds, river segments, bays, and estuaries covering huge sections of the States of California, Idaho, Oregon, and Washington.[8] NMFS designated "all river reaches accessible to listed salmon or steelhead within the range" of the fish.[9] "Accessible reaches" were defined as "those within the historical range of the [fish] ESUs that can still be occupied by any life stage of salmon or steelhead."[10]

Second, depending upon how the term "adverse modification" under section 7(a)(2) is defined, the water supply operations of WUWC members could be subjected to a higher standard of protection than would be the case in the absence of such a designation. As a result of the decision in the Gulf Sturgeon case, Sierra Club v. U.S. Fish & Wildlife Service, 245 F.3d 434 (5th Cir. 2001), adverse modification of critical habitat is arguably held to a "recovery" standard. While the precise regulatory meaning of the term "adverse modification" is yet to be defined, it is generally assumed than achieving "recovery," as required under the Gulf Sturgeon case, requires a greater degree of protection than simply avoiding jeopardy to the continued existence of the species in the wild.

This possibly heightened level of protection would be a matter of concern to numerous WUWC members. For example, WUWC members whose activities affect salmon and steelhead listed under the ESA are affected by NMFS's recovery-driven "Habitat Approach" to ESA consultation. The Habitat Approach is set forth in a detailed guidance document that NMFS applies to all consultations affecting salmon and steelhead. Habitat Approach: Implementation of Section 7 of the Endangered Species Act for Actions Affecting the Habitat of Pacific Anadromous Salmonids (1999). Under the Habitat Approach, NMFS equates the requirements of section 7 consultation with "recovery":

Impeding a species' progress toward recovery exposes it to additional risk, and so reduces its likelihood of survival. Therefore, in order for an action to not "appreciably reduce" the likelihood of survival, it must not prevent or appreciably delay recovery. Id. at 3.

A third area of concern results from the relationship between sections 7 and 9 of the ESA. As noted above, the designation of critical habitat has direct regulatory and economic consequences through consultation on federal actions under section 7 of the ESA. However, those effects are also reinforced through the "take" prohibition in section 9 of the ESA.

Under section 9, it is unlawful to "take" a listed species through actions that kill, injure, harass, or harm a species. Unlawful "harm" to a species includes habitat modification when it leads to actual death or injury. At least one court has suggested that unlawful take or harm may include modification of designated critical habitat when a listed species is not present. Defenders of Wildlife v. Bernal, 204 F.3d 920, 930 (9th Cir. 1999) (B. Fletcher, concurring) (explaining that finding of no take was based on evidence that modified habitat was unoccupied, but reserving question whether modification of designated critical habitat would be unlawful take).

Any resource manager who seeks to utilize an area designated as critical habitat therefore is confronted with the heightened risk that unintended, incidental take could occur or be alleged in connection with any use of resources in a designated critical habitat area. Prudent resource managers may respond to such a risk by avoiding any use of the critical habitat area or, if that is not a feasible option, the resource manager may seek incidental take protection through a voluntary HCP and incidental take permit under section 10 of the ESA. When a resource manager applies for an incidental take permit, federal action is required and consultation under section 7 of the ESA is required. Thus, the direct regulatory relevance of critical habitat designation is applied through ESA section 7 and reinforced by the increased threat of take liability under ESA section 9.

One specific illustration of this problem is presented by the City of Phoenix water supply program and the designation of critical habitat for the southwest willow flycatcher. The City of Phoenix owns a water right to approximately 68,000 acre feet of storage space in the Horseshoe Reservoir on Arizona's Verde River. The City developed the storage space by adding spillway gates on Horseshoe Dam in the early 1950s that expanded the Reservoir's storage capacity by adding approximately 26 feet to the full pool elevation of the reservoir. During wet years, the Reservoir has been filled to full pool, but a six-year drought has prevented the City from storing water in the upper elevations of the reservoir in recent years.

During the drought, riparian vegetation including willows and tamarisk have grown in thickets along the riverbank where it flows through the area that would normally be inundated by a full reservoir. Recent biological surveys suggest that the endangered southwest willow flycatcher may be using this emerging habitat, and the U.S. Fish & Wildlife Service is now studying this new information as it prepares to propose the designation of critical habitat for the flycatcher. Should the Service designate as critical habitat those emerging habitat areas within the Horseshoe Reservoir pool, the City of Phoenix could be severely impacted by the potential loss of effective reservoir capacity that enables the City to generate and use an average of 21,000 acre feet of water per year.

Although the City owns exclusive water rights within the Horseshoe Reservoir, the Dam and Reservoir are managed and operated solely by the Salt River Project (SRP). The operation of the Horseshoe Reservoir by SRP is a non-federal action and, as such, does not require consultation under section 7. However, the designation of critical habitat within the Reservoir could increase the risk of take allegations under section 9, should the Reservoir be filled and the emerging flycatcher habitat flooded.

Significantly, the flycatcher is a migratory bird and is not present in the Verde River valley during most of the fall, winter, and spring months. Under normal hydrological conditions, the Reservoir would be filled during the winter and spring (during which time emergent flycatcher habitat could be flooded in whole or in part), but the water level would be drawn down by May, drying most emergent flycatcher habitat before flycatchers return to the Verde River valley. In this way, the City of Phoenix could exercise its water rights and fully utilize its storage capacity without directly killing or injuring flycatchers or their nests when the birds are present. Unfortunately, the volume of water that is drawn down in preparation for the return of the birds may exceed the ability of the City of Phoenix to put that water to beneficial use during that time frame and some of the water could be lost. Should the emerging habitat be designated as critical, the City of Phoenix and SRP could face an increased risk of allegations that any damage to emerging habitat from inundation within the Reservoir harms the flycatcher species even when the birds are not present, and is therefore a take under the ESA.

The City and SRP are accountable to the public for stable, long-term management of water resources that are vital to the communities of central Arizona. The City is required under state law to use renewable water supplies, such as water from the Verde River to meet its demand. As such, it is impracticable for the City of Phoenix to avoid using the valuable and vital water rights it has developed in the Verde River. At the same time, under the circumstances, the City and SRP are likely to apply for an incidental take permit that will promote reliable use of water resources with assurances of ESA compliance.

This "ricochet effect" of critical habitat designation can be expected in many instances where there is no apparent federal action, but heightened efforts to manage risk under section 9's take prohibition lead to federal action and consultation on critical habitat effects.

All of these examples point to the need for reform of the manner in which critical habitat is designated and the regulatory significance that it carries once established. CRITICAL HABITAT REFORM ISSUES

In answer to the question "Is the critical habitat system as we know it broken?" this Committee has itself consistently answered that in the affirmative. For a period extending over five years, this Committee, by vote and by recommendation to the full Senate, has recognized that the critical habitat system used in administering the ESA is either intrinsically flawed in its legislative enabling statute or extrinsically flawed in its application, or both. Many meritorious proposals for reform have been made, both administratively and legislatively, in recent years. Unfortunately, none of these has taken hold. The WUWC hopes that, through the efforts of this Committee, the House Resources Committee, and the Departments of Commerce and the Interior, these problems can now be addressed through proactive efforts that benefit both species and the regulated community.

There are some fundamental realities associated with critical habitat. These are:

1) It makes little sense to invest the limited resources of agency staff on the numerous lawsuits focusing on critical habitat, when their efforts could be better applied to habitat improvement and recovery.

2) Courts are not the right place to prioritize agency actions and budgets affecting all endangered species.

3) FWS and NMFS (the Services) do not have an effective means to address the problems posed by the critical habitat deadlines and requirements imposed by the Act. These deadlines are driving an overwhelming docket of lawsuits, and that litigation is paralyzing the overall ESA program.

4) The Services do not have adequate resources to discharge their duties under the ESA generally or the Act's critical habitat requirements in particular. As the WUWC has testified previously, an effort should be made to provide the Services with the resources necessary to carry out their duties under the Act.

5) The requirement that the Services designate critical habitat concurrent with the listing process is a mandate that dictates less than fully informed decisions. The requirement prevents the use of the best available science to explore the real needs of the species, it also results in decisions that tend to over-designate critical habitat and cause unnecessary regulatory burdens.

6) Critical habitat can, and does, have an economic impact as a result of the additional restrictions that are imposed. These impacts can be measured and should be taken into account in balancing costs versus benefits at the time of designation. Such an analysis is necessary to weigh the benefits of including versus excluding an area as critical habitat.

7) When properly applied, the prohibition on adverse modification of critical habitat can be an important conservation tool. However, when it is too broad in application, the net of effect is to cause over-regulation and opposition to species conservation efforts.

The WUWC believes that each of these problem areas can be solved. While comprehensive legislative reform of the overall ESA remains desirable, focused Congressional initiatives or actions by the Administration also can go a long way toward improving the critical habitat program.

The WUWC is a pragmatically driven coalition that seeks a balance between the extremes. We act as a policy resource to Committees and the Administration, to provide alternatives that can improve the ESA's day-to-day administration for species, as well as for delivering water to our broad constituencies. To this end, we have explored the question of how to improve critical habitat designation and implementation. Our specific proposals for achieving such reform are discussed below. CRITICAL HABITAT REFORM PROPOSALS

The WUWC's critical habitat recommendations fall in three categories: 1) timing of designation; 2) analysis of economic impacts at the time of designation; and 3) definition of the term "adverse modification" under the prohibition of section 7(a)(2). Each recommendation is addressed separately. 1. Designate Critical Habitat After a Species is Listed, Coordinated With Recovery Plan Preparation

As currently drafted, the ESA requires that critical habitat be designated at the time of listing. In reality, these designations are seldom made coincident with listing. This practice has resulted in a spate of lawsuits to force designation. These lawsuits are often successful, resulting in a massive backlog of court-enforced designations. The Services lack the resources to carry out this responsibility effectively. As a result, designations are hurried, and often imprecise and overly broad. In addition, as a practical matter, there generally is not enough information available at the time of listing to define critical habitat accurately. Such information is more generally available when recovery plans are prepared. The WUWC believes that designation should not be required at the time of listing, but instead should be deferred to be coincident with recovery plan development. Congress needs to relax this restriction to relieve the litigation burden and make possible more common sense, and scientifically justified designation decisions. 2. Require Accurate Assessment of the Economic Impacts of Critical Habitat

The courts have made it clear that the Services must accord meaningful consideration to the economic impacts of critical habitat designation. To do so, the WUWC recommends that a formalized approach to conduct such analyses be developed by the government. The WUWC has developed recommended guidance for this purpose. Our position paper on how to conduct such an economic analysis is attached to my testimony. See Exhibit 1. Our proposal is based on the following principles. a. Not All Habitat Is Equally Important to Species Conservation: Delineate and prioritize habitat based on biological qualities that contribute to species conservation

A useful and meaningful comparison of the benefits and costs of critical habitat designation must begin with recognition that some areas of habitat are more valuable for species conservation than other areas. Biologists within the Services should use their professional judgment to delineate and prioritize habitat segments based on the quality of habitat attributes present within a habitat segment and the degree to which the habitat segment is essential to the conservation of a species. The process of delineating and prioritizing habitat segments satisfies the ESA's requirement that critical habitat be based on "specific geographic areas" that contain physical and biological features that are essential for the conservation of the species and require special management. 16 U.S.C. § 1532(5)(A).[11]

By delineating and prioritizing habitat, biologists provide economists with a means for quantifying the benefits of habitat designation that can then be compared to the costs or economic impacts. Without delineation and prioritization of habitat based on biological qualities, all habitat must be treated as though it is of equal biological value and significance. When all habitat is equal, economic costs are the only consideration in the exclusion process. Areas where critical habitat protection costs are high will be more likely to be excluded from designation and areas where critical habitat protection costs are low will be more likely to be designated regardless of the biological qualities that may exist in the included and excluded areas. The prospect of including or excluding areas from designation based solely on economic costs should give biologists the courage to delineate and prioritize habitat based on its value for species conservation. b. Avoid Expensive Efforts to Monetize Biological Benefits: Attempting to monetize the biological benefits of designation and species recovery adds little value for policymaking

While it is important to delineate and prioritize habitat areas based on biological qualities, there is little value in attempting to monetize the biological value of habitat areas for purposes of comparing costs and benefits of designation. With the passage of the ESA, the United States has implicitly assumed that the benefits of saving a species from extinction exceed the economic costs of species recovery for the nation as a whole. The economic analysis called for in the ESA should find the least cost combination of 1) critical habitat areas, and 2) associated management measures that will provide for the recovery of the species.

Placing a monetary value on the recovery of a species or the contribution that a particular habitat area makes to recovery requires nonmarket valuation studies. The methodology and results for such studies are widely debated within the economics profession, and frequently lead to more confusion and debate than clarity in decision making. Monetizing the biological benefits of designation and recovery is not necessary for the policy decisions that need to be made, but it adds significant administrative costs that should be avoided.

c. Operationalize Special Management for Critical Habitat: Specify what "special management" is necessary if habitat areas are designated as critical

Delineation and prioritization of habitat areas helps economists to identify the benefits of designation, but economists also need information on habitat protection measures that will impose costs. Economists need to know what special management measures or protections are likely to be imposed on each habitat segment if it is designated as critical.

For instance, critical habitat designation will often mean restrictions on current or future uses of land and water, or requirements for increased water levels at certain times of the year. Specificity is required for economists to assess economic activity with and without critical habitat designation. Merely designating land areas leaves economists' imagining what restrictions may be biologically implied and generates concern and uncertainty among stakeholders.

An attempt should be made to describe these special management measures and protections in a manner that is distinct from the requirements that would be imposed to prevent jeopardy to the survival of a species if it is present in the habitat area. For example, a set of fundamental "jeopardy" prescriptions might be necessary to ensure survival of the species by protecting individual animals from destruction or to mitigate the rate of habitat destruction. By comparison, an additional set of critical habitat prescriptions might be added to preserve existing high quality habitat or to restore degraded habitat to an improved condition.

A comparison of special management measures to prevent jeopardy or protect critical habitat for a given species could be accomplished by developing alternatives in a manner similar to the development of action alternatives for purposes of the National Environmental Policy Act. At a minimum, prescriptions for a no action or jeopardy alternative could be compared with special management prescriptions for designated critical habitat. Additional sets of critical habitat prescriptions could be formulated as alternatives where a proposed designation is of broad biological, economic, and social consequence. Examples of economic analysis based on comparisons of species and habitat protection alternatives already exist.[12] Studies such as these may serve as models for the development of specific management alternatives that will help economists to differentiate between the economic costs of ESA protection under the jeopardy and critical habitat standards. d. Use A Pragmatic Approach: Economic analysis must be practical and meaningful to policymaking

In designating critical habitat, the Secretary must "weigh the benefits of exclusions against those of inclusion of particular areas within the designated habitat." Catron County Board of Comm'rs v. U.S. Fish and Wildlife Serv., 75 F.3d 1429 (10th Cir. 1996). The benefits of exclusion are avoided costs to resource owners and users. Economic analysis of critical habitat designation can be viewed as a type of project analysis where the critical habitat designation is a non-construction project (a decision). Many of the decisions will be about restrictions on current or future resource use, which can be considered permanent, but not irreversible.

The required analysis is not so much benefit-cost analysis, but that special class of benefit-cost analysis known as cost-effectiveness analysis. Here the objective or "numerator" is not expressed in monetary terms, but in biological terms such as those habitat conditions essential for the conservation of the species. A cost-effectiveness analysis may be performed by (1) developing alternative configurations of habitat designations that provide equivalent biological benefits and selecting the least cost alternative or (2) by assigning habitat segments ordinal biological and cost values and including or excluding areas based on their marginal contributions to total costs and benefits.

Under the first cost-effectiveness approach, each of the options to be analyzed may be defined as a combination of habitat areas that provides equivalent biological benefits, so that economists may perform a least-cost analysis to select a habitat configuration that imposes the least cost by excluding areas where higher costs may be avoided.

Under the second cost-effectiveness approach, each habitat area may be analyzed in a 2 x 2 matrix that assigns ordinal values for high and low economic cost and high and low biological value. Areas with high costs and low biological values will be good candidates for exclusion. Areas with low economic costs and high biological values will be good candidates for designation. Indeed, there may be some areas so important to a species that they should be designated regardless of the economic impacts. Areas that are low cost and low value may be excluded or included by the Services with less potential for public controversy. Areas that are high cost and high biological value can be intensely debated by the public for inclusion or exclusion. Using a simple matrix and decision making process such as this will promote meaningful public participation and it will focus decision makers and the interested public on the most important factors in a complicated process. It will also approximate the least-cost analysis method that assumes species conservation as a given objective and minimizes the costs of obtaining that objective.

Because cost-effectiveness analysis involves comparisons between options, ordinal rankings between options are more important than absolute, cardinal measurements of dollar costs. The cost of doing the economic analysis of critical habitat is a very real administrative burden to both agency and stakeholders. Procedural short-cuts, or approximations, where done in an even and unbiased manner according to professionally accepted methods, should still describe the level and distribution of economic impacts with sufficient accuracy, and should not adversely affect decisions about which options to include. It is also important that the intricacy of the analysis and the use of original data be scaled to the size and complexity of the critical habitat being considered. For example, a more complete analysis is justified for a migratory fish or bird covering large areas than for a rare plant known to occupy only a few hundred acres. Consistent with FWS analyses in the early 1990s, large-scale designations may justify a more rigorous model and data set for measuring economic impacts, but not all designations will require such extensive analyses.[13] e. Decision Makers Should Know "Whose Ox Is Gored": Local impacts matter for a full social accounting of who is impacted

Analysis of economic impacts from critical habitat designation should make the incidence of economic costs explicit for decision makers. In Middle Rio Grande Conservancy Dist. v. Babbitt, 2000 U.S. Dist. LEXIS 21438 *59-*76 (D.N.M., Nov. 21, 2000), the court was critical of an economic analysis of critical habitat designation for the silvery minnow because it concluded that economic impacts were insignificant from a long-term national perspective. The court found the conclusion to be callous and insensitive to the very real near-term economic costs to region designated as critical habitat. The Services' approach to future analysis of critical habitat impacts should avoid a repeat of the highly theoretical conclusion that all economic impacts are insignificant over the long-term and broad-scale.

In the early science of cost-benefit analysis, there was little attention given to who received benefits or incurred costs. In the U.S. Flood Control Act of 1936, Congress declared that "benefits to whomsoever they shall accrue" of federal projects shall exceed costs. Agencies like the Corps of Engineers, Bureau of Reclamation, and Soil Conservation Service (now Natural Resources Conservation Service) used different analytical approaches, so attempts were made to standardize project analysis. As project analysis evolved, more attention was given to the incidence of costs and benefits.

A series of federal publications on project analysis culminated in the "Principles and Standards for Water and Related Land Resource Planning," published in the Federal Register, at 38 Fed. Reg. 174, by the Water Resources Council in 1973. The Principles and Standards lay out four accounts to display benefits and costs among different plans: 1) national economic development, 2) environmental quality, 3) regional development, and 4) social well-being. The regional development account should not be ignored in critical habitat studies.

The decision rule for federal project analysis has generally been "Potential Pareto Superiority." That is to say, a new economic condition is judged superior to the existing condition if, by changing the condition, the gainers could compensate all losers and still remain better off. Note that this definition turns on potential, not actual, compensation of the losers of the new policy. Objective economics is silent on whether the compensation should actually be paid because either choice requires a normative judgment.

Accounting for distributional impacts helps to inform decision makers such as the Services who are asked to make a somewhat normative judgment whether the costs of critical habitat designation outweigh benefits for a given area of habitat. "In fact, a welfare analysis that does not adequately indicate individual group effects may be misleading or useless to government officials endowed with authority to make interpersonal comparisons." (HJS, Applied Welfare Economics and Public Policy, p. 46). Furthermore, other federal laws such as the Regulatory Flexibility Act, 5 U.S.C. §§ 601-612, require the Services to consider the economic impacts of their regulations on small entities such as individuals, small businesses, and local government. An analysis of distributional impacts of critical habitat costs is essential for fulfilling this requirement.

As stated in Principle 3 above, Potential Pareto Superiority was assumed in the ESA when Congress determined that the national benefits of conserving a given species exceeds all costs. Therefore, the national economic development (NED) account for species conservation can be assumed to be positive. The function of economic analysis of critical habitat designation under the ESA therefore is to inform decision-makers of the relative costs and benefits in the region where habitat designation will occur. Delineating the regional or local winners and losers is essential to informed comparisons between critical habitat options, and to informing decisions by the Services in the critical habitat – economic impact exclusion process. 3. Define "Destruction or Adverse Modification of Critical Habitat"

Critical habitat derives its regulatory significance, in a large degree, from the prohibition in section 7(a)(2) on the adverse modification of such habitat. Section 7(a)(2) also prohibits actions that cause "jeopardy" to listed species. The Services' definitions for the two consultation tests, "jeopardy" and "destruction or adverse modification," are quite similar. Because the Services have tended to treat the jeopardy and critical habitat tests as equivalent regulatory standards, the agencies have failed to designate critical habitat for most listed species. Federal courts have held that the Services must designate critical habitat because it provides distinct protection for listed species apart from the jeopardy test that becomes effective with the listing of a species. See Gulf Sturgeon, supra; Natural Resources Defense Council v. U.S. Dept. of the Interior, 113 F.3d 1121 (9th Cir. 1997).

Because federal courts now have held that the jeopardy and critical habitat standards for consultation under the ESA are distinct tests, the Services must resolve the meaning of that distinction as a fundamental condition for determining the economic impact of critical habitat designations. Environmental advocates have pressed for a distinction based on whether critical habitat effects will impair or promote recovery of a species. Indeed, the ESA defines "critical habitat" as "specific geographic areas" that are "essential to the conservation of the species" and it defines "conservation" as "use of all methods and procedures" which are necessary to bring the status of a listed species to the point where protection afforded by the ESA is no longer necessary. 16 U.S.C. § 1532(3),(5)(A). Many equate conservation with de-listing of a species or recovery.

In the Gulf Sturgeon decision, the Fifth Circuit appears to have held that critical habitat protection is a "recovery" standard that is distinct from the jeopardy standard. Gulf Sturgeon invalidated the Services' regulatory definition of "destruction or adverse modification" of critical habitat because it was tied to the survival of a species and not just species recovery. 245 F.3d at 443. In that case, the court invalidated the definition of adverse modification which equated that term with jeopardy.

As a result, the Services must now promulgate a new definition of the term. The WUWC believes that adverse modification should be defined to accomplish several key objectives. These are:

1. As required by the court decision, to link the term to recovery.

2. The adverse impacts should be tied to the condition of the specific biological and physical habitat elements that were identified in, and the basis for, designation of critical habitat in the first instance. As required by section 7(a)(2), the determination whether those elements have been appreciably diminished is to be based upon the "best scientific and commercial data available" at the time of the specific consultation. Thus, although the most current data should be used, the measure for recovery is to be based on the reasons for the designation in the first instance. Such an evaluation should make allowances for new information shedding light on recovery needs.

3. The concept of "net effects" should be reflected, so that adverse impacts can be offset by protective measures and replacement habitat associated with the proposed action. This concept is already reflected in reasonable and prudent alternatives in biological opinions, and it should be incorporated into the determination of whether adverse modification would occur.

4. In addition to these changes to the definition, the Service's Section 7 Handbook should be revised to assist in explaining how adverse modification will be determined. In particular, the Handbook revision should emphasize the importance of avoiding too narrow an analysis of the relationship between the impacts of the proposed action and recovery. Assessing recovery solely in the context of impacts of the activity in the action area could lead to a result of finding adverse modification even though those effects are inconsequential when viewed from the perspective of the overall designated area. This is especially likely to be the case when large areas are designated. In such a circumstance, even an impact that affects a significant amount of habitat in the action area still may not appreciably diminish the overall recovery prospects for the species. This principle should be explained in the Section 7 Handbook.

Two related critical habitat reforms should be considered. First, the Services should ask for public input on the question of whether the regulatory definition of the term "jeopardy" also should be revised. The Gulf Sturgeon case raises the question of the proper relationship between jeopardy and adverse modification. If adverse modification is to be linked to recovery, the logically related inquiry is how the recovery and survival concepts should be dealt with in determining jeopardy. This is an issue that should be presented for public comment as part of the adverse modification rulemaking.

Second, perhaps the most important issue associated with critical habitat that is in need of reform, is the manner in which designations are made. The Services need to develop an approach to designation that does not merely result in all possible habitat being determined to be "critical." Part of this reform calls for the development of a meaningful and realistic approach to analyzing the economic consequences of designation. In addition, the biological criteria applied to identify areas that are essential to the conservation of the species need to be revised so that only those areas important for recovery will be designated. Administrative reform to achieve more precise and carefully delineated critical habitat designations should be coupled with revision to the regulatory definitions.

Based upon these concepts, the revised definition of critical habitat would read as follows:

Destruction or adverse modification means the net effect of a direct or indirect alteration that appreciably diminishes the value of the physical or biological features of the designated area such that they no longer meet the needs considered to be essential to the conservation of the species at the time of designation, after consideration of offsetting improvements in habitat or protection for replacement habitat associated with the proposed action. RECOMMENDED ACTION

To implement the recommendations and principles described above, Congress and the Services should take several actions.

First, the ESA needs to be amended to eliminate the requirement that critical habitat should be designated at the time of listing. Instead, the deadline should be made more discretionary and generally associated with the development of recovery plans.

Second, the regulatory definition of adverse modification needs to be revised as described above in this testimony.

Third, the Services should develop a detailed framework and methodology for economic analyses of critical habitat designation through a process of public notice in the Federal Register with review and comment. The framework and methodology may be embodied in amendments to the Services' joint regulations on critical habitat designation, 50 C.F.R. Part 424, or in a formal guidance document similar to the Services' Habitat Conservation Planning and Consultation Handbooks, or using a combination of rule amendments and guidance. The framework and methodology for economic analysis of critical habitat designation should satisfy fundamental standards based on the principles set forth in this paper:

l Stop using the "incremental" or "baseline" approach for economic analysis and require that each critical habitat designation include an exclusion process based on a professional and meaningful economic analysis of the relative economic costs for designation of specific geographic areas as critical habitat.

l For a given species and proposed habitat designation, require the Services to delineate and prioritize habitat segments based on their relative value in conserving a listed species.

l For the exclusion process, use a least-cost or cost-effectiveness approach that assumes the objective of species conservation as a given that need not be monetized, and searches for a critical habitat configuration that satisfies the conservation objective while minimizing costs. Use pragmatic decision-making short-cuts such as ordinal ranking of habitat segments and the costs of critical habitat protection for a particular habitat segment.

l For a given species and proposed habitat designation, require the Services to distinguish between a set of resource prescriptions that would likely be required to avoid jeopardy and a set of additional resource prescriptions necessary to conserve the species. This will enable the Services' economists to assign different economic costs to the inclusion or exclusion of a specific geographic area from critical habitat designation.

l Calculate the costs of designation using accepted professional economic methods and data that are scaled to the scope of a proposed designation and its biological, social, and economic impact. For designations involving a highly localized species, a simple tally of impacted activities and expected economic costs may be conducted using available secondary data or informal survey methods such as telephone interviews with affected agencies and property owners. However, more sophisticated data sets and models such as input-output or computed generalized equilibrium should be used to calculate economic costs for large-scale designations and expected large scale economic impacts that are directly and indirectly caused by designation.

l In all economic analyses of critical habitat designation, use an accounting stance that recognizes localized and regional impacts in the near term so that decision makers are provided with information on the welfare effects of designation and are not misled by a limited consideration of national accounts over the long term. CONCLUSION

The WUWC believes that critical habitat can be made an effective part of the overall ESA program. To do so, focused reform initiatives are necessary to: cause the timing of such designations to occur when the best data are available; standardize an approach to meaningful economic analysis; and redefine the meaning of adverse modification. This approach will result in more efficient, cost-effective, and appropriate protection for critical habitat, without generating such an overwhelming workload for the Services that the ESA program slows to a halt or causes unnecessary restrictions on the nonfederal sector. The WUWC looks forward to working with Congress and the Bush Administration to achieve these goals.

[1] Final Determination of Critical Habitat for the Coastal California Gnatcatcher, 65 Fed. Reg. 63,679 (October 24, 2000).

[2] Determination of Critical Habitat for the Mojave Population of the Desert Tortoise, 59 Fed. Reg. 5,820 (February 8, 1994).

[3] Determination of Critical Habitat for the Colorado River Endangered Fishes: Razorback Sucker, Colorado Squawfish, Humpback Chub, and Bonytail Chub, 59 Fed. Reg. 13,374 (March 21, 1994).

[4] Determination of Critical Habitat for the Southwest Willow Flycatcher, 62 Fed. Reg. 39129 (July 22, 1997) (designation invalidated and remanded by New Mexico Cattle Growers Ass'n v. U.S. Fish & Wildlife Serv., 248 F.3d 1277 (10th Cir. 2001).

[5] Proposed designation of Critical Habitat for Four Vernal Pool Crustaceans and Eleven Vernal Pool Plants, 67 Fed. Reg. 59884 (Sept. 24, 2002).

[6] Designation of Critical Habitat for the Arizona Distinct Population Segment of the Cactus Ferruginous Pygmy-owl, Proposed Rule, 67 Fed. Reg. 71,031 (November 27, 2002). The original final designation, since vacated by National Assoc. of Home Builders v. Norton, No. Civ.-00-903-PHX-SRB, (Sept. 21, 2001), encompassed 731,712 acres in Pima, Cochise, Pinal, and Maricopa counties, Arizona. Designation of Critical Habitat for the Cactus Ferruginous Pygmy-owl, 64 Fed. Reg. 37,419 (July 12, 1999).

[7] Designation of Critical Habitat for the Preble's Meadow Jumping Mouse, Proposed Rule, 67 Fed. Reg. 47, 153 (July 17, 2002).

[8] Determination of Critical Habitat for 19 ESUs of Salmon and Steelhead, 65 Fed. Reg. 7764 (Feb. 16, 2000). This designation was subsequently withdrawn and remanded pursuant to a consent decree approved by the court in National Ass'n of Home Builders v. Evans, No. 1:00-CV-02799 (CKK) (D.D.C. April 30, 2002).

[9] 50 C.F.R. § 226.212.

[10] Id.

[11] "Prior to designation, there must be a determination of the constituent elements of air, land, and water areas essential to the species. These constituent elements are defined as including physical structures and topography, biota, climate, human activity, and the quality and chemical content of the land, water, and air, with a focus on the physical and biological needs of the species." 50 C.F.R. § 424:12.

[12] See, e.g., Northwest Power Planning Council, "Human Effects Analysis of the Multi-Species Framework Alternatives" (2000); Huppert et al., "Economic Effects of Management Measures Within the Range of Potential Critical Habitat for Snake River Endangered and Threatened Salmon Species" (1992).

[13] See, e.g., U.S. Fish & Wildlife Service, The Economic Analysis of Critical Habitat Designation Effects for the Northern Spotted Owl (1992).