D.C. Circuit puts hydropower industry on notice: the landscape for hydro re-licensing may have changed
October, 2006
A recent D.C Circuit decision addressing the relicensing of the City of Tacoma's ("Tacoma") hydroelectric project on the Skokomish River has sent reverberations through the halls at the Federal Energy Regulatory Commission ("FERC"), and appears destined to have significant ramifications for the hydropower industry. In City of Tacoma v. FERC,[i] the D.C. Circuit upheld FERC-imposed the license conditions, including minimum stream flows about four times greater than current flows, in the face of evidence that those conditions may make the project uneconomic and result in the City's abandonment of the project.[ii] The Court also clarified the Department of Interior's ("Interior") authority under Section 4(e) of the Federal Power Act ("FPA") to impose mandatory conditions on licenses for projects on federal lands, and held that FERC lacked the authority to impose a strict time limitation on Interior's exercise of its authority under the FPA.[iii]
Legal and Factual Background
More than 80 years ago, Tacoma obtained a "minor part license" [iv] for construction and operation of the Skokomish River hydroelectric project, a part of the larger Cushman Project on the Olympic Peninsula. In 1974, when this minor part license expired, Tacoma applied for a major project license that would cover all of its Cushman hydro project-related facilities. Consistent with FERC's regulations, Tacoma received annual license renewals of its existing license and operated the Cushman Project under its these annual renewals for the next twenty-four years while FERC considered Tacoma's application. On July 30, 1998 FERC completed its review of Tacoma's re-licensing application and issued Tacoma a forty-year major license for the Cushman Project.
Although Tacoma's license contained a number of mandatory conditions designed to protect the environment, remedy past environmental impacts, restore fish populations, and otherwise mitigate the effect of the project on the Skokomish Indian Reservation, FERC explicitly rejected additional conditions submitted by Interior under Section 4(e) as both untimely and in excess of Interior's authority under the FPA.[v]
Several parties petitioned FERC for rehearing, including Tacoma and the Skokomish Tribe (the "Tribe"). Tacoma asserted that the terms imposed by FERC were unreasonable, in violation of the FPA, because the terms would make the project more costly to operate than the value of the power it generated. The Tribe argued, among other things, that the license did not adequately protect the environment of the Skokomish Indian Reservation and that all of Interior's Section 4(e) conditions should have been included as conditions of the license.[vi] FERC denied the petitions for rehearing, clarified that Tacoma could defer a decision whether to accept or reject the new license pending the outcome of the appeal process, and staying the new license pending judicial review.[vii]
On August 22, 2006, the D.C. Circuit issued its decision on the consolidated petitions for review, lifting the stay and resolving three important issues with broad impact: First, the Court held that license conditions that render a project uneconomic are not "unreasonable" per se and that FERC did not exceed its authority in imposing them in Tacoma's license. Second, the Court held that FERC lacked the authority to impose strict time limits on Interior's exercise of its authority to submit section mandatory license conditions under Section 4(e). The Court remanded the matter to FERC to determine whether, in light of the § 4(e) conditions to be imposed, it will issue the license.[viii] Third, the Court read the Interior's authority to impose conditions it deemed necessary for the protection of lands under its jurisdiction broadly, concluding that it could impose conditions intended to mitigate the impact of the entire project, not just the portions of the project actually occupying federal lands.
FERC Can Impose Uneconomic Licensing Conditions
The most significant aspect of the D.C. Circuit's decision was its extensive discussion, and ultimate rejection, of Tacoma's assertion that because the license conditions make the Cushman Project uneconomic, the conditions are unreasonable per se, and thus violate the FPA.[ix]
Addressing Tacoma's arguments directly, the Court explained that the language of the FPA requiring FERC to grant new licenses "upon reasonable terms," does not mean "the same terms that were imposed eighty years ago, or that . . . ignore the present-day statutory mandate."[x] The Court reasoned that FERC's "obligation to give ‘equal consideration' to wildlife protection and the environment[xi]. . . implies that, at least in some cases, these environmental concerns will prevail,"[xii] and the fact that a license may not exceed fifty years[xiii] indicates Congress's intent that "projects be reevaluated from time to time in light of changing circumstances and national priorities" and that this reevaluation necessarily implies that in some cases the changing regulatory landscape in which FERC operates may cast doubt on a once viable project.[xiv]
According to the Court, "[n]othing in the FPA suggests that Congress intended to ‘grandfather' existing projects so they could continue to operate indefinitely despite changes in national priorities. . . " and "reasonable terms can . . . be terms that may have the effect of shutting a project down or occasioning a change of ownership."[xv]
As a result, the Court concluded that "Congress implicitly extended to FERC the power to shut down projects either directly, by denying a new license, or by imposing reasonable and necessary condition that cause the licensee to reject the new license."[xvi]
FERC Cannot Impose Strict Time Limits on Interior's Submission of Mandatory Conditions
Under the FPA, agencies with jurisdiction over federal lands impacted by a hydro project have the authority to impose mandatory terms and conditions that the agency deems necessary to protect and utilize those lands.[xvii] In this case, Interior, the agency with jurisdiction over lands within the Skokomish Indian Reservation, submitted Section 4(e) conditions that included minimum flows for the North Fork Skokomish River, restoration of the river channel, fish passage facilities, restoration of anadromous fish, consideration of the effects of the project on treaty-protected interests of the Tribe, conditions for protection of the Skokomish Indian Reservation, cultural resources and historic preservation, and preservation of the project's flood control and recreational benefits.[xviii]
Although the FPA does not provide a deadline for an agency's submitting conditions, FERC has imposed its own deadline of 60 days, codified at 18 C.F.R. § 4.34(b). Because Interior submitted its Section 4(e) conditions to FERC two years after FERC issued its notice that the application was ready for environmental analysis FERC rejected the conditions as untimely.[xix]
The Court of Appeals concluded FERC had exceeded its statutory authority. As the Court explained, "[t]o the extent Congress has delegated licensing authority to agencies other than FERC, those agencies, and not FERC, determine how to exercise that authority. . . FERC can no more dictate to Interior when Interior should complete its work than Interior can dictate to FERC when FERC should do so."[xx]
Scope of Interior's Authority Broadly Construed
The Court also addressed the question of the extent of Interior's authority under Section 4(e): whether it was limited to mitigating the relatively small impact the limited portions of the project actually occupying U.S.-owned Reservation lands, or the much greater impact the entire project would have on the Reservation.[xxi] The Court held that Interior's authority to impose conditions to protect the reservation extends to conditions intended to mitigate the impact of the entire project on the Tribe and its fishery. So long as some portion of the project is on the reservation, Interior may impose any conditions it deems necessary to protect the entire reservation, to the extent doing so is reasonably related to protecting the reservation and the Tribe.[xxii]
Reaction and Conclusions
The Tacoma v. FERC decision is being hailed as something of a turning point in hydropower relicensing.[xxiii] Resource agencies, including Interior, are also pleased with the decision, which resolved, in their favor, inter-agency jurisdictional disputes over licensing conditions.[xxiv] The hydropower industry, however, has been left reeling, and facing with a Hobson's choice: relicense aging hydropower projects and face license conditions that render the project uneconomical; or reject the license, abandon the project, and face the imposition of substantial decommissioning obligations or costs if the project cannot be sold.
With licenses for approximately 30 projects in California, Oregon, Idaho and Washington alone up for relicensing between now and 2014, this decision may have substantial repercussions for the hydropower industry. In fact, American Rivers has already cited the D.C. Circuit's decision in comments in a relicensing proceeding for a dam in South Carolina, as standing for the principle that "relicensing is not a continuation of the status quo, but a reconsideration of the past commitment of the river resource based on present day values and ‘then existing laws and regulations.'"[xxv] The decision may lead licensees with aging projects of questionable continuing economic viability to more seriously consider the prospect of financing the decommissioning of those projects, rather than their continued operation.
While acknowledging that its decision raised the question of whom must assume the costs of abandoned projects, the DC Circuit left for another day the issue of whether, and under what circumstances, FERC may impose decommissioning obligations or costs on a former licensee if the licensee chooses to abandon its project rather than accept new license conditions that make the project uneconomic.[xxvi] Given the contentious history of this twenty-four year relicensing proceeding, and the importance of these issues to the hydropower industry, it would not be surprising to see Tacoma and FERC before the Court in the near future seeking a ruling on that very issue.
For more information, contact Connie Sue Martin.
[i] City of Tacoma v. FERC, 460 F.3d 53 (D.C. Circ. 2006) (Decided August 22, 2006)
[ii] Id. at 71. Tacoma argued that the license conditions were "a de facto decommissioning of the project."
[iii] As the Court explained, "To the extent Congress has delegated licensing authority to agencies other than FERC, those agencies, and not FERC, determine how to exercise that authority. . . FERC can no more dictate to Interior when Interior should complete its work than interior can dictate to FERC when FERC should do so. Here, FERC took all the time it needed – a full twenty-four years – to issue a license to Tacoma. Interior, in contrast, produced its license conditions within three years of receiving notice. . ." at 65.
[iv] The license was designated a "minor part license" because it covered only a small portion of Tacoma's much larger Cushman Project. At the time the license was issued, FERC's predecessor agency, the Federal Power Commission ("FPC"), interpreted its licensing authority narrowly, so the license it issued to Tacoma governed only that part of the project that occupied or used federal land. In 1963, the FPC determined that its licensing jurisdiction extends to whole projects, not just those occupying or using federal land, and that certain minor part licenses had been "improperly issued" based on "an erroneous conclusion of law." Pacific Gas & Elec. Co., 29 FPC 1265, 1266 (1963). This holding called into question all projects that were operating under minor part licenses at that time, including the Cushman Project, but Tacoma continued to operate under that license until it expired in 1974. at 63.
[v] at 60; See, also, City of Tacoma, 84 FERC ¶ 61,107 at 61,578 - 61,599 (1998). Section 4(e) of the FPA provides that a license issued for projects within federal lands may be issued only subject to conditions deemed necessary to protect and utilize the lands by the agency with jurisdiction over such lands. Although FERC makes the final decision whether to issue a license, it has no discretion regarding the § 4(e) conditions; it must either include the conditions in the license, or not issue the license.
[viii] at 65, citing Escondido Mut. Water Co. v. La Jolla Band of Mission Indians, 466 U.S. 756, 772-79, 104 S.Ct. 2105, 80 L.Ed.2d 753 (1984).
[ix] In another regional relicensing proceeding, Puget Sound Energy ("PSE") ceased hydropower operations on the White River as of January 4, 2004 and negotiated the sale of its water diversion rights to Cascade Water Alliance, a non-profit Washington corporation comprised of municipal corporations, formed under an Interlocal Contract for the purpose of providing a long-term source of water to its members. PSE's stated reason for ceasing its hydropower operations was that the company could not produce power cost effectively under the license conditions. PSE's spokesman, Ed. Schild, stated, "We have a hydropower project built in the early 20th century that simply doesn't pencil out under the environmental and engineering standards of the 21st century." August 12, 2004 Order Remanding Case, Puyallup Tribe of Indians, et al v. Ecology, et al., PCHB Nos. 03-105, 03-106, 03-107, 03-109, 03-118, at p. 5.
[xi] The 1986 amendments to the FPA added a provision to § 4(e) requiring FERC to give "equal consideration" to power production and to the protection, mitigation of damage to, and enhancement of fish and wildlife and environmental quality. Pub.L. No. 99-495, § 3(a), 100 Stat. 1243 (1986) (codified at 16 U.S.C. § 797(e)). Decisions interpreting this provision have concluded that "equal consideration" does not mean equal value, however. Conservation Law Foundation v. FERC, 216 F.3d 41, 47 (D.C. Cir. 2000); California v. FERC, 966 F.2d
[xiii] 16 U.S.C. § 808(e).
[xiv] Closure may come about because FERC denies a new license outright, or because it issues a license that the licensee finds too costly or burdensome. 2006 WL 2411362 at *16.
[xvii] 16 U.S.C. § 797(e).
[xviii] See City of Tacoma, 86 FERC ¶ 61,311, at 62,071, 1999 WL 177637 at **1 (1999).
[xix] 84 FERC ¶ 61,107, 1998 WL 608611 at **17 – 18.
[xxiii] American Rivers, an intervenor in the case, called the ruling a victory for the public and for the river's health. "Court Ruling Opens Door to Restore Water to the North Fork Skokomish River for the First Time in Decades." 8/23/06 statement of Brett Swift, American Rivers.
[xxiv] See, e.g., American Rivers v. F.E.R.C., 201 F.3d 1186 (9th Cir. 2000), discussing cases in which FERC has reclassified, rejected, or modified license conditions resource agencies submitted as mandatory conditions.
[xxv] See Comment on Filing of American Rivers, et al. under P-9988. AR and CCL file amended comments on the King Mill Initial Consultation Document to reflect the recent City of Tacoma v. FERC decision by the D.C. Circuit of the U.S. Court of Appeals. FERC submittal 20061010-5008 (10/10/2006), Docket P-9988-000, at p.2.