By Jay Ryan, Jerrod Harrison and Marcia Hook
In testimony before the U.S. Congress, Ann Miles, Director of the Office of Energy Projects at the Federal Energy Regulatory Commission (FERC), noted that more than 500 hydroelectric projects will commence a relicensing process between 2016 and 2030. These projects represent about 50% of the licensed hydroelectric projects under FERC jurisdiction and 30% of all licensed hydro capacity.
Pursuant to the Federal Power Act (FPA), FERC will consider license applications filed by both existing licensees and competitors seeking to wrest the project from the incumbent. Given the increasing value of hydroelectric projects — particularly as market forces and environmental policies drive a transition toward low- and no-carbon-emitting resources — existing licensees may increasingly face challenges from parties filing competing license applications. This article examines the statutory and regulatory framework governing competing applications on relicensing and discusses FERC precedent regarding the treatment of competing license applications.
Unless the U.S. government exercises its right to take over a hydroelectric project when its license expires, Section 15 of the FPA authorizes FERC to issue a “new license” (issued after the expiration of the initial license for that project) to the existing licensee or to a non-incumbent licensee. (Projects licensed to states and municipalities are exempt from the federal takeover provisions of FPA Section 14.)
FERC’s regulations establish the process for filing competing license applications and impose requirements on competing applicants similar to those imposed on incumbent licensees. For example, a competitor must notify FERC of its intent to file a competing license application at least five years, but not more than five and one-half years, before a project’s license expires. The competing applicant also must file a pre-application document and, if applicable, request permission to use the traditional or alternative licensing process instead of the integrated licensing process. Finally, competing license applications must be filed at least 24 months before the existing license expires.
When there are competing license applications for an existing project, FERC will issue the new license to the applicant “whose plans are best adapted to serve the public interest.” To determine this, FERC will consider factors enumerated in the FPA that require FERC to assess the plans and abilities of an applicant to comply with the FPA and potential license conditions and to manage, operate and maintain a project safely and in a manner most likely to provide efficient and reliable electric service. FERC also considers an applicant’s need for the project’s electric output, transmission issues, and whether the applicant’s plans will be achieved in a cost-effective manner. FERC may consider any other factors it deems relevant in the comparative relicensing process, with the exception of the applicants’ plans concerning fish and wildlife, which are not subject to a comparative evaluation.
If there are only insignificant differences between the applications of the existing licensee and the competitor after considering these factors, FERC will consider the existing licensee’s record of compliance with the license terms and conditions and any actions taken by the existing licensee related to the project that affect the public.1
To facilitate comparison of competing applications, FERC requires that the license applicant and each competitor file a detailed and complete statement of how its plans are as well or better adapted than the plans of the other applicant(s) to develop, conserve and utilize in the public interest the region’s water resources. This statement is due shortly after the deadline for filing competing applications.
Payment to licensee when a new license is awarded to a competing applicant
If FERC issues a new license to a competing applicant, that applicant must pay the existing licensee for the project in the same manner as the U.S. government would be required to do. Under Section 14(a), the U.S. has a right to take over a project upon payment of the licensee’s net investment, not to exceed fair value, plus reasonable severance damages.
The “net investment” could be lower than the fair market value of the project and does not include “expenditures from funds obtained through donations by States, municipalities, individuals, or others.” The FPA defines “net investment” as the “actual legitimate original cost of a project … plus similar costs of additions thereto and betterments” minus any “(a) Inappropriate surplus, (b) aggregate credit balances of current depreciation accounts, and (c) aggregate appropriations of surplus or income held in amortization, sinking fund, or similar reserves, or expended for additions or betterments or used for the purposes for which such reserves were created.”2 Exhibit D to any application for a new license submitted by a non-municipal, non-state applicant must include “an estimate of the amount which would be payable if the project were to be taken over pursuant to section 14 of the [FPA] upon expiration of the license in effect . . . including: (i) Fair value; (ii) Net investment; and (iii) Severance damages.”
The incumbent preference
An incumbent licensee does not automatically retain its license at the expiration of the existing license term. However, the FPA provides that, in evaluating competing applications, FERC “shall ensure that insignificant differences … between competing applications are not determinative and shall not result in the transfer of a project.” Because the FPA prohibits the transfer of a project to a competing licensee where only “insignificant differences” in the applications exist, both FERC and the courts have held that the FPA establishes a “marginal” preference for incumbent licensees. The existing licensee therefore has an advantage in the relicensing process if it can demonstrate that its application is equally well-adapted to serve the public interest as any competing application. This advantage is often referred to as an “incumbent preference” or “incumbent tie-breaker.”
FERC has clarified that this marginal preference is available “only to the exact entity that was the current existing licensee of the project.” With regard to entities that acquire a hydroelectric project during the term of an existing license, FERC will “scrutinize transfer requests that are filed during the last five years of a license term to determine if the transfer’s primary purpose is to give the transferee an advantage in relicensing, such as when a transfer is intended to escape consideration of a transferor’s poor compliance record.”
In practice, however, FERC’s scrutiny of license transfers has not prevented transferees from retaining the incumbent preference during relicensing.3 On several occasions, FERC has permitted a licensee that had already commenced the relicensing process to transfer its license and allowed the transferee to obtain the status of the existing licensee for purposes of the incumbent tie-breaker. In these cases, FERC noted that “[t]he transfer of license will make the transferee the ‘current existing licensee of the project’ under the relicensing provisions of [the FPA], and … the transferee will be entitled to the statutory incumbent licensee tie-breaker preference on relicensing.”
FERC’s treatment of competing applications for new licenses
FERC has considered a competing license application for a new license in fewer than 20 proceedings. To date, FERC has not awarded a new license to a competitor when an incumbent also is pursuing a new license.
Of the relicensing proceedings involving competing license applicants, more than half were resolved by settlement and withdrawal of the competing application. There have only been two proceedings where FERC reached the point where it considers the merits of the competing application. In each of those proceedings, FERC awarded the new license to the existing licensee. These decisions are instructive.
In Holyoke Gas & Electric Department, FERC awarded the existing licensee the new license because its proposal was significantly more cost-effective, with a net annual economic benefit almost 200% greater than the competing license applicant’s proposal. In doing so, FERC noted that it had previously determined “that a difference [in net annual economic benefit] of 20 percent or more is significant” in the context of evaluating competing proposals for an original license for an unconstructed project. The proposals were not significantly different in any other respect. FERC also concluded that because there was a significant difference between the proposals, it was not necessary to examine the existing licensee’s compliance record and its actions affecting the public.
In FirstLight Hydro Generating Co., FERC found no significant distinction between the competing licensing proposals but, in light of the marginal incumbent preference, granted the license to the existing licensee. Specifically, FERC determined that although the incumbent’s proposal was more cost-effective, the difference was not significant, again citing the 20% threshold from “the analogous context of comparing two proposals for original licenses.” FERC also determined that the differences between the proposals with respect to recreation enhancements at the project were insignificant because, even though the competitor’s proposal included more recreation measures than the incumbent’s, the “proposed enhancements [were] relatively minor and [would] not provide significant, new recreational opportunities …”
Notably, while FERC has not awarded a license to a competing applicant, certain competing applicants have used the licensing process to establish an ongoing role with a project. For example, in relicensing of the Pelton Round Butte Project, the incumbent and competitor entered into a settlement agreement that resulted in the parties merging their applications to become co-applicants. Similarly, in the last relicensing of the Kerr Project, the incumbent licensee and competitor agreed to become joint licensees, with the incumbent holding and operating the project for the first 30 years of the 50-year term of the new license and the competitor holding and operating the project for the balance of the term. In another proceeding involving the relicensing of the Utica, Angels and Upper Utica projects, the incumbent and competitor entered into a settlement agreement under which the incumbent agreed to transfer the projects to the competitor.
Application of the municipal preference to relicensing proceedings
Section 7 of the FPA, which governs original license proceedings, requires that FERC give preference to applications filed by states and municipalities. During the 1970s, when many of the 50-year original licenses issued under the FPA began to expire, FERC had to consider as a matter of first impression whether the municipal preference also applies during relicensing.
In City of Bountiful, Utah, FERC ruled that the municipal preference did apply during relicensing. Three years later, however, FERC changed course in Pacific Power & Light Company, overruling Bountiful and holding that the municipal preference does not apply during relicensing. Subsequently, Congress enacted the Electric Consumers Protection Act of 1986 (ECPA), which, among other things, amended the FPA to codify FERC’s interpretation that the municipal preference does not apply during relicensing. As a result of the ECPA amendments, a “municipality can prevail over an incumbent investor-owned utility that seeks to renew a license if the former’s proposal is ‘best adapted,’ [but] ‘insignificant differences … between competing applications are not determinative and shall not result in the transfer of a project.’” Thus, with the ECPA, Congress closed the door on what could have been a significant potential legal obstacle for incumbent licensees on relicensing.
Application amendments as a basis for competing applications
In several proceedings, competitors have sought to use FERC’s material amendment rule to introduce a “timely” competing application. As noted above, a license application must be filed two years before an existing license expires. FERC’s material amendment rule, codified in Section 4.35 of its regulations, requires that FERC assign a new filing date for “material amendments” to a license application. As FERC has explained, “[t]reating the proposal as a new application changes its acceptance date for filing and can result in a loss of priority and possible rejection as a late-filed application,” and provides a new opportunity to file comments, motions to intervene and, most significantly, competing applications.
In each proceeding where a competitor sought to exploit FERC’s material amendment rule to introduce a competing application in response to a filing purportedly constituting a “material amendment” to the incumbent’s relicensing application, FERC rejected the competing license application based on a narrow interpretation of what constitutes a “material amendment.” For example, during the last relicensing of the School Street Project, Green Island Power Authority sought to introduce an “alternative” to the relicensing almost 13 years after the statutory deadline to file competing license applications. Green Island argued that the material amendment rule required FERC to reopen the proceeding when the licensee:
- Informed FERC it no longer intended to install a proposed 21-MW generator;
- Reversed course and informed FERC that it intended to install the proposed 21-MW generator; and
- Submitted an offer of settlement in the proceeding.
FERC disagreed. On remand from the U.S. Court of Appeals for the Second Circuit, FERC explained that it will only determine that an amendment to a license application is “material” if the changes are “of such magnitude that the proposal should be treated as a new application” because the changes “are of such a fundamental nature as to constitute the proposal of a different project.” After undertaking an extensive review of the cases in which FERC applied the material amendment rule, FERC explained that “[e]very case where [it] concluded that amendments to the applicant’s plan of development were material involved significant changes to the project’s physical features.” Applying that standard, FERC determined that neither the changes in installed capacity nor the changes provided for in the settlement offer constituted a “material amendment.”
A substantial number of existing hydroelectric licenses will expire during the next 20 years and it is likely that many relicensing proceedings will involve competing license applications. To date, competing license applications have not resulted in the award of new licenses to competitors when an incumbent licensee is also pursuing a new license. This is attributable, in large measure, to the marginal incumbent preference, the strong compliance record of existing licensees, and existing licensees’ ability to demonstrate safe, reliable and efficient operation of their projects. Nevertheless, the existential threat of a competing license application exists, and existing licensees contemplating relicensing should begin to strategically address the factors that FERC will consider when evaluating competing license applications.
Jay Ryan, Jerrod Harrison and Marcia Hook are attorneys in the Energy Regulatory Practice of Baker Botts L.L.P. and represent hydroelectric licensees on licensing and compliance issues.
1 Id. § 808(a)(3); 18 C.F.R. §§ 4.36(d)(2)(iii), 16.13(b). While the FPA states that FERC shall consider these factors “[i]n the case of an application by an existing licensee,” FERC’s regulations state that FERC will only consider these factors if the difference between the competing applications is insignificant “after consideration of” the other enumerated factors. Id.
2 16 U.S.C. § 796(13).
3 It appears this policy was chiefly motivated by concerns about existing licensees avoiding the consequences of a poor compliance record, a factor FERC must analyze in a relicensing proceeding pursuant to FPA Section 15(a)(3). FERC has noted that one of the remedies it might consider if it found that a transfer during the last five years of a license had been made for the purpose of giving the transferee an improper advantage was to “imput[e] the transferor’s poor compliance record to the transferee in considering the transferee’s application for relicense.” Id.
Editor’s Note: The entire original text of this article, including footnotes for many statements made, is available at www.hydroworld.com/index/hydro-library.html.