Hydropower Regulation: A Bipartisan Success Story

On August 9, 2013, President Obama signed into law the “Hydropower Regulatory Efficiency Act of 2013” (the “Act”).  This legislation, passed with overwhelming support in the House and Senate, streamlines the regulatory approval process for certain hydroelectric power (“hydropower”) projects.  Perhaps more importantly, the Act reflects bipartisan recognition of the benefits of hydropower.

According to the Act, only 3% of the 80,000 dams in the United States generate electricity; developing these currently untapped hydropower resources could add an additional 60,000 MW of hydropower capacity by 2025 and create up to 700,000 new jobs in the United States.  To facilitate development of these resources, the Act simplifies the regulatory approval process for certain small and conduit hydropower projects.  Such projects can utilize agricultural, industrial, and municipal conduits or be sited at existing dams where the project will result in minimal change to water flow and will not adversely affect fish or endangered species.

Regulatory Background

Pursuant to Part I of the Federal Power Act (“FPA”), the Federal Energy Regulatory Commission (the “FERC”) regulates hydropower projects constructed and owned by non-federal entities, including any project on a navigable waterway or a project on a non-navigable waterway that affects interstate or foreign commerce.  Such projects may be licensed for a term up to 50 years, the licenses are renewable, and the owner may exercise eminent domain under Section 21 of the FPA to construct the project.  Alternatively, the FERC may find that a hydropower project is exempt from the licensing and other requirements under the FPA, in which case the owner may not exercise eminent domain under the FPA.

Prior to the Act, there were two licensing exemptions available for hydropower projects: (i) a discretionary exemption under Section 30 of the FPA for small conduit hydroelectric facilities with a capacity of less than 15 MW (or 40 MW in the case of a facility constructed, operated, and maintained by an agency or instrumentality of a state or local government for water supply for municipal purposes); and (ii) a discretionary exemption under Section 405(d) of the Public Utility Regulatory Policies Act of 1978 (“PURPA”) for “small hydroelectric power projects” having a proposed installed capacity of 5 MW or less.

Specifically, Section 30 of the FPA exempted certain qualifying conduit hydropower facilities with a capacity of less than 15 MW from the licensing requirements of the FPA.  A “conduit” is any tunnel, canal, pipeline, aqueduct or other similar manmade water conveyance that is operated for the distribution of water for agricultural, municipal, or other industrial consumption and not primarily for the generation of electricity.  This exemption could be granted to any conduit facility (not including any dam of other impoundment) constructed, operated, or maintained for the generation of electric power that the Commission determined: (1) utilized only the hydroelectric power of a conduit for electric generation and (2) had an installed capacity that did not exceed 15 MW.

Section 405(d) of PURPA also authorized the Commission to grant exemptions from the licensing requirements of the FPA to small hydroelectric power projects with a proposed installed capacity of less than 5 MW, subject to certain limitations to ensure protection of fish, wildlife, and other environmental resources.  Under PURPA, a small hydroelectric power project is any hydropower project located at the site of an existing dam that uses the water power potential of that dam.

The Act’s Reforms

The Act increases the size of private small conduit hydroelectric facilities eligible for the discretionary exemption under the FPA from 15 MW to 40 MW and increases the size of the PURPA licensing exemption for small hydroelectric power projects from 5 MW to 10 MW.  The Act also creates a mandatory exemption from the FERC’s jurisdiction for certain qualifying conduit hydropower facilities with an installed capacity of less than 5 MW and prescribes an expedited process under the FPA to determine whether a facility is eligible for the mandatory exemption.

A “qualifying conduit hydropower facility” eligible for the mandatory exemption is a facility (not including any dam or impoundment) that is: (i) constructed, operated, or maintained for the generation of electric power and uses for such generation only the hydroelectric potential of a non-federally owned conduit; (ii) has an installed capacity of less than 5 MW; and (iii) was not licensed or exempted from licensing prior to August 9, 2013.  Any party proposing to construct a qualifying conduit hydropower facility must file a notice of intent with the FERC and, within 15 days, the FERC must make an initial determination as to whether the facility meets the qualifying criteria.  If the FERC makes an initial determination that the facility does qualify, the FERC will publish public notice of the notice of intent to construct.  If no entity contests that the facility meets the qualifying criteria during the 45-day public notice period, then the facility is automatically deemed to meet the criteria.  If an entity contests that the facility meets the qualifying criteria, the FERC must promptly issue a determination as to whether the facility meets the criteria.

Additionally, the Act requires FERC to investigate the feasibility of a 2-year licensing process for hydropower projects at non-powered dams and closed loop pumped storage projects.  Prior to passage of the Act, Jeff Wright, the FERC’s Director of Energy Projects, testified before the Senate Committee on Energy and Natural Resources that licensing of hydropower projects can be expedited for “projects that: (i) are located at an existing dam where hydropower facilities do not currently exist, (ii) would result in little change to water flow and use, (iii) are unlikely to affect threatened and endangered species and are unlikely to need fish passage facilities, and (iv) involve lands and facilities that are already owned by the applicant.”  Wright also testified that investigating the 2-year standard was, in his view, unlikely to result in the FERC mandating a shortened process, because FERC can already achieve this for well structured projects and, where it cannot, there are significant constraints imposed upon the FERC by the FPA and other statutes affecting the licensing process, including the Clean Water Act, the Coastal Zone Management Act, and others.

Finally, the Act requires the Secretary of Energy to study the technical feasibility of pumped storage to support intermittent renewable energy such as wind and solar, as well as opportunities for additional hydropower from conduits.

Implementation

The Act’s licensing process reforms may not accelerate the development of hydropower projects in the short term, but they do suggest a new recognition of the unique cost, sustainability, reliability, and environmental attributes of hydropower.  The federal government, with support from both Republicans and Democrats, seems to be willing to facilitate broader development of hydropower in the future, with possibly more ambitious legislation to come.

In compliance with the Act, the FERC is now taking action to solicit public comments and recommendations on the feasibility of a two-year licensing process for development at non-powered dams and closed-loop pumped storage projects.  The FERC held a workshop to address these issues on October 22, 2013.  The workshop featured a panel representatives from interested federal government agencies, including NOAA Fisheries, U.S. Fish and Wildlife Service, the Army Corps of Engineers, and the FERC, in addition to private developers and representatives from relevant state permitting bodies.

Much of the discussion focused on three issues.  First, most of the panelists expressed their belief that the current licensing process functions well and can generally be completed within two years if the developers submit a complete preliminary application document (“PAD”) that has been developed after consultation with relevant stakeholders, including state and federal agencies.  However, the developer panelists did express a preference for the Traditional Licensing Process (“TLP”) over the Integrated Licensing Process (“ILP”), and suggested that part of expediting the licensing process might involve allowing for a quicker determination that a developer may use the TLP rather than the ILP.  Second, there was extensive discussion of whether “controversial” projects (e.g., projects that implicate the Endangered Species Act or involve changes in flow) could possibly be permitted in two years.  The consensus was that it would be unlikely, though not impossible if the applicant had a well-defined proposal to address problematic issues.  Finally, there was further discussion as to whether controversial projects should be screened out for participation in the two-year process (i.e., through institution of an eligibility checklist).  Whether controversial projects should be ineligible to participate in the expedited process, or should instead be “off-ramped” if it becomes evident that the process cannot be completed in two years, remains an open question.

To conclude the discussion, the FERC moderator inquired as to whether there would be any projects ready to participate in a pilot process by February 5, 2014.  In response, Dan Lissner from Free Flow Power, Kelly Sackheim from KC Hydro, and a representative of Grand Coulee Hydroelectric all indicated that they have projects they believe would be eligible and ready by February 5, 2014, and expressed willingness to participate in the pilot project.

The FERC will accept written comments from stakeholders until November 21, 2013.  Details regarding how to submit comments are available here.

—Jay Ryan and David Powers, partners at Baker Botts L.L.P.