With more than 300 projects anticipated to undergo relicensing over the next 8 years, the Federal Energy Regulatory Commission (“FERC”) issued a new policy statement on October 19, 2017 establishing a 40-year default license term for Federal Power Act (“FPA”) hydroelectric licenses for projects located at non-federal dams. Since the license term determines the period over which an investor is able to recover investment in project facilities, its length is a major factor in any investment decision with respect to a new or existing project. FERC’s exercise of discretion with respect to license term affects all hydro investments, including those that provide environmental benefits, and thus is a major factor in the economic value of privately-owned hydro projects.
Under the previous policy, FERC set a 30-year term where there was little or no authorized redevelopment, new construction, or environmental mitigation and enhancement; a 40-year term where there was a moderate amount of these activities; and a 50-year term where there was an extensive amount of such activity. This approach did not credit capital expenditures in a prior license term, nor did it require FERC to recognize bargained-for extended license terms beyond the confines of the policy.
The new policy statement adopting a default 40-year license term represents a compromise based on comments FERC received earlier this year from industry, environmental groups and federal and state resource agencies addressing whether FERC should maintain its current policy or consider various changes. It also provides avenues for advocacy for a longer term, including (i) by reaching consensus as between settlement parties; (ii) by demonstrating that a longer license term is necessary for coordination purposes respecting projects located in the same river basin; or (iii) by demonstrating significant investment measures expected to be required under the new license or significant investment measures voluntarily implemented during the prior license term were not otherwise “credited.” Because it is in the form of a Policy Statement rather than a regulation, FERC retains substantial flexibility regarding its application.
License Term: The Reinvigorated Bargaining Chip in Comprehensive Settlements
As a component of the new 40-year default license term, FERC redefined the role of comprehensive settlements in determining license terms, and this aspect of the new policy will likely be of great practical benefit for applicants. In recent years, applicants became increasingly frustrated by FERC rejecting the negotiated length of license terms included in comprehensive settlements, while accepting the other bargained-for provisions included in their “package deals”. Such outcomes were seen as a risk and disincentive for licensees to embark on the expensive and time-consuming exercise of coordinating a settlement that may only be accepted in part. FERC’s new policy addresses this issue head on by encouraging licensees to negotiate the length of license terms in their settlement agreements. FERC will now accept such negotiated license terms as long as the agreed-upon term is specific and does not conflict with the coordination of license terms for projects located in the same river basin.
Among those who appear to benefit are applicants proposing projects where there is little or no authorized redevelopment, new construction, or environmental mitigation and enhancement. Whereas these projects would receive a 30-year term under FERC’s previous policy, under the new policy, these projects will benefit from the default 40-year license term – receiving an additional 10 years in which to earn a return on their investments.
The extent to which applicants who have made costly discretionary investments into an existing licensed project will get “credit” for the investments in the length of the new license term under the new 40-year default, is less clear. Under the new policy, FERC has indicated it will consider a longer license term based not only on significant measures expected to be required under the new license, but also for significant measures voluntarily implemented during the prior license term without legal obligation. FERC provides examples of the types of measures found to “count,” which include the construction of pumped storage facilities, fish passage facilities, fish hatcheries, substantial recreation facilities, dams and powerhouses. However, the new policy does not address what threshold will be required to persuade FERC that these types of additional activities and investments warrant “credit” for a longer license term than the 40-year default.
Additionally, although the default 40-year term appears to be a compromise from the default 50-year term suggested in the NOI, environmental groups and resource agencies may nevertheless desire to further ensure that unanticipated project effects on environmental resources do not go unmitigated for long durations. FERC attempted to alleviate this concern by reiterating that although some projects may be relicensed less frequently with a 40-year default license term, there are a number of tools available to timely address unanticipated effects, including FERC’s standard reopener article; voluntary license amendments; and the ability of resource agencies to reserve authority to address those effects under Section 4(e) of the FPA (federal reservation), Section 18 of the FPA (fishway prescription) and in water quality certifications issued under Section 401 of the Clean Water Act.
Applicants With Pending Applications May be Motivated to Return to the Negotiating Table
While the new policy will not be applied retroactively, FERC indicated that applicants with pending applications may file a comprehensive settlement agreement, or addendum to an existing agreement, that includes an explicitly agreed upon license term or may make a filing demonstrating why FERC should award them a longer license term than the new default 40 years.