FERC to Re-Examine Its Policy on the Length of Hydroelectric License Terms

On November 17, 2016, the Federal Energy Regulatory Commission (Commission) issued a Notice of Inquiry (NOI) to re-examine its policy on the length of hydroelectric license terms under the Federal Power Act.  The Commission’s NOI is a tacit admission that the existing policy has not been working successfully – at least as measured against the present Commission’s policy goals. 

Section 15(e) of the Federal Power Act provides that a license term for any new license, i.e., a relicense, shall be not less than 30 or more than 50 years.  Under existing policy for hydroelectric projects, the Commission sets a 30-year term where there is little or no authorized redevelopment, new construction, or environmental mitigation and enhancement; a 40-year term where there is a moderate amount of these activities; and a 50-year term where there is an extensive amount of such activity.  See Consumers Power Co., 68 FERC ¶ 61,077 at 61,384 (1994).  These determinations are highly fact-specific.  The Commission has explained that the purpose of this policy is to ease the economic impact of new costs, promote balanced and comprehensive development of renewable power generating resources, and encourage licensees to be better environmental stewards.  Id.  Additionally, under current policy, when determining the license term for a relicensed project, the Commission’s approach is “forward-looking” and does not consider the capital costs for measures required or authorized during a prior license term.  See, e.g., Duke Energy Carolinas, LLC (Duke Energy), 156 FERC ¶ 61,010, at P 19 (2016).  Current policy does not require the Commission to consider license terms provided in settlement agreements.

The existing policy was principally premised upon the concept that the length of the license term was a major factor in the licensee’s investment decisions with respect to the project, and that a longer license term would be necessary to give the licensee a sufficient earnings horizon for larger capital investments.  In part, this view also rested upon the potential legal threat - never actually realized in the 96 history of the statute - that the federal government might exercise its right to take over the project at the end of the license term, paying the licensee essentially net book value based on historical costs.  Moreover, the administration of the existing policy has revealed that it sometimes discourages overhaul or upgrade of equipment towards the end of a license term because the licensee risks not receiving “credit” for that investment in the calculation of a new license term.  Finally, the existing policy lessens the possibility of settlements in the relicensing process to the extent that it takes off the table the length of the license term as something the existing licensee can bargain for.

The Commission’s announcement of its re-examination of its policy indicates that it is aware of the foregoing issues.  The NOI outlines for comments five potential options for updating the Commission’s license term policy: (1) retain the existing policy; (2) add to the existing policy the consideration of investments on measures implemented under the prior license; (3) replace the existing policy with a 50-year default license term unless the Commission determines that a lesser license term would be in the public interest; (4) add a more quantitative cost-based analysis to the existing license term policy; and (5) alter current policy to accept the longer license term agreed upon in an applicable settlement agreement, when appropriate. The Commission also solicits other suggestions of alternatives to the outlined options.

It is noteworthy that the Commission appears to be only considering a policy change with respect to this issue rather than a rulemaking.  Policies, as compared to rules or regulations, have very little force of law and are essentially non-reviewable in the courts.  In that sense, a policy change is an administrative equivalent to an executive order, something that is only valid until the next Commission decides to do something different.  That being the case, to the extent that the desire for change is intended to achieve different licensee behavior, merely changing the policy regarding license terms may not have the desired effect.

Comments in response to the NOI are due 60 days after publication in the Federal Register.