September 30, 2014

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September 29, 2014

Federal Energy Regulatory Commission "FERC" Enforcement’s Expanding Reach: Focus on Hydro Licensee

In a move somewhat unusual in the context of its normal exercise of authority with respect to hydroelectric licenses, on January 15, 2013 FERC publicly issued a “Staff Notice of Violations”,  stating that its staff had preliminarily determined that Seneca Falls Power Corporation has violated several articles of the license for the Seneca Falls Project, No. P-2438, located in upstate New York.  The litany of alleged violations is long, ranging from failure to procure and maintain adequate property rights for the project to failure to meet certain environmental conditions, such as maintenance of water elevations, installing fish passage facilities, monitoring wetlands and installing recreational facilities.  The procedural posture of the case is that the FERC Office of Enforcement Staff has now completed its fact-finding, presented Seneca Falls with its preliminary findings, Seneca Falls has had the opportunity to respond and Staff has had an opportunity to analyze the response.  Frequently after a Notice of Alleged Violation, we see that the subject of an investigation enters into a settlement with FERC Enforcement Staff.  The Notice of Alleged Violation is the first time the Office of Enforcement’s investigation becomes public. 

Enforcement actions against hydro licensees are relatively unusual.  Licensed projects are investments in private property whose earnings are derived from the generation of electricity at the project.   Through its enforcement and administration of licenses, FERC has considerable authority and discretion to influence the economics of the projects, so that generally licensees have every incentive to not compromise their economics by running afoul of FERC regulation.  However, those incentives appear not to have been effective with respect to the Seneca Falls Project.

Originally owned by an upstate utility, that company declined to seek a new license for the Seneca Falls Project when its original license expired in 1993.  One of the factors that appears to have influenced the original owner’s decision was an earlier determination by FERC that it did not possess all of the property rights that were necessary to operate the project.  The Commission thereafter solicited applications from other interested parties, and accepted the application of Seneca Falls Power Corporation (“SFPC”).  That entity was granted the license in 1997 on the condition that it acquire not only the original owner’s rights but also the additional property rights that had been determined to be missing from the project as originally licensed.  As is typical with new hydro licenses since the Electric Consumers Protection Act amended the Federal Power Act in 1986, there were other environmental conditions set forth in the articles of the new license, including reservoir elevation restrictions as well as construction of fish passage and recreational facilities.

An examination of the project docket reveals that compliance with these provisions of the 1997 license has been an issue for a number of years.  As recited in orders issued in 2009, apparently SFPC over a period of several years chronically failed to either obtain the additional land rights (or even the rights held by the original owner initially) or to comply with the indicated environmental/recreational provisions.  The order denying rehearing issued in November of 2009, cited in the Notice, demonstrated that the Commission Staff ultimately lost patience with the licensee and referred the matter to Enforcement Staff.  The Notice issued on January 15, 2013 was the first formal reaction to that referral since November of 2009.

In addition to demonstrating the relatively long track for some matters through the Commission’s enforcement process, this case illustrates that FERC’s normal regulation of hydro licenses works best when the licensee has an economic incentive to live up to the conditions of the license.  With respect to the Seneca Falls Project, those economic incentives are apparently lacking:  the project appears to have little economic value.  Although FERC tries to evaluate the economic viability of projects under new licenses, that process is less than perfect.  When projects turn out to be uneconomic, the Commission is forced to rely upon its police powers with respect to licenses, including the authority to levy fines and penalties.  But that authority is clearly limited in its effect.  It can give the licensee another reason to perform but not the economic ability to afford the financial/environmental conditions that gave rise to the compliance problem in the first instance.  It remains to be seen if the Commission will be able to find anyone – even if the license is abandoned by SFPC – to operate the project as its present license requires.  It also remains to be seen whether the Commission will be able to force anyone to pay for decommissioning the project if it proves uneconomic to operate.

© 2014 Bracewell & Giuliani LLP

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About this Author

David R. Poe, Litigation Attorney, Bracewell Giuliani Law Firm
Partner

David Poe’s practice focuses on providing administrative, regulatory and litigation advice to clients in infrastructure service industries, particularly electric utilities (including hydroelectric and nuclear generation), telecommunications and cable TV companies. He has been involved in federal and state legal issues specific to these industries.

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