Congressmen, industry experts, and environmentalists square off over efforts to streamline relicensing.

April 1, 2000

The current relicensing scheme for regulated hydroelectric projects is too costly, invites too many bitter court battles, and involves too many government agencies, critics say.

That criticism - not new in the hydro industry - in the past has tended to fall on deaf ears. Many from time to time have challenged the hydro relicensing process, which stems largely from federal legislation amended by Congress, but their efforts have met without real success. Lately however, some in Congress have begun to show concern. They worry that the current process may crack under the monstrous volume of hydro capacity due for relicensing in coming years. Congress may be ready this year to amend the legislative scheme.

According to the Edison Electric Institute, more than 40 percent of the hydro projects licensed to parties other than federal agencies - spread among 34 states - in the next decade will come up for relicensing before the U.S. Federal Energy Regulatory Commission. Extend the timeline through 2015, and some 39 states are involved. In each case, a myriad of federal and state agencies may seek to impose their own conditions on any licensing approval.

In an effort to streamline the process, Sen. Larry Craig (R-Idaho), this year will reintroduce the Hydroelectric Licensing Process Improvement Act of 1999 [S.740]. In early February, Sen. Craig told the he believes that support for his bill is stronger than ever, but admitted that it will meet with opposition from some "extremist" environmental groups.

Sen. Craig's bill would allow other federal agencies to consider project impacts on air quality, but would require the agencies to file conditions within one year of the application, and to submit such conditions for scientific peer review based on empirical or field-tested data. Moreover, Craig's bill would allow the FERC to review each condition to determine whether it would render the project uneconomic. Also, the FERC would study the feasibility of setting up a separate licensing procedure for small hydro projects of 5 megawatts or less.

Craig's legislation, which imposes tighter deadlines on resource agencies, is intended to remedy the effect of "mandatory conditioning" authority, held by several separate federal and state agencies, which tends to draw out the timeline and costs of hydro project relicensing, according to the senator.

Another problem the legislation hopes to resolve is that relicensing agencies can directly constrain the use of water flows for generating electricity and impose expensive operating conditions on hydropower projects, without considering project economics, energy benefits, and other benefits.

A recent report by the Department of Energy finds that, on average, it takes more than five years and costs between $1 million and $5 million to license or relicense all but the smallest hydropower projects, even if the owner proposes no changes in the project.

Presently, the FERC, which administers the relicensing process, cannot modify or reject mandatory conditions imposed by resource agencies even if they make a project uneconomic. And that's assuming that regulators know when a project is economic.

FERC general counsel Douglas W. Smith admitted under Senate questioning last year that by the commission's calculation under its test, a number of the projects that received initial or renewed licenses during the last few years would have produced negative economic value. Yet the parties went forward anyway. The results, said Smith, suggested that the FERC's calculations do not quite accurately measure the true market value of project operation.

"We have essentially left commercial decisions about whether a project is profitable, economically viable or attractive [to the hydro operator]," he said, explaining that the decision to keep operating under the conditions set forth in the license is up to the licensee.

The test emerged from the FERC's 1995 relicensing decision involving the Mead Corp. In that relicensing, FERC found that because of the changing economics of the electric utility industry and the fact that project economics are one of many public interest factors the commission considers, it would change its approach to evaluating the economics of both new and existing hydro electric plants. Specifically, FERC dropped the traditional 30- to 50-year analysis it now considers unreliable. The FERC decided to base its analysis on current economic factors rather than forecasting, and let the Mead Corp. determine whether continued operation of its Escanaba hydro project was reasonable.

But Sen. Craig argues that mandatory conditions force hydro operators to choose between the "lesser of two economic disasters": whether to continue operating at a loss or pay millions for decommissioning. Meanwhile, licensees have no recourse but to go to court.

Sen. Craig explains that because several agencies have an absolute right to participate in the process, their absence or delay can serve as a veto. "I have seen a lot of foot-dragging right now. They don't deserve, nor should they get, three, four, or five years. They have bright, talented staffs and they should get to it," he says.

Delay in the process caused by participating agencies is a procedural fault the FERC readily has admitted in testimony before the Senate Subcommittee on Water and Power.

Sen. Gordon Smith, vice chairman of the Subcommittee on Water and Power, made this point in a Senate hearing last year. He said, "According to past testimony by FERC Chairman Hoecker before this subcommittee, 'The agencies have differing time tables and internal process and in some cases, appeals of the license conditions they have submitted to the commission have been pending for years.'"

For example, Tacoma Power, the city-owned utility, was granted a license after 24 years of political wrangling for the company's Cushman hydroelectric project. Even then, the terms of the license were unacceptable, according to Steve Klein, head of Tacoma Power. The utility is appealing the decision, and is expected to go to court later this year.

The license included a mandatory condition to increase the river flow from 30 to 240 cubic feet per second and build new fish passage and hatchery facilities. These conditions would add $2.5 million per year to the operating costs of a project that provides just 5 percent of the city's power, says Klein.

James Hoecker, FERC's chairman, has called the Cushman project the "relicensing case from hell."

Sen. Craig hopes to end such delays and political wrangling by imposing deadlines on the agencies, and making them take note of economic as well as environmental considerations in the hydro relicensing process. "A two- to three-year time line with the ability to extend for cause makes sense," he explains.

Adds Craig, an environmental agency that misses the deadline should lose its chance to participate in the process.

FERC Authority: Watered Down? Other agencies - federal and state - can issue license conditions at cross-currents with energy regulation. When environmentalists and hydropower owners lock horns in court, the question always comes up: What authority does the Federal Energy Regulatory Commission have over the hydro-relicensing process? The question goes to the heart of hydro operators' and environmental groups' woes. At times each group has been alienated by the FERC's balancing act between environmental and economic factors in relicensing. But court challenges to FERC's authority in the last year and subsequent rulings may shed some light on the commission's dominion over the hydro-relicensing process, or lack thereof. Only courts review state-imposed conditions. In , the court held that the FERC lacked authority to determine whether conditions submitted by state agencies pursuant to Section 401 of the Clean Water Act were beyond the scope of that section. The court held that disputes concerning the lawfulness of conditions submitted under Section 401 should be resolved instead by courts. In a classic state vs. federal jurisdiction debate, FERC's claim to review a state's conditions of certification and reject conditions it believes to be outside of the scope of the state's certification authority were delegated to the courts. In the past, FERC, using the case as precedent, sought to reject two kinds of certification conditions: 1) Reservations of authority, including reopener clauses allowing a state to revise conditions of certification on its own motion and clauses requiring state review and approval of project modifications. 2) Compliance review and enforcement provisions, such as schedules of compliance and provisions requiring state review of mitigation or monitoring programs. Critics say the 2nd Circuit Court ruling will delay relicensing by making hydropower companies wade through a state bureaucracy as well as a federal process. The fear is that dual final authority, with a duplicate system of state permits and federal licenses required for each project, will not work. In fact, the Supreme Court has ruled that duplicative authority would vest a veto power in the state agency, an argument that Sen. Larry Craig (R-Idaho) has made. But others say state and federal resource agencies serve as a backstop to FERC decision-making by counterbalancing hydropower interests to override environmental concerns. And FERC cannot second-guess Agencies. Moreover, in , the court ruled that the FERC lacked authority in individual cases to determine whether prescriptions submitted under color of Section 18 of the Federal Power Act were, in fact, fishways. As in the 2nd Circuit Court case, the court held that disputes relating to whether a condition was authorized by FPA Section 18 were to be resolved by the courts, not the FERC. The ruling came down in response to the commission's belief that it may reject and reclassify "improperly prescribed" Section 18 fishways. FERC's reasoning was that unqualified reservation or prescription authority for the secretaries of the resource agencies invites a unilateral fishways determination by two agencies not concerned with the delicate economic vs. environmental balancing required in every licensing. But courts found that there was nothing in the statute nor the review scheme to indicate that Congress wanted FERC to second-guess the secretaries of the resource agencies. According to Congressional documents, Congress intended that the FERC would have exclusive authority to issue all licenses, but wanted the individual agency secretaries to continue to play the major role in determining what conditions would be included in the license in order to protect the resources under their respective jurisdictions. Meanwhile, the 9th Circuit Court in also held that the commission is authorized to decide whether a condition recommended under FPA Section 10(j) is properly within the scope of that section. Can operators decline unprofitable licenses? Tacoma Power's hydroelectric project is an example of a case that challenges what FERC's role should be when disputes arise in relicensing. Steve Klein, head of Tacoma Power, believes FERC overstepped its authority in imposing uneconomic mandatory conditions on the Cushman hydroelectric project. Tacoma and FERC have been wrangling over the Cushman project relicensing for more than 25 years. Klein believes that hydropower operators should be able to reject the terms of the license if agreement cannot be found. "If we reject the license, then we no longer have the right to run the turbines. We would just drop the spill gates. We will put the water back in; that is all we are obligated to do," he says. Klein is worried that FERC would force the company to implement the uneconomic mandatory conditions even if no accord can be reached among parties. He believes that Congress, which initially induced hydro plant development, made a contract with hydro operators ensuring they would receive a relicense on reasonable terms. "A license that bankrupts you is not reasonable terms," he says. "If they said it was better to release flows for fish, the federal government ought to take the project over, compensate us for taking the asset, and operate it as a flood control project." - R.S.

Water Wars: Should Cost Be Part of Equation?
Environmentalists flatly reject Sen. Craig's proposal.

"I don't like Sen. Craig's legislation. It is developing the wrong remedy. It is only going to lead to further complication and litigation," says Andrew Fahlund, policy director for hydropower programs at American Rivers, an environmentalist group.

Fahlund denies that environmental agencies are holding up the process. In fact, he argues, it is the other way around - the hydro operators are the ones that delay the process.

According to FERC, says Fahlund, of the license applications submitted by dam owners since 1993, approximately 43 percent were deemed deficient and more than 93 percent required additional information.

"I don't think any of us in the environmental community or in the resource agency would want to see licenses delayed any longer than they currently are. In fact, the environment suffers from delaying the process," he says.

Fahlund says delays in relicensing occur when hydro operators withhold studies and information necessary for agencies to determine the appropriate conditions for protection of natural resources.

"I would prefer the process to remain about as lengthy as it gets [which is about five years]," he says.

Fahlund is opposed to Sen. Craig's position that environmental agencies should consider economics as well as the environment.

"It is appropriate to take economics in consideration after [a project] has met certain environmental requirements," he says. "We certainly don't take economics into consideration when we are saying, for instance, that a power plant has to meet certain standards under the [Clear Air Act]."

Furthermore, he believes that the agencies are sensitive to the economic considerations of a hydro power plant. "I think the agencies have an enormous sensitivity to the economics of these projects. But if they can't meet the standards that they are required to meet in order to meet modern environmental standards, they should not be permitted to operate," he says.

Meanwhile, WaterPower: The Clean Energy Coalition, a group formed late last year to encourage hydropower relicensing improvements, supports the Idaho senator's hydro power relicensing legislation, according to Joel Malina, executive director at WaterPower. The coalition recently lost its spokesperson, former FERC chair Elizabeth Moler. Moler recently left Washington, D.C. law firm Vinson & Elkins L.L.P. to become director-senior vice president of federal government affairs at Unicom Corp, according to Malina. The coalition now includes more than 500 organizations, representing utilities, business allies, municipalities, and environmental, labor, agricultural, recreational, and consumer groups, he says.

Dr. Andrew Rosenberg, deputy assistant administrator, National Marine Fisheries Service of the U.S. Department of Commerce, says the open forum on relicensing allows economics to be taken into consideration.

In Senate testimony last year, Rosenberg said, "There is extensive dialogue between FERC, the applicants, and resource agencies in almost every case. I don't think there would be a surprise that all of a sudden in the mail a mandatory condition arrives without previous discussion."

David J. Hayes, acting deputy secretary at the U.S. Department of the Interior, agrees. "[T]he current statutory authority that we have is straightforward and unbounded, without the kind of balancing you are looking for," Hayes told senators last year when questioned about considering economics in the relicensing process.

Fahlund adds that industry complaints that current relicensing causes plants to become uneconomic are driven by self-interest only.

"I don't see the crisis that the industry claims. Of the 143 licensed in the class of 1993, there was not a single license that was refused or surrendered because of project economics or environmental economics," he says.

Is FERC Anti-Hydro? Congressmen challenge the FERC's authority to order dam removal. While courts have shed light on the extent of the Federal Energy Regulatory Commission's power in hydro relicensing, the question of whether FERC has the authority to decommission dams is still heatedly debated. In 1997, FERC made the precedent-setting decision to deny Edwards Dam operators their relicensing request, and ordered the dam removed from the Kennebec River in Maine. Sens. Craig and Frank Murkowski (R-Alaska) both have argued that FERC has no legal authority to remove dams. In a Senate hearing last year, Sen. Murkowski said, "I am concerned that this administration as a policy does not support hydropower. The administration supports the removal of dams. The administration does not consider hydro renewable." But in that same hearing, Dr. Andrew Rosenberg, deputy assistant administrator, National Marine Fisheries Service of the U.S. Department of Commerce, said that dam removal is an issue only in projects where there can be broad consensus that it is the best option. FERC has shared that opinion. In an order of rehearing, the FERC explicitly stated "license denial and dam removal will, in most proceedings, not be considered a reasonable alternative by anyone ." In addition, the report stated "dams, and the reservoirs they create, usually serve a variety of non-power public purposes, such as flood control, irrigation, and recreation. Moreover, ...removing a dam can have significant adverse environmental impacts." - R.S.

Furthermore, Fahlund claims the industry is unwilling to share economic information with environmental agencies. And if regulators were to consider economics in relicensing, Fahlund asks what the standard should be.

"Let's suppose that they did consider economic information; are they supposed to be increasing profitability or just making sure that they are in the black?" he asks.

In the end, Fahlund says, the economics of a project is a private interest and should not be balanced against a public good.

"It should not matter whether the project is viable or not viable in my mind. If those are the needed prescriptions in order to protect the environment, then they should be included in the license," he says.

The burden of proof should be placed not on the agencies, but with the industry, according to Fahlund. He cites FERC testimony stating that of 143 projects licensed in 1993, the deadline has been missed seven times over the objection of participants. He believes the best process for hydro relicensing is the one in place.

Of course, this view does not sit well with Sen. Craig.

"The problem with the extreme preservationist community today is that they are not willing to accept the idea that we, over the last 100 years, have modified a variety of our rivers systems for flood control, slack water transportation, and hydro.

"I doubt that we can ever return rivers to pre-European man's presence.... We have transformed our environment and I accept that. There are some that can't accept that," says Craig. "My answer to them is go find a cave and live with a candle because government ought to be out making these operations as environmentally benign as possible, but to recognize the importance of this energy base and promote, not restrict it or kill it.

"I say that as cautiously and constructively as I can. We haven't taken any players right away. We simply said here are a few reasonable rules that you must play by."

The Operator's View: Time, Costs Spin Out of Control

David Moller manages Pacific Gas & Electric's relicensing effort throughout the country. As the company's director of projects and relicensing-trade and collaborative, he is managing 11 hydro projects in various stages of relicensing.

Moller explains the pros and cons of the three different relicensing procedures offered by the FERC.

Three-Phase Approach. "The traditional approach, sometimes called the three-phase approach, involves first determining what the issues are, and then the second phase is the licensee performing studies to evaluate the project impact," he says.

The second phase ends when the licensee files the license application. Typically, the FERC will then prepare an environmental analysis. The license application has to be filed no less than two years before the license expiration when using this approach, explains Moller.

The benefits of this three-phase approach are that it applies structure and a discipline to the relicensing process.

"In relicensing there can be competition for the license. Anybody can file an application for the license, not just the licensee. The timeframe for a competitor to file its license application is the same time requirement for the licensee," Moller explains.

"[Furthermore], it allows the existing licensee the ability to not reveal a whole lot of information about their relicensing plan until the application has been filed," he says.

As for the cons of the traditional approach, Moller says, "There is no requirement for collaboration and little requirement to take any input from anybody else." That can lead to adversarial relationships when parties that would have liked to be involved are left out of the process.

"If it is a highly adversarial situation and there are different views and the parties are unlikely to agree, it does provide a method to still file for a new license," he says.

But adversarial relationships developed early on can intensify in the settlement process under the traditional approach, and may extend the process, he explains.

Collaborative Approach. Under an alternative license process established in 1997, the primary environmental analysis is performed before the license application is filed.

Says Moller, "The environmental analysis is filed with the license application. It turns out it is not the final environmental analysis but a preliminary one. FERC still does its own environmental analysis, but it relies heavily on the one that was performed."

This alternative approach, often called the collaborative process, allows the hydro operator to collaborate with environmentalists, interested parties, and resource agencies years before submitting the application to FERC.

Hydro Relicensing: The Division of Power Hydroelectric projects due for relicensing today are subject to the provisions of the following regulations - and the many government agencies they empower. Section 4(e) of the Federal Power Act authorizes land-administering agencies, typically the Department of Agriculture and the Department of the Interior, to impose mandatory conditions on projects located on federal reservations they supervise. Section 18 of the Federal Power Act authorizes the Department of Commerce and the Department of the Interior to impose mandatory fishway prescriptions. The Coastal Zone Management Act authorizes states to impose conditions on projects affecting their coastal resources. The Endangered Species Act bars agency action that will jeopardize threatened or endangered species, and directs resource agencies to protect those species. The National Historic Preservation Act requires the Federal Energy Regulatory Commission to consult with federal and state authorities to protect historic sites. Section 10(j) of the Federal Power Act requires the FERC to include license conditions proposed by federal and state resource agencies, unless the commission finds that those conditions are inconsistent with Part I of that Act, or with other applicable law. The Government Accounting Office has found the commission in practice accepts about 95 percent of these recommendations. Moreover, hydro licenses run for 30 to 50 years. That means that the licenses that will be up for renewal in calendar year 2000 would have been awarded initially on or before 1970 - that is, before passage of many of the legislative acts that today have come to play a major role in the process, such as: Electric Consumers Act of 1986 (ECPA) National Environmental Policy Act (NEPA) Endangered Species Act Federal Water Pollution Control Amendments of 1972 (The Clean Water Act) National Historic Preservation Act Coastal Zone Management Act

The advantage, says Moller, is "if you can achieve collaborative solutions, then you can avoid a lot of the adversarial relationships you get in the traditional approach."

It may also be faster than the traditional approach if you have agreement among all interested parties, he says, adding that the alternative license process must begin earlier than the traditional approach.

However, if the collaborative process doesn't work, the company seeking relicense must fall back to the traditional approach, he says.

"The cons [with the collaborative approach] are that if it turns out that you do have competitors for the license, they are going to know everything about the project and they will be able to use all of that in their own application," he says.

Moller has had competitors for PG&E's licenses five times, but none has succeeded in winning the license. "We have had competitors take PG&E's licensing application, photocopy it, and submit it as their own."

Another problem is that the alternative licensing approach is slow and labor-intensive. There is no guarantee of success, since resource agencies are not bound by any settlement, he says. Instead, resource agencies can issue a mandatory condition at any time before or after a relicensing.

Furthermore, it can cost the hydro company more if the environmental analysis done in the early onset is disputed at settlement, Moller explains.

Hybrid Approach. A third licensing approach is a hybrid of the other two. It is not officially recognized by the FERC as a process sanctioned by legislation or rule, but as a commission spokeswoman explained, it is allowed nevertheless because it is a combination of the two accepted approaches.

"For example, the way PG&E applies the hybrid approach is different than other companies," says Moller. "We apply the structure of the three-phase process, but we use a lot of the collaborative aspects that are inherent in the alternative licensing process. We are using all three of those right now."

Moller says that PG&E has used the hybrid approach for most of its new relicensings. "The resource agencies like it, the non-governmental organizations like it, and it works for us," he says.

Moller does see improvements that could be made to the process, but mostly he would reduce the time that it takes to relicense a project.

"Over a duration of a five-year minimum relicensing proceeding, things change. That is the single biggest problem. It is a continually shifting landscape. The participants change, the social priorities change, the issues change, the economics change."

Moller says that with the alternative licensing process, the hydro company makes a tremendous effort to bring in all interested parties, listen to their concerns, identify issues, and perform studies that address those concerns. But after spending perhaps $1 million in the process, there may emerge a new group or a successor to the previous director managing the resource agency who says the hydro project must perform another multi-million dollar environmental study, Moller says.

For example, everyone might agree on an appropriate scientific method to use in determining minimum stream flows, he explains. But four years from now those same participants may say that technique is no longer appropriate and other methods must be used.

"The licensee is sitting there saying, 'I spent my $2 million four years ago. I have relied on this. I did my license application on this. I don't want to go through a whole other study effort." He adds that this situation happens all the time.

Says Moller, "We find ourselves continually changing the cast of characters, continually changing regulatory requirements, continually changing threatened endangered species listings, changing social priorities, changing power values. That is probably the biggest issue."

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