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Power & Pipes

FERC, CFTC, and State Energy Law Developments

FERC has issued a notice of inquiry inviting comments on potential changes to its regulations requiring financial assurance measures in licenses and other authorizations for hydroelectric projects. As of December 2020, FERC has identified at least 88 of the approximately 1,600 hydroelectric projects under FERC license that are nonoperational, primarily due to the licensees’ lack of financial resources. FERC expressed concern that inadequate financing may result in threats to public safety and environmental resources. Therefore, in order to fulfill its responsibilities to the public, FERC is considering whether to take additional measures to ensure licensees have the financial resources to operate and maintain their projects for the life of the project, including under unforeseen circumstances.

Section 4 of the Federal Power Act authorizes FERC to issue licenses “for the purpose of constructing, operating, and maintaining dams, water conduits, reservoirs, power houses, transmission lines, or other project works necessary or convenient . . . for the development, transmission, and utilization of power.” Among other factors, FERC is required to consider the purposes of energy, fish, and wildlife conservation; recreational opportunities; and the preservation of environmental quality in issuing hydroelectric licenses.

FERC also performs an economic analysis of hydroelectric projects to estimate the economic benefits and costs of a project, and reasonable alternatives to project power. However, FERC has explained that its economic analysis provides only a rough estimate of the cost of project power compared to that of alternative energy source and is not intended to show whether and to what degree the project will have a positive cash flow over the life of the license. As such, despite FERC’s existing safeguards against the failure of a project, such as requiring licensees to file a financing plan prior to beginning construction, the vast majority of existing licenses do not include requirements addressing whether a licensee can afford ongoing operation and maintenance expenses, required environmental or safety measures, or measures required to ensure the facility can meet future dam safety requirements.

In order to ensure that a licensee has the capability to carry out license requirements and maintain its projects in a safe condition, FERC proposes the following three potential options for establishing financial assurance mechanisms in hydroelectric licenses:

  1. Require licensees to obtain bonds to ensure they have sufficient funds to pay for operation, maintenance, environmental, and safety measures throughout the duration of the license.
  2. Establish an industry-wide trust or remediation fund to pay for necessary repairs and remediation (similar to the Environmental Protection Agency’s Superfund program), or require licensees to maintain an individual trust or remediation fund that is similar to what is done in the nuclear industry, or require funds to be placed in escrow.
  3. Require licensees to obtain insurance policies to cover costs in the event of a safety hazard or dam failure.

FERC requests public comment on the proposed financial mechanisms to ensure that licensees can afford required safety measures, ongoing project operation and maintenance expenses, and license compliance to prevent future safety and environmental hazards. FERC also acknowledges that imposing new financial requirements may pose difficulties for some licensees, particularly those operating small projects.