Regulatory Landscape for U.S. Hydro -- What Lies Ahead?

Ever wished you had a crystal ball to look at the potential future of the regulatory landscape? A veteran hydro attorney provides a glimpse into the possible future of U.S. hydropower, based on regulatory, judicial and legislative actions ongoing or expected in 2015.

By John Clements

John Clements is Of Counsel with law firm Van Ness Feldman LLP.

The Federal Energy Regulatory Commission is not the only federal agency whose regulations and actions affect U.S. hydropower development. The administration of President Barack Obama is advancing environmental initiatives in other contexts that may directly or indirectly affect the hydropower industry, and a recent federal court decision threatens to subject many hydro project owners to new permit requirements under the Clean Water Act (CWA). What is the status of these matters and related matters and what can we expect in the coming year? What can we expect from Congress? A veteran hydro attorney and former FERC hydro office director shares his perspectives.

EPA’s water transfers rule

In March 2014, the U.S. District Court for the Southern District of New York struck down the Environmental Protection Agency’s (EPA) Water Transfers Rule in Catskill Mountains Chapter of Trout Unlimited, Inc. v. EPA. The rule codified EPA’s long-standing policy that transfers of water between waters of the U.S. that do not involve an intervening industrial, municipal or commercial use are not an “addition of pollutants” to navigable waters and therefore not subject to National Pollutant Discharge Elimination System (NPDES) permits under CWA section 402. The court found EPA’s interpretation of CWA to be flawed and its reasons for excluding water transfers from NPDES to be inadequate. The court vacated the rule and remanded it to EPA for additional explanation and justification.

The case is important to the hydropower industry because under EPA’s rule and longâ€standing judicial precedent, dams that have associated hydro facilities are subject to NPDES only if they physically add pollutants to the water, such as the discharge of grease or oil. Although the court distinguished water transfers from conventional and pumped-storage hydro projects, many hydro projects also move water between or among water bodies via dams, diversions, storage reservoirs, collectors or tunnels for power generation and water supply. The presence and amount of pre-existing pollutants in the water are not ascertainable because neither the dam nor conveyances create or cause pollutants to be introduced. Moreover, the presence or quantity of such pollutants cannot be anticipated because it depends on the actions of third parties, atmospheric deposition, land use practices or other factors. Thus, establishing technology-based effluent limitations under an NPDES permit for such pollutants would be challenging and costly.

EPA has appealed the decision to the Second Circuit Court of Appeals, which could uphold the District Court or vacate its decision in whole or in part. A coalition of hydroelectric licensees and hydro trade associations filed an amicus brief supporting EPA in September 2014. Predicting the outcome of such litigation is notoriously risky business, but if the District Court is upheld, the precedents excluding hydro projects from NPDES regulation could be reversed for projects that move water between water bodies, creating a significant regulatory overlap and economic strain on dam owners, as well as interference with the water supply functions of many hydro facilities. Briefs have been filed with the court but oral arguments have not yet been scheduled.

Waters of the U.S. rulemaking

In March 2014, EPA and the U.S. Army Corps of Engineers (the Agencies) issued a Notice of Proposed Rulemaking to redefine and expand the meaning of “waters of the United States” under CWA. The joint proposed rule will affect project development and operations across the energy, water, construction, building and agriculture sectors. The proposed definition can be grouped generally into four categories:

Waters that are jurisdictional by rule;
Adjacent” waters, which may require a caseâ€specific analysis;
“Other waters” that would require a caseâ€specific “significant nexus” analysis; and
Non-jurisdictional excluded waters.

The proposed rule would make “jurisdictional by rule” all interstate waters and all waters deemed to be “adjacent” to a traditional navigable water (TNW), interstate water, impoundment or tributary, regardless of whether there is a demonstrated connection to a TNW or link to protection of ecological values. The Agencies’ broad definition of “tributaries” could result in CWA jurisdiction over manmade areas associated with water distribution and energy production, such as off-river storage ponds and impoundments of tributaries, and linear features such as conduits, access roads, and transmission lines that cross wetlands.

Many commenters, including members of Congress and a coalition of water users that includes hydro project operators, asked for withdrawal of the proposed rule and issuance of a revised draft, citing among other things inconsistency with Congress’ intent to give states primary authority to oversee land and water resources, federal regulation of new categories of waters with no further jurisdictional analysis, and inconsistency with U.S. Supreme Court decisions.

Also, in September 2014, the House of Representatives passed with a strong bi-partisan majority legislation that would prevent the Agencies from finalizing the proposed rule. Notwithstanding, the Agencies have not indicated any intent to withdraw or modify the proposed rule. The Republican-controlled 114th Congress, which took office on Jan. 3, 2015, could pass legislation that prevents the Agencies from finalizing or implementing the proposed rule or directs them with regard to various aspects of the rule. Although the President could veto such legislation, the strong Republican majority in both houses of Congress and bi-partisan interest in the proposed rule makes possible a veto override. Thus, this may be a policy issue on which Congress and the Administration could seek to find common ground. However, if the final rule is issued as proposed or substantially as proposed, it is almost certain appeals would follow and there would be a renewed push for legislation to overturn or modify the rule.

EPA proposed rule to limit power plant greenhouse gas emissions

In June 2014, EPA issued a proposed rule under section 111(d) of the Clean Air Act that would regulate carbon dioxide (CO₂) emissions from existing power plants (the Clean Power Plan, or CPP). CPP attempts to determine an attainable improvement in the CO₂ emissions rate for each state based on the “best system of emission reduction.” Each state would have to submit to EPA a plan to achieve or exceed that level of rate reduction by 2030.

Several provisions impact hydropower. EPA’s “best system of emission reduction” includes new hydro plants and incremental capacity at existing facilities as a way for states to reduce their CO₂ emission rate but does not include existing hydropower when calculating the baseline for state renewable energy targets. However, EPA is seeking comments on a modified approach that would include existing hydro in that calculation. Also, while existing nuclear plants are excluded from state energy baselines, 5.8% of installed nuclear capacity is termed “at-risk,” and states will receive credit for maintaining that capacity. However, there is no comparable analysis or credit proposal for hydropower facilities.

Many comments were submitted on CPP, including by the National Hydropower Association (NHA). NHA limited its comments to the hydropower-related aspects of the proposed rule. NHA pointed out that by using a fossil fuel emissions rate as the baseline for state emissions rate reduction goals, the proposed rule artificially inflates the carbon profile of states with significant existing hydro generation. NHA recommended that the proposal be modified to better account for hydropower resources, including, for instance: allowing states to use hydro generation as a compliance option, even if that generation is not used to establish state goals; using an average of years instead of 2012 data to set the baseline; and using a rolling compliance average of three to five years to account for drought or other natural phenomena or factor availability of water into compliance determinations as a “safety valve.” NHA also recommended that EPA conduct further analysis of factors not considered in or contemplated by the proposed rule, including the appropriateness of using hydropower growth assumptions that conflict with other federal and non-federal projections, and clarifying or modifying the apparent absence of consideration of pumped-storage and marine and hydrokinetic (MHK) technologies.

EPA has said it expects to issue a final rule in summer 2015. It is a virtual certainty that the final rule will be challenged in court. In fact, a dozen states and a major coal company have already filed lawsuits, hoping to prevent the rule from being implemented. If, when, and in what form any final rule will be issued is impossible to predict.

ESA critical habitat rules

In May 2014, the U.S. Fish and Wildlife Service (FWS) and National Marine Fisheries Service (the Services) published proposed regulatory changes and policies that would significantly revise the treatment of critical habitat under the Endangered Species Act (ESA). The Services propose: 1) changes to the rules on identification and designation of critical habitat; 2) a new definition of “adverse modification” of habitat for agency consultation under ESA Section 7; and 3) a formal policy on exclusion of lands or waters from a critical habitat designation. The proposed changes would increase the Services’ discretion to designate broad areas of occupied and unoccupied habitat as critical habitat and thereby increase the likelihood that federal actions will be found to adversely modify critical habitat. The Services anticipate designating more unoccupied areas as critical habitat to address, for example, impacts of climate change. This could affect many hydro project-related federal actions, including issuance of FERC licenses and amendments, and other actions such as certain proposals for non-project uses of project lands.

Most commenters, including NHA, took issue with the scope and clarity of the Services’ proposals and the anticipated impact on the regulated community and suggested substantial revisions. It is not clear when the Services will issue a final rule or how they will address these comments. If the final rule is appealed, the reviewing court will uphold it unless the court finds that the Agencies’ decision was “arbitrary and capricious” or was not based on “substantial evidence.” Under this generous standard, any request for judicial review would be problematic.

Interestingly, before the comment deadline, the U.S. District Court for the Eastern District of Louisiana “reluctantly” upheld USFWS’ designation of unoccupied critical habitat for the dusky gopher frog under the ESA in Markle Interests, LLC v. U.S. Fish and Wildlife Service. The species is located only in Mississippi, but FWS included 1,544 acres of privately owned timber land in Louisiana as critical habitat, even though the species was last sighted there in the 1960s. Several plaintiffs have appealed the decision to the U.S. Court of Appeals for the Fifth Circuit. The court’s decision in Markle is not likely to have significant programmatic impacts because it will most likely turn on whether FWS had substantial evidence to support its critical habitat designation for the species in question. However, the court’s decision may provide additional guidance regarding the sufficiency of evidence needed to support designation of lands not now occupied by a listed species as critical habitat.

Potential amendments to ESA

The 113th Congress saw several bills that, if enacted, would have modified provisions of the ESA. In 2014, the House Committee on Natural Resources held a hearing to consider four bills that would revise ESA to increase transparency in listing decisions and litigation. The bills would have:

Required public release of the best scientific and commercial data available for a proposed or final rule designating a species as threatened or endangered;
Required an annual report on expenditures by EPA for certain ESA-related lawsuits to be made available on the internet;
Required each state affected by a proposed listing be provided with “all data that is the basis of the determination” before a final listing determination and include all data submitted by a state, tribal or county government in the best scientific and commercial available data; and
Applied the requirements of the Equal Access to Justice Act to the recovery of attorney fees under the ESA citizen suit provision.

Five other bills were introduced (on which hearings were not held) that would modify provisions of the ESA, including a bill to allow states to implement “State Protective Action” to preclude the listing of the population of a species in that state.

It is unclear which, if any, of these bills will be reintroduced in the 114th Congress. However, a Republican majority in both houses should encourage efforts to reform ESA, so these or other measures are likely to be introduced and it is reasonable to think any proposed legislation will have a better chance of passage than the measures introduced in the prior Congress.

Potential hydro reform legislation

In the next 10 years, FERC licenses will expire for nearly 250 projects totaling more than 11,000 MW. Although the Energy Policy Act of 2005 included procedural provisions intended to restore some balance to federal resource agency mandatory conditioning authority under Federal Power Act (FPA) Sections 4(e) and 18, a decade of experience indicates those reforms are not achieving their intended purpose. The 114th Congress may offer an opportunity to seek more effective hydro licensing and regulatory reform for hydropower. In the Senate Energy and Natural Resources Committee, Chairman Murkowski (R-AK) and Ranking Member Cantwell (D-WA) represent hydro-rich states and bring tremendous experience in hydropower issues. Committee staff from both parties have expressed intent to move hydropower reform, as a stand-alone bill or as part of a larger energy package. Republicans in the House, particularly Cathy McMorris Rodgers (R-WA), continue to prioritize hydropower reform. NHA, working with Van Ness Feldman and others in the hydro industry, is working to take advantage of these favorable conditions.

Moving the MHK industry forward

In 2015, we will see a continued interest in advancing MHK technologies that harness the power of ocean waves, currents and tides. Among other things, the MHK industry will be: 1) working with the U.S. Department of Energy to secure long-term research and development funding; 2) supporting federally funded test centers; 3) advocating an expedited permitting regime for MHK projects; and 4) pursuing the reintroduction (and passage) of legislation to accomplish these and related objectives. NHA’s Marine Energy Council will focus on these challenges in the year to come.

Conclusion

This is likely to be an important year for the hydro industry as the Obama administration’s environment regulatory agenda faces substantial opposition from regulated entities and states that would be adversely affected, and the regulatory initiatives that affect the industry will almost certainly be challenged if they are finalized. Van Ness Feldman will be paying close attention to developments and we urge all members of the industry to do the same.

Acknowledgment

The author wants to acknowledge contributions to this article by Van Ness Feldman members Charles Sensiba and Julia Wood.

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