The D.C. Circuit Rejects FERC’s Geographical Limitation of Municipal Preference in Hydro Licensing Proceedings

On November 20, 2015 the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit” or “Court”) issued a decision in Western Minnesota Municipal Power Agency v. FERC rejecting the Federal Energy Regulatory Commission’s (“FERC” or “Commission”) interpretation limiting the municipal preference for preliminary hydropower permits under Section 7(a) of the Federal Power Act (“FPA”), 16 U.S.C. § 800(a) (2013).

The Western Minnesota Municipal Power Agency (“Western Minnesota”) and FFP Qualified Hydro 14, LLC (“FFP”) each submitted competing applications to FERC for a preliminary permit to study the development of hydropower projects in Polk County, Iowa. A preliminary permit allows the applicant to study the site and provides priority status to the permit holder in a future license application. Among competing applicants, the first to file is awarded priority status, except where a competing applicant is a municipal entity. The FPA provides that the Commission “shall give preference to” applications of States and municipalities. Western Minnesota and FFPs’ applications were deemed submitted at the same time on the same day. Despite Western Minnesota’s status as a municipality, FERC conducted a tie-breaker drawing and awarded the permit to FFP. Refusing to apply the municipal preference to Western Minnesota, FERC reasoned that the FPA provides no guidance on the scope of municipal preference and decided that municipalities should be accorded preference “only with respect to development of water resources that are located in their vicinity.” Western Minnesota’s headquarters is more than 400 miles from the development site. FERC reasoned that limiting the municipal preference in this fashion is appropriate and consistent with FERC’s interpretation of the meaning of municipalities “likely to be interested in or affected by” a preliminary permit application under the notice provision of Section 4(f) of the FPA, 16 U.S.C. § 797(f) (2013). Western Minnesota cried foul, arguing that the FPA clearly and expressly grants an unqualified preference to municipal applicants. The D.C. Circuit agreed with Western Minnesota.

The D.C. Circuit ruled that FERC’s interpretation of Section 7(a) of the FPA did not pass the first of the two-step analysis established by the Supreme Court in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 842–43 (1984), pursuant to which the courts evaluate whether Congress has directly spoken to the precise question at issue. If Congress has so spoken, then the Court and the Agency must give effect to the expressed intent of Congress. According to the Court, Congress’ use in Section 7(a) of the phrase “shall give preference” cannot be interpreted as anything other than a mandatory directive to the Commission to prefer municipalities with at least equal development plans. The Court held that Section 7(a) of the FPA is not an invitation for the Commission to determine when granting preference to a particular municipality would serve the public interest. The Court further rejected FERC’s limitation of the meaning of the term “municipality” under Section 7(a) of the FPA based on FERC’s interpretation of “municipality” under Section 4(f) of the FPA. Section 4(f) simply requires FERC to notify municipalities “likely to be interested in or affected by” a preliminary permit application filed with the Commission. The D.C. Circuit explained that Section 4(f) is a notice provision that informs the Commission which municipalities must be notified of an application, but does not provide which municipalities the Commission must prefer under Section 7(a). No ambiguity is created by two statutory provisions with differing mandates. Indeed, the Court found that it is consistent with the plain reading of these provisions that a municipality eligible for Section 7(a) preference may not be entitled to receive Section 4(f) notice that an application has been received. The Court further reasoned that the absence of the “likely to be interested in or affected by” language in the provision granting municipalities preference in preliminary permit proceedings showed Congress’ intent to not limit the application of such preference and that, even if such language was part of Section 7(a) of the FPA, Western Minnesota’s application for a preliminary permit demonstrated its interest in this preliminary permit proceeding.

The Court vacated the Permit Order and the Rehearing Order and remanded the case to FERC for further proceedings consistent with the Court’s holding. The Court suggested that the Commission might address its concerns regarding the competitive impacts of granting preference to distant municipalities through their interpretation of what constitutes an “equally well adapted” project to conserve and utilize in the public interest water resources under Section 7(a) of the FPA. As the Court pointed out, however, FERC precedent is to reject the use of a proximity “test” in order to establish well adaptedness. The Court also stated that, notwithstanding its suggestion, any such efforts would have to survive the Chevron two-step analysis.

There is increasing need for the development of new economically viable clean energy resources. In recent years, development of renewable energy resources, including hydropower, has been exacerbated by coal and nuclear generator retirements. The U.S Department of Energy, for example, has calculated that the untapped potential across the United States for hydro capacity is 85 gigawatts (“GW”) in new-stream reach developments and 12 GW in non-powered dam developments. Competition for the development of hydropower resources is bound to become more prevalent.

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