Federal Register / Vol. 45, No. 224 / Tuesday, November 18, 1980 Rules and Regulations DEPARTMENT OF ENERGY Federal Energy Regulatory 18 CFR Parts 4 and 375 [Docket No. RM80-45; Order No. 106] Exemption From All or Part of Part I of Issued: November 7, 1980. AGENCY: Federal Energy Regulatory ACTION: Final rule. SUMMARY: The Federal Energy Only projects with a generating The final rule is designed to 76115 Howard A. Jack, Assistant General James H. Hoecker, Division of Regulatory Development. Office of the The Federal Energy Regulatory determinations and will consider further rulemakings to exempt classes or categories of projects, as permitted by section 408(b) of the ESA. The final rule is effective November 7, 1980. I. Background Title IV of the ESA, also known as the Renewable Energy Resource Act of 1980, contains a provision that amends the Public Utility Regulatory Policies Act of 1978 (PURPA) to authorize the Commission to exempt certain small hydroelectric power projects, on a caseby-case basis or by class or category of such projects, from all or part of Part I of the Act, including any licensing requirement. Section 408 grunts the Commission discretion to provide exemption under the following specified conditions. The proposed installed capacity of an exemptible project may not exceed 5 megawatts. To be exemptible, a project must utilize the water power potential of an existing dam, unless it is a project that will utilize a so-called "natural water feature" that does not require the creation of a dam or man-made impoundment. Such a natural water feature will commonly be an elevated lake or a waterway the topographical features of which permit diversion of sume waters for purposes of power generation. Finally, section 408 provides that certain environmental requirements upply to those projects that the Commission exempts from licensing. Those requirements include the National Environmental Policy Act. the Fish and Wildlife Coordination Act, the 'Pub. Law 96-294. 94 Stat. 611. Section 408 of the ESA amends, inter alia, sections 405 and 408 of the Public Utility Regulatory Policies Act of 1978 (18 U.S.C. 2705 and 2708). 76116 Federal Register / Vol. 45. No. 224 / Tuesday, November 18, 1980 / Rules and Regulations Endangered Species Act, and the consultation provisions in section 30 of the Federal Power Act that apply to exemption of small conduit hydroelectric facilities. The Notice of Proposed Rulemaking in this docket was issued for public comment on August 28, 1980. Prior to issuing the proposed rule, the Commission issued a Notice of the Availability of a Draft Rule and of Informal Conferences. Pursuant to that notice, the Commission's stuff took informal comments on the draft rule and related inquiries and held informal conferences on them in Washington. D.C. on August 1. 1980 and August 12, 1980. In addition to requesting written comments on the rule as finally proposed, the Commission held a third public meeting to discuss the rule, on September 23, 1980. The comments. including transcripts of the three meetings, are available for inspection in the public files of the Commission. This phase of the implementation of section 408 of the ESA utilizes case-bycase determinations based on information provided by individual applicants to provide exemptions for small hydroelectric power projects.' The Commission will exempt smull hydroelectric power projects in much the same way it now exempts small conduit hydroelectric facilities.' This exemption rule has several important features. First, only a person who has sufficient property interests to develop a small hydroelectric power project may apply for exemption. Second, a project owner may apply for exemption from licensing or from any of the other provisions of Part I of the Act, but application procedures for each of these two kinds of exemption differ. Third, all, but not part, of a currently licensed water power project is exemptible. Fourth. the rule explains in detail a system of priorities and preferences among the various kinds of applicants that seek to develop a project. Finally, an applicant may seek. consistent with the statute, waiver of any provision of the rule. II. Comment Analysis Two related issues received the most extensive commentury. The proposed rule permitted only a project owner. i.e.. someone with a real property interest 145 Fed. Reg. Satna September 1, 1980. 45 Fed. Reg. 40501. July 25, 1980. 'The Commission's staff is currently developing further rulemakings to implement the provision in section 408(b) of the ESA allowing the Commission to exempt "classes or calegones of projects. thereby ahvisting any application procedure. *See. Order No. 76, 45 Fed. Reg. 28085. April 19. 1960. sufficient to develop the project, to apply for exemption and provided that exemption applications timely filed will be preferred to applications for preliminary permit or, all other things being equal, for license. The proposed rule, had the effect of eliminating the preference that section 7(a) of the Act would afford a non-owner state or municipality that applies for a license or preliminary permit insofar as such applicant competes with an accepted application for exemption. Instead, the proposed rule provided project owners a priority over non-owners, regardless of state or municipal status. Municipalities and associations of local public power systems oppose both the proposed abandonment of the statutory municipal/State preference in relation to the exemption process and the preference given to exemption applicants over non-owner license or permit applicants. The public power entities argue that States and municipalities that are not project owners are entitled to preferential treatment under the Act when competing with exemption applicants for the right to develop a site. They contend that in providing the Commission with the power to exempt certain projects from the Act, the Congress intended only to cut the red tape that accompanies licensing, not to establish a new system of priorities or preferences. These commenters assert that the preference is a controlling factor in dealing with any water power project within the Commission's jurisdiction. whether in an exemption context or not. and is not a licensing requirement from which a project may be exempted under section 408 of the ESA. They argue for the primacy of the licensing over the exemption process based on the safeguards they allege the former process to provide for the public interest. Licensing is to be supplemented by the exemption process, they say, only to the extent that licensing fails to encourage the development of a project. Based on this presumption, the American Public Power Association (APPA) proposes a procedure wherein any competition arising before the Commission between exemption applicants and license or permit applicants would convert the process to one for a permit or a license, with the municipal and State preferential rights under section 7(a). The approach reflected in the proposed rule is supported by most of the private hydropower developers and investor-owned utilities. They claim that the statutory preference, as well as the threat of condemnation by a successful State or municipal licensee under section 21 of the Act, deters private developers from even identifying a site by applying for a permit or license. If the preference system were invoked under the proposed exemption rule, these commenters contend that it would also deter exemption applicants. The Congress did not prohibit the Commission from providing exemption from section 7(a) of the Act when it granted the Commission discretion to exempt projects "in whole or in part from the requirements (including the licensing requirements) of Part I of the Act. One commenter cited changes in economic circumstances since the enactment of the preference as a basis for eliminating the preference, at least from the exemption process. The Commission agrees that the legislative history of section 408 of the ESA does not address this issue: the statute is clear on its face. however. The Commission may choose to exempt any or all projects under 5 megawatts from the provisions of section 7(a) or any other requirement of Part I of the Act. Thus, the Commission may regard as equals all applicants that seek to develop a small hydroelectric power project, within the context of the exemption process. without regard to whether they are governmental entities or not. There are several important reasons for doing so. Moreover, when competitors are otherwise equal, there are good reasons for generally preferring the project owner. The exemption authority was provided by the Congress to encourage small hydropower development. This will occur as a result of removing regulatory impediments where possible and by allowing market forces relatively free reign consistent with that purpose. In light of this objective. the Commission believes the national interest in encouraging development of a small renewable energy resource project with new or added capacity is more important than Federal Government control of who actually does it or who gains the immediate economic benefit. APPA argues that, where competition for a site exists, an exemption is unnecessary; the exemption process is intended to encourage development of previously ignores sites, not necessarily or primarily to expedite development of known and usable sites. The Commission believes APPA's position misses several significant points. First, unless those persons with first-hand knowledge about available sites. frequently project owners, are encouraged to come forward with plans for development, the question of Federal Register / Vol. 45. No. 224 / Tuesday. November 18, 1980 Rules and Regulations Competition will never arise with respect to much currently unexploited Hydropower potential. Few non-public project owners will venture to formulate development plans and apply for exemption, if they would thereby expose their projects to taking facilitated by the municipal/State preference. Moreover, even where hydropower sites are known to be available for further development. speed of development would likely be sacrificed by undertaking a comparison of the relative merits of the applications submitted by public and private developers and by the inevitable conversion, under the APPA proposal, to a licensing proceeding at any time that a public entity that is not the project owner filed a competing application. Many years or experience in administering the Act show that cases involving competing applications take significantly longer to decide and demand more time and money from the perspective of developers. Thus, encouraging States and municipalities to file competing applications increases the institutional barriers to rapid hydropower development. Other considerations support the Commission's decision not to apply section 7(a) to the exemption process. The procedures in the proposed and final rules do not prevent a state or municipality from developing a site. A non-owner public entity will be in at least as good a position as any other non-owner, it may still negotiate with the project owner for access to the project, whether by sale, lease, or other available contractual device. In other words, a state or municipality may do business like anyone else in order to obtain an interest sufficient to develop the site.If that fails, the alternative of a condemnation proceeding under the state laws governing eminent domain is often available. A state or municipality that obtains the necessary property rights by purchase or condemnation may then obtain an exemption as the project owner. Or. as APPA itself pointed out. the state or municipality may often be able to condemn un exempted project under state law after it has been exempted. In fact. APPA acknowledged that the primary benefit of retaining the preference under section 7(a) would be, that the state or municipal licensee would suffer less adverse political reaction by condemning a project under The Commission also notes that this rule gives a stale or municipality that is a project owner protections and preference against other interested states of municipalities that are non-owners, who might otherwise get a license for the project and condemn it under the Federal power of eminent Junwill Federal law, as a licensee, than under Project owners, public or private. Some commenters oppose the First, the Commission anticipates that. 73117 permits or licenses, but also generally to interests. It is important to note that, although project owners are in a more "favored" position than normally under the Actin that they are subject only to market pressures and not to artificially created regulatory pressures—the final rule does not isulate the owner entirely from regulatory pressures. The final rule clarifies that a project owner will not obtain an exemption where a non-owner who was also a preliminary permittee has made timely application for a license. In addition, however, it provides that where a non-owner license applicant has filed first, the Commission will favor that application unless the plans of the subsequent exemption applicant would better develop the water power potential of the project. The final rule also allows a non-owner to file for a license after the exemption application, if it proposes a plan of power development that would render the project significantly better than any exemptible project. The hierarchy of application preferences in § 4.104 balances the public interest in expeditious development under an exemption with some opportunity for non-owners to compete and propose more comprehensive development of a site. A permit application reflects an intent by the applicant only to study a site for development. A license application manifests both. the plans and the capability for imminent development. Because exemption applications for projects 5 megawatts and less will be similar in content and imminence of development to license applications. they will be preferred to permit applications. just as license applications are preferred to permit applications (see §4.33). Similarly, because the exemption applicant must be a person with sufficient real property interests in any non-Federal lands involved to develop a site immediately, the rule provides such applicants with advantages over license applicants who have no such property interests. For example. a first-filed exemption application will bar any license application, with the one limited exception noted above. Favoring a project owner will also tend to reduce the costs of litigation associated with competition for a power site and the transaction costs of transferring the project involuntarily from the owner to some other developer. 76118 Federal Register / Vol. 45. No. 224 / Tuesday, November 18, 1980 / Rules and Regulations One commenter advocated that no exemption application should be considered by the Commission if there is a previously filed license application. This approach was originally set forth in the draft rule. If a project owner failed to seek a permit or an exemption or license to develop a site, the price of that failure would be to risk loss of the site to a non-owner who first proposed development in a permit or license application. While this approach itself has not been adopted, the Commission recognizes that there is a problem. The Commission believes that the rule should not discourage interested nonowners who wish to exploit the full water power potential of a site in circumstances where the project owner does not take timely action to protect itself and develop the site adequately. Therefore, under § 4.104 the protection afforded the project owner has been restricted as follows: a project owner may not file for exemption for a project for which there is a preliminary permittee that files a timely application for license. i.e.. before the permit expires: even where there has been no permit, u nun-owner license applicant will be preferred to an exemption applicant that files second and in competition with the license applicant. unless the plans of the exemption applicant would better develop the water power potential of the affected water resources; and a non-owner may file for a license in competition with an accepted exemption application, if the non-owner proposes significantly better power development that would make the project ineligible for exemption, i.e.. at least 7.5 megawatts, or 50% more capacity than the maximum allowed under the statute. One commenter suggested that exemptions be limited to a term of 30 years. The final rule does not limit the term of exemptions: the Commission has chosen to grant exemptions in perpetuity, subject to standard conditions. A project with only a 30-year exemption would be virtually a licensed project by another name. The only considerations that would warrant reexumination of whether to continue the exemption for a project after a term of years are more appropriate for licensed projects or are, like the possibility of more comprehensive development, provided for under the scheme of exemption. It was proposed that a project owner be given the latitude to apply for an exemption at any time up to final Commission action on a pending license or permit application or to convert a license application to an exemption application at any time before the license application is approved. The proposals have been rejected because they pose unreasonable burdens upon efficient administration of the permit, license, and exemption programs. To provide some certainty to the Commission, its staff, and other interested agencies and persons and to allow expeditious completion of proceedings, the nature of the proceeding and the participant must be fixed at a relatively early point. Therefore, the project owner is afforded only a limited time either to file in competition with a non-owner's application for a license or permit or to request that a license application be treated as one for exemption. Numerous commenters opposed the exclusion of projects located on Federal lands from this case-by-case exemption process. The failure to include such projects was described as especially burdensome on project owners in the western United States, where a large portion of all land is Federally-owned and a high probability exists that a project will involve Federal land in some way, even if the dam and powerhouse, for example, are located on private property. Some commenters proposed deletion of the reference to Federal lands in the definition of "small hydroelectric power project." leaving project owners to negotiate access to Federal lands within one year. If rights to use public lands were not obtained, the procedure could then be changed to a licensing procedure. It was also suggested that the rule should exempt projects with only transmission lines on Federal lands or that any project on Federal lands leased for power purposes be made exemptible. The Commission acknowledges the difficulty facing western developers with respect to this issue under the proposed rule. The Commission's concern is both to protect lands in the public domain and to permit development of projects that depend on such lands for power generation or distribution. In light of the comments. the Commission has lifted the proposed restriction relating to projects on Federal lands. The reference to Federal lands has been removed from the definition of "smail hydroelectric power project." Projects that use Federal lands may therefore be exempted from any portion of Part I of the Act, subject to the new standard condition in Article 5 [§ 4.106(e)], which states that an exemption from licensing in no way confers any right to use or occupy Federal lands. Such rights must be obtained from the appropriate Federal land management agency. If the right to use any Federal lands involved is not obtained for the project within one year. the Commission may accept a license application for the project from any person to whom it is authorized to issue licenses under section 4(e) of the Act. and may revoke the exemption. Although there was general approval for the Commission's decision not to use the broad definition of “project” in the Federal Power Act in establishing the scope of an exemptible facility, it was further suggested that, for purposes of exemption. a "project" be defined as an individual generation sile, presumably the power-plant and appurtenant facilities. This would, of course, have the effect of preventing aggregation of the capacity of more than one powerhouse that uses water from the same impoundment for purposes of determining whether a project is within the 5 megawatt limitation. In those few cases where several small, independent power generating sites depend on a single impoundment, whether or not under license, a narrower definition would probably optimize the developmental impact of the exemption process. However, there are various practical difficulties in defining "project" solely in terms of a generation facility, without, among other things. encouraging applications that might attempt to circumvent the 5 megawatt statutory limitation: or failing to include the dam and impoundment in either an exempted project or a licensed project where the Commission could impose conditions on their use and maintenance-for environmental or dam safety reasons, for example. The Commission nevertheless recognizes the value, in some circumstances, of exempting certain sites that clearly are separate and distinct from other generating sites at the same dam and impoundment and has provided an opportunity for applicants to obtain waiver of the provisions that necessitate aggregation of all capacity at a single impoundment. The definition of "small hydroelectric power project" includes run-of-river projects, a concern of two commenters. The 5 megawatt capacity limitation will not be applied only to capacity added to a project, as requested by another commenter. Such application of this statutory limitation would permit exemption of large projects based on a comparatively insignificant addition to capacity. That could be an unfortunate result from an environmental or safety perspective. It appears from the language of Title IV of PURPA, as amended by 408 of the ESA, that |