US Energy Regulator Considers Financial Requirements for Hydropower Projects

Under the Federal Power Act (FPA), the US Federal Energy Regulatory Commission (“FERC” or “Commission”) licenses and regulates over 1,600 hydroelectric project dams, diversions, and related hydropower facilities. At FERC’s last formal meeting during the Trump administration, FERC opened a Notice of Inquiry (NOI)¹ to determine whether to impose financial assurance requirements on hydropower licensees and, if so, what those financial assurance requirements should be.

FERC hydropower licensing seldom involves any financial assurance component. While the FPA contains provisions that could arguably permit FERC to require hydropower licensees and license applicants to demonstrate their solvency, and to fund operational and potentially project decommissioning expenses upon license expiration or termination, the NOI acknowledges that the actual adoption of such requirements is “rare.” When financial assurance requirements are adopted, they typically apply only to new licensees undertaking construction activities and, on occasion, expansion activities. The NOI notes only two financial assurance-related orders dating within the past seven years—one imposing financial assurance requirements and another imposing sanctions for failure to comply with financial assurance requirements that were set forth in a prior order. In some cases, such as the recent collapse of dams in Illinois and Michigan and the resulting flooding events, effectively no FERC license-specific financial assurance or liability protection was in effect at all.

The NOI seeks comments on whether to impose comprehensive financial assurance requirements on the hydropower sector. The NOI’s stated purpose is to ensure that a licensee has the capability to carry out license requirements and maintain its projects in a safe condition. FERC has asked for comments as to what (if any) forms of financial assurance to require—posting bonds, a financial assurance trust mechanism (that might be industry-wide or license-specific) and/or coverage under insurance policies. The NOI does not indicate whether the smallest hydropower facilities might be eligible for lightened financial assurance regulation, and the NOI contains no proposed scope or specification of requirements—instead, the NOI only seeks comments.

The NOI contains little legal text explaining which provisions of the FPA authorize the Commission to adopt the bond, funding and/or insurance proposals and in only the most general terms; it repeatedly asserts that “[t]he Commission could” adopt the measures that the NOI enumerates. Because many FERC-regulated hydropower facilities do not sell their electrical output at cost-based rates and are not entitled to increase their power sales rates to account for the costs of any financial assurance requirements that may result from the NOI proceeding, some hydropower licensees likely will react negatively to the NOI.

Comments on the NOI are due within 60 days of its publication in the Federal Register. (At press time, publication had not yet occurred.)

¹ Financial Assurance Measures for Hydroelectric Projects, Notice of Inquiry, Docket No. RM21-9-000, 174 FERC ¶ 61,039 (2021).