FERC Holds Technical Conference to Consider Financial Assurance for Hydropower Projects

On April 26, 2022 FERC held a Commission staff-led technical conference to discuss whether and, if so, how the Commission should require additional financial assurance mechanisms in the licenses and other authorizations it issues for hydroelectric projects.  The purpose of this effort is to ensure that licensees have the capability to carry out license requirements and, particularly, to maintain their projects in safe condition.  The technical conference followed, by over a year, the Commission’s January 26, 2021 notice of inquiry (NOI) seeking comments on potential changes to FERC’s rules relating to financial assurance for hydropower projects.


The genesis of FERC’s January 2021 NOI was FERC’s concern that inadequate financing of hydropower projects may result in threats to public safety and environmental resources, especially for nonoperational projects.  FERC specifically noted recent experiences where a lack of funding for needed dam safety repairs led to several dam failures in 2020.  Therefore, FERC is considering whether to take additional measures to ensure that licensees have the financial resources to operate and maintain their projects for the life of the project, including under unforeseen circumstances.  FERC held the April 26 technical conference at the request of several commenters, including the National Hydropower Association (NHA) and American Rivers, to more thoroughly consider the issues raised in comments filed on the NOI.

Historically, FERC has not closely analyzed licensees’ or license transferees’ financial wherewithal.  Although, in rare instances, the Commission has required licensees to file a “financial assurance plan” that includes the requirement to obtain a bond, normally the Commission does not do that.  Rather, the Commission evaluates the economics of a project and the licensee’s financial well-being when ruling on an initial license application, and then relies on the licensee’s acceptance of the license, together with the investment commitments inherent in that, as sufficient incentive for the licensee to ensure that it has sufficient capital, or access thereto, in the future to comply with the license’s requirements, including safety obligations.

The January 2021 NOI

Given the recent dam safety issues it sees as related to inadequate asset financing, FERC’s January 2021 NOI sought comment on three items.  First, the NOI sought comment on whether the Commission should require financial assurance from licensees. Second, the NOI sought comment on whether, and how often, the Commission should require licensees to reaffirm or recertify that they have adequate financial assurance instruments in place. Third, and finally, the NOI sought comment on three options the Commission identified 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 fund to pay for necessary repairs and remediation, require licensees to maintain an individual trust fund, 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.

All of these mechanisms entail imposing additional costs on the issuance (including relicensing) and transfer of hydropower licenses, which could hinder growth in hydropower.  There also is some dispute about the Commission’s authority to impose additional regulatory requirements on existing licensees.  The technical conference addressed these and other issues.

Industry Comments

In their comments on the NOI, NHA and the Edison Electric Institute (EEI) took the position that changes are not warranted because FERC’s existing authority and practices sufficiently ensure dam safety and financial support.  To the extent FERC disagrees, though, NHA and EEI took the position that any changes should be limited, and tailored to small “mom and pop”-owned projects, and should not apply to the industry as a whole.  NHA and EEI also argued that any new financial assurance requirements should allow for broad flexibility in how the applicant or licensee can satisfy the requirements, and further that forms of financial assurance that do not tie up capital should be prioritized, such as letters of credit or existing publicly available information.

FERC’s Actions Since the NOI

Since the NOI, FERC has been slow to act on pending license applications, especially license transfers, where financial ability has been called into question.  In an effort to bridge the gap, though, FERC has been including in its license transfer orders a standard license article reopener to allow it to address financial assurance in the future:  “Reservation of Authority to Require Financial Assurance Measures.”  The Commission reserves the right to require future measures to ensure that the licensee maintains sufficient financial reserves to carry out the terms of the license and Commission orders pertaining thereto.”  Commissioner Danly, however, has taken the position that this reopener “violates the Federal Power Act by amending the license to reserve the Commission’s authority to impose financial assurance mechanisms in a transfer proceeding.”  Also, based on the discussion at the April 26 technical conference, it appears that at least Chair Glick and Commissioner Phillips do not believe this reopener is sufficient to address their concerns.

The Technical Conference

The April 26 technical conference consisted of three panels.  The first panel, “Protecting Hydroelectric Facilities and Communities with Financial Assurance Requirements,” examined the potential safety risks hydroelectric facilities face and how a financial assurance requirement could mitigate these risks.  This included examining project-specific risks (e.g., condition of project facilities), regional risks (e.g., changes to the project area since construction), and global risks (e.g., climate change).

The panel’s industry representatives supported NHA’s position that any financial assurance requirements are not necessary and, if FERC believes they are necessary, should be imposed only on a targeted, case-by-case basis.  Their position is that financial issues, and lack of maintenance or other noncompliance, are not the cause of safety problems, and imposition of stringent financial requirements could be counterproductive.  Environmental NGO panelists, on the other hand, advocated for adoption of stringent financial assurance requirements, across the board.  And FERC Chairman Glick suggested some skepticism about the industry’s position.

The second panel, “Establishing a Financial Assurance Requirement,” explored factors that “should inform” the Commission’s decision to establish a financial assurance requirement.  Panelists recommended specific project characteristics that should be considered, and the panel also evaluated the appropriate amount of financial assurance that the Commission should require.

The Michigan Department of Environment’s Dam Safety Engineer advocated for financial assurance to address the recent dam failures that have occurred in Michigan, which have been some of the most high profile failures in the country.  He said that a corporate owner could dissolve and walk away from a project.  Industry representatives, on the other hand, took the position that financial assurance should be required only when it is shown to be clearly necessary based on a known safety issue, given the Commission’s stringent dam safety requirements and its existing authority.  The industry representatives argued that the Commission should have general awareness of dam safety issues before they become a problem, because of the Part 12 safety program.  Therefore, they contended that the focus should not be on the dam’s characteristics, but on the characteristics of the licensee.  The following characteristics should mean that separate financial assurance mechanisms should not be required:

  1. Licensee has an investment grade credit rating obtained in the last 3 years.
  2. Licensee has the ability to issue bonds to cover project operations.
  3. Licensee has taxing authority.
  4. Licensee has power purchase contracts generating revenue sufficient to cover project operations, including reasonable contingency.
  5. Licensee has access to public grants or loans sufficient to cover project operations, including reasonable contingency.
  6. Licensee demonstrates a financial plan that self‐funds project operations, including reasonable contingency. This option could include a sinking fund, or Reserve Policy designation that acts as an individual licensee’s remediation fund that could fund large upgrade projects and be replenished over time, always preparing for large, non‐routine project maintenance.

Licensees could be required to periodically recertify to one or more of the foregoing characteristics, to show that the licensee can deal with unforeseen costs.  Former FERC Commissioner Philip Moeller, of EEI, reiterated that separate, additional financial assurance should not normally be required and, when required, should be only on a case-by-case basis, when it is shown to be needed.  Otherwise capital will needlessly be constrained, which could have adverse consequences for dam safety.  Chairman Glick again expressed some skepticism with regard to the industry’s position.  He suggested that the Commission should be proactive, and not assume that no prior problem will mean there will be no future problem.

The third and final panel, “Evaluating Mechanisms for Financial Assurance,” discussed the mechanisms licensees could use to satisfy a financial assurance requirement and the availability of those mechanisms.  The panelists discussed various instruments used by other federal or state agencies to satisfy financial assurance requirements and those used in other industries.

The panel’s industry representatives reiterated the self-certification suggestions noted above, discussed in the second panel, and argued that they should be sufficient.  A panelist from EPA’s Resource Conservation and Recovery Act (RCRA) program offered suggestions from EPA’s experience with hazardous waste facilities, noting that EPA offers a variety of mechanisms, providing flexibility in compliance options.  EPA’s options include an annual financial test and a parent guarantee.  The Hydropower Reform Coalition argued that each licensee should have a financing plan specific to that project that covers known obligations and unknown future obligations – beyond simply dam safety – including a concrete financial assurance mechanism that functions in an insurance-like manner.  There was some dispute among the panelists concerning the cost and availability of various forms of financial assurance, as well as the appropriate scope of coverage.

Next Steps

On April 27, 2022 the Commission issued a notice soliciting post-conference comments, with a deadline for submission of comments of June 13, 2022.  The Commission then will decide whether to proceed with a formal rulemaking to adopt a rule imposing additional, or more specific, financial assurance requirements.  FERC staff did not offer any predictions with respect to content or timing, but it appears likely that FERC will proceed with a formal rulemaking in the not-too-distant future, based on the comments and questions from Chairman Glick, Commissioner Phillips, and FERC staff.  Stay tuned.