Emerging Possibilities for State Control of Hydroelectric Development

Thomas B. Arnold

Editors' Summary: Almost 40 years ago, in First Iowa Hydro-Electric Cooperative v. Federal Power Commission, the United States Supreme Court ruled that the Federal Power Act preempted almost all state controls on hydroelectric development. Over the last 10 years, though, court decisions and statutes have afforded the states increasing power to regulate areas concurrently under federal control. In this article, Mr. Arnold examines First Iowa in light of these trends. He concludes that courts may read First Iowa today to open some avenues for the states to regulate the environmental effects of hydropower projects. Also, the states may be able to regulate these effects through § 401 of the FWPCA and through other federal statutes.

Mr. Arnold has practiced environmental law since 1970 and has concentrated on hydro and minimum stream flow issues since 1978. He practices law in Concord, Massachusetts. The author thanks the following for their comments on drafts of this article: Katherine Preston of the Massachusetts Scenic Rivers Program; Ron Wilson, in private practice, Washington, D.C.; Chris Meyer, Pat Parenteau, and Terry Thatcher of the National Wildlife Federation; Michael Blumm, visiting professor at Boalt Hall, University of California; Rod Walston, California Deputy Attorney General; and George Knapp, associate at LeBeouf, Lamb, Leiby & MacRae.

[13 ELR 10135]

The past four years have seen renewed, almost frenzied, interest in hydroelectric power development. Applications for permits have jumped from a level of about 20 per year in the mid-1970s to 1,859 in 1981. Interest in hydro development was stimulated by the passage in 1978 of five major acts comprising the National Energy Act.¹ This act removed several institutional barriers to the development of small hydro sites and provided major new financial incentives to developers and investors. Section 210 of the Public Utilities Regulatory Policies Act of 1978 (PURPA) required electric utilities to offer to purchase energy from small hydro producers at a rate not to exceed the "incremental cost to the electric utility of alternative electric energy."² The Federal Energy Regulatory Commission's (FERC's) regulations required utilities to purchase energy at a rate equal to each utility's "full avoided cost."³ Thus, PURPA and FERC set up a market in which a small hydro producer had a guaranteed buyer for the power at a price set by the utility's cost, not by the cost of producing the power.⁴ In addition to these market incentives, the small hydro developer was given two direct economic subsidies: a 21 percent investment tax credit against any federal taxes owned by the developer,⁵ and a five-year depreciation schedule for the cost of capital investments, as opposed to the 40-year period previously used.⁶ These provisions meant that an investment of $100,000 in new turbines on an existing dam allowed the investor to claim an average annual deduction for the next five years of $20,000, and a tax credit in the year of the investment of $21,000. The combination of these substantial subsidies and a guaranteed market at the utility's full avoided cost encouraged a flood of proposals to develop hydro sites all over the country.

These proposals are being made at a time when the law governing the regulation of hydroelectric projects is changing. Ever since the 1946 decision of the United States Supreme Court in First Iowa Hydro-Electric Cooperative v. Federal Power Commission (FPC),⁷ the Court has struck down state laws that have attempted to regulate hydroelectric development. However, since 1973 the Supreme Court's view of the balance between federal and state authority to regulate a variety of activities has shifted to allow greater state control.

[13 ELR 10136]

It is not the purpose of this article to trace that shift, since that analysis has already been done more than adequately.⁸ Rather, this article analyzes the extent to which the present Supreme Court may allow federal laws or decisions to preempt state laws or decisions governing hydropower.⁹ It first presents the analytical framework that the Supreme Court used in First Iowa. It then briefly describes the changes in the Court's view that have occurred since 1973 and the conceptual basis that the Court now uses in preemption cases, and applies these doctrines to the Federal Power Act (FPA) in the hydro development area. The article finally considers the other possible statutory bases for state regulation of hydro development.

Vertical Preemption: The Federal-State Balance After the First Iowa Decision

The Constitution of the United States vests control over interstate commerce in the federal government.¹⁰ This power includes the right to regulate navigation on navigable waters of the United States.¹¹ It also includes the right to control the construction of dams in such waters.¹² In 1920, this power was codified in the Federal Water Power Act, which was subsequently amended to the FPA.¹³ The central purpose of the FPA was to provide comprehensive control over uses of navigable waters, including navigation, irrigation, flood control, and hydroelectric development.¹⁴ However, the constitutional support for control of hydroelectric development comes not only from the right to regulate navigable waters, but also from the right to control projects that generate electricity for interstate transmission.¹⁵

Had Congress intended to do so when it passed the FPA, it could have explicitly preempted state control of hydro projects on navigable rivers through the Supremacy Clause.¹⁶ It did not do so. Rather, it created a balance between federal and state governments, a "dual system of control."¹⁷ It provided that construction of any dam, diversion, or hydroelectric facility on navigable waters of the United States would require a license from the Federal Power Commission, renamed the Federal Energy Regulatory Commission in 1978.However, Congress also included two sections in the FPA that reserved some regulatory authority to the states. The extent of that authority has not only been the subject of recurrent litigation, as the states have tried to assert their regulatory power, but has also shifted as the Supreme Court's view of the federal-state balance has shifted. Section 9(b) requires each applicant for a federal license to submit to FERC

[s]atisfactory evidence that the applicant has complied with the requirements of the laws of the State or States within which the proposed project is to be located with respect to bed and banks and to the appropriation, diversion, and use of water for power purposes and with respect to the right to engage in the business of developing, transmitting, and distributing power, and in any other business necessary to effect the purposes of a license under this chapter.¹⁸

Section 27 states:

Nothing contained in this chapter shall be construed as affecting or intending to affect or in any way to interfere with the laws of the respective States relating to the control, appropriation, use, or distribution of water used in irrigation or for municipal or other uses, or any vested right acquired therein.¹⁹

The landmark interpretation of § 9 was made when the First Iowa Hydro-Electric Cooperative applied for a federal license to construct a new dam on the Cedar River, and to divert all but 25 cubic feet per second of the Cedar River to a 50-megawatt power station on the Mississippi River eight miles away. Iowa law prohibited any dam from being constructed until a permit was granted by an executive council after the council found, inter alia, that the "water taken from the stream … is returned thereto at the nearest practicable place without being materially diminished in quantity or polluted."²⁰ The Cooperative did not apply for an Iowa permit, claiming that such action would have been futile. Instead, it applied to the FPC for a license under the FPA. The FPC dismissed the application on the ground that the Cooperative had not [13 ELR 10137] presented satisfactory evidence of compliance with Iowa law, as required by § 9(b) of the FPA.²¹

On appeal, the circuit court first stated that Congress had not intended to occupy the regulatory field completely, or to exclude state control.²² The FPA contemplated a dual system of control. The court noted that the Cooperative might have been able to obtain a state permit because the Iowa statute had not yet been interpreted by the Iowa Supreme Court. It then described its review power as follows: "It is the duty of courts to avoid the issue of constitutionality [preemption] if the [state] statute which is being interpreted is susceptible of any reasonable interpretation consistent with constitutionality."²³ In deciding whether a state law was preempted by congressional action the primary test was whether the competing demands of the state and national interests involved could be accommodated. Applying this test to the case before it, the court held that Congress intended "to assist state control and regulation, rather than to impair or diminish it."²⁴ Therefore, the court required the Cooperative to make a good faith effort to obtain the permits required by Iowa law. Only if a showing was made that those permits could not be obtained would the court consider whether the Iowa law was unconstitutional. In short, the court refused to declare a state law unconstitutional on its face, but required the Cooperative to demonstrate that the decisions of state and federal agencies were inconsistent. In that case, the court left no doubt that the federal decision would control.

The Supreme Court reversed, holding that the Cooperative need not apply for the permit required by Iowa law.²⁵ The Court based its decision on four grounds. First, to require an applicant for a federal license of secure a state license as a condition precedent to federal action would give the states veto power over projects that Congress intended the FPC to regulate. Second, it would subordinate to the states the comprehensive planning that Congress entrusted to the FPC. Third, a duplicate system of licenses would be "unworkable." Conformity to both state and federal standards would be "impossible in some cases and probably difficult in most of them."²⁶ Finally, it would make the FPC the agent of the states for purposes of enforcing state laws.

In deciding the meaning of § 9(b) the Court described the reference to state laws as merely a "suggestion to the [FPC] of subjects as to which [it] may wish some proof submitted to it of the applicant's progress."²⁷ That section did not require an applicant even to apply for state permits or approvals because the FPA leaves "no room or need for conflicting state controls."²⁸ The Court also interpreted § 27 to save only those state laws that deal with proprietary, or property rights, and then only when water is used in irrigation or for municipal purposes.²⁹ However, these statements were not required to decide the precise issue before the Court, and are dicta only.

This limited view of the role of the states in regulating hydroelectric projects has been generally followed for over 30 years.³⁰ However, recent decisions of the Supreme Court in other fields indicate a shift toward allowing state laws to stand. Thus, chances are increasing that the Court may allow a wider range of state laws to stand in the field of hydro regulation.

The Burger Court's Shift Toward State Control

The split of regulatory responsibility between the federal government and the states has been a troublesome issue for federal courts to resolve. Part of the reason is that the views of the Supreme Court have shifted back and forth, now giving deference to state laws, now reading congressional actions as barring any concurrent state control. In deciding preemption cases from 1940 to the early 1970s, the Court distinguished two types of preemption. In the first, congressional action had occupied the field, leaving no room for state regulation. To make this determination, the Court looked at whether the federal scheme was pervasive³¹ or whether the subject of regulation was one in which there was a dominant federal interest.³²

The second type of case in which preemption was found involved a conflict between state and federal law. The Court would find a conflict where compliance with both was a "physical impossibility"³³ or where the state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."³⁴ The First Iowa case was a classic application of these doctrines. The Court found a pervasive scheme in which the responsibility for comprehensive planning was given to the FPC, and it reaffirmed the strong federal interest in controlling navigable waters. It also found that [13 ELR 10138] compliance with state law requirements "may well block the federal license"³⁵ under § 9(b) of the FPA, and that "conformity to both standards would be impossible in some cases and probably difficult in most of them."³⁶

Beginning in 1973 and continuing to the present the Burger Court has changed the tests for deciding when state law is preempted and has shown greater deference to state legislation.The Court has not inferred preemption merely from the "comprehensive character" of the federal regulatory scheme.³⁷ State regulation has been upheld over subjects that previously had been held to have a dominant federal, or national, interest.³⁸

In reassessing the second ground for preemption — a conflict between federal and state control — the Court has changed the test substantially.

We must also be careful to distinguish those situations in which the concurrent exercise of a power by the Federal Government and the States or by the States alone may possibly lead to conflicts and those situations where conflicts will necessarily arise.³⁹

Finally, in deciding whether a state law stands as an "obstacle" to the accomplishment of congressional objectives, the Court examines the purposes and strength of the interests of both federal and state laws. If the purposes are similar, the state law will probably be preempted. If the purposes are different, the state law will probably be allowed to stand.⁴⁰ The proper approach is "to reconcile the operation of both statutory schemes with one another rather than holding one completely ousted."⁴¹ This judicial standard is very close to the standard of accommodation that the District of Columbia Circuit Court of Appeals articulated 38 years ago in the First Iowa case.⁴² In addition to reviewing the purposes of the two laws, the Supreme Court also has stated that the state law must do "major damage" to "clear and substantial" federal interests before it will be preempted under the Supremacy Clause.⁴³

In summary, the Burger Court is likely to allow a state law to stand when it does not do "major damage" to a substantial federal interest. It has also indicated that there must be an "actual conflict,"⁴⁴ not the potential for one, and that the determination of whether a conflict exists must await the interpretation of the state law by the state's court.

Emerging Possibilities for State Control of Hydropower Development

The changing attitude of the Supreme Court has increased the odds that the assertion of state regulatory power over hydroelectric power projects will be upheld. The various grounds for asserting such control are discussed below.

The Federal Power Act

Under the FPA three categories of state laws are most likely to be upheld by the Supreme Court: (1) laws regulating diversions out of the natural stream bed, (2) laws that have a different purpose than the FPA, (3) laws that regulate projects or aspects of projects that have a minimal federal interest. A fourth category — laws that are intended to implement a comprehensive plan for river use and development in the state — may give a state indirect control by influencing the decision of developers and investors. Each type of law is discussed below in more detail.

* Laws Regulating Diversions. As noted above, §§ 9 and 27 of the FPA save some state laws. The First Iowa opinion characterized those laws as dealing with "proprietary" rights.⁴⁵ Yet the language in each section appears broader. Section 9 refers to laws with respect to "the appropriation, diversion, and use of water for power purposes."⁴⁶ Section 27 refers to laws relating to "control, appropriation, use or distribution of water used in irrigation or for municipal or other uses."⁴⁷ The question, simply put, is whether the Court today would allow a broader range of state laws to stand.⁴⁸

A 1978 Supreme Court decision, California v. United States,⁴⁹ sheds light on how the Court might answer that [13 ELR 10139] question. That case arose when the Bureau of Reclamation applied for state permits to divert water from the New Melones Dam project on the Stanislaus River in California. The construction of the dam had been specifically authorized by Congress. The Bureau applied to the California State Water Resources Control Board for a permit to appropriate and divert water from the Stanislaus River, and was granted a conditional permit that severely limited the storage of water behind the dam. In that case the Court construed the following language of § 8 of the Reclamation Act of 1902: "Nothing [in this Act] shall be construed as affecting or intended to affect or to in any way interfere with the laws of any state … relating to the control, appropriation, use or distribution of water used in irrigation …."⁵⁰

The Court ruled that a state agency may impose conditions on a federal project so long as those conditions are not inconsistent with clear congressional directives respecting the project. The Court indicated that § 8 includes more than just vested rights in the water: "That section does, of course, provide for the protection of vested water rights, but it also requires the Secretary to comply with state law in the 'control, appropriation, use or distribution of water.'"⁵¹ Since the lower courts had not addressed the issue of whether the conditions imposed by California were inconsistent with congressional directives as to the New Melones Dam, the Supreme Court remanded for consideration of that issue.

Although the legislative histories of the Reclamation Act and the FPA are different, the language Congress used is almost identical. The decision suggests that the Court may be willing, under the FPA, to see whether a conflict actually exists between state regulatory decisions and acts of Congress. Thus, it may be argued that a hydro developer must obtain both state and federal licenses or permits before claiming that a conflict exists that is sufficiently great to preempt the state's decision.

The decision is also important because the Court "disavowed" the dicta in several earlier opinions, even though those dicta would have led the Court to the opposite result from the one it reached.⁵² The Court's unwillingness to be bound by earlier dicta means that the dicta in First Iowa on the scope of § 27 may have equally little precedential value and may be "disavowed" by the Court in an appropriate case.

It should be noted that one district court has already considered this issue and has decided that California v. United States did not implicitly overrule First Iowa.⁵³ The Vermont district court relied on a footnote in a recent Supreme Court opinion, New England Power Co. v. New Hampshire,⁵⁴ as an indication that First Iowa is still good law. The footnote noted the "preeminent" authority of the federal government to "regulate the flow of navigable waters."⁵⁵ However, the case did not involve an attempt by New Hampshire to regulate flows, but to prohibit sales of hydroelectric power from federally licensed dams outside of the state. Predictably, the Supreme Court struck down that law, but it did not even consider the issue raised in California v. United States. The district court also discerned a common thread in California v. United States and First Iowa, namely, avoidance of duplicative regulation. Yet, the recent decisions of the Burger Court discussed above indicate a willingness to see whether there is an actual conflict between state and federal agencies, rather than striking down a state law on the possibility of conflict.⁵⁶

* Laws That Have a Different Purpose Then the FPA. Regardless of whether the Court upholds state laws controlling the appropriation or distribution of water under §§ 9(b) or 27 of the FPA, there is another class of state laws that the Court could uphold on other grounds. These are laws regulating hydro development in the context of overall electric system planning and reliability for purposes having nothing to do with navigability or the use of waterways.

The Supreme Court has allowed state law to stand when the purpose of the state law was different from the purpose of the federal law and did not discriminate against interstate commerce.⁵⁷ The Court has reached that decision even though the regulated activity complied with federal law but was prohibited by state law.⁵⁸ The lower courts have been inconsistent in their application of this preemption standard.

For example, in Town of Springfield v. McCarren,⁵⁹ the Vermont Public Service Board asserted jurisdiction over a proposed new dam on the Black River. The Board claimed that the developer had to obtain a certificate of public good under state law. The Vermont law applied to all new electrical generating and transmitting facilities in the state without regard to whether they were located on navigable waters. Before issuing a certificate of public good, the Board must find, inter alia, that the project:

(1) will not unduly interfere with the orderly development of the region …,

(2) is required to meet the need for present and future demand for service, and

(3) will not adversely affect system stability and reliability and economic factors.⁶⁰

Clearly, ensuring system reliability and orderly development of the region are different purposes from ensuring the comprehensive development of navigable [13 ELR 10140] waters.⁶¹ Yet, the Vermont district court did not address the purposes and decided that the FPA preempts all state regulation, whatever the purposes, and regardless of whether there is a conflict.

The purposes of the Vermont law are closely analogous to the purposes of a California law regulating nuclear power plants that the Supreme Court recently upheld. In deciding that the California law was not in conflict with congressional purposes and objectives, the Supreme Court noted that compliance with both federal and state laws was "possible."⁶² It upheld the California statute in part because the state legislature intended the law to deal with the economic aspects of nuclear power, not the safety aspects that federal law addresses.⁶³

If the reasoning of the Supreme Court had been applied to the Vermont law, a different result would be likely. The Vermont law is not specifically saved by §§ 9 and 27 of the FPA. Nonetheless, because it is designed to achieve purposes that are completely different from those of the FPA, it would not be preempted until, at a minimum, a decision by the Vermont Public Service Board was shown to be in direct conflict with a FERC license.

* Laws That Regulate Projects or Aspects of Projects That Have a Minimal Federal Interest. Granted that the federal government has the "preeminent" power to regulate dams on navigable water. Granted that this power flows from the dominant federal interest in controlling navigation and interstate commerce, including sales of electricity. But how strong is the federal interest in the retrofit of an existing dam where all of the power will be consumed on site? In such a case would state control over the mode of operation and the minimum releases do "major damage" to "clear and substantial" federal interests?⁶⁴

Although the answer to that question is arguably "no," another decision from the Vermont district court does not agree. In Town of Springfield v. State Environmental Board, the court ruled that the Vermont Environmental Board had no jurisdiction over roads leading to a hydro site.⁶⁵ The Environmental Board agreed that FERC had exclusive jurisdiction over the construction of the dam and the generation of electricity, but asserted its jurisdiction over the relocation of highways leading to the site. The court rejected this contention, finding a congressional intent to regulate all aspects of a hydroelectric project. The court based its decision, not on the danger of conflict between state and federal decisions, but on the "pervasiveness of the federal scheme."⁶⁶ Yet pervasiveness is no longer automatically dispositive grounds for preemption,⁶⁷ particularly where the federal interest is minimal. One wishes that the district court had addressed the relationship between the comprehensive development of the nation's waterways and the location of roads in such a way as to protect public health, safety, and the environment.

* State Comprehensive Plans. The FPA requires FERC to find that a project is best adapted to a "comprehensive plan" for improving or developing the waterway or waterways.⁶⁸ Such a plan must balance three interests: (1) interstate or foreign commerce, (2) water power development, and (3) other beneficial public uses, including recreational purposes. Although FERC prepares water resources appraisal reports and planning status reports, which are used as comprehensive plans for watersheds, those reports usually are devoted to insuring that one hydroelectric project will not interfere with the generating potential of those already in existence or planned and that the maximum power potential of the river is developed. One looks in vain for explicit description, much less a balancing, of all three statutory interests.

In 1982 the State of Maine took a bold step to assert some control of hydroelectric development in the state. On July 6, 1982, Governor Brennan signed an executive order declaring that the state's policy was to prohibit new hydroelectric development on those rivers that had the highest value for other beneficial public uses, including recreation. The order also directed the preparation of a comprehensive plan for the use and development of Maine's rivers, and the submission of the plan to FERC. The plan, as prepared, included the following components:

(1) the governor's executive order;

(2) the Maine Rivers Study, an inventory and identification of those rivers with the highest public value for boating, fishing, and natural resources;

(3) an analysis of the need for electricity generated by hydropower to meet demand for 1990 and 2000; and

(4) a statewide fisheries plan.

It was submitted to FERC in October 1982. Although FERC refused to be bound by the plan or the state's policy that certain rivers should have no new hydroelectric development,⁶⁹ it will be more difficult legally and politically for FERC to issue a license that runs counter to the state's plan without preparing a comprehensive plan of its own, an event that is seen in most quarters as unlikely. And, even if FERC is prepared to proceed without regard to the plan, at least one developer has terminated a preliminary permit on the express grounds that the project runs counter to the state's plan.⁷⁰ Thus, although the binding effect of Maine's plan on FERC remains undetermined, its practical effect is to achieve the desired result of directing development to river stretches where the "other beneficial public uses" are of lower value.

[13 ELR 10141]

The Federal Water Pollution Control Act

The Federal Water Pollution Control Act (FWPCA) establishes a joint federal-state system for improving and protecting the quality of our nation's waters. Although overall supervisory powers were granted to the Environmental Protection Agency (EPA), specified regulatory authority was granted to the states. The point of intersection between the state's regulatory powers and FERC's authority to license hydro projects occurs in § 401 of the Act, which states:

Any applicant for a Federal license or permit to conduct any activity including, but not limited to, the construction or operation of facilities, which may result in any discharge into the navigable waters, shall provide the licensing or permitting agency a certification from the State … that any such discharge will comply with [applicable water quality standards].⁷¹

A preliminary question is whether the "discharge" from a dam requires state certification under § 401. The term "discharge" is defined in the FPWCA to include, but is not limited to, the discharge of a pollutant.⁷² The D.C. Circuit recently has decided that the discharge from a dam is not a "discharge of a pollutant" so as to require a permit under § 402.⁷³ Since the term "discharge of a pollutant" is defined to mean "any addition of any pollutant to navigable waters,"⁷⁴ the court had to decide whether the discharge from a dam was the "addition" of a "pollutant." Deferring to EPA's interpretation of the Act, the court decided that it was not, and that EPA was not required to issue permits under § 402 for dams.

However, § 401 refers to "any discharge," not just the "discharge of a pollutant." The fact that both terms are used in the Act and the language of the definition of a "discharge" makes it clear that a "discharge" includes not only additions of pollutants but other discharges as well. Thus, the discharge from a dam, even if it is not the "discharge of a pollutant," can require state § 401 certification.

Under § 401 a state has two grounds for refusing to certify, or for imposing conditions on a hydro project. The first ground is based on the state's right to set water quality standards. Under § 303 of the FWPCA, a state is authorized to revise or adopt new standards:

Such revised or new water quality standard shall consist of the designated uses of the navigable waters involved and the water quality criteria for such waters based upon such uses …. Such standards shall be established taking into consideration their use and value for public water supplies, propagation of fish and wildlife, recreation purposes, and … other purposes ….⁷⁵

If, for example, a state adopts water quality standards that incorporate and require maintenance of the naturally occurring temperatures and dissolved oxygen levelson certain streams, it must refuse to certify any project that would violate those standards.⁷⁶

The second ground for the exercise of the state's certification power is § 401(d) of the FWPCA. That section says that the state must certify not only that the proposed discharge will meet water quality standards, but also will comply "with any other appropriate requirement of State law."⁷⁷ In a recent decision, Roosevelt Campobello International Park Commission v. EPA,⁷⁸ the First Circuit Courts of Appeals construed the scope of this language. In that case the State of Maine had imposed conditions on a proposed oil refinery under the state siting law. EPA refused to incorporate those conditions into its national pollutant discharge elimination system (NPDES) permit for the project. On appeal, two issues were presented to the court: (1) were the conditions that the state imposed related to water quality and (2) if they were, was EPA required to include the conditions in its NPDES permit. The answer of the court speaks for itself:

Petitioners argue, with some force, that the conditions listed above are related to water quality, since they are designed to minimize the risk of an oil spill which would severely impair water quality. We believe that the ALJ made a more fundamental error by seeking to determine which requirements of state law were appropriately affixed to the state's certification. Section 401(a) of the Clean Water Act empowers the state to certify that a proposed discharge will comply with the Act and "with any other appropriate requirement of State law." Any such requirement "shall become a condition on any Federal license or permit." § 401(d).⁷⁹

By emphasizing the requirement that state certification shall include such limitations as are necessary to assure compliance "with any appropriate requirement of State law," the court reaffirmed the state's control over projects that require federal licenses. Under this decision, if a state legislature or a state agency prohibits or sets conditions on a proposed hydro project, and if the state's water quality agency includes those requirements in its § 401 water quality certification, those conditions are binding on FERC and must become part of the FERC license. These conditions need not be directly related to maintenance of water quality standards, although the state's case will be even stronger if they are. Although the direct application of § 401 to FERC-licensed projects still remains to be tested, the statutory language and the First Circuit decision are clear. States should also note that certification under § 401 can only be given after the appropriate state agencies have acted. Thus, states have a powerful new argument that applicants must go through the state's review processes before a FERC license can be issued.⁸⁰

[13 ELR 10142]

The Energy Security Act of 1980

In response to the flood of hydroelectric proposals that were generated by the National Energy Act of 1978, Congress passed the Energy Security Act of 1980 (ESA).⁸¹ Section 408(b) of the Act allows FERC to grant an exemption from the licensing requirements of the FPA to small hydroelectric power projects of 5,000 kilowatts or less.⁸² FERC is given discretion to exempt projects on a case-by-case basis or on the basis of classes or categories of projects. However, the Act provides that such exemptions are

subject to the same limitations (to ensure protection for fish and wildlife as well as other environmental concerns) as those which are set forth in subsections (c) and (d) of section 30 of the Federal Power Act.⁸³

Subsection (c) of § 30 of the FPA states:

the FERC shall consult with the United States Fish and Wildlife Service and the State agency exercising administration over the fish and wildlife resources of the State in which the facility is or will be located, in the manner provided by the Fish and Wildlife Coordination Act … and shall include in any such exemption —

(1) such terms and conditions as the Fish and Wildlife Service and the State agency each determine are appropriate to prevent loss of, or damage to, such resources and to otherwise carry out the provisions of such Act ….⁸⁴

On their face, these two sections give each state's fish and wildlife agency the power to control or regulate any project for which an exemption is requested. However, the scope of the state's power has been severely limited by FERC. On January 19, 1982, FERC issued Order No. 202.⁸⁵ The order became effective on February 18, 1982.⁸⁶ It limits the power of state fish and wildlife agencies to set conditions to protect a single type of species — migratory fish.⁸⁷ Thus, the power to regulate the development of small, exempt projects, which was delegated to the states by Congress, has been practically eliminated by FERC. A final resolution of this issue awaits the decision of the D.C. Circuit.⁸⁸

A subtler question under the ESA is whether a project that is granted an exemption, or classes of projects that are granted a categorical exemption by FERC, can be regulated by state regulatory agencies other than the fish and game agency. In other words, does the preemption doctrine apply to exempt projects? Hydro developers and FERC staff have argued that the federal preemption of state control continues even after a project, or class of projects, is exempted from the FPA licensing requirements. The problems with this position are obvious. It is hard to argue that the ESA is a "pervasive" regulatory system, when in fact it authorizes the exemption of projects from federal regulation and does not explicitly prohibit other state control. It is also difficult to argue that there will "necessarily" be conflicts between state and federal decisions when the federal decision is an exemption from regulation. A view which is more consistent with current trends in preemption law would be that the purpose of the exemption provision is to reduce federal review and oversight of these projects are to allow greater state control since these types of projects have a minimal federal interest. The requirements for a "comprehensive plan" under § 803(a) and the "dual control" that was so troublesome to the First Iowa court have been removed. Under these circumstances it is reasonable to assume that state regulatory power, to the extent that it is still preempted for licensed projects, will emerge in full force over exempt projects.

The Wild and Scenic Rivers Act

In 1968 Congress declared it to be the policy of the United States to preserve in their free-flowing condition selected rivers that possess "outstandingly remarkable scenic, recreational, geologic, fish and wildlife, historic, cultural or other similar values."⁸⁹ A river may be added to the federal system by act of the appropriate state legislature, so long as the river is permanently administered as a wild, scenic, or recreational river by an agency or political subdivision of the state, and so long as the Secretary of the Interior, upon application by the governor, finds that the river meets the criteria established in the Act.⁹⁰ Once a river is designated as a federal wild, scenic, or recreational river under the Act, FERC is prohibited from licensing the construction of any dam or other project works that would directly affect the river.⁹¹ Nor may any department or agency of the United States assist by loan, grant, license, or otherwise the construction of any water resource project that would have a direct and adverse effect on the values for which the river was designated.⁹²

Although this law gives the states the ability to block FERC from issuing licenses on the state's outstanding rivers, it has been little used. However, as public interest in protecting important river resources increases, and as the states build on and refine the data base contained in the nationwide inventory, this section may see greater use.⁹³

Conclusion

Any discussion of hydro law must acknowledge that the [13 ELR 10143] First Iowa decision is still controlling law. Until that case is modified or overruled by the Supreme Court, state laws that attempt to regulate hydro projects will be in jeopardy. However, the Burger Court has signaled its willingness to allow state regulatory laws to stand, even in fields that were previously thought to be the subject of exclusive federal control. No one can forecast with accuracy how the present Court would decide a case involving state regulation of a hydro project. Much would depend upon the purposes of the state law, the Court's perception of the strength of the state and federal interests, and on whether there was an actual conflict between the decisions of the state agency and FERC. Yet despite these uncertainties, a case that seeks the modification or reversal of First Iowa clearly has a greater chance of success now than at any time since that decision was written. Given the trend of the Supreme Court's decisions, and given the powers that have been conferred on the states by the Federal Water Pollution Control Act and the Energy Security Act, states should be encouraged to assert their interests aggressively in the regulation and control of hydro development.

1. The five acts were the Public Utilities Regulatory Policies Act, Pub. L. No. 95-617, 92 Stat. 3117 (1978); Energy Tax Act, Pub. L. No. 95-618, 92 Stat. 3174 (1978); National Energy Conservation Policy Act, Pub. L. No. 95-619, 92 Stat. 3206 (1978); Power Plant and Industrial Fuel Use Act, Pub. L. No. 95-620, 92 Stat. 3289 (1978); and Natural Gas Policy Act, Pub. L. No. 95-621, 92 Stat. 3350 (1978).

2. 16 U.S.C. § 824a-3(b).

3. 18 C.F.R. § 292.304(b)(2)-(4) (1982). The term "full avoided cost" in the regulation is equivalent to the term "incremental cost" in § 201 of PURPA.

4. The FERC regulations requiring utilities to offer to purchase at the full avoided cost and to "interconnect" with the small power producer were declared invalid on January 22, 1982. American Electric Power Service Corp. v. FERC, 675 F.2d 1226 (D.C. Cir. 1982), cert. granted, 51 U.S.L.W. 3287 (U.S. Oct. 12, 1982) (No. 82-226).

5. See 26 U.S.C. §§ 46, 48(l)(2)(A)(vii), 48(l)(13) and associated regulations.

6. See 26 U.S.C. § 168.

7. 328 U.S. 152 (1946).

8. Two articles were particularly helpful in tracing these shifts and in describing the criteria that the Court has applied. Comment, The Preemption Doctrine: Shifting Perspectives on Federalism and the Burger Court, 75 COLUM. L. REV. 623 (1975); Wiggins, Federalism Balancing and the Burger Court: California's Nuclear Law as a Preemption Case Study, 13 U.C.D. L. REV. 1 (1979-80).

9. Federal preemption of state action may be called vertical preemption. This article does not discuss the analogous issue of horizontal preemption, the extent to which FERC has exclusive control within the federal government over hydroelectric development. With the exception of a recent case in the Ninth Circuit, horizontal preemption issues have been largely resolved in favor of giving total control of hydro projects to FERC. See National Wildlife Federation v. Gorsuch, 693 F.2d 156, 13 ELR 20015 (D.C. Cir. 1982) (dam operations are outside the definition of pollutant discharge and therefore excluded from the permit requirements of the national pollutant discharge elimination system under the Federal Water Pollution Control Act); Monongahela Power Co. v. Alexander, 507 F. Supp. 385, 11 ELR 20782 (D.D.C. 1980), appeals docketed, Nos 81-1201, -1203, & -1282 (D.C. Cir. Feb. 25 & Mar. 11, 1981) (FERC's exclusive jurisdiction over FERC-licensed hydroelectric projects is not preempted by the Federal Water Pollution Control Act provision granting the United States Army Corps of Engineers the power to regulate the discharge of dredge and fill material into navigable waters); but see Escondido Mutual Water Co. v. FERC, 692 F.2d 1223 (9th Cir. 1982) (irrigation project that crosses Indian reservation land is within FERC's jurisdiction but FERC license must include any conditions imposed by the Secretary of the Interior deemed necessary for the protection and utilization of the reservation).

10. "The Congress shall have Power …To regulate Commerce among the several states." U.S. CONST. art. I, § 8, cl. 3.

11. Gibbons v. Ogden, 22 U.S. 1 (9 Wheat 1) (1824).

12. United States v. Appalachian Power Co., 311 U.S. 377, 405 (1940).

13. Ch. 285, 41 Stat. 1063 (1920). This law was amended in 1935 to create the present Federal Power Act. Ch. 687, 49 Stat. 838 (1935). The FPA was administered by the Federal Power Commission, whose title was changed in 1977 to the Federal Energy Regulatory Commission. See 42 U.S.C. §§ 7134, 7151(b), 7171-7177.

14. FPC v. Union Electric Co., 381 U.S. 90 (1965) (hydroelectric power project utilizing nonnavigable headwaters of a navigable river and serving interstate power system must obtain license pursuant to the FPA).

15. Id. at 94. Both these powers of course stem from the Commerce Clause, supra note 10.

16. "This Constitution and the Laws of the United States which shall be made in Pursuance thereof … shall be the Supreme Law of the Land … any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. CONST. art. VI, § 2.

17. First Iowa Hydroelectric Coop. v. FPC, 328 U.S. 152, 167 (1946).

18. 16 U.S.C. § 802(b).

19. 16 U.S.C. § 821.

20. IOWA CODE ch. 363, §§ 7767, 7771.

21. 16 U.S.C. § 802(b).

22. First Iowa Hydro-Electric Coop. v. FPC, 151 F.2d 20, 24 (D.C. Cir. 1945), rev'd, 328 U.S. 152 (1946).

23. Id. at 24.

24. Id. at 26.

25. First Iowa Hydro-Electric Coop. v. FPC, 328 U.S. 152 (1946).

26. Id. at 168.

27. Id. at 177-78.

28. Id. at 181.

29. Accord, FPC v. Niagara Mohawk Power Corp., 347 U.S. 239 (1954) (FPA does not abolish private proprietary rights to use navigable waters for power purposes granted by state law); California v. Oroville-Wyandotte Irrigation Dist., 411 F. Supp. 361 (E.D. Cal.), aff'd, 536 F.2d 304 (9th Cir.), cert. denied, 429 U.S. 922 (1976) (although the FPA confers broad federal control over power projects, states may continue to exercise compatible powers).

30. FPC v. Oregon, 349 U.S. 435 (1955) (despite federal public lands legislation granting state control over nonnavigable waters, FPC has authority to license a power project using nonnavigable waters on a federal reservation); Public Utility Dist. No. 1 v. FPC, 308 F.2d 318 (D.C. Cir. 1962) (state statutory limitation on city's eminent domain powers does not prevent city, as a federal licensee, from exercising condemnation powers granted it by the FPA); Washington Dep't of Game v. FPC, 207 F.2d 391 (9th Cir. 1953) (FPC acted within its discretion in not requiring municipality to show compliance with state laws regulating construction of dams because compliance would bar project).

31. See, e.g., Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947) (United States Warehouse Act does not completely preempt state regulation of warehouse contracts and leases with public utilities).

32. See, e.g., Hines v. Davidowitz, 312 U.S. 52 (1941) (Federal Alien Registration Act of 1940 was intended by Congress as a comprehensive and uniform scheme for the regulation of aliens and therefore supersedes state law requiring aliens to register and carry identification cards).

33. E.g., Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963) (upholding California statute setting a minimum oil content for avocados transported or sold in the state because Florida avocado growers were not faced with a physical impossibility of complying with the state law and a federal law that regulated Florida avocado picking dates by size and weight).

34. Hines v. Davidowitz, 312 U.S. at 67 (1941) (see supra note 32).

35. First Iowa, 328 U.S. at 167.

36. Id. at 168.

37. E.g., DeCanas v. Bica, 424 U.S. 351 (1976) (upholding state law forbidding an employer to knowingly employ illegal aliens because Immigration and Nationality Act did not intend to completely preempt state law in the employment area); New York Dep't of Social Services v. Dublino, 413 U.S. 405, 415 (1973) (federal Social Security Act does not bar a state from independently requiring individuals to accept employment as a condition for receipt of federally funded aid to families with dependent children).

38. E.g., DeCanas v. Bica, 424 U.S. at 354-55 (1976) (see supra note 37); Goldstein v. California, 412 U.S. 546 (1973) (state statute prohibiting the "piracy" of sound recordings was not in violation of the Copyright or Supremacy Clauses of the U.S. Constitution because at the time the law was enforced, federal copyright law had not preempted the field).

39. Goldstein v. California, 412 U.S. at 554 (1973) (emphasis in original).

40. Merrill, Lynch, Pierce, Fenner & Smith v. Ware, 414 U.S. 117 (1973) (California wage relief law is not preempted by the arbitration clause of the Security Exchange Act of 1934 because state law does not unduly interfere with federal regulation of the securities industry and arbitration rule is not within the federal act's mandate to protect investors and insure fair trade practices).

41. Id. at 127.

42. [T]he primary test to be applied is not a mechanical one of whether the particular activity affected by the state law is part of interstate commerce, or the arbitrary one of whether the Federal legislation can be stretched to cover a particular project, but, rather, whether the over-all, competing demands of the state and national interests involved can be accommodated.

First Iowa Hydro-Electric Coop. v. FPC, 151 F.2d 20, 26 (D.C. Cir. 1945), rev'd, 328 U.S. 152 (1946) (emphasis added).

43. Hisquierdo v. Hisquierdo, 439 U.S. 572, 581 (1979) (state community property law allowing award to wife of an interest in husband's expected benefits under the Railroad Retirement Act of 1974 impermissibly conflicts with the Act); accord, New York Dep't of Social Services v. Dublino, 413 U.S. 405, 423 n. 29 (1973) (see supra note 37).

44. Pacific Gas & Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 51 U.S.L.W. 4449, 4456 n.28 (U.S. Apr. 20, 1983). For a discussion of the case, see infra text accompanying notes 62 & 63.

45. First Iowa, 328 U.S. at 176.

46. 16 U.S.C. § 802(b) (emphasis added).

47. 16 U.S.C. § 821 (emphasis added).

48. One commentator thinks it would, based on the strong movement of the Burger Court towards allowing state laws to stand. Wiggins, Federalism Balancing and the Burger Court: California's Nuclear Law as a Preemption Case Study, 13 U.C.D. L. REV. 1, 84 (1979-80).

49. 438 U.S. 645, 8 ELR 20593 (1978).

50. 43 U.S.C. § 383 (emphasis added).

51. California v. United States, 438 U.S. at 674-75, 8 ELR at 20601 (1978).

52. Id. at 670-74, 8 ELR at 20599-601.

53. Town of Springfield v. McCarren, 549 F. Supp. 1134 (D. Vt. 1982), aff'd, No. 82-7837 (2d Cir. Feb. 16, 1983).

54. New England Power Co. v. New Hampshire, 455 U.S. 331 (1982) (invalidating as violative of the Commerce Clause a state law requiring electrical energy generators to obtain public utility commission approval prior to the interstate export of energy).

55. Id. at 338 n.6.

56. See supra notes 31-44 and accompanying text.

57. E.g., Huron Portland Cement Co. v. City of Detroit, 362 U.S. 440 (1960) (federal statute regulating licensing and safety inspections of steam vessels in interstate commerce does not preempt city smoke abatement code regulating emissions from vessels).

58. Merrill, Lynch, Pierce, Fenner & Smith v. Ware, 414 U.S. 117 (1973) (see supra note 40); but cf. Ray v. Atlantic Richfield Co., 435 U.S. 151 (1978) (state law regulating the design, size, and movement of oil tankers is preempted by the Ports and Waterways Safety Act to the extent that the federal act regulates the same aspects of tanker activities).

59. 549 F. Supp. 1134 (D. Vt. 1982), aff'd, No. 82-7837 (2d Cir. Feb. 16, 1983).

60. VT. STAT. ANN. tit. 30, § 248.

61. FERC's regulatory purposes admittedly extend beyond development of navigation into some aspects of power supply and marketing. Congress charged FERC with ensuring that interstate sale and transmission of electricity is done consonant with the public interest. However, Congress expressly preserved state powers to regulate other economic aspects of electricity. 16 U.S.C. § 824(a).

62. Pacific Gas & Electric Co. v. State Energy Resources Conservation & Dev. Comm'n, 51 U.S.L.W. 4449, 4456 (U.S. Apr. 20, 1983).

63. Id. at 4455-56.

64. Hisquierdo v. Hisquierdo, 439 U.S. at 581 (1979) (see supra note 43).

65. Town of Springfield v. Vermont Environmental Bd., 521 F. Supp. 251 (D. Vt. 1981).

66. Id. at 250.

67. See supra text accompanying notes 37 & 38.

68. 16 U.S.C. § 803(a).

69. Letter from C. M. Butler, Chairman, FERC, to Governor Joseph Brennan (Aug. 3, 1982).

70. 48 Fed. Reg. 2179 (1983) (surrendering the preliminary permit for the Masardis project, anew dam on the Aroostook River).

71. 33 U.S.C. § 1341(a)(1), ELR STAT. 42140 (emphasis added).

72. 33 U.S.C. § 1362(16), ELR STAT. 42146.

73. National Wildlife Federation v. Gorsuch, 693 F.2d 156, 13 ELR 20015 (D.C. Cir. 1982).

74. 33 U.S.C. § 1362(12), ELR STAT. 42146.

75. 33 U.S.C. § 1313(c)(2), ELR STAT. 42125 (emphasis added).

76. See deRham v. Diamond, 32 N.Y.2d 34, 295 N.E.2d 763, 343 N.Y.S.2d 84 (1973) (FWPCA gives state Commissioner of Environmental Conservation power to certify whether proposed hydropower project will meet state water quality standards, and Commissioner acted reasonably in certifying the Storm King pumped storage project).

77. 33 U.S.C. § 1341(d), ELR STAT. 42140.

78. Roosevelt Campobello International Park Comm'n v. EPA, 684 F.2d 1041, 12 ELR 20903 (1st Cir. 1982).

79. Id. at 1056, 12 ELR at 20910 (emphasis added).

80. In Maine, Governor Brennan has proposed a Maine River Protection Act, which includes the following provision:

Further, the Legislature finds that projects inconsistent with this policy on new dams and redevelopment of existing dams will alter the physical and chemical characteristics and designated uses of the waters of these river and stream segments. It finds that these impacts are unacceptable and constitute violations of the State's water quality standards. The Legislature directs that no project which fails to meet the requirements of this section may be certified under the United States Clean Water Act, section 401.

Legislative Document No. 1296, Me. Leg., 111th Sess. (1983) (to amend ME. REV. STAT. ANN. tit. 12 by adding § 649).

81. Pub. L. No. 96-294, 94 Stat. 611 (1980).

82. 16 U.S.C. § 2705(d).

83. Id.

84. 16 U.S.C. § 823(c) (emphasis added).

85. 47 Fed. Reg. 4232, as corrected by 47 Fed. Reg. 20295 (1982), 18 C.F.R. §§ 4.109-4.113 (1982).

86. A petition for rehearing was filed by several environmental groups and was denied on October 12, 1982. A petition for review of the order is pending before the D.C. Circuit, No. 82-2434 (Dec. 3, 1982).

87. 18 C.F.R. § 4.111(a)(2) (1982).

88. See supra note 86.

89. Pub. L. No. 90-542, 82 Stat. 906 (1968) (current version at 16 U.S.C. §§ 1271-1287, ELR STAT. 41421).

90. 16 U.S.C. § 1273(a)(ii), ELR STAT. 41421.

91. 16 U.S.C. § 1278(a), ELR STAT. 41426:3.

92. Id.

93. A few final questions deserve to be mentioned. Since the Wild and Scenic Rivers Act prohibits FERC from granting licenses for projects on designated rivers, may it grant exemptions under the ESA for projects on designated rivers? Or, may the Internal Revenue Service grant tax credits for such projects?