When Powers Collide: FERC Ruling Discusses ARRA Section 1603

A recent administrative order illustrates the intersection (or collision)between the purposes of the Federal Power Act (“FPA”) and the American Reinvestment and Recovery Act of 2009 (“ARRA”). In its order, the Federal Energy Regulatory Commission (“FERC”) halted plans by a municipality (“Municipality”) and two related entities (“Related Entities”) to develop a hydropower project.

The Municipality had invested nearly $3.6 million since 2006 to develop the site. Yet, FERC denied the application because it found that the Municipality and Related Entities’ collaboration misusedthe Municipal Preference established by the FPA. Furthermore, FERC barred Related Entities from filing another application for one year.

Background:

On December 6, 2006, FERC issued Municipality a three-year preliminary permit to study the feasibility of developing a hydropower plant. When the permit expired, Related Entities and two other unaffiliated entities filed competing applications for preliminary permits. Related Entities also filed a notice of intent to file a license application. FERC denied Related Entities’ applications based on its finding that the Related Entities improperly collaborated with Municipality to obtain an unfair advantage over the other applicants. FERC subsequently denied Related Entities’ request for rehearing.

Discussion:

The FPA requires FERC to give preference to municipalities in granting preliminary permits and original licenses for water power plants. Where non-municipal entities use a municipality’s preference to obtain a competitive advantage over other non-municipal applicants, FERC will dismiss the application. In addition, to remedy the misuse of municipal preference, FERC will generally prohibit the violating entities from applying for one year.

What makes this docket peculiar is that the Related Entities were wholly owned by Municipality. Furthermore, they were created pursuant to guidance issued by the U.S. Department of Treasury (the “Treasury”) under its ARRA Section 1603 program, which provides grants for the development of certain renewable and clean energy projects. Under Section 1603, governmental entities are ineligible to receive the grants. However, the Treasury has issued guidance that, under certain circumstances, permits governmental entities to create wholly owned, taxable subsidiaries that are eligible to receive Section 1603 grants.

Among other things, Municipality argued that it was merely following guidance issued by the Treasury. In other words, Municipality’s creation of, and collaboration with, Related Entities was the only means to obtain funding under ARRA. FERC was not persuaded by this argument. Citing other FERC precedent, it reasoned that the motive behind the parties collaboration was immaterial.

FERC also hinted that it disagreed with the Treasury’s guidance concerning Related Entities’ eligibility for Section 1603 grants. FERC quoted Section 1603’s prohibition on governmental entities or their instrumentalities from receiving grants. It concluded by noting, “it is not clear whether the [Related Entities] would qualify for funding under this Act.” At the least, FERC expressed skepticism of the Treasury’s guidance.

Conclusion:

In short, by complying with the Treasury’s guidance in an attempt to secure funding through ARRA Section 1603, Municipality and Related Entities ran afoul of FERC’s interpretation of the FPA’s municipality preference rule. Governmental entities seeking to obtain ARRA Section 1603 grants must be wary of this latest ruling by FERC when they allow non-governmental entities to obtain an advantage over other competing applicants.

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