Fall River Rural Electric Cooperative (Fall River) petitioned the Ninth Circuit for review of two orders issued by the Federal Energy Regulatory Commission (FERC) in response to Fall River's license application to construct and operate a new hydroelectric power facility on the Madison River in Montana. In denying Fall River's application and request to hold the proceedings in abeyance, as well as Fall River's request for a rehearing, FERC concluded the proposed project was barred by section 6 of the Federal Power Act (FPA).[1] The Ninth Circuit denied Fall River's petition for review, finding substantial evidence in support of FERC's factual determination under the FPA, and concluding FERC's orders were consistent with the agency's precedent and regulations.

Hebgen Dam, a water storage and release facility, is one of nine developments that comprise the Missouri-Madison Hydroelectric Project on a 324-mile stretch of river in southwest Montana. The project is licensed by FERC to Pennsylvania Power & Light Montana (PPL). In 2001, FERC granted Fall River a preliminary permit to determine the feasibility of constructing and operating a hydroelectric facility at Hebgen Dam. PPL did not object to the preliminary permit and entered into negotiations with Fall River regarding a possible site use and operations agreement. Fall River submitted its final license application for the proposed Hebgen Dam project in May 2004. The application proposed several changes and additions to the existing Hebgen Dam, which included the construction of a new powerhouse and several modifications to the existing structure of the dam.[2] Fall River estimated that construction would take approximately three months.

Under section 6 of the FPA, FERC cannot substantially alter existing, licensed projects without the consent of the licensee.[3] In light of section 6 of the FPA, FERC initially agreed to continue processing Fall River's final license application based on the understanding that Fall River and PPL were actively negotiating an agreement for the construction and operation of the proposed facility. After PPL terminated all negotiations with Fall River, however, FERC dismissed Fall River's license application. Upon review, FERC concluded section 6 of the FPA barred the proposal because the project would substantially alter PPL's licensed project, and Fall River did not obtain the requisite consent from licensee PPL. FERC also denied Fall River's request to hold the application in abeyance because PPL expressed no intent to resume negotiations with Fall River. Subsequently, a three-person panel of FERC commissioners denied Fall River's request for rehearing, concluding the project required substantial physical alterations and would create potential operating problems related to the joint-use of the Hebgen Dam site.

In its petition for review, Fall River argued that 1) FERC's orders denying its license application and request to hold the proceedings in abeyance were not supported by substantial evidence, 2) FERC's decision was inconsistent with the agency's precedent, regulations, and issuance of a preliminary permit, and 3) FERC failed to consider whether PPL impliedly consented to the project. The Ninth Circuit reviewed FERC's decision under the Administrative Procedure Act (APA)[4] to determine whether FERC's action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.[5] When FERC's findings are supported by substantial evidence, the Ninth Circuit accepts FERC's factual findings as conclusive.[6]

Reviewing Fall River's petition, the Ninth Circuit first rejected Fall River's contention that its proposal would not materially alter PPL's existing project works, operations, or power generation. The court noted that an "alteration" under section 6 of the FPA is a factual issue determined on a case-by-case basis,[7] but Fall River and FERC agreed that to violate the FPA, a "proposed project must substantially alter an existing license."[8] FERC concluded that Fall River's project involved substantial physical alterations to the existing facility, including installation of new gates on the intake tower, excavation of a large area of the dam, reconfiguration of the outlet conduit, and installation of a valve house and new penstock. FERC also determined the "potential for 'joint-use operational problems [between PPL and Fall River] would be a substantial alteration of the existing license.'"[9] The Ninth Circuit explained that such actions "fundamentally change the physical characteristics and operation of the Hebgen Development," and that "Fall River apparently [did] not appreciate the cumulative impact of its proposed project."[10] Accordingly, the Ninth Circuit concluded that FERC's factual findings regarding the physical alterations and operational interference were supported by substantial evidence.

The court next considered whether FERC's decision on Fall River's application was consistent with the agency's prior precedent. First, the Ninth Circuit examined FERC's analysis of three cases where the agency found the applicant proposed a substantial alteration to existing licenses.[11] In Niagara Mohawk Power Corporation,[12] FERC rejected a license application to modify an existing development because the project required significant construction and alterations of the existing licensed project, which would effectively lead to the closure of the original facility.[13] The Ninth Circuit reasoned that Fall River's proposal likewise required "more than an insubstantial amount of construction."[14] In a second case, FERC denied an application that proposed modifying an existing dam and powerhouse because it involved significant structural modifications to the project dam and project works adjacent to the dam.[15] Although Fall River did not ask to modify an existing powerhouse, the Ninth Circuit determined Fall River hoped to construct a new powerhouse and make other alterations to the Dam. Finally, FERC considered the case of Green Island Power Authority (Green Island),[16] in which a proposal to construct a new dam was denied because it would render an existing project inoperable.[17] In examining Green Island, the Ninth Circuit concluded FERC only used Green Island as an "extreme example of a substantial alteration" and did not imply that Fall River's proposal needed to be as extreme as the Green Island proposal to amount to a substantial alteration.[18]

The Ninth Circuit also reviewed FERC's evaluation of earlier decisions where the agency found no substantial alteration to existing licenses. In Water Basin Water Conservancy District,[19] FERC found no substantial alteration to a license to construct a penstock under an existing canal because construction was only expected to take three to seven days and would result in no physical interference to prior licensees once finished.[20] In contrast, the Ninth Circuit determined Fall River's construction project was expected to take eight months and would "fundamentally alter the flow of water through Hebgen Dam."[21] Additionally, in Howard W. Bair,[22] FERC granted a preliminary permit that proposed extending an existing pipe by forty feet.[23] The Ninth Circuit distinguished Bair, concluding Bair involved only a preliminary permit and small-scale changes, whereas Fall River's proposals were "far more extensive."[24] Finally, in two prior cases, FERC concluded that a 0.3% reduction in power generation did not constitute a substantial alteration.[25] Fall River argued that similarly, its proposed project would not reduce power generation at Hebgen Dam. However, the Ninth Circuit noted that while power generation would not be reduced at Hebgen Dam,[26] the two earlier cases were distinguishable because they lacked "physical modifications comparable to those now proposed by Fall River."[27] Reviewing the two lines of prior precedent, the Ninth Circuit concluded FERC's orders regarding Fall River were consistent with the agency's past decisions and therefore entitled to deference.

The court next considered Fall River's assertion that FERC's orders were inconsistent with its regulations and the agency's issuance of a preliminary permit. Fall River argued that because its final license application was substantially identical to the preliminary application granted by FERC, FERC's denial of its final license application constituted a change in policy that required a reasoned explanation.[28] The Ninth Circuit noted that FERC's practice is to issue preliminary permits unless there is a clear indication that a project would involve impermissible alterations to an existing license, [29] or there is a "permanent legal barrier" to the proposed project.[30] Further, FERC's issuance of a preliminary permit does not indicate the agency made a decision on the merits of a license application.[31] In rejecting Fall River's argument, the Ninth Circuit concluded FERC's orders were consistent with its regulations because it was not clear at the time of the preliminary permit application that Fall River's project would substantially alter PPL's license, nor was there any indication that a permanent legal barrier would preclude issuance of the final permit.

Lastly, the Ninth Circuit rejected Fall River's argument that FERC failed to consider whether PPL impliedly consented to the project. The court found no basis to require FERC to thoroughly analyze each and every argument in its decision-making process, particularly in Fall River's case because section 6 of the FPA "unequivocally" states that FERC may only alter a license if the licensee consents to the change. Further, Fall River did not cite any cases showing there could be an implied agreement by the licensee to the permit changes. Finally, the court deemed the consent argument waived because Fall River did not specifically argue the issue in its opening brief.

In sum, the Ninth Circuit denied Fall River's petition for review. The court concluded that substantial evidence supported FERC's determination that the proposal would substantially alter PPL's license, that FERC's orders were consistent with the agency's precedent and issuance of a preliminary permit, and that PPL did not impliedly consent to Fall River's proposal.