May the holder of a Federal Energy Regulatory Commission exemption for a hydropower project revise its authorized installed capacity by altering its headgate, in order to qualify for a state net metering program that could boost the project's financial viability? In at least one recent case, the Commission said no, despite recognizing "the difficult financial obstacles often faced by small hydropower operators". Instead, the Commission suggested that the project sponsor ask the New Hampshire Public Utilities Commission for state-law relief. The case illustrates current U.S. energy policy dynamics, including tensions between federal and state regulatory programs.
At issue is KC Pittsfield LLC's Celley Mill Project on Eastman Brook in New Hampshire. The project operates pursuant to an exemption from licensing, originally issued by the Commission in 1984, and includes a concrete diversion structure, head pond, penstock, powerhouse containing a 130-kW turbine generator, transmission line, and appurtenant facilities. Earlier this year, the exemption holder asked the Commission to approve a reduction of the project's authorized installed capacity to 100 kW.
According to that request, reducing the authorized installed capacity to 100 kW would allow the project to qualify as a small customer-generator under New Hampshire's group net metering law, a reclassification which the exemptee said "would substantially increase the project's financial viability." State retail programs such as group net metering can offer greater value for project output, relative to federally jurisdictional wholesale markets, if projects are eligible. In this case, the exemptee stated that it was authorized in 2016 for group net metering as a large customer-generator, it would need an installed generating capacity of 100 kW or less to qualify as a small customer-generator (and therefore to produce more valuable net metering credits). In support of its request, the company also described engineering changes to the project's headgate, designed to reduce its ability to generate power.
But the Director of the Commission's Division of Hydropower Administration and Compliance denied this request, explaining that the Commission's definition of authorized installed capacity is based on the generator or turbine unit's specifications, and that the work described by the company did not affect these items. The exemptee requested rehearing of this denial, arguing that the Division Director had erred by not considering the project's financial viability or the turbine's limited hydraulic capacity. The exemptee cited a 1996 Commission staff delegated-authority order as an example in which a turbine's limited hydraulic capacity was considered in determining a project's installed capacity.
On rehearing, the Commission upheld the denial of the exemptee's request. In its order, the Commission noted that since 1995, its annual charge regulations have defined "authorized installed capacity" as the lesser of the ratings of the generator or turbine units. The Commission also noted that its rules define turbine rating in a way that considers physical alterations to the unit itself, but that does not reflect site-specific circumstances or changes thereto, "to avoid having to calculate what would essentially be project-by-project adjustments to turbine ratings to reflect the myriad of possible site-specific hydraulic conditions that can affect the turbine’s performance." In a footnote, the Commission addressed the 1996 order cited by the exemptee, noting that "orders issued by Commission staff under delegated authority are not binding on the Commission" and that it appears that the result in that "staff order issued over two decades ago, is inconsistent with current Commission policy."
The Commission noted that not only is this request "contrary to Commission policy", it is also based on a reduction in input that [the exemptee] admits is only theoretical". The Commission described the exemptee's request in this case as "exactly the type of site-specific adjustment that the Commission sought to avoid when determining a project’s installed capacity for FPA purposes. As we have previously explained, such case-specific precision is neither necessary in the FPA context nor administratively feasible."
Addressing financial viability, the Commission noted that "a project’s financial viability plays no role in the Commission’s determination of a project’s authorized installed capacity." The Commission also held that "a project’s eligibility to participate in a state net metering program is immaterial to the Commission’s determination of authorized installed capacity... Although we recognize the difficult financial obstacles often faced by small hydropower operators, we believe that the state utility commission — here, the New Hampshire Public Utilities Commission — is the appropriate venue to advocate for a site-specific capacity adjustment for eligibility purposes under a state net metering program."
This situation illustrates several dynamics in present energy policy. States are enacting laws and adopting rules establishing programs like net metering, to incentivize particular types of electric generation resources. Many of these programs are open to renewable resources such as small hydropower, although the eligibility criteria vary by jurisdiction (and tend to change over time). Some programs allow existing resources to qualify, but in some cases participation will require navigating a patchwork of regulatory structures, with risks including ultimate ineligibility. Federal regulators can be indifferent to some state-law programs (or even hostile if they are federally preempted). However, where FERC-licensed or exempt projects can qualify for these state-law programs, they can often access retail-level revenue streams of greater value and certainty than wholesale markets typically offer. These dynamics will continue to drive small hydro projects and other existing resources that could qualify towards net metering.
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