State Takeover Analysis

After digging through the documents and talking (and emailing) with those who are for and those who are against, here is my opinion on the proposed State takeover of the Yadkin Project. Now, I am not a lawyer and have not read ALL of the Federal Power Act, but I think I am pretty close on how things will turn out. Let me know if you think I missed something that would make a difference.

There several issues here. Following is my summary:

1. Is there legal basis for taking the Yadkin Project? – Yes
2. Was the request to take it filed on time? – No
3. Is there legal basis to continue even though the request was filed “out of time”? – Yes
4. What is the cost to the State to take it (if they could)? – $25 to $80 million plus severance damages as determined by the FERC.
5. Does the State have a case if the motion to take it was filed on time? – Possibly
6. Does the State have a case since the motion was filed out of time? – Unlikely
7. What does this all mean to us, the residents, owners and users of Badin Lake? – Delay in getting the new license approved and what that implies.
   

Legal basis for taking the Yadkin Project
Those who are for the takeover don’t want it being called a “takeover.” They prefer to use the word “recapture.” They want you to believe that the Yadkin Project originally belonged to the State and that they are just trying to take it back from Alcoa. But the relevant section in the Federal Power Act (U.S. Code Collection, Title 16, Chapter 12, Subchapter I— http://www4.law.cornell.edu/uscode/16/usc_sup_01_16_10_12_20_I.html) is titled “§ 807. Right of Government to take over project works.” The Act states “…the right of the United States or any State or municipality to take over, maintain, and operate any project licensed under this chapter at any time by condemnation proceedings upon payment of just compensation is expressly reserved.” So, yes, there is a legal basis for the State to take over the Yadkin Project.

The request to take the Yadkin Project was filed out of time
Section 807 starts out with “Upon not less than two years’ notice in writing from the commission the United States shall have the right upon or after the expiration of any license to take over and thereafter to maintain and operate any project or projects as defined in section 796 of this title……..” The license for the Yadkin Project expired on March 31, 2008, so the State’s request to take over the project is more than three years overdue.

Basis to continue even though the request was filed out of time
From the Code of Federal Regulations, Title 18, Chapter I -- FEDERAL ENERGY REGULATORY COMMISSION, DEPARTMENT OF ENERGY (http://www.law.cornell.edu/cfr/cfr.php?title=18&type=chapter&value=1) we get § 385.214 Intervention (Rule 214), (d) Grant of late intervention. “(1) In acting on any motion to intervene filed after the period prescribed under Rule 210, the decisional authority may consider whether:……” So, yes, the FERC says it is possible to file out of time and still proceed with an intervention.

Cost to take the Project
This gets murky. Proponents of the takeover say $25 million. APGI says $500 million. Big difference!

From § 807 (a) Compensation; condemnation by Federal or State Government:
“…upon the condition that before taking possession it shall pay the net investment of the licensee in the project or projects taken, not to exceed the fair value of the property taken,…” and “The net investment of the licensee in the project or projects so taken and the amount of such severance damages, if any, shall be determined by the Commission after notice and opportunity for hearing.”

Evidently, APGI estimated net investment at $25 million in its 2006 relicensing application to the FERC. APGI now says the net investment is $80 million and that FERC would award significant severance damages. APGI also talks about $240 million for required “upgrades.” It appears that – but I have not confirmed – the $240 million is estimated maintenance and upgrade costs over the 50 year license timeframe. But the $240 million does include the immediate cost to install aerators to restore the dissolved oxygen levels below the dams required for the water quality certification. It also appears that the $240 million is part of the $500 million thrown out by APGI but, again, I have not been able to confirm that.

[Clarification update from APGI – 4/14/09: The $80 million figure is the estimated investment as of 2005 and the $25 million figure is the $80 million amount reduced by depreciation. (I would expect APGI has both more investment and more depreciation over the last four years.) The $240 million is for capital expenditures for modernization expected over the next seven years, not 50 years. The $500 million amount is an estimate by APGI of fair market value for the Project.]

So there you have it. Somewhere between $25 and $250 million. It all depends on what the FERC would accept and award (if it gets that far).

Does the State have a case?
It’s interesting that section 807 of the Federal Power Act makes no mention of justification for government to take a project. But the following section (808 – New licenses and renewals) states “Any new license issued under this section shall be issued to the applicant having the final proposal which the Commission determines is best adapted to serve the public interest…” The State is claiming that they would serve the public interest better than APGI. Section 808 also lists several other criteria, not the least of which is “The plans of the applicant to manage, operate, and maintain the project safely.” The current state of the State’s plan is a bill introduced in the Senate. I don’t think the FERC would call that a plan.

The State’s sole justification for taking the Project is that the previous license to Alcoa was supported because the power was to be used to create local jobs (smelting aluminum at Badin), but that is no longer the case with this license. The power generated by APGI will be sold on the open grid and so may be sold anywhere, not just to support local industry. Acknowledging that the Federal Government has never exercised its right to take over a project, a footnote on page 4 in the state petition to FERC for intervention says:

“Nevertheless, this case is unique. The licensee is not regulated by the State as a public utility. Nor is the State aware of any other instance in the State where a licensee has secured a license, with the State’s active support, expressly to support the local community, and then abandoned the activity that brought about that benefit.”

But there is no mention in the State’s filing with the FERC about what it would do with the power generated (to create local jobs). And the Senate bill to create the trust to operate the Project for the State explicitly states that one of the powers and duties of the trust is “To manufacture, produce, and generate hydroelectric power using the waters of the Yadkin River, and to sell the hydroelectric power to utilities within and without the State of North Carolina.” So the State would be doing nothing different to create local jobs than APGI is doing. The only difference is that the profit of the hydropower generation would go to the state instead of the private (publicly owned) company that developed the Project. That appears to be the only way the State would serve the public interest better than APGI.

So the State may have a case before the FERC for taking the Project without cause. It all depends on how the FERC would rule on a government takeover where there is no clear rationale other than the State wanting the profits from the generation.

Any chance since the request was filed out of time?
No way. Although the FERC has procedures to permit filing an intervention out of time, such a motion must “show good cause why the time limitation should be waived” and several other criteria. The State’s reason for being late is stated in the filing: “The State recognizes that this motion is out of time; however, the opportunity to intervene through the normal channels predated the election of the current gubernatorial administration.” In other words it was filed (three years) late because the old governor didn’t do it.

Alcoa shut down the Badin Works in August of 2002. That’s the reason the State says they are opposing APGI getting the new license. The State had three and a half years, until March of 2006, to submit a timely filing for takeover. But now, three years after a timely filing was due: “NOW COMES the State of North Carolina, by and through Governor Beverly Eaves Perdue (the “State”), and moves: (i) to intervene out of time………” Sorry, I don’t think that will fly with the FERC.

What does this mean to the residents, owners and users of Badin Lake?
All this may further delay the FERC issuing a license to APGI. It was already delayed a year because of a procedural issue by the North Carolina Division of Water Quality (NCDWQ) in issuing the water quality certificate. That issue is now resolved and, technically, the NCDWQ could issue the water quality certificate, and it must issue it or say why not by May. Now the Governor wants to intervene and so it puts NCDWQ in an awkward position since it is the only thing holding up the FERC ruling on issuing the APGI license.

The new APGI license has many benefits to the people of North Carolina in general and to the residents, owners, and users of Badin Lake. APGI included a list of them in a flyer in the new pier permits that it just mailed out. We have only one problem with the APGI license, and that is with the Low Inflow Protocol (LIP) specification that requires Badin Lake to be lowered to five feet below full before the downstream flow of the river below Falls dam is reduced to begin conserving water in times of drought. As I have said before, I believe we have a good chance to get that modified after the license is issued.

…………………………Garry