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Parties Involved:
Farmington River Power Company
Petitioner
Federal Energy Regulatory Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 9, 1996 Decided January 10, 1997

No. 95-1504

FARMINGTON RIVER POWER COMPANY,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

John N. Estes, III argued the cause and filed the briefs for petitioner.

Janet K. Jones, Attorney, Federal EnergyRegulatoryCommission, argued the cause for respondent.

With her on the brief was Jerome M. Feit, Solicitor.

Before: GINSBURG, RANDOLPH and TATEL, Circuit Judges.

Opinion of the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: The basic issue in this case is whether the Federal Energy Regulatory

Commission may charge petitioner, an operator of a nonlicensed dam, for what are known as

"headwater benefits"energy benefits a dam receives from the operation of an upstream damfor

periods prior to the date on which the Commission notified petitioner of its potential liability.

Because we hold that section 10(f) of the Federal Power Act authorizes FERC to impose headwater

charges only for periods following individual notice, we vacate the Commission's Order and remand

for reconsideration. We also conclude that the Commission, in violation of section 27 of the Power

Act, improperly charged petitioner for releases of water to which petitioner had a vested right under

state law.

I

This case involves three dams on the Farmington River, a tributary of the Connecticut River

flowing from Massachusettsthrough the New Hartford, Connecticut area. Owned by petitioner, the

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Farmington River Power Company, and built in 1925 near the river's mouth, Rainbow Dam supplies

power to Farmington's parent company, the Stanley Works. Because Rainbow Dam is not on a

navigable waterway, it did not originally need a license from the Federal Power Commission, FERC's

predecessor. In 1972, the Second Circuit reversed FERC's attempt to bring the dam under license,

concluding that requiring a license for a dam that predated the licensing requirement would exceed

FERC's authority. Farmington River Power Co. v. FPC, 455 F.2d 86 (2d Cir. 1972).

The Metropolitan District, a Connecticut municipal corporation, owns Goodwin Dam, which

was completed in 1960 and islocated about forty-five miles upstreamfromRainbow Dam. The Army

Corps of Engineers constructed the third dam, Colebrook, in the pool of water Goodwin Dam

created. Colebrook Dam began operating in 1969. The Metropolitan District now operates

Colebrook in conjunction with Goodwin Dam.

Hydropower plants benefit from even and predictable flows of water, which allow them to

operate continuously at higher capacity. Through storage and controlled release of water, upstream

dams and reservoirs create such "headwater benefits." To encourage the construction of these

flow-control dams, Congress included section 10(f) in the Federal Water Power Act of 1920,

requiring licensed power projects receiving headwater benefits to pay to the upstream providers

equitable charges as determined by the Federal Power Commission. Federal Water Power Act, ch.

285, sec. 10(f), 41 Stat. 1063, 1070 (1920). In 1935, Congress amended the Act to authorize the

Commission to assess nonlicensed dams for headwater benefits. Federal Power Act, ch. 687, tit. II,

§ 206, 49 Stat. 803, 843-44 (1935) (codified as amended at 16 U.S.C. 803(f) (1994)).

Almost two decades after the construction of Colebrook Dam, FERC informed Farmington,

by letter dated January 11, 1988, that it was "conducting a headwater benefits study of the

Farmington River Basin under section 10(f) of the Federal Power Act" and requested information

about flow and power generation for the period from 1975 to 1986. Farmington supplied the

requested information. After conducting a study using a complex computer model, FERC issued a

preliminaryreport inDecember 1991, estimating headwater benefitsto Farmingtonbetween1972 and

1991 at $682,667. Following a period for comment and discussion, the Commission issued a final

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report in September 1994, along with an order assessing Farmington $943,835, including $68,759

for the cost of conducting the headwater benefits study. Farmington River Power Co., 68 FERC ¶

62,291 (1994).

Farmington sought rehearing, claiming that it had no notice of charges prior to the study, and

that it had a vested right to the release of the water in question. The Commission denied rehearing

on both grounds, but granted rehearing asto Farmington's argument that the statute did not authorize

charging nonlicensees for the costs of the study, and vacated that portion of its initial Order.

Farmington River Power Co., 72 FERC ¶ 61,119 (1995).

II

We begin with the basic issue in this case: whether section 10(f) charges may include

assessments for headwater benefits received prior to the notice called for by this section. With

respect to nonlicensed dams, section 10(f) provides:

Whenever anypower project not under license is benefited bythe construction

work of a licensee or permittee, the United States or any agency thereof, the

Commission, after notice to the owner or owners of such unlicensed project, shall

determine and fix a reasonable and equitable annual charge to be paid to the licensee

or permittee on account of such benefits, or to the United States if it be the owner of

such headwater improvements.

16 U.S.C. § 803(f) (1994). Relying on section 10(f)'s initial phrase, the Commission argues that

liability attaches "whenever" power projects receive benefits, whether before or after notice from

FERC. We disagree. Because the "whenever" phrase modifies only the verbs "shall determine and

fix," it specifies only when the Commission may determine and fix charges, not the period of liability.

Only "equitable" and "annual" directly modify the word "charge." Because requiring that charges be

annual has no significance for charges based on periods prior to notice, the word "annual" creates a

presumption of prospective charges.

The signal difference between this language concerning nonlicensed dams and the language

covering licensees reinforces our reading of the statute. As to licensed dams, the first paragraph of

section 10(f)specifiesthat "theCommission shallrequire as a condition ofthe license that the licensee

so benefited shall reimburse" the owner of an upstream dam for headwater benefits. Id. Licensed

dams, then, have an affirmative duty to pay. The statute itself, as well as the explicit conditions of

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their licenses, puts licensed dams on clear notice of this duty. In contrast, nonlicensed dams have

neither an affirmative duty to pay nor licenses providing individual notice of the date from which

liability may accrue. Instead, section 10(f) directs FERC to fix an annual charge "after notice." Id.

Because Congress thus clearly contemplated only prospective annual charges, we need not defer to

the Commission's contrary interpretation. See MCI Telecomm. Corp. v. AT&T, 114 S. Ct. 2223,

2231 (1994) ("[A]n agency's interpretation of a statute is not entitled to deference when it goes

beyond the meaning that the statute can bear."); Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837, 842-43 (1984) ("If the intent of Congress is clear, that is the end of the

matter.").

Even if we thought the language of the statute ambiguous, we would not defer to the

Commission, because we find itsinterpretation ofsection 10(f) unreasonable. See id. at 843-44. As

interpreted by the Commission, nothing in section 10(f) would prohibit it from imposing retroactive

liability all the way back to 1935, the year in which Congress amended section 10(f) to cover

nonlicensed dams. Although the Commission limits retroactive liability to 25 years, Louisville Gas

& Elec. Co., 58 FERC ¶ 61,338, ¶ 62,094 (1992), it does so simply as an exercise of its equitable

discretion, not because it believes the statute so requires.

The Commission's interpretation of section 10(f) is particularly unreasonable in view of the

peculiar nature of headwater benefitsliability. Unlike most regulatory statutes, where liability accrues

from the actions of regulated parties, here liability flows solely from the actions of others, i.e.,

operators of upstream dams. As the Commission acknowledges, it is difficult for a project owner

even to know whetherits damisreceiving headwater benefits. Under these circumstances, we cannot

believe Congress meant to impose pre-notice liability on owners of nonlicensed dams such as

Farmington.

Our holding that theCommissionmaynot impose pre-notice liability raises a related question:

What action by the Commission constitutes the notice after which it may impose headwater benefits

liability? In this case, there are three possibilities: the Commission's initial notification of Farmington

in January 1988 that it was beginning a headwater benefits study; the Commission's issuance of its

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preliminary assessment in December 1991; and the Commission's release of its final report in

September 1994. Although Farmington suggests that the critical event for purposes of notice was

the issuance of the preliminary assessment in December 1991, the Commission understandably has

not taken a position on this issueafter all, it has argued that it may extend liability back to 1972.

Because selection ofthe proper date for the beginning ofliability involves questions both ofstatutory

interpretation and of agency policy, we think it best to allow the Commission to formulate its view

about this issue on remand.

III

We turn next to Farmington's argument that, in violation ofsection 27 of the Power Act, the

Commission has assessed it for water to which it had a vested right under state law. Section 27

provides: "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." 16 U.S.C. § 821 (1994).

Beginning in 1911, in a series of agreements with the Metropolitan District and its

predecessor, the Board of Water Commissioners of the City of Hartford, Farmington acquired rights

to a regulated flow of water. Farmington acquired these rights to offset certain diversions of water

in various tributaries of the Farmington River. In 1949, the Connecticut legislature passed Special

Act No. 444, authorizing the Metropolitan District to construct Goodwin Dam. An Act Increasing

the Powers of the Metropolitan District, Respecting Water, 1949 Conn. Spec. Acts 1013. Special

Act No. 444 specifically authorized the District, using water in excess of amounts needed to supply

the local water system, to regulate the river's flow in order to compensate riparian owners for the

dam's diversion of water. Id. § 3. The Special Act also required a minimum flow of 50 cubic feet per

second. Id. § 4. In 1961, the Metropolitan District and the riparian owners, including Farmington,

executed a Riparian Agreement which reaffirmed the 50-cubic-feet-per-second minimum, and

instituted a yearly minimum flow of 21.7 billion gallons. The Agreement expressly required the

District to continue these releases even if the District and the United States were to construct an

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upstream dam.

In 1963, Connecticut authorized the District to contract with the federal government to share

in the benefits and costs of Colebrook Dam. The authorizing act expressly provided, "The powers

granted by this act shall not affect ... the obligation of the said district to maintain at all times ... a

minimum flow ... as provided in [Special Act No. 444]." An Act Amending the Charter of the

Metropolitan District, Concerning the Colebrook River Dam, 1963 Conn. Spec. Acts 98. In 1965,

the District and the United States entered into the Colebrook Agreement, which granted the District

permanent rights to certain water releases from Colebrook Dam.

Farmington claims that Special Act No. 444 and the 1961 Riparian Agreement create vested

rights under state law that section 27 of the Power Act prohibits FERC from derogating. According

to the Commission, whatever rights Farmington may have in water from Goodwin Dam, it has no

right to water from Colebrook Dam. The Commission's argument misses the point. The question

is not whether Farmington hasrightsto water from Colebrook Dam, but whether it has vested rights

in water from Goodwin. We think it clearly does. Under the Special Act and the Riparian

Agreement, Farmington has vested rights to 21.7 billion gallons of water per year, and to a certain

amount of control over the release of that water, free of charge. The Commission's effort to charge

Farmington for water covered in SpecialAct No. 444 and theRiparianAgreement thusinterferes with

Farmington's vested rights. Because the District had no authority to enter into an agreement with the

federal government that would impair Farmington's rights under Special Act No. 444, the

government's construction of Colebrook Dam cannot negate Farmington's vested rights.

The Commission claims that its headwater benefits study did in fact take account of

Farmington's preexisting rights, but we have reviewed the Commission'sstudy ourselves and can find

no indication that this is so. At oral argument, we asked Commission counsel to point to any

statement in the study showing that the Commission took Farmington'srightsinto account or that the

assessment of benefitsfromColebrook Damspecificallyexcluded the benefits derived fromGoodwin

Dam. Unable to identify any such reference, counsel nevertheless assured us that it was "absolutely

safe to assume" that benefits from Goodwin were excluded. Yet the record is to the contrary. The

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onlyreferencesto Goodwin Damin the Commission's entire finalreport treat it as part ofColebrook's

reservoir system. Moreover, the Commission's only response in the final report to Farmington's

assertion of preexisting rights was a denial of the existence of any such rights:

Water flows through the Farmington River Basin are subject to flowage rights and

waterstorage agreements among numerousriparian owners.... Farmington maintains

that many of these releases should be considered in the headwater benefits

determination and excluded from the energy gains calculations.... The Commission's

staff evaluationwas conducted based on section 10(f) ofthe FederalPower Act which

creates a statutory liability to reimburse the United States for headwater benefits

received. No other contractual or other right to the continued enjoyment of this

benefit arises by virtue of this statutory obligation.

DIVISION OF PROJECTCOMPLIANCE& ADMIN.,FED.ENERGY REGULATORY COMM'N,FINALREPORT:

HEADWATER BENEFITS DETERMINATION: FARMINGTON RIVER BASIN 31 (1994) (emphasis added).

We conclude that in assessing Farmington for the release of water covered by Special Act No. 444

and the 1961 Riparian Agreement, the Commission has violated section 27 ofthe Federal Power Act.

Finding the Commission's Order on Rehearing in error on both the liability period and the

liability amount, we vacate and remand for further proceedings consistent with this opinion.

So ordered.

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