The Federal Energy Regulatory Commission (FERC) has issued an order proposing a $15 million civil penalty in response to the failure of a licensee to respond to FERC dam safety orders in the wake of the failure of the Edenville dam and downstream FERC-licensed Sanford Dam (Project No. 2785) in Michigan in May 2020 (see June 1, 2020 edition of the WER).  The December 9, 2020 Order to Show Cause and Notice of Proposed Penalty followed months of FERC orders and directives to the licensee related to the catastrophic failure of the two dams, which resulted in the evacuation of 10,000 people, an estimated $190 million in economic damages to local residents, and $55 million in response costs, prompting Governor Gretchen Whitmer to request a disaster declaration from the federal government.

Directly following the dam breaches, the FERC Division of Dam Safety and Inspections (D2SI) ordered the licensee to form an independent forensic investigation team to assess the Sanford Dam and the two upstream dams also operated by the licensee, the Secord Project (Project No. 10809) and the Smallwood Project (Project No. 10810).  The licensee was also ordered to coordinate with the State of Michigan regarding the breach of the Edenville Dam, which was a FERC-licensed project until FERC revoked the license in 2018 in response to a 14-year history of extensive noncompliance.  FERC also directed the licensee to perform dam safety inspections at all three of its FERC-licensed dams, to remove debris that accumulated at the downstream Sanford Dam following the upstream dam failures, and to conduct a study of the stability of the shoreline around the Sanford reservoir (see July 21, 2020 edition of the WER).  According to the December 9 order, the licensee failed to comply with these directives.  In August 2020, following the licensee’s failure to show that the forensic team had begun its investigation, FERC contracted directly with the team to conduct the independent forensic investigation.

FERC’s December 9 order proposes a $15 million penalty under Section 31(c) of the Federal Power Act based on the licensee’s failure to abide by D2SI directives in violation of both Standard Article 4 of the FERC license and Section 12.4(b) of FERC’s dam safety regulations, both of which subject hydropower projects to the supervisory authority of the D2SI Regional Engineer.  In determining the amount of the proposed penalty, FERC considered the $23,331 maximum per-day, per-violation penalty for violations occurring prior to 2021 established under the Federal Civil Penalties Inflation Adjustment Act, as well as the factors set out in 18 C.F.R. Section 385.1505 that FERC must consider in determining the amount of a proposed penalty.  According to FERC, “a substantial penalty is justified” because the dam safety violations risked further failure of project works and shoreline and put the surrounding communities at risk of additional flooding and harm to life and property.  FERC also cited the seriousness of the violations, the licensee’s failure to take remedial efforts and the licensee’s “elevat[ion of] its own economic interests (e.g., avoidance of professional fees) above the safety of its neighbors.”  If the penalty is assessed, it would be the largest FERC dam-safety related penalty since the overtopping of the Taum Sauk upper reservoir in Missouri in December 2005, which resulted in a $15 million settlement, including a $10 million civil penalty and a $5 million escrow for project-related improvements.

A significant complication facing FERC in determining whether to move forward with the civil penalty is the fact that the licensee for the three FERC projects implicated in the violations declared bankruptcy on July 31, 2020.  Effective that same date, Midland and Gladwin Counties, where the projects are located, acquired the properties and flowage rights associated with the projects through condemnation proceedings.  The counties have appointed the nonprofit Four Lakes Task Force to serve as its designated representative for federal and state coordination and funding in connection with the recovery and restoration of the three lakes and the Edenville lake formerly licensed by FERC.

In the weeks since FERC issued its proposed penalty order, both the Four Lakes Task Force and the bankruptcy trustee have objected to the amount of FERC’s proposed penalty.  The Task Force noted that the penalty would be less than 5% of the cost to restore the environment and lakes and that the penalty “may be too late and will not benefit the Four Lakes community.”  The bankruptcy trustee explained that the assets available for flood victims who are creditors in the bankruptcy will be insufficient to make them “even close to whole” and that a large penalty that is not subordinated to the other claims in the bankruptcy would “wreak havoc on the confirmation of the Chapter 11 plan,” which is scheduled to be confirmed on January 25, 2021.  As such, the trustee requested FERC to withdraw the penalty altogether or quickly impose a nominal penalty and request that the penalty be given lower priority than other claims in the bankruptcy proceeding.

The licensee submitted a response to FERC’s order to show cause on January 8, 2021, claiming that the condemnation of the project properties by the counties constructively terminated the project license, thus removing the licensee from FERC jurisdiction.  The licensee further asserted that imposing a civil penalty would serve no public purpose and would only harm innocent creditors, most of whom are flooding victims.

FERC’s order is available here.