On July 2, 2021, the U.S. Court of Appeals for the Fourth Circuit waded into the controversy surrounding proper interpretation of the one-year deadline for state action contained in Section 401 of the Clean Water Act. Its opinion in North Carolina Department of Environmental Quality v. Federal Energy Regulatory Commission, 2021 WL 2763265 (4th Cir. July 2, 2021), interprets Section 401’s deadline with considerably more leniency toward the states than either of the other circuits that have recently addressed the issue. Regulated entities seeking federal discharge permits have to carefully assess the timeline for state involvement in their permits and consider outreach to shape acceptable state water quality guidelines under Section 401.

Key Takeaways

• Section 401 of the Clean Water Act authorizes states and tribes to impose water quality requirements on any federal license that would create a discharge into the waters of the state or tribe. The state certification requirement is therefore a key hurdle for any project sponsor seeking a federal license that might impact water quality.

• In contrast with recent decisions from other federal circuit courts, the Fourth Circuit’s decision interprets Section 401’s one-year shot clock in a manner that gives states and those seeking federal licenses considerably more leeway to withdraw and resubmit requests for certification from states and tribes.

• The Fourth Circuit suggests, but does not decide, that the state or tribe could extend the one-year deadline by taking non-final action on a certification request within the one-year deadline. If widely adopted, this interpretation could result in significant project delays.

• At least in the short term, the Fourth Circuit may create more confusion about the rules governing Section 401’s one-year shot clock.

Background

Section 401 of the Clean Water Act broadly authorizes states and tribes to approve, reject, or impose conditions on federally-permitted projects that may result in a discharge into state or tribal waters. But Section 401 imposes a one-year shot clock, providing that if the state or tribe “fails or refuses to act on a request for certification, within a reasonable period of time (which shall not exceed one year) after receipt of such request,” the state’s (or tribe’s) authority to act “shall be waived.” This seemingly straightforward requirement has generated considerable controversy, including recent opinions from the D.C. Circuit and Second Circuit that strictly interpret the one-year shot clock.

The Fourth Circuit case arises from efforts to obtain a license to operate the Bynum Hydroelectric Project, a small project on the North Carolina’s Haw River. A license from the Federal Energy Regulatory Commission (FERC) is required to operate a hydroelectric project under Part I of the Federal Power Act if the project is on navigable waters of the United States or would affect interstate commerce. Because a federal license is required and the project will result in a discharge into North Carolina waters, the state certification requirements of Section 401 are triggered, requiring the licensee to obtain a Section 401 certificate from North Carolina as a prerequisite to obtaining a FERC license.

The Bynum licensee initially filed an application for a Section 401 certification with the North Carolina Department of Environmental Quality (NCDEQ) on March 3, 2017. NCDEQ informed the licensee that it could not act until it received an environmental assessment. After FERC issued its Environmental Assessment on October 25, 2018, the licensee submitted the document to NCDEQ. NCDEQ informed the licensee that, because of notice-and-comment requirements, it would not be able to complete its certification process until after March 3, 2018, the expiration of the one-year period initiated by the March 3, 2017, application. In response, on February 11, 2019, the licensee withdrew and resubmitted its Section 401 application and asked NCDEQ to puts its review on hold until July 23, 2019.

On September 20, 2019, the NCDEQ issued a Section 401 certificate imposing several conditions on the Bynum project that NCDEQ believed were necessary to ensure compliance with North Carolina water quality standards. On the same day, FERC issued an order granting a license to the Bynum project. In the order, FERC concluded that North Carolina had waived its rights to certify the project under Section 401 because it had not acted within one year of the initial application, filed on March 3, 2017. In reaching this conclusion, FERC relied primarily on the D.C. Circuit’s 2019 opinion in Hoopa Valley Tribe v. FERC, 913 F.3d 1099 (D.C. Cir. 2019), which held that the FERC licensee of a series of dams on the Klamath River in Oregon and California could not extend Section 401’s one-year deadline by repeatedly withdrawing and resubmitting the same application in order to accommodate ongoing negotiations over the fate of the Klamath River dams. FERC reasoned that, under Hoopa Valley, the licensee’s withdrawal and resubmittal of its application did not restart Section 401’s one-year shot clock.

The NCDEQ challenged FERC’s conclusion on appeal and the Fourth Circuit reversed and remanded the FERC license with instructions to include the conditions imposed by the NCDEQ under Section 401. To reach this conclusion, the Fourth Circuit reads Hoopa Valley very narrowly, characterizing Hoopa Valley as “flowing from a fairly egregious set of facts,” arising from a “written agreement” between the state agencies and the license to “year after year, to take no action at all on the applicant’s § 401 certification request.” The Court concluded that, although the Bynum licensee twice withdrew and resubmitted its application with NCDEQ, there was no “contractual agreement for agency idleness.” In the absence of such explicit collusion between the licensee and the state agency, the Court concluded that Hoopa Valley does not apply. The Court also suggested that Section 401’s language providing that state authority is waived if the agency “fails or refuses to act” within one year means that the agency can take some action other than either finally granting or finally refusing the certification request, and could take “longer than a year to make its final decision.”

Rather than explicitly adopting this novel reading of the statute, however, the Court rejected FERC’s conclusions primarily on factual grounds, concluding that the evidence did not support FERC’s finding that there was a “coordinated withdrawal and resubmission scheme.” Rather, the licensee voluntarily withdrew its application after learning that NCDEQ would be unable to act without the environmental assessment, which would likely require the NCDEQ to deny the application. In these circumstances, the Court concluded, a licensee may withdraw its application to avoid rejection and resubmit the application. If it does so without explicitly colluding with the agency, the Court concluded, Hoopa Valley does not apply and the beginning of the one-year shot clock is reset when the application is resubmitted.

Conclusion

While the Fourth Circuit’s decision creates some welcome leeway for applicants for federal licensees to avoid rejection of Section 401 certification applications where the state agency threatens to reject an application because the one-year clock is running out, it creates significant uncertainty. In particular, it is unclear whether courts in other circuits will adopt the suggestion that, if carefully parsed, Section 401’s language allows the state agency to take interim action that effectively extends the one-year deadline for final action. In addition, the Court’s decision is difficult to square with recent Second Circuit decisions concluding that an initial Section 401 application, even if incomplete, triggers running of the one-year clock (New York State Department of Envt’l Cons. v. FERC, 884 F.3d 450 (2^nd Cir. 2018), and that the state agency waives its rights under Section 401 even if it seeks to extend the one-year deadline to accommodate administrative processes like statutorily-mandated notice-and-comment periods (New York State Department of Envt’l Cons. v. FERC, 991 F.3d 439 (2^nd Cir. 2021). On the other hand, the decision provides some clear limits on Hoopa Valley that, if adopted by other courts, will effectively limit that decision to its facts.