September 9, 2013. On August 2, 2013, DENR’s Division of Water Resources denied a Section 401 water quality certification for the relicensing of Alcoa’s four hydroelectric dams on the Yadkin River. (See an earlier post for background on 401 Certifications.) The denial letter did not cite any water quality basis for denying the 401 Certification. Instead, the letter referred to a lawsuit filed the same day by the N.C. Department of Administration that: 1. claimed title to the bed of the Yadkin River under the Alcoa dams as public trust land; and 2. asked the court to recognized State ownership of the Alcoa dams based on public trust ownership of the riverbed under the dams. The significance of the Alcoa 401 Certification denial is that many projects requiring 401 Certifications are located in waters that may be covered by the public trust doctrine. The Alcoa denial raises some interesting questions about issuance of 401 Certifications for activities in rivers and streams in particular. First, some history on Alcoa’s dams and the public trust doctrine.
History. Alcoa operates four dams on the Yadkin River to generate electricity. Alcoa bought an unfinished aluminum smelting plant in the town of Badin from a French company in 1915, completed the plant and began operation in 1917 powered by the newly constructed Narrows Dam on the Yadkin River. As power demand increased, Alcoa built three more hydroelectric dams on the Yadkin — at the Falls (1919), High Rock (1927) and Tuckertown (1962). After Congress strengthened the federal role in permitting hydroelectric power projects, Alcoa received a 50-year federal license to operate the dams (together known as the “Yadkin Project”) in 1958. In 2002, Alcoa began the process of renewing the federal license.
For two years, a group of North Carolina local governments, state agencies (including DENR), federal agencies, lakefront homeowners associations, and environmental organizations met to develop recommended license conditions for the Yadkin Project. The group reached agreement on measures to protect water quality and habitat; provide public access; maintain lake levels and adequate downstream flows; and create a drought management system for the area affected by the Yadkin Project. The group submitted the proposed conditions to the Federal Energy Regulatory Commission (FERC) in 2007. You can find a description of the 2007 relicensing settlement agreement here.
Shortly after the settlement agreement had been signed, Alcoa stopped all production at the Badin aluminum works and eliminated the last 30 jobs at the plant. At its height, the Badin aluminum works employed about 1,000 people, but production had declined over a ten-year period. As the demand for power at the Badin works lessened, Alcoa started selling electricity from the Yadkin Project on the wholesale market. Complete shutdown of the Badin plant set off a backlash. Stanly County, which did not sign the relicensing settlement agreement, demanded that Alcoa compensate the county for jobs lost in the shut down of the Badin works and raised concerns about industrial contamination in the area of Alcoa’s Badin plant. Stanly County and others opposed to renewal of Alcoa’s FERC license persuaded Gov. Beverly Perdue to intervene in the FERC relicensing and request transfer of the Alcoa license to the State of North Carolina. FERC’s decision on relicensing of the Yadkin Project has now been on hold for several years waiting for the state to make a decision on issuance of a 401 Certification for operation of the dams.
In 2009, DENR issued a 401 Certification for the Yadkin Project. The certification required Alcoa to upgrade the hydroelectric generation facilities and make operational changes to improve downstream water quality and restore flow to streams affected by operation of the dams. DWQ revoked that 401 Certification in late 2010 after discovering that information submitted by Alcoa during the application review may have been misleading. After resolving DWQ’s concerns, Alcoa reapplied for a 401 Certification last year. DWQ was moving toward issuing a new 401 Certification for the Alcoa dams — there was a public hearing on a draft 401 Certification in May — when DENR suddenly reversed direction and denied the 401 Certification on August 2, 2013 citing the McCrory administration lawsuit filed the same day. You can find documents related to Alcoa’s recent 401 application (including the denial letter and the complaint in the McCrory administration lawsuit) here.
Public Trust Doctrine. Under ancient law brought to the American colonies from England, lands under navigable waters are owned by the sovereign and held in trust for the public. The “public trust doctrine” protects the right of the public to use the waters for navigation, fishing, and recreation. After independence, the states acquired title to public trust lands previously held by the King. Since the state holds lands under navigable waters in trust for the use of the public, the state rarely transfers ownership of those lands outright. On the other hand, the state allows many private activities on state-owned public trust lands — both commercial and non-commercial. Most of the docks, piers, marinas, and fish houses in coastal waters have been built on state-owned public trust lands. You will find other commercial activities in coastal waters, rivers and streams including aquaculture operations, mining, commercial recreation facilities, and dams (used for various purposes).
The McCrory administration lawsuit admits that Alcoa had state permission to build hydroelectric dams on the Yadkin River. In the late 18th and early 20th century, the General Assembly allowed a number of companies to build hydroelectric dams and mill dams on state rivers by special legislation. It is not clear that the state claimed ownership of the bed of the Yadkin River at the time. Some early laws authorizing construction of dams on the Yadkin refer to construction on “non-navigable” sections of the Yadkin River and a number of state court decisions recognized private ownership of the bed of the Yadkin River at specific locations. In Rose v. Franklin, 216 N.C. 289, 4 S.E.2d 876 (N.C., 1939), the N.C. Supreme Court noted that the parties to a title dispute admitted that the Yadkin River was a non-navigable stream as it passed through the town of Elkin and found that the plaintiff owned to the center of the river.
Until the 1990s, court decisions recognized state ownership of lands under: 1. tidal waters (like the waters of the Atlantic Ocean and the coastal bays and sounds); and 2. other waters that were navigable by sea-going vessels. The second category covered rivers that were below the fall line and deep enough to be navigated by large boats. The public trust cases appeared to allow private ownership of the beds of other rivers and streams, but recognized a public trust easement on those that could be navigated by shallow-draft boats or used to float logs downstream. Decisions like Rose v. Franklin fit this understanding of the law.
A 1995 N.C. Supreme Court decision, Gwathmey v. State, 464 S.E.2d 674, 342 N.C. 287, abandoned the use of tidal influence as a factor and stated a simple rule: the public trust doctrine applies to any water body that, in its natural condition, can be navigated by “useful vessels, including small craft used for pleasure”. It isn’t clear whether Gwathmey completely abandons the old distinction between waters navigable by sea-going vessels and those floatable by canoe for purposes of state ownership of the bed. One problem with the Gwathmey case is that it involved tidal waters and marsh where public trust ownership had historically been recognized. The court just substituted one grounds for public trust ownership (navigability) for another (tidal influence). The decision never addressed the impact of the new rule on inland rivers where state courts had recognized private ownership of the river bed. The McCrory administration lawsuit claiming title to the Alcoa dams may require the court to explain how the Gwathmey decision applies to interior rivers and streams.
The 401 Certification Decision. The letter denying the Alcoa 401 Certification offers only one grounds for the denial — the state’s claim of ownership of the Yadkin River bed and the Alcoa dams built there. Citing a water quality rule, 15A NCAC 02H.0502 (f), the letter says that “signature on the  application ‘certifies that the applicant has title to the property, has been authorized by the owner to apply for certification or is a public entity and has the power of eminent domain’. The required ownership certification ensures that the applicant owns the project’s dams and powerhouses and is fully capable of implementing all protections of water quality that may be imposed as conditions in a 401 Certification.”
The rule applies to all 401 applicants, raising the question of what will now be required of applicants proposing development in public trust waters or in rivers and streams where public trust ownership may be in question. It is not a standard that seems to have been applied before to projects on rivers and streams– even in the very recent past. Just one month earlier, DENR waived a 401 Certification for the proposed Cleveland County dam without requiring the county to show ownership of the bed of the First Broad River or obtain state permission to apply for a federal Clean Water Act permit to build a dam. Beyond dam construction, a 401 Certification may be required for other commercial activities like in-stream mining; aquaculture; construction of recreation facilities; and water intake structures for industry or agriculture. Having invoked the requirement for Alcoa’s hydroelectric dams, DENR will need to explain how the requirement applies to other applicants and permit holders:
— Does the standard set in the Alcoa denial letter apply to all projects in navigable waters that require a 401 Certification? This is not a trick question; the letter indicates that ownership or some form of state permission will be necessary to satisfy DENR that the applicant has sufficient control over a project on public trust lands to meet water quality conditions on a 401 Certification.
— What will an applicant have to do to show private ownership of land under a river or stream? Deciding whether a river or stream is navigable can require a boat trip — literally. Answering the question of public trust ownership will be further complicated by uncertainty about how the Gwathmey decision applies to rivers (or parts of rivers) that had never been considered navigable by sea-going vessels. In the past, many of those riverbeds had been recognized as private property subject to a public trust easement for navigation.
— Without proof of private ownership of the river or stream bed, what kind of state permission will be needed? In the 19th and early 20th century, the General Assembly often authorized activities in rivers and streams by special legislation — as it did for construction of hydroelectric dams on the Yadkin River. The state issues leases and easements in public trust lands for some purposes, but those programs developed fairly late in the 20th century and have been used for the most part in coastal waters. The easement criteria in G.S. 146-12 lend themselves more readily to piers and docks than to more intensive uses such as mining or dam construction.
In something of a reverse of the Alcoa 401 denial, the state has often relied on environmental permits as the vehicle for approving activities in public trust waters. Under G.S. 146-12, issuance of a Coastal Area Management Act (CAMA) permit for development in coastal waters also gives the applicant a state easement. (The State Property Office has an opportunity to review those CAMA applications.) Outside the coastal counties, it is hard to find consistent application of the easement requirement. For projects that don’t require a CAMA permit, there will likely be more uncertainty about public trust ownership and a less well-trod path to state approval if the state does own the submerged lands.
— What standards will be applied in granting or denying state permission for activities on public trust lands? The McCrory administration lawsuit suggests an intent to tie Alcoa’s operation of the Yadkin dams to generate electricity for sale on the wholesale market to compensation for use of the public trust resources. Outside of leases to mine on submerged lands, state law has not generally taxed revenue from commercial use of public trust resources.
— What happens when Congress has given a federal agency authority to permit an activity in navigable waters? Under the Federal Power Act, FERC has the authority to license hydroelectric projects in navigable waters of the United States. The U.S. Army Corps of Engineers has authority to permit other types of structures in navigable waters under the Rivers and Harbors Act of 1899 and issues Clean Water Act permits to fill navigable waters. The Section 401 Certification has generally served as the state approval for federally permitted projects in navigable waters. I don’t know that the state has previously required a separate easement or lease. I also don’t know whether the federal agencies believe any other state approval is needed given Congressional authority to permit these activities in navigable waters.
Many questions. The answers will be interesting.