Fair Competition in Hydroelectric Licensing Act of 1985

Fair Competition on Hydroelectric Licensing Act of 1985 - Amends the Federal Power Act to require the Federal Energy Regulatory Commission (FERC) to give preference to State and municipal applicants for preliminary permits or original licenses for hydroelectric facilities.

Prescribes guidelines under which FERC shall determine which electric utility license applicant offers the proposal best adapted to a certain comprehensive plan for waterways improvement.

Prohibits the FERC from denying a license to a competing applicant because it has not previously operated a hydroelectric project.

Requires the existing licensee to: (1) make available to an entity planning to file a competing license application all the data necessary to complete such application, and to grant a competing applicant access to the project works and lands; and (2) agree to perform with competing applicants certain joint studies required to be submitted with a license application.

Requires FERC to give preference to State or municipality proposals which are equally well adapted to comprehensive plans for waterway improvement as the proposals of other applicants.

Authorizes FERC to require implementation of electricity consumption efficiency improvement programs for the conservation and proper utilization of natural resources.

Requires FERC to include as a condition of a license that an electric utility licensee provide in the public interest: (1) transmission services to other electric utilities over its transmission facilities; and (2) an increase in the transmission capacity of any bulk power transmission facility which it owns or operates.

Authorizes the FERC to make available to the existing licensee up to an average of 25 percent of the project output for the initial one-fifth of the license term at the new licensee's cost of power and energy from the project.

Requires FERC to issue new licenses no later than 12 months prior to the expiration date of an existing license. Requires the FERC to report annually to the Congress all projects for which new licenses have not been issued within such period.

Requires the FERC to transmit to the Attorney General all license applications in order to ascertain whether any activities under the Act would tend to be inconsistent with certain antitrust laws. Prohibits the FERC from issuing a license where such inconsistencies are found.

Amends the Public Utility Regulatory Policies Act to repeal FERC's authority to exempt certain small hydroelectric power projects from the licensing requirements of the Federal Power Act. Makes inapplicable to a new hydroelectric generating facility the economic incentives granted by the Act to small power production facilities if the new facility requires the construction of a new water diversion structure.