United States: FERC Opens Notice Of Inquiry For Review Of Natural Gas Pipeline Policies

Joseph Donovan is a Partner in the Washington D.C. office

Mark Kalpin is a Partner in the Boston office

Stephen Humes is a Partner in the New York office

Tara Kaushik is a Partner in the San Francisco office

HIGHLIGHTS:

• The Federal Energy Regulatory Commission has unanimously voted to open a new Notice of Inquiry seeking input on whether – and, if so, how – it should update its existing policies and procedures for reviewing and issuing authorizations to interstate natural gas transportation facilities under Section 7 of the Natural Gas Act. This is the first time since 1999 that the Commission has reviewed its Policy Statement.
• This proceeding could result in substantial modifications to the existing regulatory construct, and directly impact the manner in which future applications for Section 7 authorization are both prepared and reviewed.
• It is incumbent for the natural gas industry and other stakeholders to take a proactive role in the Commission's review, as the decisions reached in this proceeding can impact future pipeline proceedings for years, if not decades.

The Federal Energy Regulatory Commission (FERC, or Commission) unanimously voted at its April 19, 2018, open meeting to open a new Notice of Inquiry (NOI) seeking input on whether – and, if so, how – it should update its existing policies and procedures¹ for reviewing and issuing authorizations to interstate natural gas transportation facilities under Section 7 of the Natural Gas Act (NGA).

This is the first time since 1999 that the Commission has reviewed its Policy Statement.² The Commission noted that the purpose of the NOI is the same as it had in adopting the current Policy Statement; namely, "to appropriately consider the enhancement of competitive transportation alternatives, the possibility of over building, the avoidance of unnecessary disruption of the environment, and the unneeded exercise of eminent domain."³

Scope of Review Could Have Substantial Impact on Natural Gas Industry 

This proceeding could result in substantial modifications to the existing regulatory construct, and directly impact the manner in which future applications for Section 7 authorization are both prepared and reviewed. Environmental groups are expected to be actively involved as they seek to frame the new policies. In fact, within 24 hours of the public meeting in which the Commission voted to open the proceeding, a group of 11 environmental and public interest groups filed a joint letter urging the Commission to adopt a series of revisions, including expanding its review of the applications to consider an expansive "all relevant factors" test to determine public need; using expanded regional (versus project-specific) assessments; minimizing the use of precedent agreements in analyzing affiliated offtake arrangements; and incorporate analysis of the downstream environmental impact of each project using such tools as Social Cost of Carbon and Social Cost of Methane.

In order to create the record necessary for the Commission to sustain any of its decisions, it is incumbent for the natural gas industry and other stakeholders to take a proactive role in the Commission's review, as the decisions reached in this proceeding can impact future pipeline proceedings for years, if not decades.

Impact of Executive Order 13807

Part of the rationale for opening this new inquiry rests on Executive Order 13807, which President Donald Trump signed on Aug. 15, 2017, in order "to improve the efficiency, timing, and overall predictability of the Commission's certification process."⁴ The Commission summarized Executive Order 13807 as seeking to "ensure that Federal authorities make informed decisions concerning the environmental impacts of infrastructure projects"; "provide transparency and accountability to the public regarding environmental review and authorization decisions"; and "make timely decisions with the goal of completing all Federal environmental reviews and authorization decisions for major infrastructure projects within 2 years."

Of note, Executive Order 13807 defines "major infrastructure project" as an infrastructure project for which "the lead Federal agency has determined that it will prepare an environmental impact statement" under the National Environmental Policy Act (NEPA).⁵ As a result, while it is not clear how any revisions to the Policy Statement will apply to potential pipeline applications for which the Commission as lead agency utilizes an environmental assessment (rather than a full environmental impact statement), it is certain that this question will be the subject of comments.

Specific Areas of Requested Comment

The Commission has identified four general areas of examination in this inquiry. In particular, the Commission seeks input on the following areas:

A. Potential Adjustments to the Commission's Determination of Need

The Commission noted that some entities have raised questions on whether precedent agreements remain an appropriate indicator of need and that some additional information should be required in evaluating the need of a proposed pipeline. Thus, the Commission seeks comment on the following questions:

• A1. Should the Commission consider changes in how it determines whether there is a public need for a proposed project?
• A2. In determining whether there is a public need for a proposed project, what benefits should the Commission consider? For example, should the Commission examine whether the proposed project meets market demand, enhances resilience or reliability, promotes competition among natural gas companies, or enhances the functioning of gas markets?
• A3. Currently, the Commission considers precedent agreements, whereby entities intending to be shippers on the contemplated pipeline commit contractually to such shipments, to be strong evidence that there is a public need for a proposed project. If the Commission were to look beyond precedent agreements, what types of additional or alternative evidence should the Commission examine to determine project need? What would such evidence provide that cannot be determined with precedent agreements alone? How should the Commission assess such evidence? Is there any heightened litigation risk or other risk that could result from any broadening of the scope of evidence the Commission considers during a certificate proceeding? If so, how should the Commission safeguard against or otherwise address such risks?
• A4. Should the Commission consider distinguishing between precedent agreements with affiliates and non-affiliates in considering the need for a proposed project? If so, how?
• A5. Should the Commission consider whether there are specific provisions or characteristics of the precedent agreements that the Commission should more closely review in considering the need for a proposed project? For example, should the term of the precedent agreement have any bearing on the Commission's consideration of need or should the Commission consider whether the contracts are subject to state review?
• A6. In its determinations regarding project need, should the Commission consider the intended or expected end use of the natural gas? Would consideration of end uses better inform the Commission's determination regarding whether there is a need for the project? What are the challenges to determining the ultimate end use of the new capacity a shipper is contracting for? How could such challenges be overcome?
• A7. Should the Commission consider requiring additional or alternative evidence of need for different end uses? What would be the effect on pipeline companies, consumers, gas prices, and competition? Examples of end uses could include: LDC [local distribution company] contracts to serve domestic use; contracts with marketers to move gas from a production area to a liquid trading point; contracts for transporting gas to an export facility; projects for reliability and/or resilience; and contracts for electric generating resources.
• A8. How should the Commission take into account that end uses for gas may not be permanent and may change over time?
• A9. Should the Commission assess need differently if multiple pipeline applications to provide service in the same geographic area are pending before the Commission? For example, should the Commission consider a regional approach to a needs determination if there are multiple pipeline applications pending for the same geographic area? Should the Commission change the way it considers the impact of a new project on competing existing pipeline systems or their captive shippers? If so, what would that analysis look like in practice?
• A10. Should the Commission consider adjusting its assessment of need to examine (1) if existing infrastructure can accommodate a proposed project (beyond the system alternatives analysis examined in the Commission's environmental review); (2) if demand in a new project's markets will materialize; or (3) if reliance on other energy sources to meet future demand for electricity generation would impact gas projects designed to supply gas-fired generators? If so, how?

B. The Exercise of Eminent Domain and Landowner Interests

The Commission observed that it has recently seen an increase in the number of proposed projects where applicants are unable to access potential rights-of-way prior to the Commission's decision on an application, which limits the information that can be included in an application. The Commission notes that it makes its determination with the best information available at the time, and utilizes a number of conditions and mitigation safeguards should additional information be gained upon access to the route. To address this scenario, the Commission asks comment on the following questions:

• B1. Should the Commission consider adjusting its consideration of the potential exercise of eminent domain in reviewing project applications? If so, how should the Commission adjust its approach?
• B2. Should applicants take additional measures to minimize the use of eminent domain? If so, what should such measures be? How would that affect a project's overall costs? How could such a requirement affect an applicant's ability to adjust a proposed route based on public input received during the Commission's project review?
• B3. For proposed projects that will potentially require the exercise of eminent domain, should the Commission consider changing how it balances the potential use of eminent domain against the showing of need for the project? Since the amount of eminent domain used cannot be established with certainty until after a Commission order is issued, is it possible for the Commission to reliably estimate the amount of eminent domain a proposed project may use such that the Commission could use that information during the consideration of an application?
• B4. Does the Commission's current certificate process adequately take landowner interests into account? Are there steps that applicants and the Commission should implement to better take landowner interests into account and encourage landowner participation in the process? If so, what should the steps be?
• B5. Should the Commission reconsider how it addresses applications where the applicant is unable to access portions of the right-of-way? Should the Commission consider changes in how it considers environmental information gathered after an order authorizing a project is issued?

C. The Commission's Consideration of Environmental Impacts  

Noting that there has been increased stakeholder interest regarding alternatives that the Commission could use to evaluate the public interest such as how the Commission addresses climate change and greenhouse gas (GHG) emissions, the Commission invites comments on the following ways that it could review its environmental evaluations:

• C1. NEPA and its implementing regulations require an agency to consider reasonable alternatives to the proposed action. Currently the Commission considers the no-action alternative, system alternatives, design alternatives, and route alternatives. Should the Commission consider broadening its environmental analysis to consider alternatives beyond those that are currently included? If so, what specific types of additional alternatives should the Commission consider?
• C2. Are there any environmental impacts that the Commission does not currently consider in its cumulative impact analysis that could be captured with a broader regional evaluation? If so, how broadly should regions be defined (e.g., which states or geographic boundaries best define different regions), and which environmental resources considered in NEPA would be affected on a larger, regional scale?
• C3. In conducting an analysis of a project, should the Commission consider calculating the potential GHG emissions from upstream activities (e.g., the drilling of natural gas wells)? What information would be necessary for the Commission to reliably and accurately conduct this calculation? Should the Commission also evaluate the significance of these upstream impacts? If so, what criteria would be used to determine the significance of these impacts?
• C4. In conducting an analysis of a project, should the Commission consider calculating the potential GHG emissions from the downstream consumption of the gas? If so, should the Commission base this calculation on total consumption, or some other amount? What information would be necessary for the Commission to reliably and accurately conduct this calculation? Should the Commission also evaluate the significance of these downstream impacts? If so, what criteria would be used [to] determine the significance of these impacts?
• C5. How would additional information related to the GHG impacts upstream or downstream of a proposed project inform the Commission's decision on an application? What topics or criteria should be included in this additional information?
• C6. As part of the Commission's public interest determination, should the Commission consider changing how it weighs a proposed project's adverse environmental impacts against favorable economic benefits to determine whether the proposed project is required by the public convenience and necessity and still provide regulatory certainty to stakeholders?
• C7. Should the Commission reconsider how it uses the Social Cost of Carbon tool in its environmental review of a proposed project? How could the Commission use the Social Cost of Carbon tool in its weighing of the costs versus benefits of a proposed project? How could the Commission acquire complete information to appropriately quantify all of the monetized costs/negative impacts and monetized benefits of a proposed project?

D. Improvements to the Efficiency of the Commission's Review Process

Recognizing that Executive Order 13807 mandates more timely decisions for completing all environmental review and project authorization decisions within two years, the Commission seeks comments on the following questions:

• D1. Should certain aspects of the Commission's application review process (i.e., pre-filing, post-filing, and post-order-issuance) be shortened, performed concurrently with other activities, or eliminated, to make the overall process more efficient? If so, what specific changes could the Commission consider implementing?
• D2. Should the Commission consider changes to the pre-filing process? How can the Commission ensure the most effective participation by interested stakeholders during the pre-filing process and how would any such changes affect the implementation and duration of the pre-filing process?
• D3. Are there ways for the Commission to work more efficiently and effectively with other agencies, federal and state, that have a role in the certificate review process? If so, how?
• D4. Are there classes of projects that should appropriately be subject to a shortened process? What would the shortened process entail?

Next Steps

As of the time of this posting, the Commission had not yet published the NOI in the Federal Register, which will trigger a 60-day window for submission of comments. Until the Commission reviews and considers the comments filed, and then takes further action on this issue, the Commission's existing policies and procedures will remain in place.

Footnotes

1 See Notice of Inquiry,Certification of New Natural Gas Facilities, 163 FERC ¶ 61,042 (2018) (NOI). The Commission has docketed this proceeding as PL18-1-000. The Policy Statement in place for almost 20 years established the current regulatory process and policies that has governed certification proceedings since adoption. See Certification of New Interstate Natural Gas Pipeline Facilities, 88 FERC ¶ 61,227 (1999), clarified, 90 FERC ¶ 61,128, further clarified, 92 FERC ¶ 61,094 (2000) (Policy Statement).

2 During the pendency of this proceeding, the Commission will continue to process natural gas facility matters under the current rules and processes, and to make determinations on the issues raised in those proceedings on a case-by-case basis. NOI at P. 4.

3 NOI at P. 3.

4 NOI at P. 23, ref. Exec. Order No. 13807, 82 FR 40463, 40463 (Aug. 15, 2017) (Executive Order 13807).

5 Executive Order 13807 at40464

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