March 15, 2019

Friction Shadows FERC Pipeline Process Review

Scott Grover

After applying its principles in relatively unwavering fashion for nearly 20 years, the Federal Energy Regulatory Commission (FERC) stands poised to modify its guidelines for authorizing the construction of new interstate natural gas pipeline facilities. On April 19, 2018, FERC issued a Notice of Inquiry seeking feedback from stakeholders as to whether, and if so, how the agency should revise the current standards applicable to the process by which FERC approves requests under the Natural Gas Act (NGA) by jurisdictional interstate pipeline companies to construct new natural gas transportation facilities that are shown to be, now or in the future, required by the public for convenience and necessity. See Certification of New Interstate Natural Gas Facilities, Docket No. PL18-1, 163 FERC ¶ 61,042 (Apr. 19, 2018) (the NOI). To facilitate the provision of stakeholder input, FERC set forth several questions for interested participants to address in four categories. The categories include (1) need determination, (2) eminent domain exercise and landowner interests, (3) the consideration of environmental impacts, and (4) improvements to review process efficiency. See id., 51–60.

The standards under consideration are set forth in what is commonly referred to as FERC’s Certificate Policy Statement. See Certification of New Interstate Natural Gas Pipeline Facilities, 88 FERC ¶ 61,227 (1999); order on clarification, 90 FERC ¶ 61,128; order on clarification, 92 FERC ¶ 61,094 (2000). The Certificate Policy Statement arrived at the end of the natural gas industry’s transformation in the 1980s and 1990s from a tightly controlled system of discretely tasked participants to a much more diverse and competitive marketplace. Seeking “to foster competitive markets, protect captive customers, and avoid unnecessary environmental and community impacts while serving increasing demands for natural gas,” the Certificate Policy Statement implemented a major change in how the Commission would evaluate new projects: “rolled-in” pricing would give way to “incremental” pricing. NOI, 14, 16–17.

Thus, where the cost of new projects previously was included in (or rolled into) the rates of existing customers, the Certificate Policy Statement required a jurisdictional pipeline to show preparedness to financially support the project without relying on subsidies from existing customers. With limited exception, pipelines would be allowed to recover the costs of new facilities only from the shippers who use them, and would retain the risk for the cost of the new facilities and any unsubscribed capacity. See NOI, 17. In addition, pipelines would be required to show the elimination or minimization of any adverse effects the project might have on existing customers, existing pipelines in the market and their captive customers, and landowners and communities affected by the construction. When residual adverse effects exist, FERC would use an economic balancing test to measure the benefits and adverse effects. If the former outweighed the latter, FERC would then proceed with an environmental analysis under the National Environmental Policy Act of 1969 (NEPA). See, e.g., NOI, 26–34; S. Nat. Gas Co., 162 FERC ¶ 61,122, 11–13 (Feb. 15, 2018). Although not issued as a rulemaking, the Certificate Policy Statement firmly established the parameters for FERC’s evaluation of new pipeline projects, and has been used consistently ever since.

In the NOI, FERC specifically identified nine changes since the establishment of the Certificate Policy Statement prompting its decision to undertake a review. Several of them reflected changes in the industry landscape, such as “dramatic increases in production,” pipeline system flows reversing or becoming bidirectional, and the increased use of natural gas for electric generation. Many others were societal, such as the “increased interest” in how FERC considers both greenhouse gas (GHG) emissions specifically and environmental concerns more broadly in the pipeline approval process, as well as an indicated desire by stakeholders to expand, or limit, FERC’s NEPA evaluation process. See NOI, 2. While changes in production and utilization of pipelines certainly have occurred, the societal pressures likely can take chief credit for motivating FERC to revisit its Certificate Policy Statement. In recent years, as environmental and other advocates began to understand the role of FERC in the natural gas pipeline approval process, protesters have made FERC a consistent audience for their voices. See, e.g., Gavin Blade, Gas Pipeline Protesters Turn Up Heat on FERC, Utility Dive (Sept. 21, 2017), available at www.utilitydive.com/news/gas-pipeline-protesters-turn-up-heat-on-ferc/505415; Michael Brooks, Pipeline Protesters Force FERC to Close Monthly Meeting, RTO Insider (May 19, 2016), available at www.rtoinsider.com/ferc-closed-open-meeting-26581. Moreover, FERC decisions on several recent pipeline authorizations have revealed a rift at the agency as to the appropriate consideration due GHG emissions traceable to a proposed pipeline project.

In October 2017, with FERC operating under a bare quorum of three commissioners, Commissioner Cheryl LaFleur dissented in two orders approving pipeline certificate applications. In her dissents, Commissioner LaFleur expressed concern that potential environmental impacts reflected in the records of the proceedings supported further consideration of a course whereby the capacity needs to be served by the two pipelines would be met through a single, larger diameter facility. See Atlantic Coast Pipeline, et al., 161 FERC ¶ 61,042 (Oct. 13, 2017) (LaFleur, dissenting); see also Mountain Valley Pipeline, LLC, 161 FERC ¶ 61,043 (Oct. 13, 2017) (LaFleur, dissenting). Her dissents also called for an expanded analysis of need, including further consideration by FERC of “evidence of the specific end use of the delivered gas . . . as part of our overall needs determination.” Id. Her objections, while very clear, nonetheless carried a measure of restraint, perhaps in respect for the decisions by the majority, composed of the two newly appointed Commissioners, Neil Chatterjee and Robert Powelson.

In March 2018, with FERC back at full capacity, Commissioner LaFleur, joined by recently appointed Commissioner Richard Glick, more vehemently objected to the majority’s actions on a pipeline certificate. In this case, however, FERC was addressing a remand from the U.S. Circuit Court of Appeals for the District of Columbia (D.C. Circuit) that had vacated the certificate for a group of three Southeast pipelines and directed the FERC to (1) revise the underlying environmental impact statement (EIS) to provide a quantitative estimate of downstream GHG emissions (or explain why it was unable to do so), and (2) explain FERC’s position on the usefulness of the social cost of carbon tool relative to NEPA analyses. See Fla. Se. Connection, et al., 162 FERC ¶ 61,233 (Mar. 14, 2018), on remand from Sierra Club v. FERC, 867 F.3d 1357 (D.C. Cir. 2017). The objections of Commissioners LaFleur and Glick focused on the majority’s position (Commissioners Chatterjee and Powelson, joined by Chairman Kevin McIntyre) that the significance of quantified GHG emissions remained indiscernible, based on the record, and that the social cost of carbon tool was not a suitable means of assessing such potential significance in pipeline cases. See id. (“I reject the contention that the Commission is unable to discern the significance of GHG emissions.” (LaFleur, dissenting) and “[T]he Commission must take a ‘hard look’ at climate change—the ultimate environmental impact. The responsible way to do so today is by converting the GHG emissions estimates to concrete impacts by way of the Social Cost of Carbon.” (Glick, dissenting)).

The views of Commissioners LaFleur and Glick show no sign of changing—a fact exemplified by, if nothing else, a comparison of Commissioner LaFleur’s initial 2017 dissent in the Atlantic Coast Pipeline decision with her August 2018 dissent on rehearing of that order. See Atlantic Coast Pipeline, et al., 164 FERC ¶ 61,100 (Aug. 10, 2018) (LaFleur, dissenting). The majority’s views likewise seem unwavering, although with Commissioner Powelson’s departure from FERC in August 2018, FERC potentially may be deadlocked in votes on pipeline projects—all of which makes the April 2018 NOI more intriguing.

As noted at the outset of this article, the NOI solicited feedback from participants on various categories of questions, including environmental considerations. Among the questions posed are some that strike at the center of the present FERC divide. One of these is whether GHG emissions (upstream and downstream) should be factored into the agency’s analysis of pipeline certificate applications, and if so how. Another is whether FERC should “reconsider how it uses the Social Cost of Carbon tool in its environmental review of a proposed project,” and if so, how. See NOI, 58, C3–C7. Thus, even with a major policy initiative pending (i.e., the NOI), FERC leaders continue to grapple with (and seemingly signal) their respective views on the issue and––one would think––where they stand on the questions.

It is, of course, possible that the input received from stakeholders in response to the NOI could prompt Commissioner LaFleur or Commissioner Glick to revisit stated views—although, given the relative positions each has advanced, such movement seems unlikely. It is similarly difficult to see Commissioner McIntyre or Commissioner Chatterjee undertaking a wholesale reevaluation of views, particularly considering the thoughtful rejection of the Social Cost of Carbon tool in the Southeast pipelines decision. That said, not unlike the sensitivity Commissioner LaFleur expressed through her initial dissent in the Atlantic Coast Pipeline proceeding, Chairman McIntyre may well endeavor to find common ground that reunites the commissioners and returns pipeline certification decisions to the stability they enjoyed for more than 15 years.

This backdrop is not without consequence. While “policy statements” themselves customarily avoid appellate scrutiny (see, e.g., Interstate Nat. Gas Ass’n v. FERC, 285 F.3d 18, 59 (D.C. Cir. 2002)), the application of the Certificate Policy Statement regarding agency action—particularly agency action on an application for a new pipeline certificate—remains subject to the traditional requirements of the Administrative Procedure Act. See, e.g., Transcontinental Gas Pipe Line Corp., 518 F.3d 916, 919 (D.C. Cir. 2008). Moreover, depending on what course FERC pursues in response to the NOI, be it new or existing, much debate can be expected about what “factors” are “relevant” in deciding whether the existing or future public convenience and necessity will be served by new pipeline facilities. See id. (“We review FERC orders under the Administrative Procedure Act’s arbitrary and capricious standard under which we must uphold an agency’s action where it has considered the relevant factors and articulated a rational connection between the facts found and the choice made.” (internal citations and punctuation omitted; emphasis added)).

To have the NOI put to an end the current state of unrest is perhaps an unfair expectation. Policy disputes and their manifestation operate far differently than they did at the start of the twenty-first century. But give credit to FERC for endeavoring at least an attempt to develop a record that, a minimum, will afford those circles willing to listen a basis for understanding what the preferable course is for pipeline infrastructure development for the next decade and beyond, and why.

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Scott Grover

Mr. Grover is an energy lawyer at Balch & Bingham LLP and a member of the editorial board of Natural Resources & Environment. He regularly counsels and represents electric utilities on regulatory matters in the retail and wholesale electricity and natural gas sectors. He may be reached at sgrover@balch.com.