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August 18, 2014

Say Aloha To LNG: No FERC Approval Required For Hawaiian Company’s LNG Operations

In a decision that may have ramifications for the construction and operation of small liquefied natural gas (LNG) terminals and liquefaction facilities, FERC determined in a January 17 order that it had no jurisdiction over the approval of a proposed Hawaiian LNG operation. 

At issue was an application by Hawaii-based The Gas Company, LLC seeking authorization to engage in operations that involved taking delivery of LNG International Shipping Organization (ISO) containers shipped from the Continental United States, revaporizing the LNG, and injecting it into the company’s distribution system or to end users’ facilities. The Gas Company believed its proposed activities were associated with the operation of an LNG terminal and therefore required authorization from FERC under section 3 of the Natural Gas Act.

FERC disagreed that authorization was necessary, basing its decision on its interpretation of the words “natural gas facilities” in the definition of an LNG Terminal in the Natural Gas Act (as amended by the Energy Policy Act of 2005).  An LNG Terminal under the Natural Gas Act includes:

[A]ll natural gas facilities located onshore or in State waters that are used to receive, unload, load, store, transport, gasify, liquefy, or process natural gas that is imported to the United States from a foreign country, exported to a foreign country from the United States, or transported in interstate commerce by waterborne vessel, but does not include (A) waterborne vessels used to deliver natural gas to or from any such facility; or (B) any pipeline or storage facility subject to the jurisdiction of the Commission under section 7 [of the Natural Gas Act].

FERC agreed with The Gas Company that the LNG at issue would be “transported in interstate commerce by waterborne vessel,” but decided that the facilities that would be used to receive, load, and unload LNG containers for The Gas Company did not constitute “natural gas facilities” since the facilities are used to receive, load, and unload containers with other products besides LNG.  Therefore, the facilities at issue were not an LNG Terminal, and FERC concluded that it did not have jurisdiction under section 3 of the Natural Gas Act.

Though FERC did not elaborate on its reasoning, this interpretation appears to exclude from the definition of a natural gas facility (for purposes of the definition of an LNG Terminal) generic port or pier facilities that receive different kinds of products.

The Gas Company’s application in the proceeding involved the first stage of a three-stage plan to expand LNG supply and operations in Hawaii.  FERC explained in a footnote to the decision that it did not perform an analysis of the other stages of the plan.  This suggests that FERC could take a case-by-case approach to determining whether particular LNG facilities fall under its jurisdiction, and will look to the facts and circumstances of each application.  An applicant should expect that FERC will take a hard look at each set of  facilities/operations and provide a discrete jurisdictional analysis.

FERC also determined in the order that The Gas Company’s proposed operations were outside of its jurisdiction under section 7 of the Natural Gas Act.  According to FERC, given the nature of the operations, The Gas Company would be either a local distribution company or a Hinshaw company, both of which would be exempt from FERC’s section 7 jurisdiction.  In reaching this conclusion, FERC rejected The Gas Company’s assertion that it did not qualify for Hinshaw status because it injected gas into a local distribution system.  FERC stated that a pipeline could qualify for Hinshaw status regardless of whether the system engaged in intrastate transmission or local distribution.

Finding that it did not have jurisdiction under either section 3 or section 7 of the Natural Gas Act, FERC dismissed the application.  Consequently, The Gas Company needs no approval from FERC to engage in the contemplated LNG operations.  FERC’s decision helps pave the way for the transportation of LNG supplies to Hawaii, which currently relies on high-cost synthetic natural gas for various energy needs.

© 2014 Bracewell & Giuliani LLP

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