May 26, 2022

Volume XII, Number 146

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FERC Issues Two Controversial Policy Statements on Natural Gas Infrastructure

On February 18, 2022, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued two controversial policy statements that will significantly impact the permitting and construction of new natural gas pipeline facilities.  The policy statements were each approved by a 3-2 majority with Commissioners Danly and Christie issuing separate dissents.

The Updated Policy Statement on Certification of New Interstate Natural Gas Facilities (“Updated Policy Statement”) revises FERC’s 1999 Certificate Policy Statement to give environmental analysis and policy, including environmental justice, a greater role in determining whether FERC should approve new natural gas transportation facilities as consistent with the “public convenience and necessity” under Section 7 of the Natural Gas Act (“NGA”).  A companion Interim Policy Statement on the Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews (“GHG Policy Statement”) seeks to explain how FERC will assess the impacts of natural gas infrastructure projects on climate change in its reviews under the National Environmental Policy Act (“NEPA”) and the NGA. In each order, the majority states that neither the Updated Policy Statement nor the GHG Policy Statement policy statement establishes binding rules. They are instead intended to explain how the Commission will consider issues as they arise in all pending and future certificate applications for construction of new facilities.  FERC will not otherwise apply the policy statements retroactively, and is not amending any of its regulations at this time.

Background – The 1999 Certificate Policy Statement

The 1999 Policy Statement, which FERC has applied with relative consistency since its issuance, established the following framework for evaluation of interstate natural gas certificate applications:

  • Determine whether the project meets the threshold requirement of no requirement of financial subsidization from existing customers.

  • If so, next consider whether the applicant has eliminated or minimized any residual adverse effects the project might have on:

    • the applicant’s existing customers;

    • existing pipelines in the market and their captive customers; and

    • landowners and communities affected by the proposed project.

  • Balance any residual adverse effects against the anticipated benefits from the project.

  • To demonstrate project need, applicants generally submitted precedent agreements with prospective customers for long-term firm service, essentially economic need.

  • FERC also could consider other indicia of need, including demand projections, potential cost savings to consumers, or a comparison of projected demand with the amount of capacity currently serving the market, but as a practical matter, most projects were approved based on precedent agreements.

  • If FERC found that the project’s benefits outweighed adverse impacts on economic interests, then it would then consider the environmental impacts of the project.

FERC’s revisions to the 1999 Policy Statement are based in part on changed circumstances.  In 1999, new natural gas projects were market-driven and the firm shippers with service agreements justifying the need for new facilities were local distribution companies which also held most of the interstate pipeline capacity.  Today, many new pipeline projects are driven by natural gas producers who need firm capacity to ensure that they can deliver their gas to markets at pooling points or city gates.  Further, the Commission observes that over the past decade, landowners, communities, tribes, environmental organizations, and others have increased participation in natural gas certificate proceedings to address the use of eminent domain, the need for new projects, and the environmental impacts of project construction and operation, including impacts on climate change and environmental justice communities  In addition, FERC has begun to consider the impacts of greenhouse gas emissions (“GHGs”) in its environmental analyses of new projects under NEPA.  Finally, like other federal agencies, FERC has expanded its focus on environmental justice and equity to address any disproportionate impacts of the siting, construction, and operation of natural gas facilities on disadvantaged communities.

The Updated Certificate Policy Statement

In the Updated Policy Statement, FERC announces that while precedent agreements will continue to constitute important evidence of need, such agreements alone may not be sufficient to establish need for a project.  FERC will begin to look behind precedent agreements to RFPs, open seasons, and other evidence.  One key change is FERC’s expectation that an application will include a showing of how the gas will be used, and the expected utilization rate of the new facilities.  If applicants do not have end use information, they should work with their prospective shippers to obtain it.  FERC states that not including such use data may prevent the applicant from meeting its burden to demonstrate need.  Market data and information on individual shippers as well as current or projected demand would also be helpful, according to FERC.  For supply-related projects (i.e., driven by producers), evidence of projected lower gas prices for consumers due to increased competition or projected regional gas supply or market growth would help justify need.  For reliability or pipeline integrity projects, a demonstration that the applicant is replacing older or inefficient facilities, addressing pipeline safety or environmental requirements, and/or reducing emissions would provide system benefits and avoid adverse impacts.  FERC also encourages applicants to provide a thorough analysis of alternatives to the project.

Similar to the 1999 Policy Statement, FERC will consider four major interests that may be adversely affected by the construction and operation of new projects, including the interests of:

  • the applicant’s existing customers;

  • existing pipelines and their captive customers;

  • environmental interests; and

  • landowners and surrounding communities, including environmental justice communities.

The Updated Policy Statement indicates that FERC may deny an application based on any of these types of adverse impacts.  The Updated Policy Statement discusses each of these impacts in detail.

FERC will balance all interests, both economic and environmental together instead of sequentially.  It will consider environmental impacts (including climate impacts) both in its public interest determination under the NGA and it its NEPA review process.  FERC expects applicants to propose mitigation measures, and it will consider such mitigation, or lack thereof in balancing adverse impacts against project benefits.  FERC also may condition certificates with additional mitigation measures not proposed by an applicant or deny an application if the adverse impacts as a whole outweigh the benefits of the project and cannot be mitigated or minimized.

FERC will expand its analysis of landowner impacts and ensure that the impacts on environmental justice communities are fully considered and mitigated.  It will look unfavorably on applicants that do not work proactively with landowners and will consider good faith in eminent domain negotiations.  It encourages applicants to identify and work with environmental justice communities and will consider the cumulative environmental impacts on such communities.  It will look with disfavor on mitigation proposals that are not supported by the affected communities.

FERC states that it will consider and balance any benefits beyond demand that are alleged by the applicant and supported in the record, which may include evidence that the project will displace more pollution-heavy generation sources, facilitate the integration of renewable energy sources, and/or result in a significant (i.e., more permanent) source of jobs or tax revenues.  Just as there may be here may be projects where one major adverse impact outweighs any benefit, FERC notes that some proposals may have significant impacts, but are still found to be in the public interest if the public benefits outweigh those impacts.

The GHG Policy Statement

In the GHG Policy Statement, FERC states that, because human-made GHG emissions “are the primary cause of climate change” and “GHG emissions are released in large quantities through the production, transportation, and consumption of natural gas,” in order for FERC to “fulfill its statutory responsibilities, it is critical that the Commission consider and document how its authorization of infrastructure projects under the NGA, particularly natural gas transportation facilities, will affect emissions of GHGs.”  Accordingly, the GHG Policy Statement explains how FERC will evaluate “climate impacts under NEPA, both those caused by a project’s contribution to climate change and the impacts of climate change on the project, and describes how the Commission will integrate climate considerations into its public interest determinations under the NGA.”

To determine whether to prepare an Environmental Impact Statement (“EIS”) or an environmental assessment (“EA”) in conducting its NEPA review, FERC will quantify the proposed project’s emissions under an assumed 100 percent utilization rate (i.e., the “full burn” rate).  If the “full burn” rate indicates that the project might produce 100,000 or more metric tons per year of carbon dioxide equivalent, FERC will presume the project to have a significant effect on the environment and, therefore, will prepare an EIS—unless record evidence, including mitigation measures proposed by the project sponsor, refutes that presumption.  FERC’s rationale for this threshold was that it captures “projects that may result in incremental GHG emissions that may have a significant effect upon the human environment.”  FERC explains that the 100,000 metric ton threshold “will cover the vast majority of potential GHG emissions from natural gas projects authorized by the Commission” and likely will “include projects transporting an average of 5,200 dekatherms per day and projects involving the operation of one or more compressor stations or LNG facilities.”

To assess a project’s GHG emissions, FERC will analyze a project’s emissions that are “reasonably foreseeable and have a reasonably close causal relationship” to the project.  That includes emissions resulting from “construction and operation of the project as well as, in most cases, GHG emissions resulting from the downstream combustion of transported gas.”  FERC explains that, in NGA section 7 proceedings, FERC will consider the project’s direct emissions to be reasonably foreseeable, but will make case-by-case determinations on whether upstream and downstream emissions are “a reasonably foreseeable effect” of the project.

Recognizing that judicial precedent on the scope of FERC’s NEPA obligations is different for NGA section 3 proceedings than for NGA section 7 proceedings, FERC explains that, for projects proposed pursuant to NGA section 3 (i.e., LNG import/export facilities and facilities at the place of import/export where a pipeline crosses an international border), it will consider the project’s direct emissions to be reasonably foreseeable, but it will not consider upstream and downstream emissions because the Department of Energy—not FERC—is the legally relevant cause of the natural gas exports from those facilities and the environmental impacts of those exports.

In contrast to its approach for determining whether to prepare an EIS versus an EA, FERC explains that it will not estimate the project’s reasonably foreseeable GHG emissions by assuming 100 percent project utilization.  Rather, FERC will estimate those emissions based on “a projection of what amount of project capacity will actually be used,” along with “evidence of other factors expected to reduce or offset” the project’s emissions.  With respect to the latter point, regarding factors that might reduce or offset emissions, FERC explains that, consistent with its “broad authority to attach reasonable terms and conditions to NGA section 7 certificates of public convenience and necessity and NGA section 3 authorizations,” it “encourage[s]” project proponents “to propose mitigation that will minimize climate impacts.”  FERC will consider those proposed mitigation measures on a case-by-case basis in balancing the need for a project against its environmental impacts.

FERC declines to prescribe any particular mitigation mechanisms, and instead gives project sponsors the flexibility to develop mitigation proposals.  FERC provides certain examples of possible mitigation measures, including participation in carbon offset markets and the use of physical mitigation measures, which FERC explains might be recoverable through the project sponsor’s proposed rates.  FERC explains that it will consider any proposed mitigation measures in both the agency’s NEPA analysis and in its determination, under the NGA, of whether the project is in the public interest.  Further, FERC explains that, when issuing an NGA certificate, the agency may require mitigation measures beyond those proposed by the project sponsor, by “condition[ing] its authorization on the project sponsor further mitigating” the project’s climate change impacts.

Finally, FERC determines that, although the GHG Policy Statement is an “interim” policy statement on which FERC is requesting public comment, the GHG Policy Statement will apply to both currently pending and new NGA section 3 and 7 applications.  FERC notes that applicants with pending applications “will be given the opportunity to supplement the record and explain how their proposals are consistent with [the GHG Policy Statement], and stakeholders will have an opportunity to respond to any such filings.”

Dissents

Commissioners Danly and Christie dissented from both the Updated Policy Statement and the GHG Policy Statement, each taking somewhat different approaches.  In his dissent from the Updated Policy Statement, Commissioner Danly argues that it contravenes the purpose of the NGA, which, as the Supreme Court has held, is to “encourage the orderly development of plentiful supplies of . . . natural gas at reasonable prices.”  He further contends that together with the GHG Policy Statement, the Updated Policy Statement will have “profound implications for the ability of natural gas companies to secure capital, on the timelines for Natural Gas Act (NGA) section 7 applications to be processed, and on the costs that a pipeline and its customers will bear as a result of the potentially unmeasurable mitigation that the majority expects each company to propose when filing its application and the possibility of further mitigation measures added unilaterally by the Commission.”  He further provides a detailed critique of the Updated Policy Statement based on the scope of FERC’s jurisdiction under the NGA and contends that NEPA does not expand that jurisdiction.  He also disagrees that FERC must look beyond precedent agreements to determine need in every proceeding.  Nor does he agree that FERC can deny a certificate based on the end-use of the gas.

Commissioner Danly also penned a separate dissenting statement specific to the GHG Policy Statement, asserting that the majority’s order is unlawful, unworkable, “deliberately drafted so as to evade judicial review,” and “will sow confusion throughout an industry that already suffers profound uncertainty.”  In sum, Commissioner Danly claimed that the purpose of the order “appears to be to actively discourage the submission of section 3 or section 7 applications by intentionally making the process more expensive, more time-consuming, and riskier.”  In both of his dissents, Commissioner Danly takes issue with the majority’s assertion that these policy statements are “non-binding.”  Given the nature of the majority’s “expectations” regarding what information it wants to see in pending and new Section 7 and Section 3 applications, Commissioner Danly contends that those expectations are, as a practical matter, legal obligations that may aggrieve applicants and their customers.

Commissioner Christie filed the same dissent in both dockets.  He argues that FERC has exceeded its authority by essentially re-writing both the NGA and NEAP, which can only be done by Congress.  He states that “Congress has not explicitly authorized the Commission to regulate in this area as required under the major questions doctrine, nor has it laid down an intelligible principle for the Commission to follow as required by the non-delegation doctrine.”  He notes that FERC is an economic regulator, not an environmental regulator.  He questions whether FERC:

  • can use a GHG analysis to reject a certificate,

  • can, or is required to, reject a certificate,

  • has unlimited authority to condition certificates,

  • can reject a project solely due to the interests of landowners and environmental justice communities, and

  • has the authority to consider upstream or downstream activities over which it has no jurisdiction under the NGA.

Looking Ahead

Exactly how FERC will implement the framework set forth in these two policy statements remains uncertain, and it will take some time for applicants and other stakeholders to unpack the policy statements and fully understand and come to terms with the Commission’s expectations. In particular, where FERC has not yet issued an order in a pending certificate proceeding (and there are several pending) the applicants and Commission staff will have to determine how to proceed; regardless of the process, those applicants’ filings to “supplement the record” will be dissected and likely opposed by landowners, environmental groups, and other parties, further delaying action

While the policy statements are subject to further comments or rehearing, it is unlikely that FERC will significantly revise the new policies. Policy statements generally are not appealable, because typically no party is considered to be legally aggrieved by a policy statement. The Commission was careful to make clear that the policy statements do not establish binding rules.  As indicated by Commissioner Danly’s dissents, there is some uncertainty about whether that is true for these policy statements and, therefore, it remains possible that entities might choose to appeal these policy statements.  In any event, to the extent the Commission applies the newly announced policies in the context of any particular Section 3 or Section 7 proceeding, parties to those proceedings will have the opportunity to seek judicial review of those policies.

As for the practical implications these policies will have for the natural gas industry, the proof will be in the pudding: either FERC is legitimately seeking the information it needs to prepare appeal-proof orders granting certificates, or—as the dissents indicate—the majority is attempting to impose procedural hurdles and legal standards that no applicant will ever be able or willing to meet due to cost, burden, uncertainty, and/or technical infeasibility.

©2022 Pierce Atwood LLP. All rights reserved.National Law Review, Volume XII, Number 52
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About this Author

Nicholas Gladd Partner Attorney Regulation Energy Law Maine D.C. Office Pierce Atwood LLP
Partner

Nic Gladd represents clients in complex transactional, regulatory, and litigation matters spanning the energy industry. Nic is experienced in structuring and negotiating commercial agreements for energy projects and operating assets,  counseling on power market design and cost-of-service ratemaking, and representing clients before administrative agencies and appellate courts.

Prior to joining Pierce Atwood, Nic was of counsel in the Energy & Infrastructure practice in the Washington, D.C. office of a large international law firm. In that...

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Randall S. Rich Pierce Atwood Partner DC Energy Energy Infrastructure Project Development & Finance
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Randall Rich is the Leader of our Energy Practice Group and the partner-in-charge of the Washington, DC office. Throughout his over 38 years of experience, beginning in the Office of General Counsel of the Federal Energy Regulatory Commission (FERC) and continuing for more than 23 years at Bracewell, LLP, Randy always strives to form close personal bonds with clients as well as trusting relationships with both regulators and his colleagues in the energy bar. He gains an intimate understanding of the business and legal needs of clients by working for extended periods in their offices, hand-...

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Valerie L. Green Pierce Atwood Partner DC  Energy Energy Infrastructure Project Development  Finance Litigation
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Valerie Green focuses her practice on natural gas, electricity, renewable energy, and regulatory and compliance issues involving the Federal Energy Regulatory Commission (FERC) and other administrative agencies. Clients rely on Valerie’s responsiveness, attention to detail, and deep knowledge of regulatory process and precedent in proceedings involving administrative litigation, compliance audits and investigations, and in appellate litigation before the U.S. Court of Appeals for the District of Columbia Circuit. Valerie’s focus on coalition and consensus building in situations involving...

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