FERC changes the game for the natural gas pipeline industry

At the Federal Energy Regulatory Commission’s (“FERC” or the “Commission”) meeting held on February 17, 2022, FERC announced sweeping changes to its guidance for the certificate process for interstate natural gas pipeline projects.  The Updated Certificate Policy Statement modifies a policy that has been in effect since 1999.  The three Democratic Commissioners supported the new policy, while the two Republicans dissented and expressed concerns that the new policy goes beyond the authority and jurisdiction of the Commission, and will have the effect of creating uncertainty for project developers and hampering the development of natural gas supplies in the US.

The updated policy statement looks at more than economic factors, and will evaluate all factors, including balancing between economic and environmental factors – although how balancing will take place will not be specified until individual certificate orders.  The Updated Policy Statement will apply to all new and pending projects, and applicants with projects pending will be able to supplement the record to provide information required by the new policy. 

The updated policy places a greater emphasis on evaluating the need for a project on a broader basis than the economics, requiring the Commission to consider circumstances surrounding precedent agreements (including whether they are with affiliates of the project sponsor), demand projections underlying the capacity subscribed, estimated capacity utilization rates, potential cost savings to customers, regional assessments, and statements from state regulatory commissions or local distribution companies.  The Commission will also look at information related to the intended end use of gas to demonstrate project need.

The updated policy focuses on the interests of four separate groups that may experience adverse impacts from a project: existing customers; existing pipelines and their captive customers; environmental interests; and landowners and surrounding communities, including environmental justice communities.  The policy statement continues the policy that a pipeline sponsor must be able to support its project financially without relying upon subsidization by existing customers, but this requirement will no longer be a stated threshold requirement.  The Commission will assess whether new capacity could impact other pipelines through a loss of market share; while the Commission does not protect pipelines from competition, it is required to consider the impacts to ratepayers, including a rise in rates, that could occur if a pipeline were to lose market share.

The policy will include consideration of environmental impacts and mitigation measures, and will include a consideration of climate change.  The consideration of impacts on landowners will consider a wider range of impacts than just economic impacts.  The evaluation of impacts on communities will involve robust early engagement with all interested landowners and will continue throughout the process.  Environmental justice communities must be identified early, and mitigation measures must be applied to environmental justice communities.  The amount and types of data that pipeline applicants must submit with regard to environmental justice communities appears to be substantial, and includes information on pre-existing conditions with considerations of factors such as air pollution and heat vulnerability, as well as the effects of pre-existing infrastructure (e.g., bus depots, highways, and waste facilities).  This represents a significant new area of study for pipeline applicants.

In conjunction with the updated Certificate Policy Statement, the Commission also issued an Interim policy statement on Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews which details the framework of how to evaluate GHG and climate impacts of new projects under NEPA and public interest determination under NGA section 7.  Although FERC is inviting comments on the interim policy statement to be submitted by April 4, the Commission will apply this new draft policy statement immediately to both new and pending projects.  The draft policy statement lays out the type of information FERC will find useful to evaluate a proposed project’s impact on climate change as well as any benefits and adverse impacts to determine whether the project is in the public convenience and necessity.

• The draft policy statement outlines the process for quantifying GHG emissions and determining if the project emissions are significant. The NEPA document will quantify the GHG emissions that are reasonably foreseeable and have a causal nexus to the project. Determination as to the reasonable foreseeability of are based on the amount of capacity utilized as well as other enumerated factors such as project utilization rate, upstream and downstream impacts, and proposed mitigation.

• With respect to determining utilization of the project, the Commission will examine utilization data from project shippers for new projects, historical utilization data for project expansions, demand projections, and amount of capacity used on an interruptible basis.

• The Commission is not providing guidance on the specific mitigation mechanism but will require applicants to propose mitigation proposals to mitigate all or part of a project’s climate change impacts and encourages sponsors to mitigate direct GHG emissions to the extent they have an adverse impact. Sponsors may also propose ways to mitigate upstream or downstream emissions to the extent they are reasonably foreseeable.

• The draft policy statement will be applied on a case by case basis and the policy statement does not establish a standard level of mitigation.  Additionally, the Commission may condition approval of the project upon further mitigation of these impacts.

• The draft policy statement will presume that if a project exceeds 100,000 metric tons per year of GHG emissions, the Commission will presume it will have a significant impact on the environment and therefore under NEPA an EIS will be undertaken. The Commission will consider mitigation measures in the record evidence in determining the amount of GHG emissions. In determining whether to perform an EA or an EIS, the Commission will assume 100% utilization of the project as a screen to determine whether to do an EA or EIS so as to avoid delays arising later in the process.

Taken together, these two policy statements represent a major shift in the paradigm for FERC’s evaluation of natural gas projects, and will create new challenges for project developers.  The fact that these policy statements are immediately applicable to pending projects creates a range of issues – both legal and practical - for current applicants:

• how does an applicant supplement its record with adequate information under these untested policy statements, and how will the additional delay for reopening the record and allowing for a new review impact the viability of pending projects, especially those with completed environmental reviews who have already been waiting months for a Commission decision? 

• For current applicants, natural gas pipelines and other potential developers, a similar array of legal and practical questions emerge – should all of these entities intervene in every pending project docket to protect their legal ability to challenge the policy statements when they are ultimately applied to their own projects? 

• In addition, the immediate applicability of these policy statements – one of which is an interim, not final, policy – is in and of itself a legal issue that may make these statements immediately subject to legal challenge.   

Ultimately, these new policy statements augur in a new vision of FERC’s authority and role in regulating the interstate natural gas industry in the United States.  It remains an open question whether this new vision will sustain political and judicial scrutiny.

Authored by Stefan Krantz, Kevin Downey, Zack Launer, and Allison Hellreich.