In recent years, as the shale revolution has led to natural gas development in nontraditional energy states, landowners and others have become increasingly active before the Federal Energy Regulatory Commission in natural gas certificate proceedings.
Against this background, the chairman of FERC, Kevin McIntyre, announced in December 2017 that the commission will embark on a review of its 1999 Certificate Policy Statement for deciding when a proposed natural gas project is required by the public convenience and necessity. Based on comments from FERC commissioners, this review may include potential changes to the commission’s environmental review process under the National Environmental Policy Act.
The Natural Gas Act and FERC’s Review
Section 1(b) of the Natural Gas Act gives the commission jurisdiction over the transportation of natural gas in interstate commerce. Under Section 7(c) of the NGA, companies must obtain a certificate of public convenience and necessity from the commission to construct any facilities for natural gas transportation.
A pipeline with a commission-issued certificate has the right to exercise eminent domain to acquire the land necessary to construct and operate its proposed new pipeline when it cannot reach a voluntary agreement with the landowner.
FERC’s Certificate Policy Statement
The Certificate Policy Statement provides the analytical framework the commission uses to decide when a proposed project is required by the public convenience and necessity. The commission’s review evaluates a certificate proposal on a case-by-case basis based on the facts and circumstances relevant to the application, and balances demonstrated market demand against potential adverse environmental impacts and private property rights.
Once a certificate application is filed, the threshold question applicable to an existing pipeline is whether the project can proceed without financial subsidies from the pipeline’s existing customers. This does not mean that the applicant must bear all the financial risk of the project; the risk can be shared with the new customers, but it cannot be shifted to existing customers. If an applicant can show that the project is financially viable without financial subsidies from existing customers, it has established the first indicator of public benefit.
The next step is to determine whether the applicant has made efforts to eliminate or minimize any adverse effects the project might have on the existing customers of the pipeline proposing the project, existing pipelines in the market and their captive customers or landowners and communities affected by the route of the new pipeline. This is not a decisional step in the process, but is a point “where the Commission will review the efforts made by the applicant and could assist the applicant in finding ways to mitigate the effects, but the choice of how to structure the project at this stage is left to the applicant’s discretion.”
To demonstrate that its proposal is in the public convenience and necessity, “an applicant must show public benefits that would be achieved by the project that are proportional to the project’s adverse impacts. The objective is for the applicant to create a record that will enable the Commission to find that the benefits to be achieved by the project will outweigh the potential adverse effects, after efforts have been made by the applicant to mitigate these adverse effects.”
Public benefits might include meeting unserved demand, eliminating bottlenecks, accessing new supplies, lowering costs to consumers, providing new interconnects that improve the interstate grid, providing competitive alternatives, increasing electric reliability or advancing clean air objectives. The evidence necessary to establish the need for the project usually includes a market study.
The commission also conducts an independent environmental review of a project under the National Environmental Policy Act, even if the project does not rely on the use of eminent domain and the applicant structures the project to avoid or minimize adverse impacts on any of the identified interests. This policy approach strives to advance the development of a sustainable energy infrastructure that supports economic growth, environmental protection and other social benefits over the life of the project.
The commission begins its environmental review at the time an application is filed with the commission; consequently, its environmental and economic review of a proposed project generally proceeds concurrently. The Policy Statement did not alter this process, indeed:
[t]he Policy Statement encouraged project sponsors to acquire as much of the right-of-way as possible by negotiation with the landowners and explained how successfully doing so would influence the Commission’s assessment of public benefits and adverse consequences. The Policy Statement nonetheless recognized that, under section 7(h) of the NGA, a pipeline with a Commission-issued certificate has the right to exercise eminent domain to acquire the land necessary to construct and operate its proposed new pipeline when it cannot reach a voluntary agreement with the landowner.
In short, the commission examines landowners’ concerns and endeavors to mitigate adverse impacts where possible and feasible.
The breadth and scope of FERC’s environmental analysis of pipeline projects increasingly has been challenged by landowners, environmental groups and others. Indeed, the commission has affirmed that the length of the waiver period for state agencies to issue a water quality certification under section 401(a)(1) of the Clean Water Act, 33 U.S.C. § 1341(a)(1) (2012) (CWA), is one year.
Notwithstanding this affirmation, the commission expressed concern “that states and project sponsors that engage in repeated withdrawal and refiling applications for water quality certifications” are engaging in actions contrary to the public interest and the spirit of the CWA.
Nonetheless, the commission has not concluded that such practice “violates the letter of the statute.” Questions regarding the intersection of the commission’s certificate and environmental review will likely be raised in the Certificate Policy review proceeding.
While the commission has not formally initiated a proceeding or issued a proposal, each commissioner commented at the December open meeting on the potential proceeding:
- Chairman McIntyre announced that the commission would reexamine the Policy Statement. He committed to an open, transparent process.
- Commissioner LaFleur indicated she would like the proceeding to examine how the commission determines the economic need for a proposed pipeline. She pointed out that the commission’s practice is to rely on precedent agreements, while the Policy Statement detailed additional factors that should be examined. She also hopes that the proceeding addresses the commission’s environmental review and downstream impacts of the project.
- Commissioner Chatterjee supports the current Policy Statement but committed to having an “open door” to consider various viewpoints.
- Commissioner Powelson believes a review is important to reflect good governance and committed to having an open mind.
- Commissioner Glick believes a review of the Policy Statement is important. Specifically, he wants any proceeding to examine whether the commission should rely on more than precedent agreements to show economic need. He also wants the commission to review how it evaluates the environmental impacts of a proposed project, including greenhouse gas emissions. Finally, he questioned whether the commission should continue to issue “conditional” certificates that require additional submissions or analysis.
In addition to the topics raised in the commissioners’ comments, it will be interesting to see if the commission will revisit some of the questions it raised in the proceeding that preceded the issuance of the 1999 Certificate Policy Statement. In that proceeding, the commission asked a variety of questions, including:
- Whether proposed projects that will establish a new right-of-way in order to compete for existing market share should be subject to the same or different considerations as projects that will cut a new right-of-way in order to extend gas service to a frontier market area.
- Should the commission authorize all applications that meet minimum regulatory requirements, and then let the market pick winners and losers?
- Should the commission select a single project to serve a given market and exclude all other competitors?
- Should the commission approve an environmentally acceptable right-of-way and let potential builders compete for a certificate?
- Should the commission look behind the precedent agreements or contracts presented as evidence of market demand to assess independently the market’s need for additional service?
- Should the commission apply a different standard to precedent agreements or contracts with affiliates than with nonaffiliates?
- Are precedent agreements primarily with affiliates sufficient to meet the statutory requirement that construction must be required by the public convenience and necessity?
- Should the commission, in an effort to check overbuilding and capacity turnback, take a harder look at proposals that are designed to compete for existing market share rather than bring service to a new customer base, and what particular criteria should be applied in looking at competitive applications versus new market applications?
- Should the commission encourage prefiling resolution of landowner issues by subjecting proposed projects to a diminished degree of scrutiny where the project sponsor is able to demonstrate it has obtained all necessary right-of-way authority?
- Should a different standard be applied to project sponsors who do not plan to use either federally- or state-granted rights of eminent domain to acquire right-of-way?