On April 19, 2018, the Federal Energy Commission (FERC) issued a Notice of Inquiry (NOI) into whether and how it should revise the approach it has used for almost 20 years to evaluate proposals to construct and operate interstate pipeline facilities.1 Specifically, the NOI seeks industry input regarding whether modifications to its Certificate Policy Statement are needed in order for FERC to evaluate whether a proposed pipeline project is a public convenience and necessity, as required by Section 7 of the Natural Gas Act (NGA).
FERC currently evaluates applications for certificates of public convenience and necessity to construct and operate new pipeline facilities pursuant to its Certificate Policy Statement, which was issued in 1999. The Certificate Policy Statement expresses a preference for incremental pricing of new facilities, which means that the costs of those facilities must be recovered solely from the shippers that use them, and the pipelines are at risk of cost underrecoveries. Existing pipeline customers that will not use the new facilities do not bear any responsibility for the costs of the construction or operation of those facilities. In addition, under the Certificate Policy Statement, an applicant can demonstrate need for new facilities through the execution of precedent agreements, including precedent agreements with affiliated shippers. The Certificate Policy Statement also sets forth the manner in which FERC will evaluate the environmental issues related to new pipeline projects. As FERC’s environmental review often takes more time than its review of economic implications of proposed pipeline facilities, FERC will evaluate the economic interests before fully turning to environmental analysis. More recently, FERC’s environmental analysis has considered the greenhouse gas implications of proposed pipeline projects.
The NOI recognizes that the natural gas industry has experienced significant changes since FERC issued the Certificate Policy Statement. Notably, technological advances have led to dramatically increased natural gas production, particularly in shale formations. Increased production has led to increased demand, especially for gas-fired generation resources. As a result, FERC has received increased applications for new pipeline and liquefied natural gas (LNG) facilities. The NOI notes that many of the new facilities are designed to transport gas from production areas to pooling points that permit access to the markets served by the interstate pipeline grid.
The NOI seeks input on four main issues: (1) the reliance on precedent agreements to demonstrate the need for a project; (2) the potential exercise of eminent domain and landowner interests; (3) the evaluation of alternatives and environmental effects under the NGA and the National Environmental Policy Act (NEPA); and (4) the efficiency and effectiveness of FERC’s review process.
First, with respect to precedent agreements, the NOI notes that when most precedent agreements were executed by local distribution companies, state commissions had an opportunity to evaluate the need for those agreements. Today, many precedent agreements are executed with producers or marketers, and those agreements may not face the same level of scrutiny. In addition, many precedent agreements may be executed by affiliates of the pipeline applying to construct the new facilities. The NOI, therefore, seeks input as to whether it should re-evaluate the use of precedent agreements to determine whether an application has demonstrated the need for its project and, if so, what evidence of need FERC should consider. The NOI also asks whether the fact that a shipper executing a precedent agreement is affiliated with the pipeline is relevant, whether the use to which the gas will be used should be considered, and whether the fact that multiple pipelines have been proposed for the same geographic region should affect the analysis of need for the various projects. Finally, the NOI questions whether FERC should consider alternatives to proposed projects when evaluating need.
Second, FERC notes that a number of recent applicants have been unable to secure rights-of-way prior to filing an application and, sometimes, prior to the issuance of FERC’s order on the application. The NOI also notes that landowner concerns have increased in recent years. The NOI, therefore, seeks industry input on the use of eminent domain, on landowner involvement and notification, and on right-of-way access.
Third, the NOI asks questions regarding the analysis of the environmental impacts of a proposed project. FERC seeks input regarding how it should consider project alternatives, whether it should consider additional environmental impacts that it does not currently consider or that would be addressed with a more regional approach to environmental review, and how FERC should evaluate greenhouse gas concerns.
Finally, FERC seeks input with respect to how it could more efficiently and effectively process applications filed pursuant to Section 7 of the NGA.
Comments on the NOI are due 60 days after publication in the Federal Register.