On September 6, 2019, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) dismissed the City of Oberlin, Ohio’s and the Coalition to Reroute Nexus’s (collectively, “Petitioners”) request to vacate FERC’s authorization of Nexus Gas Transmission, LLC’s (“Nexus”) to (1) construct and operate an interstate natural gas pipeline through parts of Ohio and Michigan; and (2) use eminent domain to acquire any necessary rights of way to complete the project (see December 18, 2018 edition of the WER). The D.C. Circuit agreed with Petitioners, however, that the Commission failed to adequately substantiate its finding that it lawfully credited Nexus’s precedent agreements—under which shippers agree to enter into service agreements once the pipeline is built—with foreign shippers serving foreign customers as evidence of market demand for the interstate pipeline. As a result, the D.C. Circuit remanded this issue to the Commission, without vacatur, for further explanation of the decision.

On November 20, 2015, Nexus sought the Commission’s authorization under section 7 of the Natural Gas Act (“NGA”) to build and operate approximately 257 miles of a new natural gas pipeline to transport 1.5 million dekatherms per day of Appalachian Basin shale gas to consuming markets in northern Ohio, southeastern Michigan, and Ontario, Canada. In determining that Nexus’ project was in the public convenience and necessity, the Commission (1) found that Nexus’s precedent agreements were “the best evidence” that the pipeline served unmet market demand; (2) approved Nexus’s proposed 14% return on equity (“ROE”), subject to the condition that Nexus design its initial customer rate based on a hypothetical capital structure of 50% equity and 50% debt; and (3) found that the pipeline does not “represent a significant safety risk to the public.” Following the Commission’s authorization, the U.S. District Court for the Northern District of Ohio found that Nexus had the right to exercise eminent domain to condemn certain easements over Petitioners’ properties, and Nexus subsequently exercised that right. In response, Petitioners asked the D.C. Circuit to vacate the Commission’s order granting Nexus an NGA section 7 certificate, along with its orders on rehearing.

On review, the D.C. Circuit rejected Petitioners’ arguments that the precedent agreements for the pipeline were inadequate to demonstrate project need because they only amounted to 59% of the pipeline capacity and because half of the agreements were with Nexus’s affiliates. In doing so, the D.C. Circuit noted that the Commission’s Certificate Policy Statement does not include a bright line test for how much capacity must be subscribed. The D.C. Circuit further noted there was no evidence of self-dealing with the affiliate precedent agreements, and Nexus remained at risk for unsubscribed capacity. The D.C. Circuit found, however, that the Commission inadequately explained why—under the NGA, the Takings Clause, and D.C. Circuit and Supreme Court precedent—it is lawful for the Commission to credit precedent agreements with foreign shippers serving foreign customers to show that an interstate pipeline is required by the public convenience and necessity for transportation in interstate commerce. The D.C. Circuit clarified that interstate commerce does not include foreign commerce within the meaning of the NGA. The D.C. Circuit also questioned whether basing a finding of project need on precedent agreements for service to foreign customers presents an issue under the Takings Clause because Nexus would not be exercising eminent domain under its NGA section 7 certificate authority for a “public use.” Accordingly, the D.C. Circuit remanded the issue to the Commission for further explanation.

The court also rejected Petitioners’ other claims regarding the Commission’s Nexus order. Among other things, the D.C. Circuit found that the Commission sufficiently explained its reliance upon the “established policy” of balancing both consumer and investor interests to the pipeline at issue in authorizing a 14% ROE. The D.C. Circuit also upheld the Commission’s finding that the pipeline does not “represent a significant safety risk to the public,” because the Commission, in making its determination, referenced the safety standards established by the U.S. Department of Transportation (“DOT”) for natural gas pipelines. Finally, the D.C. Circuit rejected Petitioners’ contention that the Commission arbitrarily failed to consider moving the pipeline away from residences and buildings, in part, because DOT regulations do not require natural gas pipelines to remain a minimum distance from residences or buildings. The D.C. Circuit further noted that Petitioners’ claim failed because the Commission graded every mile of the Nexus pipeline using the DOT’s classification system based on population density.

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