FERC Issues Updated Policy Statement on Certification of Interstate Natural Gas Pipeline Applications | Practical Law

FERC Issues Updated Policy Statement on Certification of Interstate Natural Gas Pipeline Applications | Practical Law

The Federal Energy Regulatory Commission (FERC) issued an updated policy statement on the certification of new interstate natural gas facilities with updated criteria for determining whether a project is required by public convenience and necessity under the Natural Gas Act.

FERC Issues Updated Policy Statement on Certification of Interstate Natural Gas Pipeline Applications

by Practical Law Finance
Published on 23 Feb 2022 • USA (National/Federal)
The Federal Energy Regulatory Commission (FERC) issued an updated policy statement on the certification of new interstate natural gas facilities with updated criteria for determining whether a project is required by public convenience and necessity under the Natural Gas Act.
On February 18, 2022, the Federal Energy Regulatory Commission (FERC) issued two new policy statements that will significantly affect how it reviews natural gas infrastructure projects:
The Updated Policy Statement describes how FERC will evaluate all factors on whether a new, modified, or expanded natural gas project is required by public convenience and necessity under the Natural Gas Act (NGA). It is also intended to improve the legal durability of FERC's decisions regarding pipeline and liquified natural gas (LNG) projects following a series of court decisions raising concerns about FERC's prior approach (see Legal Updates, Vecinos Para El Bienestar De La Comunidad Costera v. FERC: Court Remands LNG Project Authorizations Because of Deficient Climate Change and Environmental Justice Impacts Analysis and Environmental Defense Fund v. FERC: US Appeals Court Vacates Certificate for Natural Gas Pipeline).
In deciding whether to issue a certificate of public convenience and necessity, the Updated Policy Statement provides that FERC must consider all of the benefits of a proposed project together with all of its adverse impacts, including economic and environmental impacts. The Updated Policy Statement, however, declines to adopt a bright-line test for how FERC would carry out this balancing of interests, explaining that FERC's approach must remain flexible enough for FERC to resolve specific cases and take into account the different interests that must be considered.
The Updated Policy Statement applies only to pending and new projects (including LNG projects) and those applicants with projects now pending before FERC will have the opportunity to supplement their records if necessary.
Both Republican Commissioners James Danly and Mark C. Christie dissented from the policy statements.

Background

The 1999 Policy Statement set out the criteria for FERC's review and approval of natural gas pipelines under Section 7 of NGA (15 U.S.C. §717f). The 1999 Policy Statement has been the subject of criticism in recent years for being outdated and inadequate given how significantly the US natural gas sector has changed since 1999 (see Article, Natural Gas Pipelines: 2018 In Review: Criticisms of FERC Review Process and Practice Note, US Oil & Gas Industry: Overview).
In April 2018, partially in response to these criticisms, FERC issued a notice of inquiry (NOI) to help it explore whether, and the extent to which, it should revise the approach established by the 1999 Policy Statement to determine whether a proposed natural gas project "is or will be required by the present or future public convenience and necessity" (163 FERC ¶ 61,042 (2018); see also, Legal Update, FERC Initiates Review of Natural Gas Pipeline Evaluation Procedures). Not much progress was made on this NOI because of, among other things, FERC did not have a full complement of commissioners for long periods of time (see Article, Natural Gas Pipelines: 2019 In Review: Volatility and Uncertainty at FERC).
In February 2021, FERC issued a new NOI (2021 NOI) that expanded the factors to be considered as part of the review including these projects' effects on environmental justice communities (174 FERC ¶ 61,125 (Feb. 2021)). The notice also considered new developments including a renewed focus on environmental issues, Biden executive orders that required federal agencies to pay greater attention to climate change, and judicial decisions that questioned the scope of FERC's review (see Legal Update, FERC Issues New NOI to Revisit the Review of its Policy Statement on Interstate Natural Gas Pipeline Applications). For more information on these issues, see Practice Notes, Biden Administration Energy and Climate Change Policies and Regulations: 2021 Tracker and FERC Review of Natural Gas Pipeline Projects and Article, Natural Gas Pipelines: 2019 In Review.
FERC also released a staff presentation and a fact sheet describing certain key issues contained in the Updated Policy Statement.

Updated Policy Statement Provisions

According to FERC, the Updated Policy Statement reaffirms many of the goals and objectives of the 1999 Policy Statement, including:
  • Giving appropriate consideration to the enhancement of competitive transportation alternatives, the possibility of overbuilding, the avoidance of unnecessary disruption of the environment, and the unneeded exercise of eminent domain.
  • Providing incentives for the optimal level of construction and efficient customer choices.
  • Providing incentives for applicants to structure their projects to avoid or minimize, the potential adverse impacts that could result from construction of the project.
For more information, see Practice Note, FERC Review of Natural Gas Pipeline Projects: Certification Process.

Differences Between the Updated Policy Statement and the 1999 Policy Statement

The Updated Policy Statement differs from the 1999 Policy Statement on a variety of issues. It goes further than the 1999 Policy Statement by:
  • Clarifying how FERC will execute its public interest obligations under the NGA.
  • Explaining that when making its determinations FERC intends to consider all impacts of a proposed project, including economic and environmental impacts together.
  • Calling for a robust consideration of impacts to landowners and environmental justice communities in FERC's decision-making process.

Reduced Reliance on Precedent Agreements

FERC noted that it has traditionally relied on precedent agreements between project applicants and shippers to establish the need for a project (see Legal Update, FERC Reaffirms Primacy of Precedent Agreements in Approving Natural Gas Pipeline Projects). Under the terms of the Updated Policy Statement:
  • While precedent agreements will remain an important evidence of need, precedent agreements alone are not sufficient to establish need for a project. Applicants should provide information to help explain why a project is needed, such as the intended end use of the gas. Applicants are encouraged to provide specific information detailing, among other things:
    • how the gas to be transported by a proposed project would ultimately be used;
    • why the project is needed to serve that use; and
    • the expected utilization rate of the project.
  • FERC may consider other evidence of need, including demand projections, estimated capacity utilization rates, potential cost savings to customers, regional assessments and statements from state regulators or local utilities.
Precedent agreements with affiliates, which have often been used to demonstrate market need, will no longer be sufficient given the ease with which this criteria can be manipulated. In a 2021 decision regarding Spire STL Pipeline LLC's pipeline, the court held that the decision to issue a certificate for the pipeline was arbitrary and capricious because it relied solely on a precedent agreement with an affiliate to establish market need for the proposed pipeline (see Legal Update, Environmental Defense Fund v. FERC: US Appeals Court Vacates Certificate for Natural Gas Pipeline).

Broader Analytical Framework

According to FERC, the 1999 Policy Statement included an analytical framework for how FERC evaluated effects of certificating new projects on economic interests (see Legal Update, FERC to Limit Consideration of the Environmental Impact of Natural Gas Projects). The Updated Policy Statement provides a more comprehensive analytical framework for FERC's decision-making process by specifically clarifying how FERC will evaluate all factors bearing on the public interest, including balancing economic and environmental interests in determining whether a project is required by public convenience and necessity.

More Robust Assessment of Public Benefits and Adverse Effects

Under the Updated Policy Statement, FERC will first consider four major interests that may be adversely affected by the construction and operation of new projects:
  • The interests of the applicant's existing customers. The Updated Policy Statement maintains FERC's existing policy that a pipeline applicant must be prepared to financially support its proposed project without relying on subsidization by its existing customers, although FERC notes it will no longer characterize that as a "threshold" question.
  • The interests of existing pipelines and their captive customers. FERC will continue to assess whether the new pipeline capacity that may result in overbuilding of new lines could impact:
    • existing pipelines through a potential loss of market share; and
    • captive customers of existing pipelines if they must pay for any resulting unsubscribed capacity in their rates.
  • The interests affecting the environment. FERC will consider environmental impacts, and any potential impact mitigation, along with other adverse impacts in making its public interest determinations under the NGA. It notes, however, that part of FERC's consideration of environmental impacts will include a project's potential impact on climate change (see Legal Update, FERC Issues an Interim Policy Statement on Greenhouse Gas Emissions from Natural Gas Pipelines).
  • The interests of landowners and surrounding communities, including environmental justice communities. In particular, FERC will:
    • to the extent practicable, consider a wider range of impacts than just the economic impact associated with a permanent right-of-way on a landowner's property. FERC's consideration of landowner impacts will be based on robust early engagement with all interested landowners, as well as continued evaluation of input from such parties during any given FERC proceeding; and
    • look carefully at potential impacts to environmental justice communities, including considering measures to eliminate or mitigate a project's adverse impacts on such communities and tailor mitigation to the needs of different such communities.

Practical Implications

The Updated Policy Statement, together with the policy on greenhouse gas emissions, will have a significant impact on natural gas project development. It may require developers to rethink project routes, engage more closely withs stakeholders, and increase the time it takes to review these projects.
Industry groups including the Interstate Natural Gas Association of America (INGAA) and the American Petroleum Institute (API), have already raised concerns about the potential effect of these policies on project costs, create regulatory uncertainty, and jeopardize the reliability and affordability of the US energy supplies.