On September 4, the Federal Energy Regulatory Commission (FERC,
or the Commission) issued two orders concerning the
Commission's regulation of liquefied natural gas (LNG)
activities that were notable not for what the Commission ultimately
decided, but rather for the views expressed by new Commissioner,
and future Chairman, Norman Bay. In two separate orders involving
petitions for declaratory orders filed by Shell U.S. Gas &
Power LLC (Shell) and Pivotal LNG Inc.
(Pivotal),1 Commissioner Bay disagreed with his
colleagues on the proper interpretation of the statutory language
from the Energy Policy Act of 2005 (EPAct 2005) defining "LNG
terminal." While in both cases the Commission held that the
proposed LNG operations were not FERC-jurisdictional, the separate
opinions written by Commissioner Bay signal a more expansive view
of FERC jurisdiction over planned LNG activities. With Bay's
ascension to the FERC chairmanship expected to take place in April
2015, the differing views concerning the breadth of Commission
jurisdiction over LNG activities and projects will likely prompt
the submission of more petitions seeking jurisdictional
clarity.
With the recent increase in supplies of natural gas, there has
been more focus on exporting natural gas to other countries, using
natural gas as transportation fuel and transporting natural gas to
markets inaccessible by natural gas pipelines. The pursuit of
activities and projects that rely on LNG has become more prevalent
as developers and investors seek to capitalize on such trends.
Jurisdiction over small and midsize LNG projects remains an
evolving question and, as a result, several parties, such as Shell
and Pivotal, have come before the Commission seeking
clarity.
Part of the uncertainty surrounding FERC jurisdiction of small-
and mid-scale LNG facilities stems from the statutory definition of
"LNG terminal," which was added by EPAct 2005. This is
the same act that granted the Commission exclusive authority under
Section 3 of the Natural Gas Act (NGA) to approve or deny an
application for the siting, construction, expansion or operation of
an LNG terminal.2 The definition of LNG terminals
includes:
all natural gas facilities located onshore or in State waters that are used to receive, unload, load, store, transport, gasify, liquefy, or process natural gas that is . . . transported in interstate commerce by waterborne vessel.3
While the language has been understood to cover large-scale
coastal liquefaction and regasification facilities for the import
and export of LNG, its applicability to smaller-scale LNG
facilities for domestic uses is less clear. Section 7 of the NGA
also comes into play when determining FERC jurisdiction over
natural gas facilities. This section, among other things, grants
FERC jurisdiction over the transportation, and the sale for resale,
of natural gas in interstate commerce, as well as the construction,
acquisition and operation of facilities to transport natural gas in
interstate commerce.
Shell and Pivotal both argued their proposed LNG operations and
facilities would not be subject to Commission jurisdiction under
Section 3 or Section 7 based on the "vehicular natural gas
exemption" in Section 1(d) of the NGA. The Commission rejected
that premise, concluding that the exemption is not relevant for
determining jurisdiction if the party already engages in
jurisdictional activities, separate and apart from vehicular use
purposes. The Commission did find, however, that none of the
planned activities fell within the jurisdiction of Sections 3 or 7.
In the Shell Order, after a review of past precedent and an
analysis of the definition of "LNG terminal" introduced
by EPAct 2005, the Commission concluded that none of the waterborne
vessels, trucks and/or trains that Shell will use to import
Canadian LNG will be "natural gas facilities" that meet
the definition of "LNG terminal." In addition, there will
be no interconnected pipelines at any of Shell's proposed
facilities. Therefore, FERC concluded, none of the facilities
involved in Shell's LNG operations will be LNG terminals
subject to FERC's Section 3 authority. The Commission followed
similar reasoning in the Pivotal Order, finding no jurisdiction
under either Section 3 or Section 7.
By way of background, Shell's project would include LNG
facilities that would receive, store, offload and retail LNG. These
facilities would include a liquefaction unit located on the shore
of Lake Huron in Ontario, along with a docking and storage facility
in Michigan. The LNG produced in Ontario would be imported into the
United States via truck, train and waterborne vessel to be used as
vehicular and non-vehicular fuel. Shell also indicated it planned
to construct a liquefaction unit on the Mississippi River, where
LNG would be loaded onto waterborne vessels that would (1)
transport LNG to other vessels to be used as fuel or (2) transport
LNG to onshore storage facilities for subsequent use as
transportation fuel. Shell argued these facilities should not be
considered FERC-jurisdictional LNG terminals.
Pivotal's planned project would expand its production of LNG
at its five inland facilities not currently subject to FERC
jurisdiction. Pivotal anticipated that the LNG it produced may be
transported via waterborne vessel to customers in the contiguous
United States as well as non-contiguous states or territories
(e.g., Hawaii and Puerto Rico). Pivotal further noted that none of
the LNG would be regasified and injected into the
FERC-jurisdictional interstate pipeline system.
Notably, in both orders, Commissioner Bay disagreed with the
majority's interpretation of "LNG terminal" from
EPAct 2005. In his dissent in the Shell Order, Commissioner Bay
stated he would have found Shell's proposed LNG activities to
be FERC-jurisdictional under Section 3 of the NGA. Bay based his
reasoning on the statutory definition of "LNG terminal."
He criticized FERC for trying to limit the plain meaning of the
definition, and he argued that if the statute is read literally, it
is clear Shell's facilities are "LNG terminals."
According to Bay, Congress intended to preempt state action and
used broad language to accomplish that result, thereby providing
"exclusive authority" to FERC with respect to LNG
terminals, including "all natural gas facilities" in
which natural gas was "transported in interstate commerce by
waterborne vessel."4 In other words, Bay would
have asserted jurisdiction over Shell's facilities regardless
of the fact that no transportation via interstate pipeline was
contemplated. In his concurrence in the Pivotal Order, Bay
reiterated his disagreement with the majority's interpretation
of "LNG terminals" but would not assert jurisdiction
because Pivotal's plants are located well inland.
In both orders, the Commission based its rulings of
non-jurisdictional status on the specific activities proposed by
each applicant and noted instances where slight changes could
subject the applicants to FERC jurisdiction. As such, the
applicability of these orders to other parties is somewhat limited.
FERC acknowledged as much in the Pivotal Order when it noted
"[t]he reasoning set forth herein will be applicable only to
other situations with the same underlying relevant
characteristics."5 Therefore, unless a
company's proposed operations are directly on point with a
similar proposal that has been ruled on by the Commission, an
entity is well-served in filing a new petition with the FERC laying
out the unique circumstances of its planned operations.
While the Commission's rulings in the Shell and Pivotal cases
bode well for developers of small-scale LNG operations seeking to
serve new markets as the rulings lower the regulatory barriers
facing such projects, the fact that Commissioner Bay will be the
Chairman in approximately six months suggests that these matters
are far from settled. Clearly, on the basis of these two orders,
Chairman Bay will have a more expansive view of FERC jurisdiction
over LNG projects than his fellow Commissioners. The fact-specific
nature of these orders, coupled with the uncertainty over the
breadth of FERC's regulatory approach, enhances the need and
urgency for parties to seek Commission guidance on the
jurisdictional aspects of their proposals.
Footnotes
1 Shell U.S. Gas & Power,
LLC, 148 FERC ¶ 61,163 (2014) (Shell
Order); Pivotal LNG, Inc., 148
FERC ¶ 61,164 (2014) (Pivotal
Order).
2 15 U.S.C. § 717b(e).
3 Pub. L. No. 109-58, § 311(b), 119 Stat. 594, 685 (2005)
(codified at 15 U.S.C. § 717a(11)).
4 15 U.S.C. § 717b(e)(1).
5 Pivotal Order at P 26.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.