On February 18, 2022, the Federal Energy Regulatory Commission ("FERC" or the "Commission") issued two interconnected policy statements (the "Policy Statements") regarding its review and certification of interstate natural gas facilities under the Natural Gas Act ("NGA").

The Updated Policy Statement on Certification of New Interstate Natural Gas Facilities (the "Updated Policy Statement") revises how FERC "will evaluate all factors bearing on the public interest in determining whether a new interstate natural gas transportation project is required by the public convenience and necessity" under the NGA.1 The Interim Policy Statement on Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews (the "Interim GHG Policy Statement") sets out FERC's "procedures for evaluating climate impacts under the National Environmental Policy Act (NEPA) and describes how [FERC] will integrate climate considerations into its public interest determinations under the NGA."2

Taken together, the Policy Statements (though officially non-binding) could profoundly affect the review and approval process for certain natural gas infrastructure projects in the United States—including both new and currently pending applications—and are very likely to face sustained legal challenges. Commissioners James Danly and Mark Christie voted against the Policy Statements and issued sharp dissents that may provide a roadmap to challenge them and/or their implementation.

FERC sought comment on various aspects of the Interim GHG Policy Statement with a deadline of April 4, 2022, but did not seek comment on the substance of the Updated Policy Statement.

The Updated Policy Statement

The Updated Policy Statement grew out of a 2018 Notice of Inquiry (the "2018 NOI"), in which FERC sought comments concerning whether it should revise its approach under the then-effective 1999 Certificate Policy Statement for determining "whether a proposed natural gas project is or will be required by the present or future public convenience and necessity."3 Specifically, FERC sought input on whether, and if so how, the Commission should adjust its methodology for determining whether there is a need for a proposed pipeline, including the Commission's consideration of "precedent agreements with prospective customers for long-term firm service as the principal factor in demonstrating project need."4 In addition, the Commission asked for input regarding the use of eminent domain and consideration of environmental impacts.

Determining Project Need

The Updated Policy Statement uses the same framework as the prior 1999 certificate policy statement in that it seeks to compare the need for a project with the potential adverse impacts to determine whether the project would serve the public convenience and necessity. However, the new Updated Policy Statement significantly changes the specific aspects the FERC will focus on to analyze a proposed project.

The Updated Policy Statement notes that FERC had, in practice, traditionally relied almost exclusively on the existence of precedent agreements to establish project need. Moving forward under the new Updated Policy Statement, "the existence of precedent agreements may not be sufficient in and of themselves to establish need for the project."5 Moreover, precedent agreements executed between affiliates "will generally be insufficient to demonstrate need."6 Instead, FERC will "consider all relevant factors bearing on the need for a project," which may include the following:

  • The circumstances surrounding precedent agreements, including "whether the agreements were entered into before or after an open season and the results of the open season, including the number of bidders, whether the agreements were entered into in response to [local distribution company] or generator requests for proposals (RFP) and, if so, the details around that RFP process, including the length of time from RFP to execution of the agreement."7
  • The ultimate use for the gas, why the project is needed to serve that use and the utilization rate for the project.8
  • The current and projected future demand for the project, including any analyses showing how market trends would affect future need for the project.9
  • Assessment of alternatives to the project, including "information indicating that other suppliers would be able to meet some or all of the needs to be served by the proposed project on a timely, competitive basis or whether other factors may eliminate or curtail such needs."10
  • For projects undertaken to respond to increased natural gas demand, FERC states it will consider evidence that demonstrates such projected demand increase. This evidence may include a market study that projects volumetric or peak day load growth.11
  • For projects undertaken to add different supplies of natural gas to a market, FERC states it will consider evidence to demonstrate consumer benefits. This evidence "may include projections of the net benefits, for example projected lower natural gas prices for consumers due to increased supply competition, compared to the incremental costs of transportation on the new pipeline."12
  • For projects undertaken to support more efficient system operations or respond to changing safety or environmental requirements, FERC will examine how the proposed facilities provide the expected benefits. A project applicant may also document how the proposed project avoids adverse impacts or satisfies any changed regulatory requirements.13

In a major departure from its prior practice, FERC stated that if the applicant does not establish need, FERC "will not undertake any further consideration of the project's benefits or adverse effects."14 Thus, project need is now the threshold determination that must be met by a project applicant. Only when need has been established will FERC proceed to evaluate the project's benefits and adverse impacts.

Consideration of Adverse Impacts

The Updated Policy Statement expressly provides that FERC may deny an application for a new project based on any of the following four major interests that may be adversely affected by a new project:15

  • The impacts on the existing customers of the pipeline applicant.16 FERC requires that a certificate applicant be able to financially support its proposed project without relying on subsidization by its existing customers. The requirement of "no financial subsidies" was treated as a "threshold question" under the prior 1999 certificate policy statement, but project need is the threshold determination under the new Updated Policy Statement. Now, the "no financial subsidies" policy will be considered by FERC under the adverse impacts criteria.
  • The impacts on any existing pipelines and their captive customers.17 FERC notes important concerns for existing pipelines in the relevant market who may be affected by potential loss of market share and being left with unsubscribed capacity. This risk may also impact captive customers of these existing pipelines who may be required to pay for any resulting unsubscribed capacity in their rates. In this regard, FERC emphasized that it "must consider the possible harm to captive customers that can result from a new pipeline, regardless of whether there is evidence of unfair competition."18 FERC notes that comments from existing pipelines and their customers will be important to its review, as will comments from state utility and public service commissions.
  • The Updated Policy Statement provides that environmental concerns will now be balanced together with all other impacts and weighed against the evidence of need and other potential benefits.19 FERC expressly states that it expects projects to be structured to avoid or minimize potential adverse environmental impacts. Moreover, FERC expects applicants to propose mitigation measures to minimize environmental impacts, and it may require additional terms and conditions before granting a certificate. FERC also notes that it will consider climate impacts addressed in the Interim GHG Policy Statement in additional to other environmental impacts when making public interest determinations. The two dissents to the Updated Policy Statement argue that it is unclear just what an applicant might need to do in this area to satisfy the Commission's criteria.
  • The interests of landowners and surrounding communities.20 The 1999 certificate policy statement focused primarily on economic impacts associated with a right-of-way on a landowner's property, but the Updated Policy Statement notes that FERC's analysis will now be more expansive. The review will include consideration of steps a pipeline applicant takes to acquire lands "through respectful and good faith negotiation, as well as the applicant's plans to minimize the use of eminent domain upon receiving a certificate."21 FERC also specifically notes that its analysis will include assessing impacts to environmental justice communities and any necessary mitigation that may lessen such impacts.22 In this regard, FERC explains that data from the Environmental Protection Agency's (EPA) EJSCREEN may be useful to identify environmental justice communities, and further encourages applicants to consult with other authoritative guidance provided by the EPA, the Council on Environmental Quality, and other sources.23 FERC also notes the importance of considering the cumulative and incremental impacts on identified communities.

Weighing Public Benefits Against Adverse Effects

In weighing benefits under the 1999 certificate policy statement, FERC would first determine if any adverse effects existed on the economic interests of existing customers, existing pipelines, or landowners and their communities, following mitigation efforts. If so, FERC would balance the public benefits of the project against those residual adverse economic effects. If the benefits outweighed the economic effects, FERC would then consider the environmental impacts. Under the Updated Policy Statement, however, FERC will review all economic and environmental impacts of the proposed project concurrently so that all benefits are weighed against all of its adverse impacts together.24

The Interim GHG Policy Statement

The Interim GHG Policy Statement threatens to increase both the time and expense of natural gas infrastructure reviews under NEPA. By way of overview, when a federal agency proposes to take a major federal action, it must conduct a review of that action under NEPA. The extent of that review depends upon the significance of the impact of the action on the human environment, beginning with categorical exclusions. Put simply, agencies will forego a detailed environmental analysis for those enumerated classes of actions for which no significant impact is expected. For example, FERC categorically excludes from substantial NEPA review pipeline construction and modification projects described in "blanket" certificate applications.

If a proposed action does not fall within a categorical exclusion, the agency must prepare an Environmental Assessment ("EA") to determine whether the action has the potential to result in significant environmental effects. If it does not, the review ends with a Finding of No Significant Impact ("FONSI"). If it does, then the agency must prepare a costly and time consuming Environmental Impact Statement ("EIS"), including an analysis of alternatives to the action, a description of the affected environment and a fulsome discussion of the environmental consequences.

The Interim GHG Policy Statement establishes a rebuttable presumption that proposed infrastructure projects emitting 100,000 metric tons of CO2 equivalents have a significant impact on climate change. This is a very low bar that will sweep up many projects. FERC estimates that pipelines that transport more than 5,200 dekatherms per day, and projects that involve the operation of one or more compressor stations, would require an EIS.25 By way of example, depending upon the type of pipe used, the EPA estimates CO2 emissions can be as high as 2,750 metric tons of CO2 per mile per year; accordingly, many pipeline projects could exceed the 100,000 metric tons of CO2 threshold.

Since many (if not all) federal agencies now include climate change impacts in their NEPA review, this presumption places a large number of natural gas projects into the EIS category. To determine the projected emissions, the Interim GHG Policy Statement guides federal agencies to include all reasonably foreseeable emissions based not only on the capacity of the project itself, but also on those emissions with a close causal relationship to the project. This includes everything from emissions from construction equipment to downstream combustion of the transported gas. It is not hard to see how this quickly could lead to exceedance of the 100,000 metric ton threshold and a full EIS process.

The EIS process necessarily entails greater cost and time than the EA. A project proponent, typically using a consultant, must prepare a draft EIS including the above elements. FERC then must obtain input from any "cooperating" agencies having jurisdiction or relevant expertise (such as EPA or PHMSA), before issuing the draft EIS with initial recommendations for approval or denial. That starts a 45-day (or more) public comment period, during which time FERC must hold public meetings. Upon the conclusion of the comment period, FERC responds to any public comments made to the draft, and then revises the EIA as warranted before issuing the final EIS. Thirty days after notifying the public of the availability of the final EIS, FERC will issue a final order approving or denying the application. While the process timing may differ based on complexity and time required to produce the drafts themselves, a typical EIS process can take more than 12 months while an EA might require as few as three.

Conclusion

FERC approved both Policy Statements on a split vote of three to two along party lines. The two dissenting commissioners authored vociferous written dissents that detail each of their respective policy and legal objections. Recent commentary suggests the likely beneficiaries from the Policy Statements appear to be the environment; lawyers and consultants (i.e., lengthier certification processes as participants wade through a "tyranny of vagueness"26); existing pipelines (i.e., less competition); large landowners opposed to oil and gas pipelines; and environmental justice communities. On the other hand, new project developers and rate-payers (i.e., fewer projects, less available supply, higher natural gas prices) may face more significant challenges.

Legal challenges to the Policy Statements seem a virtual certainty, but the likely form and timing of such challenges remains unclear. In any case, developers, owners and operators of, and investors in natural gas infrastructure projects in the U.S. should stay tuned.

Footnotes

1. Updated Policy Statement, 178 FERC ¶ 61,107 (2022).

2. Interim GHG Policy Statement, 178 FERC ¶ 61,108 (2022).

3. Certification of New Interstate Natural Gas Facilities project, 163 FERC ¶ 61,042 (2018).

4. Updated Policy Statement at P 10.

5. Id. at P 54.

6. Id. at P 60.

7. Id.

8. Id. at P 55.

9. Id. at P 59.

10. Id.

11. Id. at P 56.

12. Id. at P 57.

13. Id.

14. Id. at P 61.

15. Id. at P 62.

16. Id. at PP 63-66.

17. Id. at PP 67-70.

18. Id. at PP 68.

19. Id. at PP 71-76.

20. Id. at 77-93.

21. Id. at P 85.

22. Id.

23. Id. at P 87.

24. Id. at PP 94-99.

25. Id. at P 89.

26. Interim GHG Policy Statement, 178 FERC ¶ 61,108 (2022) (Danly, dissenting).

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