Worldwide, the energy industry is going through a sea change. In the U.S., this change is driven by the politics of climate change, especially the U.S. Environmental Protection Agency's recently released Clean Power Plan, the centerpiece of President Obama's policy to reduce greenhouse gas emissions.
Regardless of the debate over the EPA's rulemaking, which received over 4 million comments, one impact is clear: Despite the Clean Power Plan's surprising de-emphasis on a large-scale buildup of new natural gas capacity (as predicted under the draft plan), U.S. electric power generation will continue to shift from coal to natural gas as the most cost-effective approach to achieving new clean power targets — provided that gas can be delivered on time.
However, the coal-to-gas shift will require the nation to expand and strengthen its infrastructure in order to find, produce and store natural gas. It will also require U.S. operators to transport natural gas, and especially to site and build new gas pipelines.
The energy industry is rightly concerned about the need to reduce pipeline permitting delays, especially those associated with federal and state agencies that must sign off on reviews. Coal-to-gas fuel switching requires regulatory reviews of new and needed energy infrastructure to be timely, predictable and adequate to meet market demand and the needs of consumers for reliable supply and long-term price stability.
These gas infrastructure projects, with capital expenditures of hundreds of millions to billions of dollars, and are financed and built by public and private companies. But these projects are approved by an agency of increasing prominence, the Federal Energy Regulatory Commission.
News media accounts suggest that FERC permitting uncertainties are a problem, leading to increased gas prices and the reluctance of downstream generators to build natural gas generating projects. That's why both the House of Representatives and Senate have taken up bills to attempt to reduce the uncertainty and time requirements of the federal and state regulatory process.
As these House and Senate bills work their way through Congress, it's important for all involved to make evidenced-based decisions. In the words of Mark Twain: "It's not what you know that gets you into trouble. It's what you know that ain't so."
Currently, the debate, which surrounds modernizing federal energy policy, including natural gas infrastructure development, appears to be based more on anecdotes and not objective data. Put another way, there's "a lot we know that ain't so."
What follows are five examples of things that "ain't so" — five myths about the energy regulatory process.
Myth #1: Regulatory Approval Is Uncertain
Obtaining approval to site and construct an interstate pipeline or liquefied natural gas terminal typically requires many federal interagency authorizations and thus many opportunities for the government to say no or to ask for more information. Industry applicants commonly reference "commission approval" as a "critical uncertainty" for these large-scale growth projects. In fact, however, the data shows that FERC approval is seldom denied. Actually, since 2008, FERC approved 95.8 percent of applications for natural gas infrastructure projects, including new construction, expansion and LNG projects.
FERC dismissed only 0.9 percent of projects during the approval process. The remaining slice of the pie is accounted for by company-initiated decisions to withdraw or suspend a project for business reasons. FERC's regulatory "up or down" permitting decisions are, in fact, overwhelmingly "up."
Myth #2: Approval Process Takes Too Long
Though permitting is just one step in the process of building a natural gas pipeline, it is critical to the timing of investments, and many assert that the current regulatory scheme takes too long. Thus, Congress has proposed a mandatory timeframe for reviewing all natural gas projects.
But consider the facts used by Congress and the industry. A "delay" is typically computed by comparing the company's targeted in-service date (i.e., when the company expects the FERC review process to end and gas to flow), to the actual in-service date. Using this measure, what does the data show?
This analysis compiled data from all completed new construction, expansion and LNG projects filed with FERC over the past eight years. The resulting data-driven examination compared company-targeted in-service dates with actual in-service dates, finding that nearly 85 percent of the projects (actually, 84.3 percent or one standard deviation around the mean difference) are completed between 140 days before and 257 days later than companies' anticipated dates.
There are, of course, outliers. The fastest 5 percent of reviews are completed from 71 to 554 days before company-provided targets. The slowest 5 percent are completed as many as 372 to 1494 days late, or after company-provided targets. Thus, completing the permitting process takes time, but many projects are completed well ahead of expectations. Focusing on these outliers, rather than on the central, well-defined tendencies may cause decision-makers to make poor judgments.
Myth #3: FERC Proceedings Are Unnecessarily Complex
FERC proceedings are lengthy, even complex. A project often involves many thousands of fillings and takes, on average, 610 days to go in-service. Often, there are many moving parts. For example, a new construction proceeding averages 15 federal and state approvals.
But the process itself is well-defined and transparent (i.e., every filing is accessible to all interested parties in a timely manner on FERC's comprehensive electronic library). In addition, the process is managed by FERC, the lead agency for coordinating federal interagency authorizations, including National Environmental Policy Act compliance. As a result, applicants have access to an "overseer" even if not a one-stop shop. So, complex, yes; unnecessarily complex, probably not, especially given the number of stakeholders, both public and private, with access to this trove of filings.
Myth #4: Environmental Advocacy Groups Have No Voice
Many, including environmental advocacy groups, view the FERC approval process as little more than a "rubber stamp." The data show otherwise.
Objections by major public interest groups to permitting decisions adds, on average for completed projects, five and one-half months (or 69 percent more time than the average) to the duration to obtain FERC approval when compared to projects without protest. Those protesting a proposed pipeline voice their concerns on a frequent basis to the tune of 52 protest filings per proceeding during the past four years.
Put another way, the impact of protests by environmental groups is more consequential than even they appreciate, expanding debate and increasing the time of review. While it may not lead to the dismissal of a project before FERC, it often leads to greater consideration of a multitude of environmental issues, including the route of a pipeline.
Myth #5: Regulatory Decision-Making Is Excessively Qualitative
While energy regulatory proceedings, such as traditional litigation, rely on precedent, these proceedings also rely on more quantitative analysis than traditional litigation cases. They are dependent on discrete financial and project values like cost projections, mileage and capacity, which result in highly quantitative submissions, such as environmental impact studies, field surveys and construction reports.
With the high degree of transparency afforded by FERC, each of these filings can be accessed to build a project profile. And, with such a voluminous data set, philosophical perspectives underlying regulatory precedent can be exposed by objective data. In fact, predictive analytics, which leverages statistics, allows parties to surface insights into critical proceeding milestones and account for variables in order to more accurately manage regulatory risk.
Deep data analysis helps dispel these and other myths, all of which cloud our understanding of regulatory proceedings that are critical to our country's future. More can be done to explore the data in order to detect meaningful patterns that are vital to strengthening and transforming our energy markets.
There's a basic truth from public choice economics, namely that markets work best when information is perfect and complete. While those levels of perfection are never met, the closer we get, the more efficient our markets become. It's a vital national interest as well as a vital interest to every business and consumer in the U.S. to have efficient energy markets. That's where data analytics can do a lot to advance both private and public interests.
Law360, New York (September 15, 2015, 10:15 AM ET) –
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