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FERC Issues Two New Policy Statements Regarding Natural Gas Infrastructure Construction

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On February 18, 2022, the Federal Energy Regulatory Commission (“FERC”) issued two important policy statements by a 3-2 vote related to the construction of natural gas facilities. The Updated Policy Statement on the Certification of New Interstate Natural Gas Facilities (“Updated Policy Statement”) revises FERC’s 1999 Certification of New Interstate Natural Gas Facilities Policy (“1999 Policy”) and changes the balancing test by which FERC evaluates applications to construct interstate natural gas facilities under Section 7 of the Natural Gas Act (“NGA”). The new interim policy statement on the Consideration of Greenhouse Gas (“GHG”) Emissions in Natural Gas Infrastructure Project Reviews (“GHG Policy Statement”) describes how FERC will evaluate GHG emissions under the National Environmental Policy Act (“NEPA”) and the NGA.  Chairman Glick and Commissioners Clements and Phillips voted in favor of the policy statements, while Commissioners Danly and Christie voted against each and issued dissents.

Chairman Glick defended the new policy statements, saying that FERC must “consider all evidence as to whether a proposed project is needed” and that the policy statements “provide[] examples of how the Commission will do just that.” But Senator Manchin (D-W. VA) was critical, stating that “[t]oday’s reckless decision by FERC’s Democratic Commissioners puts the security of our nation at risk.”

FERC will apply both new policy statements immediately to pending and future certificate applications. Pipelines with pending or planned certificate applications should immediately consider whether to revise their precedent agreements to reflect potential changes to the FERC process and, in particular, the risk of additional costs from mitigation requirements. Pipelines must also consider whether to supplement the record in pending certificate proceedings to include additional project need data, project utilization data, downstream GHG emissions data, and information regarding the pipeline’s efforts to minimize or mitigate potential impacts on landowners and environmental justice (“EJ”) communities.

The Updated Policy Statement is final and not subject to further comment, but FERC seeks comments on the GHG Policy Statement by April 4, 2022.

Updated Policy Statement

When assessing the public convenience and necessity under Section 7 of the NGA, FERC will balance the benefits of the project against the adverse effects of the project. FERC declined to adopt any bright-line standards for how it will carry out this balancing test. The benefits of a project will primarily be demonstrated by project need in the form of customer demand, but FERC will also consider benefits beyond demand, including displacement of more pollution-heavy generation sources, facilitation of the integration of renewable energy sources, or a significant source of jobs or tax revenues.

Importantly, precedent agreements (the contract between a pipeline and a project customer) may no longer be sufficient on their own to establish the need for a project, and precedent agreements between affiliates are presumed to be suspect. Although applicants should continue to provide precedent agreements, FERC encourages applicants to also provide (1) specific information detailing how transported gas will ultimately be used; (2) why the project is needed to serve that use; and (3) the expected utilization rate of the project. The Updated Policy Statement provides some examples of the sort of evidence FERC seeks for certain types of projects, such as market-driven projects and projects supporting more efficient operations. FERC also encouraged applicants to address how the future need for the project would be affected by market trends, as well as current and expected policy and regulatory developments, and to provide a thorough alternatives analysis. Pipelines with pending applications should consider supplementing the record with additional evidence of project need to bolster the benefits side of the balancing test.

As for the adverse effects of a project, FERC will focus its analysis on four categories:

  • Impacts on existing customers of the pipeline;
  • Impacts on other existing pipelines and their customers;
  • Environmental impacts; and
  • Impacts on landowners in surrounding communities, including EJ communities.

When considering existing customers of the pipeline, the Updated Policy Statement provides that possibility of an increase in rates or financial subsidization is no longer a “threshold question.” However, applicants must still be prepared to financially support the project without subsidization. Regarding other existing pipelines and their customers, the Updated Policy Statement finds that although it is not FERC’s role to protect existing pipelines from effects of competition, FERC must consider the possible harm to captive customers that can result from a new pipeline, particularly if “a proposed project is designed to substantially serve demand already being met on existing pipelines.” For such projects, FERC will consider whether the project will offer other advantages (e.g., lower costs to consumers or enhancing system reliability).

Finding that the 1999 Policy failed to describe how FERC considers environmental interests in its decision-making, the Updated Policy Statement specifies that FERC will balance all impacts, including economic and environmental impacts, together in the public interest determination, weighing potential adverse impacts against evidence of need and other potential benefits. FERC expects applicants to (1) structure projects to avoid, or minimize, potential adverse environmental impacts and (2) propose mitigation measures. As further described in the GHG Policy Statement, FERC may “condition the certificate to require additional mitigation” should it deem the proposed mitigation inadequate. The potential that FERC will require additional, new mitigation in a certificate order, particularly for GHG emissions, is a significant risk for pipelines, as the cost for such mitigation may be so high as to render projects uneconomic. Pipelines should consider addressing this risk in precedent agreements with project customers.

The Updated Policy Statement also focuses on a “more expansive” consideration of landowner impacts than the 1999 Policy whereby FERC will look at more than economic impacts associated with eminent domain. Landowner consideration will be based on robust early engagement with all interested landowners and continued evaluation of input. FERC expects applicants “to take all appropriate steps to minimize” the need for eminent domain. FERC will look unfavorably on applicants that do not proactively work with landowners to negotiate easements respectfully and in good faith, and failure to comply with requirements regarding restoration of right-of-way could lead to a compliance action by FERC, including referral to Office of Enforcement. Pipelines should engage with landowners during the route planning process, continue to engage while the FERC application is pending, and document these efforts for FERC.

The Updated Policy Statement is committed to ensuring EJ and equity concerns are better incorporated, and consideration of impacts to communities will include an assessment of impacts to any EJ communities and necessary mitigation. Environmental justice analysis also applies to liquefied natural gas facilities under NGA Section 3, even though Section 3 facilities are not the subject of the Updated Policy Statement. The Updated Policy Statement adds detail on identifying EJ communities and anticipates that the Office of Public Participation will help facilitate public participation in FERC proceedings to ensure EJ communities are able to fully participate. Pipelines should work to identify and engage with EJ communities early in the project development timeline and specifically consider ways to avoid or mitigate impacts by working with affected EJ communities.

GHG Policy Statement

The GHG Policy Statement was issued as an interim policy statement and FERC seeks comment on all aspects of the policy. The GHG Policy Statement states that it was prepared in light of FERC’s concerns about climate change and as an attempt to “fulfill [its] statutory responsibilities” as described by the D.C. Circuit in certain recent decisions such as Sabal Trail and Vecinos (how to interpret these and certain other appellate decisions is a key contention among the Commissioners). The GHG Policy Statement purports to “not establish binding rules” and states that it “is intended to explain how [FERC] will consider these issues when they arise.” Yet, the GHG Policy Statement applies to both currently pending and new NGA Sections 3 and 7 applications, and applicants with pending applications may supplement the record in response. The GHG Policy Statement spells out certain items that applications are encouraged to include, including projected utilization rate, an estimate of reasonably foreseeable project GHG emissions, and mitigation proposals.

FERC will quantify a project’s GHG emissions that (1) are reasonably foreseeable and (2) have a reasonably close causal relationship to the proposed action, even if such effects are later in time and further in distance from the proposed project. When calculating operational GHG emissions, FERC directs project sponsors to continue to follow the existing guidance. FERC will consider operational GHG emissions calculated based on the projected utilization rate and “other factors that might impact a project’s net emissions,” with downstream GHG emissions from combustion of transported gas included in most instances and upstream GHG emissions from gas production considered on a case-by-case basis. To calculate the projected utilization rate, FERC will consider: (1) expected utilization data from project shippers; (2) historical usage data; (3) demand projections; and/or (4) an estimate of how much capacity will be used on an interruptible basis. Project sponsors are “encouraged” to file a projected utilization rate and submit evidence of other factors that might impact a project’s net GHG emissions. Project applicants should strongly consider filing such information, as FERC has previously assumed that pipelines will flow the maximum quantity of gas every day when calculating potential GHG emissions. Utilization rate data will only serve to reduce what FERC views as the potential GHG emissions from a project.

FERC next establishes a significance threshold that presumptively triggers an environmental impact statement (“EIS”) for projects that will result in emissions of 100,000 metric tons or more per year of CO2e, which corresponds to approximately 5,200 dekatherms per day of new transportation. FERC’s rationale for choosing 100,000 metric tons is (i) that number will “cover the vast majority of potential GHG emissions from natural gas projects authorized by [FERC]” (FERC notes that 99% of pipeline project emissions will be picked up by this threshold); and (ii) Step 2 of the EPA’s Tailoring Rule subjected sources with potential to emit 100,000 metric tons per year of CO2e to its Prevention of Significant Deterioration and Title V permitting programs. FERC made only a minor effort to tie this level of GHG emissions to actual impacts on the environment, which is the standard for determining significance under NEPA. Although FERC declined to use the Social Cost of Carbon to determine significance, the GHG Policy Statement mentions that FERC “could consider” using it in the future.

In determining the amount of CO2e from a project for purposes of deciding whether to prepare an environmental assessment (“EA”) or an EIS, FERC will apply the 100% utilization or “full burn” rate for natural gas supplies delivered by the proposed project. Through the EA or EIS, FERC will calculate an expected level of GHG emissions from the project based on operational and expected downstream GHG emissions (and upstream GHG emissions in some instances), taking into account utilization rate, offsets, and mitigation. FERC’s low significance threshold coupled with inclusion of downstream GHG emissions means that most projects that expand pipelines will be subject to an EIS, including potentially projects that would qualify under the blanket certificate program.

As to mitigation, the GHG Policy Statement states that FERC has the authority to attach conditions to project certificates requiring project sponsors to mitigate reasonably foreseeable upstream or downstream emissions, citing Sabal Trail and Public Citizen. FERC “encourages” project sponsors to propose mitigation measures but does not set a clear mitigation standard. Instead, the GHG Policy Statement states that FERC plans to evaluate proposed mitigation plans on a “case-by-case basis.” If FERC then deems the proposed mitigation measures inadequate to support the public interest determination, then FERC may condition the certificate to require additional mitigation of a project’s GHG emissions. FERC states that proposed mitigation measures should be “real and additional,” quantifiable, “unencumbered” and trackable, and suggests measures like purchasing Renewable Energy Credits, participating in cap-and-trade markets, and restoring wetlands. Finally, FERC states that natural gas companies may propose to recover costs of such mitigation measures through their proposed rates. Whether to propose mitigation, what form that mitigation should take, and how to recover the associated costs will be one of the most important decisions for project developers, and FERC’s purported authority to require additional mitigation through certificate conditions (an authority Commissioners Danly and Christie challenge) is likely to be a focal point of any court challenge to the GHG Policy Statement.

Commissioner Danly’s Dissents

Commissioner Danly filed a dissent to both the Updated Policy Statement and the GHG Policy Statement. In his dissent to the Updated Policy Statement, Commissioner Danly warns that the Updated Policy Statement combined with the GHG Policy Statement will have a profound impact on (1) pipelines’ ability to secure capital, (2) timelines for processing applications, and (3) the costs a pipeline and its customers will bear as a result of unmeasurable mitigation expected in each application. He disagrees with FERC’s construction of its legal authority in making the public interest determination, decisions regarding adverse effects, and imposition of mitigation requirements.

In his dissent to the GHG Policy Statement, Commissioner Danly states that FERC has set forth a “standardless standard” that will cause confusion in the industry and make an EIS the default environmental document. He again disagrees with FERC’s construction of its legal authority, positing that consideration of effects on climate change from non-jurisdictional entities like downstream and upstream parties violates the NGA and Council on Environmental Quality (CEQ) regulations, while the threshold of 100,000 tons per year of CO2e violates NEPA. Finally, Commissioner Danly states that the GHG Policy Statement’s language was crafted to side-step the check of judicial review, such as by encouraging (in effect, requiring) pipelines to voluntarily propose mitigation in order to receive a certificate.

Commissioner Christie’s Dissents

Commissioner Christie filed identical dissents to both the Updated Policy Statement and the GHG Policy Statement. He argues that FERC cannot use a GHG analysis to reject or condition a certificate under the NGA, nor can it de facto reject a project by rendering it unfeasible. Commissioner Christie also critiques the policy statement as being driven by policy preferences, not legal authority, and as violating the major questions doctrine and principles of democracy by purporting to arrogate to FERC legal authority over questions of profound economic and political significance that Congress has not granted.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.