Navigating the Transition: Key Midstream Issues to Watch in the Biden Administration
News stories and campaign rhetoric frequently create expectations of immediate shifts following an administration change, but most changes in the federal government happen slowly, and the constraint on resources and time needed to comply with administrative procedures often mean that many areas of environmental regulation and permitting policy will remain unchanged in the early years of the new administration. So where should the midstream business focus its near-term attention? Here are several key issues to watch over the upcoming year.
Federal Energy Regulatory Commission (“FERC”) Leadership and Policies
By statute, no more than three of the five FERC commissioners may be of the same political party. The President has unilateral power to designate the FERC chairman from among the commissioners; in addition to administrative duties, the Chair has some control over FERC’s agenda and can help shape FERC’s priorities. Currently, FERC has a 3-2 Republican majority, and this is likely to continue for some months after the inauguration, assuming that current members of the Commission serve out their terms in office. However, FERC could switch to a Democratic majority as early as June 2021 when Commissioner Chatterjee’s term expires, and the result could be significant changes in key policy areas.
For midstream infrastructure developers, and particularly those in the interstate natural gas transportation space, two crucial FERC policy areas to watch are greenhouse gases (“GHGs”) and eminent domain. Both issues have been the subject of intense disagreement between Republican and Democratic commissioners.
With respect to GHGs, current FERC policy is to quantify and analyze the direct GHG emissions of constructing and operating projects (e.g., emissions from equipment and vehicles used during construction, and emissions from operating pipeline equipment such as compressor stations and valves) as well as directly connected industrial facilities if their emissions are “reasonably foreseeable,” but not GHG emissions from upstream production and downstream consumption of transported natural gas that FERC does not consider reasonably foreseeable.
This policy has engendered sharp opposition from environmental groups and other project opponents, and within the Commission itself. A revision to FERC’s approach would represent a significant change in FERC’s analysis of projects under the National Environmental Policy Act (“NEPA”) and possibly also FERC’s standard for evaluating the public convenience and necessity under the Natural Gas Act.
Similarly, escalating opposition to interstate natural gas pipeline developers’ use of federal eminent domain authority under the Natural Gas Act has led to acute disagreement among Commissioners (as well as repeated and ongoing litigation), with Democratic commissioners generally more sympathetic to landowners’ concerns. Any change in FERC policy regarding eminent domain (for instance, if FERC were to attempt to impose conditions in certificate orders purporting to limit the use of eminent domain) could have a major effect on the timelines for — and, in some cases, potentially even the feasibility of — constructing FERC-jurisdictional natural gas projects.
Legal Defense of Major Pipeline Projects
Once a major midstream infrastructure project receives necessary permits, it is common for project opponents — whether local development opponents or, in some instances, national environmental non-governmental organizations (“NGOs”) — to file lawsuits asking the federal courts to vacate, or invalidate, those permits. These lawsuits can stall projects for months, or even years. Because these groups are suing to challenge the permit, the case is actually brought against the federal (or in limited instances, state) agency that issued the permit, rather than the project proponent who received the permit. While project proponents often play an important role by “intervening” in the lawsuit to support the government’s decisions to issue the permit, the government’s legal defense of its permit is critical to success in the courtroom.
Depending on the permit in question, these lawsuits may originate in a federal district court under the Administrative Procedure Act, or go directly to a federal appellate court under a special statutory review mechanism, such as the provisions for direct appellate review of FERC orders under the Federal Power Act and the Natural Gas Act. Because of the slow turnover among federal judges with lifetime appointments, immediate changes to the pace and risks of such judicial proceedings are not likely; any effect on the overall composition of the bench resulting from new appointments by the Biden Administration would be slow and incremental. For those projects permitted under the Trump Administration, some special considerations may come into play. With the possible exception of certain high-profile and politically controversial projects, the Biden Administration should be expected to continue to defend federal permits in court, including those issued under the prior administration. Nonetheless, certain risks may become more acute.
As a general principle of administrative law, courts virtually never direct an agency outright to deny a permit that was previously granted. Rather, if a reviewing court finds flaws in the agency’s work, a more typical result is to remand the permit to the agency with instructions to conduct additional analysis while leaving the permit in place, or in some instances to vacate (invalidate) the permit and remand the matter to the agency for reconsideration of its initial decision. Of course, where the agency reaches the same conclusion on remand, this very often results in the permit being reissued. While the resulting delay can be extremely costly and disruptive for project developers, this nonetheless allows the project to proceed. In certain instances, however, it is possible that an agency under the Biden Administration could choose not to reach the same result on remand from an adverse judicial decision vacating a permit issued under the prior administration. In this respect, the stakes in litigation defending federal permits for major pipeline infrastructure projects may be higher than usual during the transition period, with the downsides and risks of an adverse judicial decision being potentially greater than normal.
National Environmental Policy Act Regulations
Before the legal challenges begin, midstream projects are typically required to obtain a number of federal permits for their construction and operation, and federal agencies must comply with an environmental law known as NEPA before they can issue those permits. NEPA requires agencies to analyze the environmental consequences of the major federal actions they take, and to provide transparency to the public about that analysis. The regulations guiding how much and what kind of analysis is required come from two sources: (1) the Council on Environmental Quality (“CEQ”) within the Executive Office of the President, which issues regulations that guide all federal agencies in complying with NEPA and (2) individual federal agencies, as those agencies then issue their own regulations implementing NEPA and applying any agency-specific requirements.
Recent revisions during the Trump Administration to the CEQ’s regulations on how federal agencies should implement NEPA were a long time in coming, as the last comprehensive overhaul of the NEPA regulations occurred more than 40 years ago. These revisions streamlined the NEPA process and arguably would make issuing federal permits faster, more efficient, and less susceptible to legal challenges by environmental groups. Federal agencies must promulgate their own rules to implement NEPA that are consistent with the CEQ’s rules. The Trump Administration’s new rule requires agencies to propose updates to their own rules within one year of the new rule’s effective date, which was in mid-September 2020. The Trump Administration has accelerated some of these rulemaking efforts to try to put as many agency rules in place before the Presidential Inauguration, but the Biden Administration still will have time to seek to dismantle the new CEQ rule entirely, alter its effectiveness date, or apply an overlay of revisions atop the current rule, as well as to affect the larger suite of individual agency NEPA implementation rules, even if the current administration’s “midnight rules” make it more cumbersome to do so.
Some environmental groups argue that the revisions go too far and have brought challenges in multiple federal courts, and the Biden Administration is likely to face pressure to rescind the Trump Administration rules, returning to a more stringent and time-consuming set of NEPA regulations. These groups argue that the Trump CEQ regulations would allow agencies to ignore effects like climate change from GHG emissions. This can be very consequential in the NEPA analysis for a midstream project, as it touches on whether an agency must analyze, for example, induced upstream production and ultimate downstream combustion of hydrocarbons transported through a pipeline.
The Biden Administration’s selection of Brenda Mallory to lead CEQ is also a clear signal that changes to the NEPA regulations are coming. For example, Mallory was influential in the Obama Administration’s creation of guidance on how agencies should incorporate climate reviews into their NEPA analyses, and she will be leaving a position with an environmental organization that is currently challenging the Trump Administration’s NEPA regulations. Between the court fights and the time it takes to revise regulations within the federal government, we expect the state of NEPA review to be in flux for the short to medium term, with the potential for more expansive impact analysis requirements with respect to climate change to be proposed in the future.
Defining Federal Waters: Waters of the United States (“WOTUS”) Rule
Policy-makers and the affected public have been fighting for decades over the extent of federal jurisdiction over “waters of the United States” under the Clean Water Act and how far onto private property the federal government can reach to regulate waterbodies. The Biden Administration is on deck to continue that fight and reverse recent trends narrowing the extent of federal jurisdiction. This legal fight can have major impacts on pipeline and other infrastructure projects, as a federal Clean Water Act permit may be required when crossing a waterbody that falls within federal jurisdiction.
The debate centers on the definition of “waters of the United States,” a term used in several federal regulatory programs, and sometimes referred to as “WOTUS.” Supreme Court precedent on the extent of federal jurisdiction remains muddy, with the 2006 decision in Rapanos v. United States resulting in a fractured 4-1-4 decision, and it is unlikely that Congress would be able to provide a legislative fix. The fight is likely to continue in agency rulemakings and in legal challenges to those rulemakings.
The Obama Administration spent six years developing the “Clean Water Rule,” which expanded federal jurisdiction to cover, for example, more intermittent streams, ephemeral streams, and isolated wetlands than were previously regulated. Challenges by industry, agricultural interests, and Republican-led states kept the rule from going into effect in 28 states. The Trump Administration spent three years undoing the Clean Water Rule and pulling the pendulum the other way with the “Navigable Waters Protection Rule” in an attempt to balance state and federal permitting. Although there have been multiple challenges to the Trump Administration’s rule, it has currently been enjoined, or stopped from going into effect, only in Colorado, and that decision is currently on appeal.
As litigation over the Trump Administration’s Navigable Water Protections Rule continues, the Biden Administration is likely to explore how to use the rulemaking process to undo that rule. As events of the past decade illustrate, this will not be an easy or a quick fix. Even if the Biden Administration’s Department of Justice backs away from defending the Navigable Water Protections Rule in its ongoing challenges, the rule will continue to be defended (e.g., by state and industry parties that have intervened in the litigation), and crafting a new rule will likely take years. Even if the Biden Administration succeeds in rescinding the Navigable Water Protections Rule and re-promulgating something like the Obama Administration’s Clean Water Rule, it would not immediately result in wide-scale application of the Clean Water Rule, which never went into effect in numerous states, and would restart numerous cases that were challenging that rule. The state of federal regulation of waters is therefore likely to remain in flux for some time, and states can (and often do) regulate waters more expansively than the federal government.
Crossing Federal Waters: Nationwide Permit 12 (“NWP 12”)
While the definition of “waters of the United States” and the location of a specific project will determine the permitting requirements, most linear infrastructure projects like pipelines, if they are of any appreciable length, are likely to cross waters and wetlands subject to federal jurisdiction. For decades, these projects have qualified for streamlined permitting under the U.S. Army Corps of Engineers’ (“Corps”) nationwide permit program, and NWP 12 in particular, which applies to utility lines and pipelines. Securing authorization under these general permits is much faster and cheaper than obtaining an individual permit from the Corps. The Clean Water Act allows the Corps to issue general permits for up to five years before they must be renewed. Permitting for pipeline and other linear infrastructure projects could be slowed down if the Biden Administration changes the circumstances where infrastructure projects can rely on NWP 12 and other nationwide permits commonly used in infrastructure development.
Opponents of infrastructure projects have in recent years focused their attacks on NWP 12 to block these projects. For example, opponents of the Keystone XL pipeline project succeeded in obtaining a nationwide injunction against the use of NWP 12 from a federal district court in Montana, arguing that the Corps failed to undertake programmatic consultation under the Endangered Species Act when the Corps issued the permit in 2017. The Montana court eventually limited its injunction to only new oil and gas pipelines. The Supreme Court stayed that injunction for all parties except for Keystone XL, and the appeal over the merits of the Montana court’s decision is currently before the Ninth Circuit.
On January 5, 2020, the Corps reissued a subset of its nationwide permits earlier than their current 2022 expiration. In addition to splitting NWP 12 into three permits (so that oil and gas pipelines are now governed by their own separate permit), the Corps also reduced the number of conditions that would trigger an applicant’s need to submit a pre-construction notification (“PCN”) to the Corps before proceeding with its activity. In addition to requiring a PCN when a threatened or endangered species may be in the vicinity or when a historic property may be affected, the 2017 version of NWP 12 required a PCN in seven other circumstances. The new 2021 NWP for oil and gas pipelines removes five of these PCN triggers as redundant. However, the 2021 NWPs add one additional PCN trigger to the oil and gas NWP, which now requires a PCN for oil and gas pipeline activities when the overall project is to install a new pipeline greater than 250 miles in length. The new rule also addresses how the Corps has complied with the Endangered Species Act (“ESA”) and why the Corps did not undertake a national programmatic ESA Section 7 consultation as part of the latest NWP rulemaking. The Corps took the same position in issuing the 2017 NWPs, and that position is central to the dispute in the Keystone XL litigation.
The final rule was published on January 13, 2021, and has an effective date of March 15, 2021. The Biden Administration could seek to delay having the new rule from going into effect, and thereafter seek to make changes to the Corps’ approach to permitting, or even extend the deadline to correspond to the March 2022 expiration date of all other current NWPs. This would not deprive industry of the opportunity to continue to use the in-place nationwide permits in the interim, because they do not expire for another two years. Given the outcome of the recent runoff election in Georgia, Congress and the new Administration could potentially use the Congressional Review Act (“CRA”) to overturn the final rulemaking, as discussed in greater detail below. There is uncertainty about the effect of such an action, since doing so prohibits the agency from issuing a substantially similar rule in the future, and this may unusually constrain the Corps in the context of these NWPs, and NWP 12 in particular, which has been in place for many decades and reissued under administrations of both political parties. If the agency instead takes administrative action to forestall the effectiveness of the new NWPs, this time could also give the Biden Administration an opening to undertake additional analysis that might reduce litigation risk on the ESA issues.
The Biden Administration could also trim back the availability of nationwide permits for politically disfavored types of projects, such as oil and gas development and the pipelines and marine terminals that support their movement in commerce. For example, now that oil and gas pipelines are split from other utility projects in their own NWP, the Corps could suspend or revoke NWP 12 for oil and gas pipelines without affecting transmission or other utility line activity.
Clean Water Act Water Quality Certifications
In recent years, states have used the Clean Water Act’s Section 401 water quality certification process to functionally veto certain politically disfavored projects, including oil and gas pipelines and export terminals. In June 2020, the Trump Administration finalized a rule narrowing the scope of state water quality reviews to focus only on pollution discharges and not, for example, a project’s impacts on climate change or air quality. The rule also reiterated the ability of individual federal agencies to impose deadlines by which a state agency must act on a request for water quality certification, including deadlines shorter than the one-year maximum deadline provided by statute, as long as the review periods are reasonable. These changes followed from President Trump’s April 2019 Executive Order No. 13868 on “Promoting Energy Infrastructure and Economic Growth.” Environmental opponents are currently challenging the rule change in several federal district courts. The Biden Administration may opt not to defend the cases, may seek a remand to change the rule, or may act on its own to go through the rulemaking process to revise the rule. Regardless, the Trump Administration’s final rule will have very limited effect on a state’s ability to block any project requiring Section 401 certification — the state may just have to act sooner and be clear about the basis on which a denial is made.
In August 2020, the Trump administration altered or “rolled back” a number of requirements in Obama-era methane regulations for “new sources” in the oil and gas industry. This included entirely removing the transportation and storage (midstream) sectors from methane and VOC regulation, removing methane as a separately regulated pollutant for the rest of the oil and gas industry, adjusting some of the existing leak detection and repair requirements, and making the legal case that EPA must make more industry-sector and pollutant-specific findings before regulating additional source categories under Section 111 of the Clean Air Act in the future.
Re-imposing methane regulations for the oil and gas industry, including for midstream operations, is likely to be a priority for the Biden EPA, as it is seen as a legal stepping stone to regulating more (existing) sources of GHGs in the future. This could mean equipment upgrades and more stringent leak detection, repair, and reporting requirements. However, changes to regulations will not occur on “day one” of the new administration. Revising a highly technical regulation like the methane emissions rule will take time and agency resources, is subject to the procedural requirements of the Administrative Procedure Act, and any revisions will be subject to court challenges that could further delay them from taking effect. As a result, it will likely take many months, if not years, before industry could be required to comply with new requirements. Change could happen more quickly, however, if the federal court currently hearing a legal challenge to the Trump methane rules finds legal flaws with the rules sufficient to send them back to the agency without letting them go into effect.
Further complicating any attempts by the Biden administration to re-impose methane regulation on the oil and gas sector is the recently finalized EPA significant contribution finding for GHG emissions from electric generating units. On January 12, 2021, the EPA established a new framework under Section 111(b) of the Clean Air Act for determining when GHG emissions from a source category “contribute significantly” to air pollution so as to warrant regulation under the Clean Air Act’s New Source Performance Standards. The rule determined that regulation of electric generating units under Section 111(b) of the Clean Air Act was appropriate because GHG emissions from this source category exceed 3% of total U.S. GHG emissions. In its rulemaking, EPA identified the following source categories as below the 3% threshold: oil and natural gas, petroleum refineries, and industrial-commercial-institutional steam generating units. Accordingly, under EPA’s new significance test, GHG emissions from these categories would not “contribute significantly” to air pollution so as warrant regulation under Section 111(b) of the Clean Air Act. While this rulemaking may be susceptible to challenges under the Administrative Procedure Act, until a final decision is made by the courts or the agency rolls back this rule, attempts to regulate methane emissions from oil and gas sources will be constrained.
Recently Finalized Regulations and the Congressional Review Act (“CRA”)
In conjunction with administrative actions taken by the Biden Administration, the new Congress may use the streamlined legislative procedures available under the CRA to disapprove a range of Trump Administration “midnight” regulations that were enacted near the end of the term. The CRA provides a streamlined procedure for Congress to enact legislation to disapprove (i.e., veto) rules issued by federal agencies. That procedure is available only for a limited time after a rule is published and formally notified to Congress — i.e., 60 legislative days (a period which is often much longer than 60 calendar days). In practice, the CRA mechanism should be available for rules published and notified to Congress after approximately June 2020. A CRA resolution is not subject to Senate filibuster, meaning that only simple majorities of the House and Senate — and signature by the President — are required to enact legislation to overturn a rule. A CRA resolution of disapproval not only invalidates a rule, but bars the agency from issuing another rule in “substantially the same form” in the future, absent specific statutory authorization. Historically, the CRA was rarely used until the beginning of the Trump Administration. In practice, the CRA is most relevant when a new Presidential administration changes political party, and the same party controls both houses of Congress. The conditions are now ripe for a Democratic Congress and President to disapprove rules finalized near the end of the Trump Administration.
EPA does not have the resources to bring an enforcement action for every alleged violation of environmental law, and therefore focuses its enforcement and compliance assurance resources by developing and implementing national program priorities, called National Compliance Initiatives (“NCIs”). The current NCI strategy runs through September 2023, and includes six areas of focus. A Biden EPA might not wait until 2023 to put its own stamp on the NCIs and might consider moving some regulatory programs from the day-to-day “core” enforcement program into a national initiative. There are a few ways this could affect the midstream industry:
- Climate enforcement. A Biden EPA might develop a broad strategy around enforcement of federal and state GHG emission regulations. This might include the following programs: federal GHG reporting, federal new source review GHG permitting, federal new source performance standards compliance, renewable fuels standards, and enforcement of emerging state CO2 and methane regulations that have been included in state implementation plans under the Clean Air Act.
- Energy sector enforcement. A Biden EPA — like the Obama EPA — might target the energy sector specifically to achieve air, water, and waste pollution reductions. An energy sector initiative might include a focus on compliance with air quality requirements at upstream and midstream oil and gas operations and major and minor new source review permitting requirements in the oil and gas and power sectors.
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.