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Running Out of Gas: Will FERC Put the Brakes on Natural Gas Pipeline Development?

© 2018 The Texas Lawbook.


By Nick McTyre of Thompson & Knight

(March 8) – Kevin McIntyre, chairman of the Federal Energy Regulatory Commission (FERC), recently announced FERC will reexamine how it certifies gas pipeline infrastructure. While it remains unclear how FERC will conduct this process, McIntyre has stated, “I guarantee whatever [the process] is, it will be open and transparent … and thorough, and it will invite the views of all stakeholders to ensure we are doing everything we can to accurately and efficiently assess pipeline applications that we receive and process.”

Section 7(c) of the Natural Gas Act of 1938 (NGA) gives FERC the authority to certify new interstate natural gas pipelines. For almost two decades, FERC has followed its 1999 Policy Statement on Gas Infrastructure in implementing section 7(c), which provides a two-part test.

The first prong is an economic test which compares public benefits of the pipeline project with its adverse effects to existing customers (for an expansion pipeline), customers of other pipelines, landowners, and communities. FERC then reviews the environmental effects. The application must pass the economic test before proceeding to environmental review.

In applying the economic test, FERC places a high value on long-term capacity agreements. While there is no requirement that a pipeline secure long-term shipper contracts (called “precedent agreements”), FERC relies heavily on these agreements in assessing the project’s need.

Besides these agreements, there are two other criteria that stand out in the analysis. The pipeline must assume the financial risk of any unsold capacity, and it must attempt to minimize adverse economic impacts to affected parties.

The environmental analysis focuses on reviewing adverse impacts. The National Environmental Policy Act (NEPA) requires FERC to review environmental impacts and consider any reasonable alternatives to the pipeline. The NGA requires FERC to review other options that might better serve the public interest. FERC serves as the lead agency for coordinating all federal review with NEPA compliance.

In the past decade with advances in drilling technology and gas production in new regions, construction of gas pipeline infrastructure has increased. With this increase, opposition to pipelines has intensified. Opposition has come mostly from environmentalists, states, and landowners.

Along with these groups, certain FERC commissioners have questioned FERC’s certificate review standard, especially the economic test. This past October, Commissioner Cheryl LaFleur questioned FERC’s over-reliance on precedent agreements and proposed new criteria to consider, such as “evidence of the specific end use of … gas within … region[s], environmental benefits of gas over other fuels, elimination of pipeline facility constraints, and the need for pipeline infrastructure.” Just this month, Commissioner Richard Glick dissented in another proceeding, claiming FERC “relied exclusively” on precedent agreements in establishing economic need for a project.

FERC’s gas certificate process should balance incentives between over-building and under-building infrastructure. While some claim there is an abundance of gas pipeline capacity, which may be true in some regions, other regions are experiencing critical shortages. In New England, for example, pipeline capacity constraints have driven retail gas prices to consistently high levels. In certain producer regions, including the Permian Basin, increased production and a lack of pipeline capacity will soon cause takeaway constraints at the wellhead.

Given these factors, FERC should consider deferring any significant changes until capacity constraints are met under the existing standard.

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