Week Ending February 7, 2020

FERC Processes Under NGA Questioned, Criticized at House Hearing

This Article Appears as Published in Foster Report No 3285
FERC Processes Under NGA Questioned, Criticized at House Hearing

FERC’s reviews of natural gas pipeline applications and the rate treatment pipelines receive under the Natural Gas Act (NGA) were criticized by multiple witnesses and probed by several lawmakers at a February 4 hearing in the U.S. House of Representatives.

Over two panels of witnesses, the House Energy and Commerce subcommittee on energy heard about how FERC has interpreted its statutory obligations under the NGA to minimize consideration of greenhouse gas (GHG) emissions and climate change, not look beyond precedent agreements as an indicator of need, allow pipelines to be built before legal appeals can be considered, and disregard non-pipeline alternatives.

Especially in states where policies favor emission reductions and cleaner energy, FERC should conduct a more fulsome review of whether new pipelines are needed, especially for projects where pipeline affiliates hold a majority of the capacity under precedent agreements, witnesses said. No FERC commissioners or staff testified before the subcommittee, though former Commissioner Cheryl LaFleur was among those on the first panel.

In response to questions from Rep. Scott Peters (D-Calif.), LaFleur said FERC has the authority to consider methane emissions when it acts on pipeline applications. Methane leaks from pipeline operations are considered a direct environmental effect and are taken into account in environmental impact statements, but the Commission cannot regulate those emissions once a pipeline goes into service.

“I believe FERC has the authority to set rules on the construction” of a pipeline to account for addressing methane emissions, she told Peters. “FERC could say, ‘we don’t find this in the public interest because you don’t have enough methane control, come back with a better plan,’ “ LaFleur said.

That is important because many people tout the reduced GHG emissions associated with increased gas-fired generation compared with coal-fired power plants, but they do not talk about methane, Peters said.

Representing the Interstate Natural Gas Association of America (INGAA), Michael McMahon of Boardwalk Pipelines LP said the pipeline industry is committed to reducing methane emissions. INGAA members review operations, replace equipment, and modernize facilities around compressor stations to address methane leaks, he said, reducing lost and unaccounted for gas.

Many Republican members touted the benefits of pipeline investments and jobs growth associated with low natural gas costs stemming from the shale revolution. Reps. Fred Upton (R-Mich.) and Greg Walden (R-Ore.) talked about how America is the world’s leading producer of natural gas and consumers are reaping the benefits. “The law has withstood the test of time and remains sound,” Upton said, adding that FERC conducts rigorous environmental reviews and is doing what it can to address concerns of landowners and others.

He and others referred to staffing changes recently announced by FERC Chairman Neil Chatterjee to ensure rehearing requests from landowners on pipeline approval orders are addressed promptly to minimize the use of tolling orders, which buy time for the Commission to address rehearing requests. “It appears that our current framework is working,” Upton said.

Landowner Concerns. Rep. Morgan Griffith (R-Va.) was a Republican voice calling for change, as he has in the past, due to representing a district in Southwest Virginia, where construction of Mountain Valley Pipeline (MVP) and Atlantic Coast Pipeline (ACP) has landowners upset. He and others expressed interest in having FERC consider competing pipelines or a regional approach instead of piecemeal assessments of each project. “Reforms do need to happen,” said Griffith.

The angst among Virginia landowners stemming from the two major pipelines led Griffith to introduce legislation (H.R. 173) to amend the NGA and allow greater public input in the review process and limit use of eminent domain. Sen. Tim Kaine (D-Va.) has sponsored a similar measure in the Senate, said Griffith, who joked that people are so upset with the process it has brought Republicans and Democrats together at a time when that is rare.

McMahon acknowledged that the pipeline industry as a whole needs to do a better job in meeting with landowners well ahead of time and including them in the planning process. Other witnesses commented that some pipelines have better practices when it comes to interacting with the public and farmers affected by construction or pipeline rights of way.

LaFleur deemed Chatterjee’s policy plan to address landowner rehearing requests promptly a good step, but said there is more that needs to be done on landowner rights and making it easier for the general public to participate or follow the pipeline review process at FERC.

The low cost of gas and the structural framework of the NGA have led to a resurgence in manufacturing jobs in the Gulf Coast and around the Marcellus and Utica shale regions, McMahon said in response to questions from Rep. Robert Latta, (R-Ohio). Demand centers have changed within the U.S. and pipelines have altered flows or added facilities to meet customer needs, and the NGA has allowed those changes to take place, McMahon said.

But a majority of witnesses took issue with how FERC has approved new pipelines. Use of precedent agreements as the sole indicator of need, despite the 1999 pipeline certificate policy statement calling for use of other analyses, was mentioned by Susan Tierney, senior advisor with Analysis Group Inc., and many others.

Since the policy statement was adopted in 1999, FERC has approved 487 pipeline projects and rejected only two, adding 286 Bcf/d of capacity and 24,000 miles of new pipeline. The pipeline capacity added since 1999 is nearly double the all-time record for gas use in a single day, Tierney said.

LaFleur suggested that FERC should return to the notice of inquiry (PL18-1) on the pipeline certificate policy statement that was launched in 2017. A new policy statement, ideally through a bipartisan order among commissioners, would provide more clarity and efficiency than the current practice that is dictated by frequent court orders, she told lawmakers.

Chatterjee has often said that for a policy statement to be durable, a full complement of five commissioners is best, and a unanimous decision would be ideal. Given the turnover of FERC commissioners in the past year or so, along with Commissioner Bernard McNamee announcing that he is not seeking a second term when his current term expires this summer and two additional vacancies to fill, a full complement of five commissioners is hard to see any time in the near future.

The White House has declined to nominate a Democrat to fill the spot of LaFleur, and sources do not expect additional nominees – besides the possible renomination of General Counsel James Danly for one vacant seat – to come in the next several months. When asked at a recent media briefing if he expects to address the pipeline certificate policy statement during his current term at FERC, which ends in June 2021, Chatterjee evaded the question and said his current focus is on addressing landowner concerns.

Responding to questions from Rep. Joseph Kennedy III (D-Mass.) about voting at FERC becoming more partisan in an era when climate change has divided political parties, LaFleur said there has been a lot more partisan votes along party lines at FERC over the years “and I was part of that.” Part of the issue has been natural gas’ “complicated history” within the climate considerations and disagreements among commissioners on how to apply directives from courts.

Additional Analysis Needed. Tierney said additional analysis in pipeline certificate cases would be a welcome change from the current practice of checking a box that a project is needed when there are precedent agreements for a certain amount of capacity. Studies that examine environmental impacts, economic benefits, demand for gas in a region, long-term resource plans for states or other factors would be a great improvement. Particularly when precedent agreements are with pipeline affiliates, those cases call for a more fulsome review, she said.

Examining natural gas demand in a region, or considering if more than one pipeline is needed when more than one is pending at FERC, such as with MVP and ACP, would be helpful for all involved, several witnesses told lawmakers.

Besides the environmental concerns associated with FERC’s reviews, the pipelines themselves are seeing their capacity devalued because so many facilities have been approved, said Jonathan Peress, senior director of energy markets and utility regulation at Environmental Defense Fund (EDF). The unprecedented buildout of pipelines in the past 20 years has made existing assets prone to capacity turnback and reduced throughput. Financial analysts have noted this, pointing to increasing risks for pipelines serving the same market, but such issues are not considered by FERC because it does not look beyond precedent agreements as indicators of need, Peress said.

The most egregious example of this was FERC’s approval of the Spire STL Pipeline, where a precedent agreement with an affiliate was the only contract supporting the project, Peress said. If FERC were to consider other factors such as demand for gas or energy use in a region and competing options for gas transportation, it would not have approved the Spire STL project, which is the only pipeline that EDF has challenged in a legal appeal, he said.

By refusing to fully examine project need, FERC may be setting up the pipeline sector for harm down the road, Peress said.

He and others noted that pipeline affiliates are often local distribution companies that have rates reviewed by state regulators, yet even when those state regulators have opposed a project, FERC approves it. The “self-dealing” of having pipeline affiliates sign up for pipeline capacity as an indicator of need is akin to an exercise of market power that FERC has let go unchecked, witnesses said, bringing up PennEast Pipeline and others with utility affiliate contracts as examples.

Rep. Frank Pallone Jr. (D-N.J.) said FERC has done itself no favors by approving pipeline projects that may not be needed, raising concerns in Congress. PennEast is opposed by state agencies and landowners, and FERC’s recent declaratory order providing guidance to the courts to benefit a private company is bizarre and wrong, said Pallone, chairman of the Energy and Commerce Committee.

He said the announcement by Chatterjee to address rehearing requests from landowners is commendable, but the Commission should ensure a full and equitable process for all parties, not just landowners.

Concerns About PennEast. Representing the New Jersey Conservation Foundation and The Watershed Institute, Jennifer Danis said FERC’s routine approval of pipelines has led to a proliferation of fossil fuel infrastructure that is not needed. There is a glut of pipeline capacity in the area to be served by PennEast, and illustrating the questionable need for PennEast, owners “shape shifted” the project to carve out the New Jersey portion, Danis said.

The owners called the recent filing at FERC an “amendment,” but they acknowledge that the first phase, without the New Jersey portion, could stand on its own, Danis said. While the New Jersey portion may not be built, the certificate awarded from FERC provided eminent domain authority and land has been taken in the state nonetheless, she told lawmakers.

The PennEast environmental review sidestepped a lack of data for more than half of the route in New Jersey, and somewhere in the FERC review process, the Commission decided that a lack of data does not hinder it from approving a pipeline, she said.

Other agencies have yet to sign off on the PennEast project, and such conditional certificates awarded by FERC are not what Congress had in mind when it wrote the NGA, Danis said.

FERC’s determination of need for new facilities is misplaced and the result is pipelines being added that will not be needed, said Maya van Rossum of Delaware Riverkeeper Network. “The Natural Gas Act clearly needs to be reformed” to address the situation, she told the subcommittee.

She said FERC’s use of tolling orders allows pipelines to be built while legal challenges are pending, which is an abuse of its authority under the law.

The impacts on landowners were highlighted by David Bookbinder, chief counsel at the Niskanen Center think tank. FERC does not provide adequate notice that parties need to intervene to protect their legal rights to challenge a pipeline application, Bookbinder said, questioning whether exports of gas through LNG facilities served by pipelines should qualify as a public benefit to U.S. landowners and consumers.

Bookbinder criticized the use of eminent domain authority for pipelines, though he praised Chatterjee for vowing to address landowner concerns promptly and the shuffling of FERC staff resources to accomplish that goal.

D.C. Circuit Directive. Rep. Paul Tonko (D-N.Y.) and Kennedy raised points and questioned LaFleur about consideration of environmental issues, GHG emissions, and the 2017 court case involving Sabal Trail Gas Transmission. In the Sabal Trail case, the U.S. Court of Appeals for the D.C. Circuit directed FERC to consider GHG emissions associated with downstream use of the gas in the pipeline, but FERC’s interpretation of the legal requirement has been subject to disagreement among commissioners, LaFleur said.

Kennedy said he is concerned that McNamee recently wrote that he disagrees with the D.C. Circuit on what is required of FERC under the NGA and the National Environmental Policy Act (NEPA). He was referring to a pipeline approval where McNamee said “I respectfully disagree with the court’s finding that the Commission can, pursuant to the NGA, deny a pipeline base on environmental effects stemming from the production and use of natural gas, and that the Commission is therefore required to consider such environmental effects under the NGA and NEPA.”

LaFleur told Kennedy that she disagrees with McNamee’s view, as FERC has to follow the directives of the courts. When Kennedy asked if the NGA should be amended to have FERC consider climate change and GHG emissions in its review of pipeline applications, LaFleur said that would be an excellent change due to the lack of agreement on Congressional intent. The more clarity there is the less wiggle room there would be to misinterpret the statute, she said.

Kennedy and Tonko asked panelists about FERC not using the Social Cost of Carbon as a tool for assessing the costs and benefits of pipeline projects. Tierney and LaFleur said the Commission has the authority to use that tool, which would be helpful in sorting through which projects have larger impacts on the environment. The question becomes what to do with the information once a calculation is made, LaFleur said, noting that she made calculations on her own to reach her own conclusions on pipeline and LNG project reviews. There should be some analysis done that is predictable and quantifiable, LaFleur said.

NGA Rate Provisions. Several witnesses said that the NGA should be amended to allow refunds for pipeline rates found to be excessive, siding with the American Public Gas Association (APGA) and others who have made that suggestion over the years. LaFleur supported a legislative change, noting that when the Tax Cut and Jobs Act was passed by Congress in 2017, electric utility customers received refunds quickly while the process at FERC dragged out over a year and did not result in rate reductions for some pipeline customers. The Federal Power Act allows refunds, but the NGA does not, which Congress should fix, witnesses said.

Representing APGA was Richard Worsinger, with the municipal utility in Wilson, North Carolina. He expressed support for H.R. 5178, co-sponsored by Rep. G. K. Butterfield (D-N.C.) which would provide FERC with refund authority under Section 5 of the NGA.

Besides allowing for refunds if a pipeline is found to be overcharging customers, the refund authority would mitigate the tendency for pipelines to overcharge captive customers in the first place, Worsinger said. For many small utilities served by only one pipeline, the cost of pursuing a rate change and the time lag associated with any resulting lower rate dissuades them from challenging pipeline rates, he said.

There are no valid reasons for the statutory protection against refunds to continue, Worsinger said.

McMahon countered that Congress should not upset the current balance between investors and consumers that has allowed the NGA to work so well over time. FERC has used its authority under NGA Section 5 many times to seek lower pipeline rates, including soon after the tax cut legislation was passed. All natural gas pipelines filed Form 501-G information showing costs and revenues, with rate reductions or settlements reached in about 30% of the cases, McMahon said.

He added that roughly 70% of pipeline customers today are not paying the stated rate on tariffs but negotiated rates. So, any refunds on filed rates would only apply to 30% of shippers.

McMahon also pointed out that FERC has a longstanding policy of not allowing single-issue rate adjustments. Because of that, pipelines cannot go to FERC for a rate increase when a single element of their costs go up. A full rate case is required that explores all elements of costs and revenues, he said.

In the days leading up to the hearing, Democrats in the House released broad climate change legislation framework that would alter FERC practices and oversight of the energy sector, from revised pipeline reviews to developing a carbon pricing plan, incentives for power transmission development and a revamped hydropower project licensing process. While the politics in Washington do not favor progress on such legislation, the Democrat majority in the House is pushing efforts to address climate change.

House Climate Legislation. FERC’s authority under the NGA would be significantly modified under the legislation planned by House Democrats. The summary of the CLEAN Future Act says FERC would have to consider climate change in actions under NGA Section 3 and Section 7. The change would resolve the ambiguity and arguments following the D.C. Circuit’s ruling in the Sabal Trail case.

The legislative plan also would amend the NGA to prohibit use of eminent domain for pipelines built to feed LNG export facilities.

It would establish national goals for reducing methane emissions, to 65% below 2012 levels by 2025 and direct the Environmental Protection Agency (EPA) to develop a final rule by the end of 2021 to prohibit routine flaring of natural gas at oil and gas production sites. A certain amount of “safety flaring” would be allowed to ensure safe operations at production sites, with definitions distinguishing safety flaring from routine flaring.

The thrust of the measure is to set a national goal for the U.S. to have a 100% clean economy by 2050, with emission reduction goals, steps for EPA to take, and all federal agencies developing their own plans to achieve the goal. It directs the National Academy of Sciences to evaluate how EPA should measure progress toward a net-zero emission target.

The Federal Power Act would be clarified that nothing prohibits FERC to approve a carbon pricing regime to set rates under Sections 205 and 206 of the FPA.

The plan would require retail power suppliers to use increasing amounts of clean energy resources each year, starting in 2022, rising to 100% in 2050. It would include an alternative compliance payment mechanism for retail suppliers to pay fees if they cannot satisfy the clean energy requirements, with the fees increasing annually. A clean energy credit trading program would allow entities to buy, sell and trade credits to meet their obligations.

A National Climate Bank to help states and cities transition to a cleaner economy and numerous sections on other sectors of the economy are included in the draft plan.

Democrats have said they will work with stakeholders on details for the draft legislation, acknowledging that if the Senate and White House remain in Republican control in the 2020 elections the legislative plan has almost no chance of making progress in Congress.

During the NGA hearing, Pallone said FERC’s orders and less-than-thorough environmental reviews of pipeline applications is one of the reasons Democrats have introduced the legislation. FERC should consider climate change impacts of pipelines, as the D.C. Circuit instructed, Pallone said.

McMahon stuck with INGAA views in his comments and prepared testimony. While the FERC notice of inquiry on the pipeline certificate policy statement came up at different points during the hearing, he did not express the views of Boardwalk, which differ a bit from INGAA’s.

Boardwalk supported FERC’s existing policy statement, as did INGAA. But unlike the trade group that said precedent agreements with pipeline affiliates are not different than those with other entities, Boardwalk said FERC should use more scrutiny on projects supported largely by precedent agreements with affiliates to ensure that they are the product of true competition and not an attempt to boost earnings for a common parent. “This will ensure that pipeline projects are built only if actually needed and will prevent the underutilization of existing infrastructure that could occur if a customer abandoned an incumbent pipeline to take service on a new pipeline constructed by an affiliate,” Boardwalk said in its comments.

That essentially describes the situation facing Enable Mississippi River Transmission LLC, which lost its major customer Laclede Gas Co., now known as Spire Missouri, when the distributor’s parent built the Spire STL Pipeline in the St. Louis area.

By Tom Tiernan ttiernan@fosterreport.com

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