Week Ending January 31, 2020

FERC Weighs In On Third Circuit Decision as PennEast Files Amendment

This Article Appears as Published in Foster Report No 3284
FERC Weighs In On Third Circuit Decision as PennEast Files Amendment

Providing most of a legal interpretation of the Natural Gas Act (NGA) sought by PennEast Pipeline, FERC on January 30 said if a federal appeals court ruling is allowed to stand, it would disrupt FERC’s regulation of natural gas pipelines and allow state interference in the eminent domain process.

In a rare open meeting scheduled only to address the PennEast case (RP20-41), the Commission granted a petition for declaratory order sought by PennEast, with Chairman Neil Chatterjee and Commissioner Bernard McNamee supporting the move and Commissioner Richard Glick opposing it. Chatterjee and McNamee said the ruling is needed to provide clarity on legal questions and the use of eminent domain in light of the decision from the U.S. Court of Appeals for the Third Circuit.

PennEast is encouraged by FERC’s decision that reaffirms a federally approved pipeline has the authority to construct needed infrastructure, the pipeline owners said in a statement. “In agreeing with PennEast, the Commission reiterated that vital infrastructure should not be disrupted by parochial interests after having been found by expert federal regulators to be in the broad public interest and environmentally safe,” PennEast said.

PennEast also said it filed an amendment with FERC to build the 116-mile pipeline in two phases. Phase One would consist of 68 miles of pipeline within Pennsylvania that would be completed by November 2021. Phase Two would include the remaining portion and stretch to Mercer County, New Jersey, with a targeted finish in 2023.

As a joint venture owned by subsidiaries of AGL Resources, New Jersey Resources, South Jersey Industries, UGI Energy Services and Enbridge, PennEast said demand for natural gas has continued to grow, while the project benefits have been denied “by short-sighted political interests.” Building the project in two phases allows PennEast to meet customer needs in Pennsylvania in the short term while providing sufficient time for permitting and legal issues to be resolved in New Jersey, said Anthony Cox, chairman of the PennEast board of managers.

Phase One would have a capacity of about 600,000 Dth/d, and the total capacity of 1.1 million Dth/d remains unchanged from what was originally filed at FERC. Precedent agreements for 338,000 Dth/d were filed as part of Phase One and negotiations are underway to fill the full capacity. When the project was approved by FERC, and environmental surveys in New Jersey had not been completed due to landowner opposition, including by the state of New Jersey, 90% of the capacity was subscribed under precedent agreements.

Under the phased approach, PennEast would have three delivery points in Pennsylvania – one with UGI to serve the Blue Mountain ski resort and two new connections with Columbia Gas Transmission and Adelphia Gateway, which was recently approved by FERC. There are no new private property owners affected by Phase One, which would end in Bethlehem Township in Northhampton County. The new interconnections would be on property already owned by PennEast.

The amendment proves that the PennEast owners are fully committed to the project “and meeting the needs of its customers for safe, clean, reliable and affordable energy,” Cox said.

Parties in New Jersey have continued to oppose the project, and reacted to the declaratory order, including Rep. Frank Pallone Jr. (D-N.J.), who chairs the House Energy and Commerce Committee. Pallone chastised FERC for injecting itself into a legal battle after the Third Circuit provided its ruling. “For an independent agency to help a private party seize state lands, all in order to build a pipeline, is as wrong as it is bizarre. FERC should focus more on doing the job it was created to do rather than the one it thinks the Trump Administration wants it to do,” Pallone said.

PennEast was approved by FERC in early 2018, when Glick dissented and Chatterjee, as a commissioner, concurred due to private landowner concerns, along with a concurring statement from former Commissioner Cheryl LaFleur. The project is designed to move up to 1.1 Bcf/d from Luzerne County, Pennsylvania to Mercer County, New Jersey, and at the time it was approved, some properties had not been surveyed.

New Jersey and some state agencies asserted property interests in 42 parcels of land in certain condemnation actions of PennEast, and a federal district court rejected the state’s claims that New Jersey enjoyed immunity from federal condemnation through the Eleventh Amendment of the U.S. Constitution.

A three-judge panel from the Third Circuit reversed the district court, holding that the Eleventh Amendment shields New Jersey and its agencies from being sued by certificate holders in eminent domain litigation under the NGA.

The Third Circuit upheld that ruling on rehearing, and PennEast intends to file a petition for certiorari with the U.S. Supreme Court to take the case. The deadline to file that petition had been early February, but the Supreme Court on January 27 granted PennEast’s request for more time, moving the deadline to March 4.

The order from FERC will aid PennEast and other litigants who might face challenges on legal questions regarding the use of eminent domain, clarity on the rights of states challenging pipeline construction, and implementation of the NGA at FERC, Chatterjee and McNamee said.

The order finds that the legislative history and legal precedent around NGA Section 7(h) show that Congress intended to delegate authority to condemn state property to private companies holding NGA certificates approved by FERC, Chatterjee said. The Third Circuit opinion creates sufficient uncertainty as to the proper role for FERC in condemnation proceedings to build the pipeline that it is appropriate for FERC to address the issues, he said.

While it is uncommon, FERC has acted on petitions for a declaratory order in response to adverse judicial rulings, according to the order, which cited a 2012 order on PJM Interconnection, a 2018 order on Constitution Pipeline, and a 1989 decision from the U.S. Court of Appeals for the Tenth Circuit involving Williams Natural Gas Co.

FERC disagreed with parties who claimed that FERC is precluded from acting on the petition for declaratory order. Administrative agencies are not in the same position as a private litigant, and due to its responsibilities under the NGA, the Commission is not barred from providing its interpretation of a statute it implements, according to the order.

The order refutes assertions that FERC lacks the authority to issue the declaratory order. FERC does have that authority and it is important for the courts to hear from the agency with expertise and experience in carrying out the NGA, Chatterjee said.

FERC held the special meeting because the issues are important and it was not ready to issue the order when the open meeting was held last week, he noted. The Commission does not intend to make such meetings a routine occurrence, but will do so when conditions warrant.

Countering views expressed by Environmental Defense Fund and the Niskanen Center, FERC is not attempting to subvert the judicial process or provide an incentive for forum shopping, it said. The order does not call for the Third Circuit to overturn its ruling or compel landowners to transfer property. It explains FERC’s interpretation of NGA Section 7(h), including the legislative history and precedent.

The language of the section is expansive, and the legislative history shows that the absence of limiting language regarding state land was not an oversight by Congress but a purposeful delegation of eminent domain authority to NGA certificate holders, FERC said.

The Commission also explains the problems with the work-around suggested by the Third Circuit when it sided with New Jersey in its challenge of eminent domain proceedings to build the pipeline. That work-around would have FERC – rather than NGA certificate holders — exercise eminent domain authority in the courts to see that pipelines are built, and that is not feasible, Chatterjee said.

FERC declined PennEast’s request to address issues around the Eleventh Amendment, because as an administrative agency, FERC is not the best forum for making constitutional determinations, Chatterjee added. Even so, the order underscores that the authority of a certificate holder to condemn state land is an essential element of the comprehensive framework around federal regulation of interstate commerce involving natural gas, he said.

FERC addressed Eleventh Amendment claims on certificate proceedings in 2003 when it ruled on Islander East Pipeline that Eleventh Amendment claims do not apply to NGA Section 7(h) eminent domain proceedings. The Third Circuit criticized that ruling as insufficiently supported “and we agree that decision was terse,” FERC acknowledged. It does not obviate the validity of the decision, which is based on the view that it would defeat the purpose of the NGA if a state were able to nullify a certificate from FERC by refusing to participate in eminent domain proceedings.

The Eleventh Amendment and the applicability of eminent domain proceedings under NGA Section 7(h) involves “esoteric matters of constitutional law better suited for review by the Supreme Court on certiorari from the Third Circuit,” FERC said.

New Jersey officials have praised the Third Circuit ruling, and the office of Attorney General Gurbir Grewal said the FERC order does not change the court’s finding. The Third Circuit held that a private company like PennEast lacks the authority to condemn state properties “and nothing about FERC’s action today changes that. Despite PennEast’s best efforts, the Third Circuit correctly sided with New Jersey’s interpretation of the Natural Gas Act and the Eleventh Amendment, and the court’s judgment remains in effect,” Grewal said in a statement.

Parties in the case at the Third Circuit have argued that application of the Sept. 10, 2019, decision would turn the NGA and pipeline development on its head. The court determined that the Eleventh Amendment does not allow gas companies to haul unconsenting states into federal court to condemn state property interest through eminent domain proceedings.

FERC emphasized its exclusive jurisdiction over the sale of natural gas in interstate commerce and that states and local agencies cannot unreasonably delay or prohibit construction of pipeline facilities approved by the Commission. “Indeed, that statement is routinely included in the orders the Commission issues granting certificates of public convenience and necessity,” it noted.

The Commission pointed to one of its earliest hearing orders from an administrative law judge (ALJ) in Tenneco Atlantic Pipeline Co., which said that the eminent domain grant associated with an NGA Section 7 certificate applies equally to private and state lands. Rhode Island’s assertion in that case that a private party cannot prevail against a state’s interest was rejected, and “we continue to think that Tenneco Atlantic was correctly decided as a matter of statutory interpretation,” FERC said in the order.

The Third Circuit, based in Philadelphia, has jurisdiction over some of the nation’s most prolific gas production areas in the Marcellus Shale and is home to numerous FERC-jurisdictional pipelines that are proposed or under development. Essentially every interstate pipeline must cross some state land, including waterbodies that form state boundaries. Enabling them to invoke state sovereign immunity would be a nightmare, and it would enable landowners to do the same thing through a simple granting of a state interest on private property, PennEast said when it asked for rehearing of the decision.

FERC should not be issuing an order solely to bolster the litigation position of a private party, Glick said during the meeting. The majority is trying to influence the Supreme Court to take the petition that will be filed by PennEast, Glick said.

Congressional intent behind a statutory provision that governs judicial proceedings on the use of eminent domain, where FERC has repeatedly said it has no role, is not a subject that FERC is especially well-qualified to preach, Glick said. While the majority may not like the Third Circuit decision, “we do not ordinarily rush out a declaratory order whenever a couple of commissioners disagree with a court. Nothing in today’s order makes a compelling case for why we should be doing so today,” he wrote in the dissent.

Regarding the majority’s view that Congress intended NGA Section 7(h) to apply to state lands, Glick said the evidence is not clear one way or the other. The majority’s confidence in the conclusions about Congressional intent is better evidence of “ends-oriented decisionmaking” than any clear intent of Congress.

Regardless of how the courts rule, Congress can fix this issue, Glick said, noting after the meeting that a House Energy and Commerce subcommittee has scheduled a February 5 hearing to address the NGA.

The January 29 announcement from Pallone and Energy Subcommittee Chairman Bobby Rush (D-Ill.) said the NGA is nearly a century old, and it is past time to take a comprehensive look at the way FERC implements it. “We must re-evaluate the pipeline siting process, which has long favored industry over the rights of landowners,” Pallone and Rush said in a joint statement.

Glick noted that when landowners or other groups have challenged the eminent domain process, FERC’s response has been to say it is in the hands of the courts and Congress, which wrote the NGA and could amend it. FERC refrained from wading into such arguments in the past, but now it is interpreting the provisions of NGA Section 7(h), which was enacted nearly 70 years ago. “Now all of a sudden we have the expertise, when we’re constantly telling people we have nothing to do with it. I don’t think we can have it both ways,” Glick said.

He also said the declaratory order countered the views of FERC commissioners being “humble regulators,” which has been used by FERC General Counsel James Danly, who has been nominated by the White House to fill a commissioner seat. Because the majority disagrees with the Third Circuit it is giving a legal interpretation. “No one can argue that the declaratory order that the majority is rushing out today is the act of a humble regulator,” Glick said.

The majority cherry picks examples from the NGA’s legislative history, including amendments to the NGA, along with FERC orders to bolster its case, but there is not much substance to support the conclusions, Glick wrote. He agreed that the Tenneco Atlantic decision, from 1977, explained the ALJ’s view that an NGA certificate holder has the authority to condemn state land. “But I disagree that a single ALJ opinion issued three decades after the relevant amendments tells us much, if anything, about the extent of the eminent domain authority that Congress intended to convey in Section 7(h),” Glick said.

The majority appears to believe that the Supreme Court will give deference to FERC if it takes the case, noting the Chevron case about agency authority to administer statutory provisions. But the high court may not show such deference if it adheres to strict interpretations of the NGA and the Constitution, Glick said.

In his remarks at the meeting, McNamee addressed Glick’s comment that Congress could fix the problem or fix any ambiguity involving state land. “The point of our order is that Congress has already addressed that issue,” he said. The order cites the text of Section 7(h), where it is clear that Congress gave a certificate holder the right to exercise eminent domain against state interests, McNamee said.

He referred to the fundamental elements of the NGA, to ensure consumers have access to natural gas through interstate commerce without states blocking interstate commerce. It is reasonable for FERC to articulate its position on the matter and leave it to the courts. “It will be interesting to see how this plays out,” McNamee said.

Chatterjee noted that a similar state challenge of a Columbia Gas Transmission project in Maryland is pending at the U.S. Court of Appeals for the Fourth Circuit. The Fourth Circuit recently granted an extension of time to consider the issues, which could include the declaratory order issued for PennEast.

That case is an appeal of a Maryland decision on a short Columbia Gas pipeline proposed to cross the Potomac River in western Maryland. In that case, the Maryland Board of Public Works denied Columbia Gas’ easement application and argued the Eleventh Amendment prevents a federal court from ordering the state to grant an easement, even when FERC has approved the project.

The declaratory order notes that a district court in Texas also issued a decision in 2017 blocking the condemnation of state land through a FERC-granted certificate on Eleventh Amendment grounds. That case involved Sabine Pipe Line LLC and Orange City, Texas.

Officials have noted that a petition for certiorari at the Supreme Court is likely to have a better chance of being granted when there is a split of rulings among circuit appeals courts. Some have speculated that the Supreme Court may wait to see how the Fourth Circuit rules in Columbia Gas’ appeal of the Maryland decision before acting on a petition by PennEast from the Third Circuit.

Christine Tezak of ClearView Energy Partners has a different view, noting that the briefing schedule in the Fourth Circuit has been extended twice. ClearView believes that if the Supreme Court takes the PennEast case this year, the Fourth Circuit may put the Columbia Gas case in abeyance to see how the high court rules. “If PennEast’s petition is denied, the Fourth Circuit would be free to move forward, including whether to consider the Third Circuit’s lead,” Tezak said.

Several parties have commented on the legal wrangling around pipeline decisions, including the Supreme Court holding oral argument in the Atlantic Coast Pipeline case and the U.S. Court of Appeals for the District of Columbia Circuit granting rehearing to address the use of tolling orders following its approval of Transcontinental Gas Pipe Line Corp.’s Atlantic Sunrise project. The courts’ actions show that there is a growing reticence about the pipeline review and approval process, Gillian Giannetti, attorney with the Natural Resources Defense Council said in December.

By Tom Tiernan ttiernan@fosterreport.com

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