Week Ending January 3, 2020

McNamee, Glick Disagree on Legal Points in Adelphia Gateway Project Approval

This Article Appears as Published in Foster Report No 3280
McNamee, Glick Disagree on Legal Points in Adelphia Gateway Project Approval

FERC’s approval of an oil pipeline conversion to natural gas service in the Philadelphia area is the latest forum for Commissioners Bernard McNamee and Richard Glick to argue legal points about the Commission’s obligations and authority to assess environmental issues associated with pipeline applications.

The approval of the $332 million Adelphia Gateway LLC project came with a drop in the return on equity (ROE) allowed, conditions in an environmental assessment (EA), and dismissal of most challenges from landowners and environmental groups that asserted the project is not needed. FERC ruled that because the project involves existing facilities, along with some additional compression and new laterals, it is more akin to an existing pipeline expansion and not a greenfield pipeline, knocking the ROE down from the requested 14% to 10.55%.

McNamee defended the order and expounded on his views of FERC’s authority under the Natural Gas Act (NGA) and the requirements under the National Environmental Policy Act (NEPA) when it reviews natural gas pipeline applications, similar to his writing separately when FERC approved an El Paso Natural Gas Co. expansion in November. The order had a dissenting statement from Glick and a 37-page concurring statement from McNamee, both of whom spoke about their views during the December 19 open meeting.

At the meeting and in the concurrence, McNamee said legislative text and court rulings do not give FERC the authority to deny a pipeline application based on the environmental effects of upstream production or downstream use of natural gas, nor does FERC have the authority to establish measures to mitigate greenhouse gas (GHG) emissions. There is no suitable method for FERC to determine whether GHG emissions are significant from pipeline facilities themselves, he said.

And while the U.S. Supreme Court has observed that NEPA requires an indirect effect to have a reasonably close causal relationship with the alleged cause, the text of the NGA’s “public convenience and necessity” standard is not so broad to have FERC be responsible for the effects of upstream production or downstream use of natural gas, McNamee said.

Glick labeled McNamee’s reasoning “pretty startling assertions” that FERC does not have the authority to deny a pipeline certificate application based on downstream environmental effects when the use of the gas is known. The U.S. Court of Appeals for the District of Columbia Circuit, in the 2017 Sierra Club v. FERC[1] decision, known as the Sabal Trail case, and in the 2019 case Birckhead v. FERC,[2] said FERC does have that authority, Glick said.

He acknowledged that there can be differences of opinion on legal interpretations and said McNamee has penned some well-written concurrences, “but we’re either going to follow the courts or we’re not,” and “I choose to follow the courts.” That is why he will keep dissenting in cases where FERC’s environmental reviews do not adequately assess GHG emission impacts and the consequences of FERC’s actions on climate change.

In Glick’s view, it is pretty clear that FERC is ignoring the D.C. Circuit’s directive in Sabal Trail. “Although neither the NGA nor NEPA permit the Commission to assume away the climate change implications of constructing and operating this project, that is precisely what the Commission is doing here,” he wrote in the dissent.

McNamee wrote that he respects the holding of the D.C. Circuit in Sabal Trail and the discussion in Birckhead, with the Sabal Trail decision binding on FERC. “However, 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,” he said.

There is no textual provision in the NGA giving FERC the authority to deny a certificate for a pipeline due to upstream or downstream emissions, and to interpret the “public convenience and necessity” standard for that purpose “would radically rewrite the NGA and undermine its stated purpose,” McNamee said.

The law reserves authority over upstream production and downstream use of natural gas to the states and the Environmental Protection Agency (EPA), leaving no regulatory gap for FERC to fill, he said. Congress designated EPA as the expert agency best suited as the primary regulator of GHG emissions, and suggesting that FERC can step in to deny a pipeline project based on GHG emissions would be contrary to the will of Congress and risk duplicative regulation, McNamee said.

In the EA for the Adelphia Gateway project, FERC included numerous conditions for the owners to meet in building and operating the facilities. It calculated GHG emissions associated with power generation facilities receiving the gas but declined to find that the project’s contribution to climate change would be significant. FERC dismissed the protests of the Clean Air Council, Delaware Riverkeeper Network, and others who raised various arguments about the project, including that the natural gas service is not needed or would be duplicative of the PennEast Pipeline Project in Pennsylvania and New Jersey.

Adelphia Gateway estimated that the project will cost $331.96 million, with $189 million related to the purchase of an existing oil pipeline system from Interstate Energy Co. and $142.96 million to build compressor stations, short laterals, and modify the oil pipeline for gas service.

Adelphia Gateway has precedent agreements with four shippers for 647,500 Dth/d of firm transportation service, which is about 76% of the project’s capacity.

The December 20 order (CP18-46) acted on Adelphia Gateways’s application, which was filed Jan. 12, 2018, and an amendment, filed Aug. 31, 2018, to increase gas transportation service in Pennsylvania and Delaware. The amendment was filed to increase transportation capacity from the Zone North A segment to the Zone South segment and adjust the planned rates for the three-zoned pipeline project.

Adelphia Gateway initially sought an order from FERC by the fall of 2018 to have the facilities in service by the spring of 2019. In a statement after the order was issued, the company said service is expected to begin in 2020, without additional details on when work will be complete on the different segments.

Adelphia Gateway, a new subsidiary of New Jersey Resources Corp. (NJR), was formed to buy the oil pipeline system of IEC and add onto it with expanded facilities to meet growing natural gas demand in southeast Pennsylvania and northern Delaware. IEC’s current system is used to provide oil and natural gas service to two power plants owned by Talen Generation LLC, with IEC becoming a subsidiary of Talen in 2014 through a deal approved by FERC.

Besides the purchase of the IEC facilities, Adelphia Gateway listed facility additions that include two compressor stations and two short laterals, including the Tilghman Lateral, a 4.5-mile pipeline near Chester, Pennsylvania. The planned 16-inch diameter lateral pipeline would extend from the Marcus Hook Compressor Station to an interconnection with Texas Eastern Transmission LP and Philadelphia Electric Co. in Chester.

Adelphia Gateway is pleased FERC approved the project, which was a critical step for NJR’s efforts to provide expanded gas service in the Philadelphia region, said Steve Westhoven, president and CEO of NJR.

The project will convert 50 miles of an existing 84-mile pipeline from oil to natural gas. The northern 34 miles of the pipeline were previously converted to deliver natural gas in 1996. After the purchase of IEC and the existing pipeline from Talen are completed, the northern zone will continue to operate to serve two gas-fired generation facilities in Lower Mount Bethel Township, Pennsylvania. Once all the necessary regulatory approvals are obtained, work to convert the lower 50 miles of the pipeline from oil to natural gas will begin, the company said.

The natural gas supply delivered through the Adelphia Gateway pipeline will serve customers in the Philadelphia area and is estimated to provide economic benefits of $677 million over the first 15 years it is in service.

The pipeline also will supply natural gas to Kimberly-Clark’s mill in Chester, enabling the company to replace its existing on-site coal-fired power plant with a gas-fired generation power facility and reduce GHG emissions, Adelphia Gateway said.

FERC approved Adelphia Gateway’s proposed cost of service and initial rates, with the exception of the proposed ROE. The Commission found the acquisition price for the existing facilities reasonable and considerably less than what it would cost to build new, comparable facilities.

Regarding the ROE, Adelphia Gateway proposed 14% based on previous FERC rulings for new pipeline projects, noting that it is at risk for the cost of some unsubscribed capacity in its Zone South portion and made an investment in new facilities and the purchase of existing assets. As an alternative, it proposed an ROE of 11.08% as the high level from a proxy group to reflect the risk in connection with the project.

For pipelines being converted to natural gas service, FERC has found them to be more like existing pipeline expansions than greenfield construction of new facilities, approving the ROE from recently litigated NGA Section 4 rate proceedings for existing pipelines. While Adelphia Gateway is making a significant investment in the conversion and new construction, “this project is closer to that of a conversion of an existing pipeline to interstate natural gas service than to that of constructing a greenfield pipeline,” FERC said. The main portion of the project has been built and is subscribed by existing shippers, the Commission noted.

The last litigated ROE applicable to this situation was for an El Paso Natural Gas Co. project, where FERC adopted an ROE of 10.55%. FERC rejected Adelphia Gateway’s request for an ROE at the high level in the proxy group from the El Paso rate case, directing Adelphia Gateway to revise its rates based on the ROE of 10.55%.

By Tom Tiernan ttiernan@fosterreport.com

[1]   867 F.3d 1357.

[2]   925 F.3d 510.

Want to try it out? Sign up for a free trial!
Subscribe Here