Washington Watch: Pipeline Approvals Play Out Like Classic Drama

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Environmentalists Convince Court to Revoke FERC Authorization for Pipelines Already Delivering Gas

This is a story, really a classic drama, involving three related interstate natural gas pipeline projects designed to provide much needed natural gas supplies to the electric generators in the Southeast portion of the country. To satisfy growing needs for electricity, the generators needed new gas supplies. In response, the pipelines filed applications with the Federal Energy Regulatory Commission (FERC) and received the required authorizations to construct facilities costing more than $4 billion. In reliance on the authorizations, the pipelines and electric generators began construction of their respective projects, and pipeline service commenced as required facilities became available. Then a federal appellate court revoked the underlying FERC authorization (thereby requiring the pipelines to shut down service) because the underlying environmental impact statement (EIS) prepared by FERC did not properly address the greenhouse gas (GHG) emissions from downstream electric generators. How does this story end — happily or tragically? Read on.

“If the federal government had been around when the Creator was putting His hand to this state, Indiana wouldn’t be here. It’d still be waiting for an environmental impact statement.”
— Ronald Reagan

A Familiar Backdrop: NGA & NEPA Requirements to Construct Interstate Gas Pipeline

The Natural Gas Act (NGA) requires FERC to authorize the construction and operation of new interstate natural gas pipeline facilities if and only if the pipeline project is required by “public convenience and necessity,” which FERC determines by weighing the benefits of the pipeline project (e.g., access to reliable natural gas service, reduced costs, etc.) against the potential adverse consequences on three interests (existing customers, existing pipelines and landowners or communities impacted by the route) and whether the pipeline has made efforts to eliminate or minimize any adverse effects. A pipeline’s application must, therefore, contain a detailed description of the proposed project, pipeline route maps and host of other information, including an Environmental Report consisting of 13 resource reports and related material. The Environmental Report is used by FERC to comply with the National Energy Policy Act of 1968 (NEPA).

NEPA requires federal agencies to incorporate environmental considerations in planning and decision-making. Indeed, the Supreme Court has determined that NEPA, in essence, requires a process rather than a result: “NEPA merely prohibits uninformed — rather than unwise — agency action.” Thus, the law requires FERC and other agencies to take a “hard look” at environmental concerns and determine the extent to which, if any, an environmental change is caused by the major federal action at issue and in so doing, consider direct, indirect and cumulative impacts of a proposed project. The environmental review process is intended to be thorough, but not limitless. As part of the “hard look,” FERC normally prepares an EA in the first instance. If FERC makes a finding of no significant impact (FONSI), the EA will suffice. Alternatively, a determination that the proposed pipeline project constitutes “a major federal action significantly affecting the quality of the human environment” requires a robust analysis, involving an EIS. Large pipeline projects generally require preparation of an EIS.

Protagonists: Southeast Market Pipeline Project

On Feb. 2, 2016, FERC issued a certificate of public convenience and necessity authorizing the construction of the Southeast Market Pipelines Project (SMP) — a $4 billion project consisting of approximately 685.5 miles of natural gas transmission pipeline and 339,400 hp of compression to provide transportation service for up to approximately 1.1 billion cubic feet per day (Bcf/d) of natural gas to markets in Florida and the southeast United States. The SMP is really three separate, but connected pipeline projects: 1.) Florida Southeast Connection Project, a 126-mile natural gas pipeline (either 36 or 30 in. in diameter) providing up to 640,000 dekatherms per day (Dth/d) of firm transportation service and owned by a subsidiary of NextEra Energy Inc. (NextEra); 2.) Sabal Trail Transmission LLC, a joint venture of NextEra, Spectra Energy Partners LP and Duke Energy Corp., consisting of 515 miles of new pipeline (494 miles of 36-in. diameter and 21 miles of 24-in. diameter pipeline), six compressor stations and six meter stations in Alabama, Georgia and Florida providing up to 1,075,000 Dth/d of firm transportation service; and 3.) Hillabee Expansion Project of Transcontinental Gas Pipe Line Co. LLC, including approximately 43.5 miles of pipeline looping facilities (mostly 42-in. diameter pipe) and 88,500 hp of compression at one new and three existing compressor stations in Alabama, which would be leased by Sabal Trail capacity to provide up to 1,131,730 Dth/d of firm transportation service. When completely constructed, all but a small portion of the SMP Project throughput will be subscribed by four natural gas-fired electric generation plants — the new Florida Power and Light Co. (FPL) Okeechobee Clean Energy Center; the Duke Energy Florida Citrus County Combined Cycle Plant; and both the existing FPL Martin County Power Plant and Riviera Beach Clean Energy Center.

Primary Conflict: Environmental Compliance and Review

In the fall of 2013, the pipelines initiated the “pre-filing process” at FERC, which facilitates a NEPA goal — the coordination of early project development activities with landowners and state and local officials, particularly on environmental concerns, such as route options, permitting concerns and mitigation of adverse impacts. In February 2014, FERC issued a notice that it would prepare an EIS, subsequently held 13 public scoping meetings and received more 1,100 letters commenting on the project. FERC issued two supplemental notices to prepare an EIS, one in the fall of 2014 to consider alternative routes for Sabal Trail and another in the summer of 2015 to consider a new proposed location for a Sabal Trail compressor. After publishing the draft EIS on September 2015, FERC received 137 comments.

After issuance of the draft EIS, Sabal Trail, Florida Southeast and Transco filed their certificate applications. Just before Christmas 2015, FERC issued the final EIS (about 2000 pages), concluding that, if the projects are constructed and operated in accordance with applicable laws and regulations, the projects will result in some adverse environmental impacts, but impacts would be “less-than-significant” given proposed avoidance, minimization and mitigation measures. On Groundhog Day 2016 (Feb. 2), FERC granted certificate authorization for the SMP Project. The project sponsors soon began construction and placed some of the facilities into service in the summer of 2017.

Unexpected Climax: DC Circuit Vacates FERC Certificate

In the meantime, disgruntled environmental groups and landowners filed appeals with the DC Circuit. On Aug. 22, 2017, the court (in a 2-1 decision in Sierra Club v. FERC) vacated the authorization to construct the SMP Project and remanded the proceeding to FERC for preparation of an EIS that addresses the downstream effects of GHG emitted by power plants that will burn the natural gas to generate electricity, explaining that “at a minimum, FERC should have estimated the amount the power-plant carbon emissions that the pipelines will make possible.”

“While legislation is obviously political, we have now allowed regulation to become politicized, which we believe will lead to some bad outcomes.” — Jamie Dimon

Attempted Resolution: SMP Projects and FERC Respond to Vacatur

In response to the court opinion, FERC issued a draft supplemental EIS on Sept. 27, 2017. Additionally, FERC and the pipelines requested that the court rehear the appeal en banc (i.e., all the judges, as opposed to the three-judge panel), arguing that the court should simply have remanded the proceeding to FERC instead of vacating the certificates. On Jan. 31, the DC Circuit, without explanation or analysis, denied the rehearing request. As a result, the vacatur of the certificates would become effective upon the court’s issuance of a “mandate,” which makes the appellate court’s order effective by officially transferring jurisdiction over the proceeding to the FERC (in this case). In other words, issuance of the mandate would require the SMP Project pipelines to stop transporting gas and cease construction of the unfinished facilities, because the underlying FERC authorization no longer exists. The mandate must issue seven days after the court denies rehearing.

Against this backdrop, the pipelines on Feb. 2 filed with FERC a request for expedited issuance of an order on remand reissuing the certificates or, alternatively, an application for temporary emergency certificates. On Feb. 5, FERC issued a final Supplemental EIS (SEIS), which although quantifying the maximum GHG emissions from downstream use of natural gas transported on the SMP Project, cannot attribute any discrete environmental effects to the quantified downstream emissions, and, therefore, cannot find that the quantified downstream GHG emissions pose a significant impact on the environment. And on Feb. 5, FERC and the pipelines each asked the DC Circuit to stay issuance of the mandate, explaining that FERC intended to act on the remand within 45 days and that, in the meantime, issuing the mandate would disrupt gas service. By simply filing the motions for stay, FERC and the pipelines bought some additional time; under procedural rules, the court cannot act on the motion until the Sierra Club files an answer, which was submitted on Feb. 16. The court had not yet issued an order when this column was going to press.

“Nothing is so unproductive as the law. It is expensive whether you win or lose.” — Gilbert Parker

Final Analysis: Ironically, Voiding Pipeline Authorization for Insufficient Analysis of Indirect Downstream GHG Emissions Could Increase Costs and Harm the Environment

The DC Circuit’s decision to vacate the certificate authorization for the SMP Project is somewhat baffling. The pipeline project was required to satisfy the electric reliability of Florida. Indeed, the Florida Public Service Commission has determined that existing natural gas pipeline infrastructure is insufficient to satisfy the State’s growing need for energy. Accordingly, FPL (an anchor customer of Sabal Trail) already relies on the project to supply a portion of the requirements of two power plants. Similarly, Duke Energy Florida (another Sabal Trail anchor customer), in reliance on the project, has nearly finished construction of a new $1.5 billion gas-fired electric generation plant. Absent the gas supplied by Sabal Trail, at a minimum, electric utilities will need to access other electric generation sources, which could be more costly or worse for the environment (e.g., nuclear and coal-fired generation facilities scheduled to retire). Worse yet, electric reliability in Florida could be jeopardized from the unavailability of either the retiring or the new generation. Further, ceasing construction also requires ceasing any accompanying environmental remediation and rehabilitation measures scheduled by the pipelines. In short, the shutdown could cost ratepayers more money and harm the environment.

One member of the three-judge panel dissented from the majority’s decision to vacate the certificates, explaining:

[T]he Court now insists the action taken by the Federal Energy Regulatory Commission . . . is the cause of an environmental effect, even though the agency has no authority to prevent the effect. * * * More significantly, today’s opinion completely omits any discussion of the role Florida’s state agencies play in the construction and expansion of power plants within the state – a question that should be dispositive.

Is the Sierra Club majority opinion an aberration destined to be but a footnote in legal texts or, alternatively, the vanguard of increased judicial activism in climate change litigation and a harbinger of things to come, such as a requirement to consider upstream emissions from natural gas production, an issue that is and will (no doubt) continue to be raised in other pipeline proceedings? Only time will tell.

“More regulation is not the best answer to every problem.”
— Jerome Powell

Washington Watch is a bimonthly report on the oil and gas pipeline regulatory landscape. Steve Weiler is partner at Stinson Leonard Street LLP in Washington, D.C. Contact him at steve.weiler@stinson.com.

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