Washington Watch: A Look at New Regulations Set to Impact the Pipeline Industry

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This fall, change is in the air. The Environmental Protection Agency (EPA) is rolling back the prior administration’s regulations to reduce greenhouse gas (GHG) emissions. The Federal Energy Regulatory Commission (FERC) lost a Republican Commissioner, leaving an evenly split commission to address applications for new natural gas pipelines, and, together with the Pipeline and Hazardous Materials Safety Administration (PHMSA), announced a new memorandum of understanding (MOU) to streamline the regulatory review process for new liquefied natural gas (LNG) terminals and relieve the current regulatory logjam.

Clean Power Plan Replacement

In August, EPA proposed the Affordable Clean Energy (ACE) rule to establish emission guidelines for states to address greenhouse gas (GHG) emissions from existing coal-fired generators. The ACE rule would replace the Obama administration’s broader and more aggressive Clean Power Plan (CPP), which was stayed by the Supreme Court and never went into effect.

The CPP provided each state with a goal for reducing existing power plant emissions of carbon dioxide (CO2), goals that could only be met by substituting combined cycle gas generation or renewable generation for coal-fired plants. States were required to begin reducing emissions by 2022, so that by 2030, United States’ power plant emissions of CO2 would be 32 percent lower than in 2005.

The ACE rule is not as expansive or aggressive as the CPP. ACE seeks to improve heat rate efficiency for coal-fired (not gas-fired) facilities and would not force an accelerated shift to renewable generation. ACE identifies a list of candidate technologies (each with a relatively low price tag) that could be used to improve a generator’s heat rate. [Heat rate measures the amount of energy required to generate electricity. If a unit’s heat rate is improved, it becomes more efficient, consumes less fuel, and therefore emits less pollutants.] Each state would have three years to submit an implementation plan.

The ACE rule represents an attempt by the administration to throw a “lifeline” to the coal industry and coal-fired generators. Currently, an electric generator would have to apply for a permit to upgrade its facility if emissions would increase over a year. In most cases, that would be cost-prohibitive for a coal generator, and the upgrade would not be made. But ACE would allow the coal generator to avoid that permit, if (after the upgrade) emissions would not increase on an hourly basis. From the coal generator’s perspective, a modest investment might make sense and could result in increased dispatches. Environmentalists however decry the result, because increased coal-generation dispatches would translate into increased GHG emissions.

But the truth is that, in response to various economic factors, including the availability of abundant and inexpensive supplies of natural gas and increasing amounts of renewable energy, the electric market has been moving away from coal generation for some time. The CPP would simply have accelerated the market trends. The ACE rule represents a victory for the coal industry, but its impact is likely to be short-lived. In the end, market forces, not regulation, will ultimately prevail.

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

Methane Rule Rollback

Last month, the EPA proposed to rollback a 2016 rule designed to combat climate change – i.e., regulations requiring the testing and repairing methane leaks in production and compression operations. The leaks (what the EPA calls “fugitive emissions”) can occur at a well site or compressor station when connections are not properly fitted or when seals and gaskets start to deteriorate. The 2016 rule requires owners/operators develop and implement a fugitive emissions monitoring plan at oil and natural gas well sites or at compressor stations, setting schedule for monitoring and for repairing any leaking components found. The proposed amendments would modify the schedule for monitoring and repairing fugitive emissions, including only annual monitoring on the Alaskan North Slope, where winter weather makes it difficult to conduct inspections. Finally, the proposed amendments would allow energy companies located in states with methane standards — there are six states — to follow the state standards instead of the EPA standards.

When adopting the 2016 rule, the EPA estimated that oil and gas companies would have to pay about $530 million to comply with the by 2016 rule. Most of those compliance costs would be eliminated by the proposed rule, which would save the oil and gas industry up to $75 million a year, for a total of $484 million during the 2019-25 period (using a 3 percent discount rate). In order to obtain these industry savings, however, some emission reductions would not occur.

Tension at FERC over New Gas Pipeline Authorization

In August, Commissioner Robert Powelson resigned, leaving FERC with just four members, two Republicans and two Democrats. Before his departure, however, FERC issued several orders involving NGA Section 7(c) certificate authorization for interstate natural gas pipelines. The Republican majority defended the certificates, explaining that there was a market need (as evidenced by the underlying shipper contracts) and that, as required by the National Environmental Policy Act (NEPA), FERC took a “hard look” at environmental impacts, but noted that NEPA “does not force an agency to adopt environmentally friendly outcomes” or “mandate that every conceivable study be performed and each problem be documented from every angle to explore its every potential for good or ill.” The Democratic minority objected.

As a general matter, one commissioner contends that “affiliate precedent agreements cannot be sufficient in and of themselves to demonstrate that a pipeline is needed. In such cases, the Commission must review additional evidence in the record.” Both Democrats believe FERC’s NEPA analysis should document and consider climate change resulting from GHG emissions, including carbon dioxide and methane, which can be released in large quantities through the production and consumption of natural gas. Now that Republicans no longer have a majority, compromise will be required, if orders are to be issued.

Streamlined Review of LNG Applications

On Aug. 31, FERC announced two actions involving LNG. First, FERC and PHMSA signed an MOU to coordinate the siting and safety review of FERC-jurisdictional LNG facilities. Each agency regulates a different aspect of LNG facilities: FERC determines whether the proposed facilities are in the public interest, while PHMSA deals with safety standards governing the location and design of LNG facilities. Pursuant to the MOU, PHMSA will review an LNG application to determine if it complies with PHMSA regulations and issue a letter to FERC with its findings. FERC, in turn, will consider PHMSA’s compliance letter when making its public interest determination.

Second, FERC established environmental schedules for 12 pending LNG terminal applications, most of which require an EIS to be issued in 2019. FERC should be able to clear up the regulatory log jam and shorten the environmental processing schedules by up to a year because of a streamlining the review processes (made possible by the MOU), the addition of independent contractors to assist FERC staff, and a FERC initiative moving to electronic issuances of environmental documents for natural gas programs, including LNG.

Washington Watch is a regular report on the oil and gas pipeline regulatory landscape. Steve Weiler is partner at Dorsey & Whitney LLC in Washington, D.C. Contact him at weiler.steve@dorsey.com.

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