The Federal Energy Regulatory Commission (FERC) answered longstanding calls by environmental groups and landowners to "modernize" certain aspects of the certification and approval process for natural gas infrastructure projects when a divided FERC issued an update to its Certificate Policy Statement for the first time since 1999. FERC concurrently released interim policy guidance on how it will evaluate greenhouse gas emissions and climate change impacts related to proposed natural gas infrastructure. Effective immediately for pending and new applications, FERC’s actions reveal an overarching intent by current leadership to closely scrutinize certain aspects of natural gas projects. The details of how these policy changes will actually be implemented remain to be seen, but are likely to stymie domestic natural gas project development and production in the near-term.
Environmental groups and others have trumpeted FERC’s changes as a critical victory in the fight against climate change and an important redress of the perceived adverse impacts of natural gas infrastructure projects on affected landowners as well as minority and low-income populations (i.e., environmental justice communities). Conversely, the natural gas industry and others have lamented these changes as a death knell for the industry and a deliberate partisan overstep of delegated agency power that overrules Congressional intent and sidesteps Constitutional boundaries.
The following alert furnishes a historical overview of relevant FERC policy, parses the new language to identify how the review process of natural gas infrastructure projects will likely change under this policy shift, and offers insights into potential short- and long-term impacts for the domestic natural gas industry.
History
Congress has assigned FERC the authority to regulate the construction, development, and operation of certain liquefied natural gas (LNG) facilities and interstate pipelines pursuant to sections 3 and 7 of the Natural Gas Act (NGA), respectively. FERC is required to authorize construction, development, and operation of interstate pipelines if the applicant demonstrates that the proposed pipeline "is or will be required by the present or future public convenience and necessity," FERC does so by issuing a certificate of public convenience and necessity, or certificate for short. An applicant who receives a certificate is authorized to acquire the necessary property rights to construct and operate its project using eminent domain if it cannot otherwise reach an agreement with the landowner.
FERC issues certificates after conducting a review of proposed projects that often includes a thorough balancing of factors that affect the public interest as well as an environmental review consistent with its obligation under the National Environmental Policy Act (NEPA). Accordingly, FERC can – and almost always – conditions its approval of such projects if FERC determines that certain factors have not been sufficiently mitigated by the applicant. FERC can also deny authorization of proposed projects if a balancing of all public interest factors weighs against authorization of the proposed project.
From the enactment of the NGA in 1938 through the 1990s, the domestic natural gas industry became increasingly competitive and pipelines continued to expand to meet growing demand for natural gas in the United States. Such expansion accelerated in the 1990s, leading many to call on FERC to reform its pricing policy for new construction. FERC responded by voting unanimously to adopt the 1999 Certificate Policy Statement, which required FERC to first determine, as a threshold requirement, that existing customers would not subsidize the proposed project. FERC "would next consider whether the applicant eliminated or minimized any residual adverse effects the project might have on: (1) the applicant’s existing customers; (2) existing pipelines in the market and their captive customers; and (3) landowners and communities affected by the proposed project." Although applicants could rely on a variety of factors to demonstrate that a proposed project was needed under the 1999 Certificate Policy Statement, precedent agreements with prospective customers for long-term firm service became the de facto standard for making that showing.
Policy Shifts
Updated Certificate Policy Statement
Domestic natural gas markets, grid designs, state and municipal policy instruments, regional natural gas exploration and production, and funding and revenue mechanisms have all shifted the regulatory landscape for natural gas projects under the purview of FERC during the past two decades. For instance, the shale revolution spurred by the economic viability of hydraulic fracturing fomented a strong domestic investment environment for new natural gas projects. On the other hand, increased public participation and stakeholder intervention during FERC proceedings as well as concerns pertaining to broader trends—such as climate change, renewable energy development, and policy goals oriented toward fossil fuel reduction--have acted as a countervailing force on the development of new natural gas projects in many instances.
In response to these developments, FERC initiated a notice of inquiry in 2018 (2018 NOI) to collect information from the public and stakeholders regarding potential revisions for the certificate approval process. FERC expressed a desire to revisit its existing practices of: (1) relying on precedent agreements to establish economic need; (2) granting eminent domain to applicants in light of – and often over objections raised by – landowner interests and concerns; (3) evaluating mitigation measures and alternatives under NEPA; and (4) carrying out the logistical processes in reviewing and issuing decisions on certificate applications. For more information on the 2018 NOI, please refer to our prior article on this topic published contemporaneously therewith.
FERC issued its Updated Policy Statement on Certification of New Interstate Natural Gas Facilities (Updated Certificate Policy Statement) on February 18, 2022. The Updated Certificate Policy Statement does not proffer binding rules or criteria that applicants can rely on when seeking FERC authorization of proposed projects. While the Updated Certificate Policy Statement reaffirms that FERC will consider all relevant factors when evaluating certificate applications, the Updated Certificate Policy Statement sets forth a revised framework that raises the bar for demonstrating project need and shifts the emphasis of FERC’s review towards addressing adverse impacts of proposed natural gas projects in a number of key areas.
Project Need
Precedent agreements will remain a key factor in demonstrating project need under the Updated Certificate Policy Statement, but the mere existence of such agreements will no longer be sufficient in and of itself to demonstrate that a project is needed. FERC explained that affiliate precedent agreements "raise unique concerns regarding the need for the project" and will generally be insufficient to demonstrate project need. The Updated Certificate Policy Statement does not, however, establish exactly what else is required to show that a project is needed.
The Updated Certificate Policy Statement instead encourages applicants to provide specific information detailing how the natural gas to be transported by a proposed project would ultimately be used, why the project is needed to serve that use, and the expected utilization rate of the project. The Updated Certificate Policy Statement encourages applicants to work with their prospective shippers to obtain such information to the extent necessary.
For proposed projects that do not directly service a customer, the Updated Certificate Policy Statement encourages applicants to provide evidence that demonstrates consumer benefits (e.g., projected lower natural gas prices for consumers) or expected system benefits (e.g., reduced operating costs, improved pipeline integrity, reduced natural gas leaks).
The Updated Certificate Policy Statement also encourages applicants to submit analyses of market trends and current and future regulatory developments that may affect future need for the proposed project, as well as a thorough assessment of alternatives to the proposed project. Applicants are also encouraged to submit evidence of benefits beyond demand, "which may include evidence that the project will displace more pollution-heavy generation sources, facilitate the integration of renewable energy sources, and/or result in a significant source of jobs or tax revenues . . . ."
Adverse Effects
The Updated Certificate Policy Statement maintains the requirement that applicants be prepared to financially support proposed projects without relying on subsidization from their existing customers, but states that FERC will no longer characterize this issue as a "threshold question." FERC will also continue to consider, without change, whether the applicant has eliminated or minimized any residual adverse effects the project might have on the applicant’s existing customers, as well as other existing pipelines in the market and their captive customers.
The biggest policy shift here will be the increased attention given to a proposed project’s adverse impacts on the environment (including climate change), landowners, and surrounding environmental justice communities. The Updated Certificate Policy Statement makes clear that applicants are expected to propose measures for mitigating such impacts and that FERC "will consider those measures—or the lack thereof—in balancing adverse impacts against the potential benefits of a proposal."
The Updated Certificate Policy Statement also expands the consideration of adverse impacts on landowners beyond the economic impacts associated with eminent domain, to now include an assessment of a wider range of landowner impacts beyond those that can be monetized. Key to such consideration will be evidence that the applicant has engaged in "respectful and good faith negotiation" to acquire lands and plans to minimize the use of eminent domain after receiving a certificate.
The Updated Certificate Policy Statement explains that FERC will robustly consider the adverse impacts of proposed projects on environmental justice communities that are located within the affected environment. Such consideration will factor in cumulative impacts associated with a project rather than only looking at a project’s incremental impacts on environmental justice communities. Proposals to mitigate such adverse impacts are strongly encouraged to demonstrate sufficient community input and a range of potential mitigation options.
While the Updated Certificate Policy Statement does not apply to FERC’s authorization of liquefied natural gas (LNG) facilities under section 3 of the NGA, it notes that FERC’s environmental justice analysis will also apply to such authorizations.
Balancing Public Benefits and Adverse Effects
The Updated Certificate Policy Statement will continue to weigh the public benefits against the adverse impacts of a proposed project rather than adopt a bright-line test. As noted above, FERC has expanded the range of such impacts to now include impacts on climate change (as set forth in the Interim GHG Policy Statement discussed next) and environmental justice communities. FERC will continue to consider the extent to which an applicant will be able to mitigate any adverse impacts when evaluating a certificate application under the Updated Certificate Policy Statement.
Applicability
FERC will not apply the Updated Certificate Policy Statement retroactively to certificates it has already issued. FERC will, however, apply the Updated Certificate Policy Statement to both pending and new certificate applications.
Applicants with pending applications will be given the opportunity to supplement the record and explain how such proposals are consistent with the Interim GHG Policy Statement, and stakeholders will have an opportunity to respond to any such filings.
Interim GHG Policy Statement
Concurrently with the Updated Certificate Policy Statement, FERC announced its intention to update its procedures for evaluating climate impacts under NEPA and to integrate climate change considerations (including greenhouse gas (GHG) emissions) into its public interest determinations for jurisdictional LNG facilities and interstate pipelines under NGA sections 3 and 7, respectively, as explained in the Interim Policy Statement on Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews (Interim GHG Policy Statement). Similar to the Updated Certificate Policy Statement, the Interim GHG Policy Statement does not proffer binding rules or criteria that applicants can rely on when seeking FERC authorization of proposed projects.
The Interim GHG Policy Statement encourages project sponsors for any new natural gas infrastructure project to include the following in its NGA section 3 or 7 application:
- the project’s projected utilization rate and supporting information;
- an estimate of reasonably foreseeable project GHG emissions;
- if upstream and downstream emissions are not quantified, evidence to support why those emissions are not reasonably foreseeable project emissions;
- evidence, if any, that impacts the quantification of the project’s reasonably foreseeable GHG emissions;
- a description of its proposed GHG mitigation measures, including the percent of the project’s direct and indirect GHG emissions that will be mitigated and, if applicable, a mechanism for tracking mitigation of GHG emissions; and
- a detailed cost estimate of its proposed GHG mitigation and a proposal for recovering those costs.
According to the Interim GHG Policy Statement, FERC "will then consider the project’s impact on climate change, including the project sponsor’s mitigation proposal to reduce direct GHG emissions and, to the extent practicable, to reduce any reasonably foreseeable project emissions, as part of its determination under NEPA and its public interest determination under NGA section 3 or 7."
NEPA Changes
With respect to NEPA, the Interim GHG Policy Statement explains that FERC staff will prepare an Environmental Impact Statement (EIS) for any proposed LNG facility or pipeline project that may result in 100,000 metric tons per year of CO2e or more of emissions when such project is fully utilized or operated at "full burn" rate (e.g., projects that transport an average of 5,200 dekatherms or more per day and projects that involve the operation of one or more compressor stations or LNG facilities). The foregoing presumption, however, may be refuted by record evidence. FERC’s assessment of potential mitigation measures, conversely, will rely on of a proposed project’s reasonably foreseeable GHG emissions at the projected utilization rate, rather than assuming 100% utilization. Such emissions will include, in either event, those resulting from construction and operation of the project as well as, in most cases, those resulting from the downstream combustion of transported gas.
The Interim GHG Policy Statement explains that FERC proposes, for NEPA purposes, to: (1) consider direct emissions of a project a reasonably foreseeable effect; (2) find that an NGA section 3 export facility is not the legally relevant cause of upstream and downstream emissions; (3) consider on a case-by-case basis whether downstream emissions are a reasonably foreseeable effect on an NGA section 7 interstate pipeline project; and (4) consider on a case-by-case basis whether upstream emissions are a reasonably foreseeable effect of an NGA section 7 interstate pipeline project.
With respect to downstream emissions, the Interim GHG Policy Statement states that "there appears to be a substantial likelihood of GHG emissions from the end-use combustion of transported gas as a result of a natural gas project proposed under NGA section 7." The Interim GHG Policy Statement also acknowledges that "there may be circumstances where downstream emissions are not a foreseeable effect of an authorized project," such that "each project must be analyzed on a case-by-case basis." The Interim GHG Policy Statement further provides that "project sponsors may submit any evidence they believe indicates that downstream emissions are not a reasonably foreseeable effect of a proposed project."
With respect to upstream emissions, the Interim GHG Policy Statement states that FERC "will continue to consider on a case-by-case basis whether the environmental effects from natural gas production are either likely caused by a proposed NGA section 7 project or reasonably foreseeable consequences of our approval of such projects." Along these lines, the Interim GHG Policy Statement encourages – but does not require – project sponsors to submit information on the reasonably foreseeable upstream impacts caused by a proposed project or alternatively explain why there are none for FERC to consider.
NGA Changes
With respect to the NGA, the Interim GHG Policy Statement explains that FERC will consider a proposed project’s impact on climate change, including any proposed mitigation measures, as part of its public interest determination under NGA section 3 or 7. Such determination "will assess the adequacy of the project sponsor’s proposed mitigation on a case-by-case basis and will consider the project’s impact on climate change as one of many factors" (i.e., the other factors outlined in the Updated Certificate Policy Statement and discussed above).
The Interim GHG Policy Statement also explains that FERC may condition its authorization of such projects on further mitigation of a proposed project’s climate change impacts, including such project’s direct GHG emissions, if FERC determines that the mitigation measures proposed by the project sponsor are "inadequate to support the public interest determination." While the Interim GHG Policy Statement does not mandate any particular form of mitigation, the Interim GHG Policy Statement does clarify that any such mitigation should be: (1) both real and additional; (2) quantifiable; (3) unencumbered; and (4) trackable. The Interim GHG Policy Statement identifies the following examples:
(a) market-based mitigation (e.g., renewable energy credits; mandatory compliance market participation; voluntary carbon market participation); or
(b) physical mitigation (e.g., reducing a project’s fugitive methane emissions; incorporating renewable energy or other energy efficient technologies to reduce emissions from compressor stations; carbon capture and storage; direct air CO2 capture; environmentally-based measures).
The Interim GHG Policy Statement also declines to mandate mitigation based on a specific volume or proportion of emissions, explaining that encouraging project sponsors to propose such measures allows FERC to better compare those measures against the proposed project’s benefits and provides flexibility to project sponsors.
Cost Recovery
With respect to cost recovery, the Interim GHG Policy Statement states that "[g]oing forward, project sponsors wishing to purchase offsets or proposing other measures to mitigate their project’s GHG emissions may propose to recover the costs of these measures through their proposed rates," similar to other construction and operation costs.
Applicability
Unlike the Updated Certificate Policy Statement, the Interim GHG Policy Statement is not a final agency action and is now subject to a public comment process.
While initial comments are due by April 4, 2022, FERC Chairman Richard Glick stated that FERC will apply the principles of the Interim GHG Policy Statement to both pending and new NGA section 3 and 7 applications, so that FERC can "process pipeline and LNG applications without delay" even if substantive revisions may be forthcoming in the ensuing months and years.
Applicants with pending applications will be given the opportunity to supplement the record and explain how such proposals are consistent with the Interim GHG Policy Statement, and stakeholders will have an opportunity to respond to any such filings.
Outlook
Updated Certificate Policy Statement
The domestic natural gas industry has already adopted many of the practices highlighted in the Updated Certificate Policy Statement. Namely, project developers and operators alike have sought to account for, among others, the social license to operate, corporate social responsibility efforts, and shareholder and investor pressure to consider and mitigate the issues raised in the Updated Certificate Policy Statement. Many of the initiatives and efforts proactively developed by the domestic natural gas industry will go far in addressing the concerns raised in the Updated Certificate Policy Statement.
FERC has also, in recent years, increasingly requested supplemental information similar to that encouraged or required in the Updated Certificate Policy Statement from natural gas infrastructure project developers when reviewing NGA section 3 or 7 applications. It has become increasingly common for FERC to synergize applicants’ responses to such data requests into mitigating measures—principally, foreseeable and demonstrable environmental and landowner impacts—and to condition such authorizations on acceptance of and compliance with those measures.
The Updated Certificate Policy Statement in many ways offers a regulatory framework for midstream companies to highlight efforts already underway to mitigate adverse impacts from their operations, as well as the critical role that natural gas has played in reducing GHG emissions and broader climate change impacts by displacing other pollution-heavy generation sources. As FERC begins to apply these new criteria, it is plausible to expect that any regulatory uncertainty will ultimately be resolved in the course of certificate proceedings rather than immediate and outright rejection of such applications.
Interim GHG Policy Statement
The Interim GHG Policy Statement, on the other hand, is much more likely to disrupt the development of natural gas infrastructure projects in that it will greatly increase the number of projects that will require an EIS to be prepared, which in turn will likely lead to increased project costs, as well as longer project schedules. The Interim GHG Policy Statement is also still subject to comment and further revision, so any prediction of its impacts is highly speculative at this stage. Still, any pending, planned, or future investment in natural gas infrastructure projects will likely operate under the assumption that an EIS will more likely than not be required if any such project would meet the emissions threshold set forth in the Interim GHG Policy Statement.
Conclusion
Conventional wisdom would suggest a cautious, deliberative tack employed by current and prospective project sponsors in light of the current uncertainty as to how FERC intends to practically apply the principles announced in the Updated Certificate Policy Statement and Interim GHG Policy Statement (collectively, the Policy Statements). Some project sponsors may elect to pull their currently pending applications rather than re-litigate issues that had been resolved pending FERC action. Companies who intended to file applications under NGA section 3 or 7 may postpone those projects and instead redeploy capital. Doing so would allow currently pending applications to shine light on how these Policy Statements will operate and companies to avoid running the gauntlet of regulatory uncertainty. Interestingly, one unintended short-term impact of the Policy Statements may be to delay applications to replace aging, but already certificated, natural gas facilities with more efficient and environmentally-friendly facilities, until more certainty is obtained under these Policy Statements.
The Policy Statements will likely lead to increased project costs as well as longer project schedules for domestic natural gas infrastructure projects. The Policy Statements also provide a glimpse into the regulatory headwinds that project sponsors will increasingly face by regulators, regardless of the ultimate fate of these Policy Statements. The White & Case team has the expertise and experience needed to help our clients successfully navigate those regulatory headwinds, drive innovation, and turn regulatory challenges into opportunities.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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