Challenges to Gas Pipeline Infrastructure Additions in the U.S

The Federal Energy Regulatory Commission (FERC or Commission) recently revised the standards for natural gas infrastructure project reviews in an overhaul of its approval policies in an Updated Policy Statement on Certification of New Interstate Natural Gas Facilities, issued February 17, 2022. Consistent with the earlier, 1999 Certificate Policy Statement, FERC reaffirmed the need to examine a proposed project’s impacts on existing pipelines, including whether the captive customers of existing pipelines will end up paying for unsubscribed capacity on existing pipelines that results from overbuilding of new facilities. Environmental impacts will continue to be considered, along with all other impacts, as part of the Commission’s public convenience and necessity determination under the Natural Gas Act (“NGA”). Precedent agreements between non-affiliates remain important evidence of need but will no longer be the sole factor the Commission considers. A new element was added — in evaluating a project’s impact on surrounding communities, the Commission will undertake a robust consideration of impacts to any environmental justice communities to assure that disadvantaged populations do not bear a disproportionate burden of health risk.

 In a separate policy statement issued concurrently, the Commission established procedures for evaluating climate impacts under the National Environmental Protection Act (“NEPA”) and explained how the Commission will integrate climate considerations into its public convenience and necessity findings under the NGA, including how the Commission will consider measures to mitigate climate impacts.  When making public interest determinations, FERC will fully consider climate impacts, in addition to other environmental impacts. FERC plans to gauge foreseeable greenhouse gas emissions that reasonably can be linked to a proposed gas infrastructure project, including pipelines and LNG terminals. Any proposed projects that emit more than 100,000 tons of GHGs per year will be presumed to have a significant climate change impact and require an environmental impact statement or EIS— a more stringent process than an environmental assessment, or EA. That means virtually every new project will be subject to an EIS, except for small pipeline replacement projects.

Commissioner Danly dissented, expressing concerns that the policy statements would have “ profound implications for the ability of natural gas companies to secure capital, on the timelines for NGA section 7 applications to be processed, and on the costs that a pipeline and its customers will bear as a result of the potentially unmeasurable mitigation that the majority expects each company to propose when filing its application and the possibility of further mitigation measures added unilaterally by the Commission”.  Danly went on to note that he believes the policy statements contravene the purpose of the NGA which, as the Supreme Court has held, is to “encourage the orderly development of plentiful supplies of . . . natural gas at reasonable prices.”

In response to criticism from the pipeline industry and Congress, FERC subsequently paused implementation of the policy statements and invited further comments. But it seems clear that a climate change/GHG review element in some form will ultimately be implemented since failure to consider those impacts led to several appellate court reversals of Commission orders approving projects.  Added to the expanded approval challenges at the federal level is the rights of states, under statutes not preempted by the NGA, to withhold approval of permits    necessary for construction. For example, Water Quality Permits under the Clean Water Act are not preempted by the NGA and several states have declined to issue them, effectively terminating several  projects, despite FERC’s approval of them.

What does this mean for investments in new gas pipeline facilities? Will Commissioner Danly’s fear of “profound impacts” come to pass? At a minimum, these policies likely will have a chilling effect on new gas pipeline infrastructure, with a potential exception for pipelines that connect natural gas supply to a gas fired electric generator that switches from coal to gas, generally viewed as an environmental plus.

On a positive note, however, opportunities for investment (or the financing of investment) in existing gas pipeline facilities appear favorable.  Fundamentals all but assure that facilities which connect a robust U.S. supply of natural gas to a growing domestic and worldwide (LNG) demand will maintain their value. Those facilities remain largely immune to new infrastructure policies. Repurposing of existing pipelines, gas to oil or oil to gas, also presents opportunities. Investors’ reluctance to commit capital to regulated assets, with prices potentially circumscribed by cost-based rates, can be addressed by unique deal structures, market-based or contract rates, and advantageous tax structures.  

I look forward to discussing these issues with interested members at the May conference in Washington, D.C.

Contributing Advisors