... Washington Watch: Fall Is Coming, and So Are Changes

Washington Watch: Fall Is Here, and So Are Changes

It’s fall and leaves will soon turn color, and temperatures will start to drop. Not yet, but you can almost feel the changes in the air. Change is also occurring at the Federal Energy Regulatory Commission (FERC). The good news is that FERC once again has a quorum and can resume its regulatory oversight of the electric, natural gas and oil pipeline industries. The bad news is that FERC has a backlog of cases to address. One in particular, involving Millennium Pipeline Co. LLC, will expose tension between the Natural Gas Act (NGA) and Clean Water Act (CWA), between the FERC and a state environmental agency, and between environmental activists and electric reliability.

Cheryl LaFleur

Cheryl LaFleur

FERC Quorum

By law, FERC is to be comprised of four commissioners and one chairman. A quorum of three is required for the commission to act. But there had been no quorum since Feb. 3, when Norman Bay (D) resigned. And with the resignation of Collette Honorable (D) in June, FERC had but a single member, Acting Chairman Cheryl LaFleur (D). However, the quorum was restored in mid-August, when Neil Chatterjee, former policy advisor to Senate Majority Leader Mitch

Neil Chatterjee

Neil Chatterjee

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McConnell, was sworn in as chairman on Aug. 8, and Robert Powelson, a former Pennsylvania PUC Commissioner was sworn in as commissioner on Aug. 10. More help is on the way too — with Kevin McIntrye (R), head of Jones Day’s energy group, expected to join FERC as the new chairman and Richard Glick (D), Democratic General Counsel for the Senate Energy Committee, nominated to fill the remaining commissioner seat. For those of you keeping score, if all goes according to plan, FERC will have four different chairmen in 2017 — Bay, LaFleur, Chatterjee and McIntyre. That must be some kind of record.

Robert Powelson

Robert Powelson

From Feb. 3 to Aug. 10, FERC was unable to act on a variety of matters, including natural gas pipeline applications for authorization to construct new facilities or oil pipeline requests for rate authorizations. Instead, the FERC staff has simply accepted many filings subject to later commission action. FERC’s next open meeting is not scheduled until Sept. 20. In the meantime, the commission’s newly constituted quorum has begun to act by “notational voting” — that is, a draft order is circulated to each commissioner who in turn casts a vote by placing his/her initials on the order. The first notational orders were issued on Aug. 18, with more, many more, to come.

Among the issues confronting FERC will be how to address Millennium’s request for a “notice to proceed” with construction activities now that it has received certificate authorization under NGA Section 7(c) and, arguably, all federally required environmental permits or waivers. However, a New York regulator has yet to issue the CWA Section 401 water quality certification and claims it still has more time to decide.

NGA Section 7(c) v. CWA Section 401

Under NGA Section 7(c), FERC issues a certificate authorization for an interstate pipeline to construct new facilities, but only after finding that the pipeline project is required by the “public convenience and necessity.” In order to make that finding, FERC must consider a host of issues. The commission balances the public benefits of the pipeline project (e.g., access to reliable natural gas service, reduced costs, etc.) against the potential adverse consequences, including possible environmental impacts and whether the pipeline made efforts to eliminate or minimize any adverse effects the project might have on landowners and communities affected by the route of the new facilities. Given the wide range of issues FERC must consider before granting certificate authorization, many people assume that the pipeline can proceed with construction upon receipt of an order. But that’s not the case. FERC’s certificate orders generally include a number of conditions, including the pipeline’s obtaining all other applicable permits. Not only must the pipeline accept FERC’s order (as conditioned), but must notify the commission when all the conditions have been met or waived. Only then will FERC issue a notice to proceed with construction.

Among the various permits required to be obtained by a pipeline is water quality certification from a state regulator pursuant to CWA Section 401. Section 401 requires an applicant for a federal permit to construct facilities, which may result in a discharge into the navigable waters, to provide the permitting agency a certification from the state in which the discharge originates that such discharge will comply with the applicable provisions of the CWA.

In light of the above, Congress has enacted legislation that allocates regulatory responsibility for interstate natural gas pipelines to FERC and clean water oversight to the various states. As such, FERC can issue certificate authorization, but the pipeline cannot proceed with its project unless the applicable state regulator issues or waives the water quality certification. So what happens when the state regulator delays or denies water quality certification? That is what’s at issue in a pending proceeding waiting for action by FERC.

How Long is a Year?

On Nov. 13, 2015, Millennium filed with FERC an application for NGA certificate authorization to construct a 7.8-mile, 16-in. diameter lateral pipeline to connect Millennium’s existing system with a new, $1 billion, 650 MW combined-cycle electric generation facility in the Wayawanda, New York. As originally proposed, the lateral would cost $39 million to construct and provide 127,200 dekatherms (Dth) per day of incremental firm natural gas transportation service to the electric generator. The electric generation facility was already being constructed, given that the New York Public Service Commission had previously authorized the generation facility in May 2014.

As noted above, FERC will not authorize the construction of new pipeline facilities unless the public benefits outweigh potential adverse consequences, including environmental impacts. Indeed, in compliance with the National Environmental Policy Act (NEPA), FERC incorporates environmental considerations in its decision-making. In particular, it prepares detailed statements assessing the environmental impact of and alternatives to a proposed pipeline project significantly affecting the environment, that is FERC prepares either an Environmental Assessment (EA) that concludes with a finding of no significant impact (FONSI) or an Environmental Impact Statement (EIS). NEPA does not dictate a particular decision, but rather requires FERC (and other agencies) to take a “hard look” at environmental problems, identify the relevant environmental concerns and determine that, based on record evidence, the environmental impact is insignificant or that the changes to the pipeline project reduce significant impacts to a minimum.

With regard to Millennium, landowner and environmental issues had been discussed and addressed since May 19, 2015, when the pipeline began FERC’s pre-filing review process, and the commission staff issued a Notice of Intent (NOI) to prepare an EA. In response to the NOI, FERC received comment letters from individuals, the Environmental Protection Agency, and the New York State Department of Environmental Conservation (NYSDEC). After Millennium filed its certificate application, additional comment letters were filed by NYSDEC and others. Later FERC issued an EA, which noted that during the pre-filing and application review phases, Millennium, in response to comments from landowners and regulators, modified the pipeline route and construction procedures to avoid or minimize impacts on sensitive resources, and reduce constructability concerns. The pipeline’s anticipated construction costs increased accordingly.

On Nov. 9, 2016, FERC granted Millennium certificate authorization, conditioned, among other things, on the company notifying FERC that the pipeline has received all authorizations required under federal law (or evidence of waiver thereof) prior to construction, including NYSDEC certification under CWA Section 401. As of the date Millennium received the certificate authorization, the pipeline had already been working with the department for more than a year and a half, having filed a 1,200-page application for Water Quality Certification on Nov. 20, 2015, after previously participating in the department’s pre-filing process for an additional seven months. Nevertheless, the NYSDEC informed Millennium that its application was incomplete and, over the next year, sent the company several requests for supplemental information. Each time, the company provided the requested information.

According to Millennium, the pipeline’s water quality certification application and subsequent submissions fully addressed the NYSDEC’s concerns. Specifically, to resolve water quality impacts, the company proposed to use horizontal directional drilling or conventional bore on nine of the 12 stream crossings associated with pipeline project. Installing the pipeline below the streambeds would avoid the streams entirely and result in no impact to water quality. Of the remaining three stream crossings, Millennium modified its stream crossing methods, so that the open-cut crossing method would only be used in streams that have no flow at the time of construction. That is, construction would only involve dry streambeds, so no water quality would be impacted. That left only one stream crossing, 10 ft wide, along the length of Millennium’s 8-mile pipeline project.

Yet the NYSDEC never issued the certification. Congress anticipated that states might delay issuance of water quality certification orders and therefore included the following proviso in Section 401: the certification requirement is waived, if a state fails or refuses to act on a request for certification, within a reasonable period of time (which shall not exceed one year) after receipt of such request. So, a year after submitting its application to the department and still not receiving the certification, Millennium asked the D.C. Circuit to order the NYSDEC to issue the certification.

Earlier this summer, on June 23, the D.C. Circuit dismissed Millennium’s request and explained: “Even if the Department has unlawfully delayed acting on Millennium’s application, its inaction would operate as a waiver, enabling Millennium to bypass the Department and proceed to obtain approval from FERC.” Accordingly, on July 21, the company filed with FERC a request for issuance of a “Notice to Proceed” with construction activities for all portions of the project. Thereafter, the NYSDEC quickly informed FERC that Millennium is wrong: The Department has until Aug. 30 — being one year from the date it received a complete application from Millennium — to issue a decision. Promising to issue its decision before the deadline, the department asked FERC to delay action on Millennium’s request until Aug. 31.

What will the FERC do and when will it do it? That will depend in largely on what the NYSDEC determines, so don’t expect a FERC order until at least Sept. 1.

Is Past Performance Indicative of Future Results?

In the last year, the NYSDEC has denied Section 401 water quality certification to two interstate natural gas pipelines that had received FERC certificate authorization, one involved Constitution Pipeline Co. LLC and the other involved the Northern Access Project of National Fuel Gas Supply Corp. and Empire Pipeline Inc. In 2014, FERC issued certificate authorization for Constitution’s 30-in., 125-mile pipeline with a capacity to transport 650,000 Dth of natural gas per day (enough natural gas to serve about 3 million homes) from the Marcellus shale play to customers in New York. The New York portion of the project would include new right-of-way construction of approximately 99 miles of pipeline, as opposed to co-locating within existing rights of way. To obtain the Section 401 certification, the NYSDEC demanded significant, numerous and costly mitigation measures to limit the impact on the state’s water bodies. Constitution objected, and the department denied the Section 401 certification on April 22, 2016. Constitution appealed and argued that the department had waited too long to issue its denial. On Aug. 18, the Second Circuit upheld the department’s denial of the water quality certification, but found that it did not have jurisdiction to determine whether the department had waited too long to issue its denial.

 The proposed route of the Constitution Pipeline

The proposed route of the Constitution Pipeline .

Possible alternative routes

Possible alternative routes to mitigate water quality concerns

One of the last orders issued by FERC (before losing its quorum in February) was to grant certificate authorization to the Northern Access Project. The Northern Access Project consists of 99 miles of new pipeline and compression facilities that would expand firm service on National Fuel’s system by 497,000 Dth per day and 350,000 Dth per day on Empire’s system. In April 2017, the NYSDEC denied water quality certification associated with the Northern Access Project, thereby blocking development. Following the denial, New York Governor Andrew Cuomo stated that he supports natural gas pipelines, “as long as they’re done well and done correctly.” But what does that mean? That pipeline projects will only be approved in New York if pipelines are installed under streams and waterways using directional drilling? If so, much needed pipeline construction in New York may be blocked, and that could have devastating consequences.

Impact on Electric Reliability

In January, Governor Cuomo applauded an agreement to shut down the 2,000 MW Indian Point nuclear generating facility, which is located 30 miles north of New York City and has been providing low cost electricity for more than 50 years. Maintaining he’s been trying to shutter the “ticking time bomb” for more than 15 years, Cuomo minimized the adverse impact that the closure will have on electric reliability, claiming instead that the State will invest in wind farms and other renewable energy sources, as well as add transmission lines to carry hydropower from Quebec, Canada. But that’s a pipe dream according to economist Jonathan Lesser. All the wind turbines in New York generates is less than one-fourth of the output of Indian Point, and the state’s sole utility-scale solar plant produced as much energy in 2015 as the nuclear plant produces in a day.

Instead, Lesser and others maintain that the electric output of Indian Point will have to be replaced by two gas-fired generation plants being developed in southeastern New York: 1.) the 650 MW plant in Wayawanda to be supplied by Millennium and scheduled to come online in February 2018; and 2.) a 1,100 MW, $1.6 billion plant in Dover, New York (located near the Iroquois pipeline system, which has no available capacity) expected come online in 2020. Neither generation plant will become operational unless and until their upstream pipeline transporters receive all necessary authorizations for new construction.

The first test will involve Millennium. The NYSDEC’s failure to grant the Section 401 certification would deprive the gas-fired generation facility of gas supplies, transform a $1 billion generation plant into nothing more than a large piece of art, deny New Yorkers access to a much-needed supply of electric energy, reduce electric reliability and increase costs to ratepayers. This may cause even the Cuomo administration to temper its actions. Stay tuned.

Bottom Line

Historically, pipelines that obtain FERC certificate authorization generally receive all their other required permits. But as we’ve seen in the last couple years, social media fueled protests and environmental activists have helped delay or derail pipeline development. Protestors and activists are now encouraging state environmental regulators to block pipeline development by denying Section 401 certification. Eventually, the courts will have to determine whether FERC-certificated pipeline projects can be blocked by state environmental regulators who delay and deny Section 401 water quality certification, and Congress may need to create a remedy.

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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