On June 9, 2020, the Federal Energy Regulatory Commission (FERC) issued a regulation precluding construction authorization for pipelines approved pursuant to Sections 3 and 7 of the Natural Gas Act (NGA) until FERC acts on the merits of any timely-filed requests for rehearing or the time for filing a rehearing request has expired. Parties seeking to construct new interstate pipeline facilities likely will contend FERC’s regulation is overbroad and burdensome. They may contend that it imposes unnecessary delays on the construction of critical energy infrastructure already approved by FERC and found to be in the public interest. The regulation precludes the construction of the entirety of the approved pipeline regardless of whether the scope of the rehearing request includes all of the facilities. The regulation is linked to concerns that landowners will be subject to eminent domain actions, yet ostensibly bars construction activity regardless of the basis of the rehearing request, for instance regardless of whether the rehearing request has anything to do with the exercise of condemnation rights. Pipelines may contend that the regulation is inconsistent with the NGA, federal policy supporting the construction of needed energy infrastructure, and a recent executive order directing federal agencies to support the economic response to the COVID-19 outbreak.
NGA Section 7 or 3 approval is necessary for an entity to construct and operate natural gas pipeline facilities in interstate, or foreign, commerce, respectively. FERC orders approving and finding that such facilities are in the public interest are subject to the NGA’s rehearing procedures. After an order granting Section 7 certificate or Section 3 authorization has been issued, participants have thirty days to request rehearing. If rehearing is sought, the NGA deems such applications denied unless FERC acts upon them within thirty days of their filing. FERC typically issues a tolling order on the thirtieth day following such rehearing requests to provide additional time to consider them. Historically, while rehearing is pending, so long as the pre-conditions in the NGA section 3 or 7 orders have been met and authorization for construction has been granted, construction may commence.
FERC’s regulation would alter FERC’s historical practice and precedent. Rather than allowing new certificated pipeline facilities which had been found to be in the public interest, to commence construction, the regulation requires FERC to act on the merits of “any” timely pending requests prior to construction of any part of the authorized facilities. This regulation raises a number of concerns for pipeline companies.
The regulation’s scope may be claimed to be too broad and overly burden pipelines. Regardless of the subject matter of the rehearing request, all newly authorized pipeline facilities may not commence construction. Thus, a single landowner requesting rehearing regarding the route of the pipeline over a single parcel of land could halt construction of hundreds of miles of pipeline. Because such a request for rehearing would have a limited scope, there would be no doubt that the pipeline was approved for construction along nearly the entirety of its route. Nevertheless, under the new regulation, all construction would be deferred until the rehearing request had been resolved. Similarly, limited environmental concerns regarding certain stream crossings or environmental effects in isolated areas of the pipeline’s route could be used by environmental advocacy groups to halt the construction of all of a proposed pipeline’s facilities even when the other facilities are not at issue. Also, participants that may not have provided comments before the certificate order and exercised all of their available means for being heard could apply for rehearing, stalling construction further through their own delay. The regulation may encourage rehearing requests from entities and individuals that are opposed to pipeline construction regardless of the merits and scope of their objections.
Further, the regulation poses a potential Catch-22 problem for pipelines. Presume a landowner seeks rehearing regarding the proposed route configuration or conditions on the construction of the pipeline. If FERC on rehearing of the initial order changes the route, directs more compression in lieu of larger diameter pipe or other conditions of construction, and some other participant is thereby aggrieved by the first order on rehearing, the newly-aggrieved party may then seek rehearing of the first order on rehearing, which under the regulation, arguably further defers the time when construction may commence. Regardless of the merits, entities or individuals seek rehearing of any FERC order including both the original certificate order and any order issued on rehearing. Thus, an entity or an individual opposed to the pipeline’s construction could halt construction indefinitely by filing for rehearing of any order issued by FERC.
It is clear that the regulation will increase the costs of construction. Uncertainty and construction delays could affect financing, cause loss of revenues, and impose costs associated with the effects of inflation. In particular, the extension of time over which the certificate process plays out directly increases risk to the pipeline sponsor, including the risk of additional changes in regulation, adverse capital market trends, changing basis differentials, and competitors’ (e.g., intrastate pipelines) successful capture of markets. Further, the economic benefit of having adequate gas pipeline infrastructure in place to meet demand will be hampered. The regulation fails to discuss any of these costs.
The regulation also does not come to grips with the growing likelihood that certificate application data will become increasingly stale and overtaken by events. The extended period before construction can commence means that the application’s representation of financing plans, bond issuance costs, estimated costs (for instance, based on contractors’ hourly rates), and gas commodity price signals will be rendered obsolete.
The regulation is also inconsistent with recent executive orders issued by the White House. On May 19, 2020, Executive Order 13924 was issued which directed federal agencies, such as FERC, to use any emergency authorities “available to them to support the economic response to the COVID-19 outbreak” and rescind, waive or exempt entities from regulatory standards that “may inhibit economic recovery.” In addition, on June 4th, the “Accelerating the Nation’s Economic Recovery from the COVID-19 Emergency by Expediting Infrastructure Investments and Other Activities” executive order was issued. That executive order instructed federal agencies to use the emergency provisions of environmental laws, such as the National Environmental Policy Act and the Endangered Species Act, to facilitate economic recovery. The executive order also required federal agencies to use applicable statutes and regulations to the fullest extent possible to promote economic recovery, and specifically, “speed infrastructure investments.” Yet, FERC’s regulation would significantly extend the delay before pipeline infrastructure can be constructed. Rather than allowing construction when an order under NGA Sections 3 or 7 finds that the pipeline infrastructure is in the public interest, FERC would only allow construction to begin after what could be a years-long rehearing process, on top of what is already a multi-year process for new pipelines. Even if a change in policy were warranted, such change arguably should not occur during the national emergency associated with COVID-19 and while the executive orders are in place requiring agencies to promote the economic recovery through speedy infrastructure development.
Additionally, in the past year significant volumes of natural gas have been burned in the field, for no thermal benefit, in the Bakken and Permian Basins. The number of drilled but uncompleted wells nationally numbers in the thousands, many as a result of lacking pipeline connections. These conditions likely will be compounded by new regulations.
Notably, Commissioner Glick issued a dissent to the order arguing that the regulation had not gone far enough to protect landowners. In particular, Commissioner Glick stated that not only should new pipeline facilities not be permitted to begin construction while a rehearing request is pending but also that they should be precluded from exercising their eminent domain authority. If this suggestion is adopted in subsequent FERC orders, construction of new pipeline facilities would be further delayed for potentially years as any eminent domain proceedings could not proceed until the rehearing process was completed.
The regulation and the dissent to the order raise the possibility that a potential change in FERC leadership after November election could result in significant delays in the construction of new pipeline facilities that have been found to be in the public interest. Delay will be further aggravated if, as a result of a change in the composition of FERC or adverse judicial precedent, FERC concludes that it must quantify greenhouse gas effects, perhaps by a methodology established through a generic rulemaking, which would be a predicate to further certifications. FERC rarely reverses its initial order on rehearing. Yet, this regulation would permit FERC to hold up new pipeline projects indefinitely to perform their review. In fact, FERC could decline for years to act on a rehearing request after tolling, placing pipeline projects in an extended state of limbo while forcing the pipelines to incur costs for project development that may never be recovered.