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The Federal Energy Regulatory Commission: A Very Brief Introduction to Regulation of the Application and Approval Process for Interstate Natural Gas Pipeline Construction

By

©Kurt L. Krieger Steptoe & Johnson PLLC [email protected] 304-353-8124

I. The Federal Energy Regulatory Commission

Few outside of the energy industry recognize the name of the Federal Energy Regulatory

Commission (“FERC”) and its significant role in regulating several important energy segments.

The FERC is an independent agency under the United States Department of Energy located in

Washington, D.C., that regulates the interstate transmission of electricity, natural gas, and oil.

FERC’s (and predecessor Federal Power Commission’s) roots are in the of

19351 and Natural Gas Act of 1938 (“NGA”)2 -- the later being an act of Congress that defines

FERC’s jurisdiction over the transportation and/or sale for resale of natural gas in interstate commerce, but excludes the local distribution of gas, gathering and production. The FERC also reviews proposals to build or abandon liquefied natural gas (“LNG”) import/export terminals and certain hydropower projects. Unlike its role and jurisdiction over the electric and oil segments,

FERC has the exclusive jurisdiction and authority to review and approve the siting and construction of interstate natural gas pipelines; a summary of which is the primary purpose of this brief article.

1 16 U.S.C. §§ 791, et seq.

2 15 U.S.C. §§ 717, et seq.

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FERC is composed of five commissioners who are appointed by the President with the advice and consent of the United States Senate. Commissioners serve five-year terms and have an equal vote. No more than three commissioners may belong to the same political party. The

President’s appointments are an important factor in the shaping and administration of national energy policy. FERC’s decisions are not subject to review by the President or Congress, but rather by the United States Courts of Appeals.

FERC has broad enforcement and penalty/disgorgement authority, and the penalties for

non-compliance with FERC’s rules and regulations have substantially increased since and

because of Enron. The Energy Policy Act of 2005 (“EPAct 2005”)3 increased FERC’s civil

penalty authority from a few thousand dollars per day to $1,000,000 per day, per violation for

any violation of the NGA and other federal statutes that FERC administers.

II. The Scope of FERC Regulation

The FERC is active in both the big picture, high visibility areas of energy regulation, and in technical and narrowly focused areas. The FERC:

 regulates the transmission and wholesale sale of natural gas for interstate commerce;

 approves the siting and abandonment of interstate natural gas pipelines and storage facilities;

 oversees environmental matters related to interstate natural gas pipeline and hydroelectric projects and other matters;

 regulates the transmission and wholesale sale of electricity in interstate commerce;

 reviews certain mergers and acquisitions and corporate transactions by electric companies;

 regulates the transportation of oil by pipeline in interstate commerce;

3 Pub. L. No. 109-58, 119 Stat. 594 (2005).

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 approves the siting of electric transmission projects under very limited circumstances;

 ensures the safe operation and reliability of proposed and operating LNG import/export terminals;

 licenses and inspects private, municipal and state hydroelectric projects;

 protects the reliability of the high-voltage interstate transmission system through mandatory reliability standards;

 monitors and investigates energy markets;

 enforces its regulatory requirements through imposition of civil penalties and other means; and

 administers accounting and financial reporting regulations and the conduct of regulated companies.

While the list above is extensive and broad in scope, there are many aspects of the energy industry that are not FERC regulated. FERC is not involved in the:

 regulation of retail electricity and natural gas sales to consumers;

 approval of the physical construction of electric generation facilities;

 regulation of activities of the municipal power systems, federal power marketing agencies like the Tennessee Valley Authority and most rural electric cooperatives;

 regulation of nuclear power plants;

 oversight for the construction of oil pipelines;

 abandonment of service as related to oil facilities;

 mergers and acquisitions as related to natural gas and oil companies;

 responsibility for pipeline safety; and

 reliability problems related to failures of local distribution facilities.

Responsibility for these areas is spread among various other federal and state agencies.

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III. FERC Regulation of Interstate Natural Gas Pipelines

Interstate natural gas pipelines are comprehensively regulated by the FERC. Each interstate pipeline must have a FERC-approved “tariff” which contains the pipeline’s approved services, rates to be charged, and the terms and conditions under which service will be rendered.

The rates charged may be cost-based reflecting the cost of building and operating the infrastructure necessary to render the service (and paid for by all pipeline customers via rates), cost-based but incremental (and paid for only by those for whom the expansion project is built and will benefit most from the additional service), or market-based reflecting market demand for the service (and paid for by only those customers of the pipeline using the new or additional service).

Each interstate pipeline applies for and receives a blanket construction/abandonment

certificate from FERC that authorizes the pipeline to construct less complex facility projects

without an extensive advance review process at FERC.4 The construction/abandonment blanket

certificate offers two authorization mechanisms both of which require advance written

notification of construction activity to the landowner similar to but less detailed than that which

is described later in this article for more complex projects. The “automatic” authorization within

the blanket certificate authorizes the pipeline to construct and/or abandon facilities within certain

cost and project purpose limitations without seeking any advance permission from FERC.5 For

projects that exceed that cost limit and/or which do not fit the project purpose limitations for the

automatic authorization, the second mechanism requires the pipeline company to file a mini-

application with the FERC. Like the automatic authorization mechanism, this mechanism has

limitations but the cost limits are significantly higher and the purpose limitations much less

4 18 C.F.R. §§157.201-157.216.

5 18 C.F.R. §§157.208(a) and 157.216(a).

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strict. Known as the “prior notice” mechanism, the pipeline receives approval from FERC by

silence if no one objects to the project within a certain time period after the FERC issues a notice

to the public that the pipeline has filed the mini-application.6

Regardless of which mechanism within a pipeline’s blanket construction/abandonment certificate is used, the pipeline must avoid “segmenting” a project into smaller pieces in order to squeeze the project in under the “per project” cost limits set forth in the blanket certificate project cost regulations. Similarly, the pipeline must take seriously the cost estimating process to insure that any project is, in fact, built under the applicable cost limit. Cost limits are adjusted upward annually.

For projects that do not fit either mechanism within the blanket

construction/abandonment certificate, the pipeline must seek a project specific certificate from

the FERC under Section 7 of the NGA. That process requires a detailed application covering a

variety of topics.7 The application must include a narrative describing the project and contain exhibits covering:

 Corporate structure and related details of the applicant.

 Maps and project facts including location, length and size of pipelines and compressor stations and connections with other entities.

 Environmental information (broadly defined). Preparation of the environmental exhibits will bring the applicant into contact with a variety of major federal laws and programs including the National Environmental Policy Act, National Historic Preservation Act, Clean Water Act, Clean Air Act, Coastal Zone Management Act, Wild and Scenic Rivers Act, National Wilderness Act, National Parks and Recreation Act and more. The required information must be presented to the FERC as part of the application but set forth in 13 separate “Resource Reports” covering:

o detailed project description with photo based alignment sheets, topographic maps, methods to be used for construction and/or

6 18 C.F.R. §§157.205, 157.208(b) and 157.216(b).

7 18 C.F.R. §§157.6-157.22.

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abandonment activities and a complete listing of all other authorizations required for the project and the status of the pipeline company’s efforts to obtain those authorizations;

o water use and quality;

o fish, wildlife and vegetation;

o cultural and historic resources;

o socioeconomics;

o geological resources;

o soils;

o land use, recreation and aesthetics;

o air and noise quality;

o alternatives to the pipeline company’s siting proposals;

o reliability and safety;

o PCB contamination;

o engineering and design;

o flow diagrams showing a variety of pipeline operational dynamics including pressure, capabilities/capacity under various scenarios, pressure, pipe wall thickness, etc.;

o gas supply data where relevant;

o market data showing commercial support for the project including executed precedent agreements with project customers;

o federal authorizations (other than from the FERC) required for the project;

o cost of the facilities to be constructed;

o financing;

o construction, operation and management agreements;

o revenue (expenses and income);

o depreciation;

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o tariff (the rates to be charged to project customers) with appropriate support;

o acquisition information (if any facilities are being acquired rather than constructed) including acquisition contracts and accounting entries; and

o abandonment information (if any facilities are being abandoned) including any relevant contracts, flow diagrams showing the impact on the pipeline company’s capabilities after the abandonment, impact on customers served by the facilities to be abandoned, effect on existing tariffs, accounting entries and location of the facilities to be abandoned.

At the time of application filing, the pipeline company must trigger a landowner notification process in which all affected landowners (defined by FERC regulations) and interested government entities receive a formal packet of information, including information about how to become a party in the FERC review process and how to fight or comment on the project if desired. Once filed, the application will be the subject of a “Notice of Application” published by the FERC in the Federal Register.

The landowner notification process is one of several facets of a larger undertaking

referred to as “stakeholder outreach” in which the applicant must educate landowners, agencies

and public officials about the project and the FERC review process. Outreach is an extremely

important and well-organized process. The primary purpose of outreach, in addition to

education, is to provide a forum in which as many landowner, environmental, and local

government concerns as possible can be resolved by the pipeline working directly with the

stakeholders.

All parts of the application are dissected by subject area specialists within the FERC.

The review of the environmental exhibits will divert onto its own track with the FERC staff

issuing notices to the public for site visits and scoping meetings held near the project sites to

assist the FERC staff in determining the scope of its environmental review process. For

proposed interstate natural gas pipeline projects, FERC is the lead agency under the National

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Environmental Policy Act (“NEPA”).8 In accordance with NEPA, FERC staff must prepare

either an Environmental Assessment (“EA”) or an Environmental Impact Statement (“EIS”). A public comment period may be provided for an EA and is always provided for a Draft EIS, which will ultimately be converted into a Final EIS.

Because the environmental review of a project is the time drag on the FERC’s processing of an application for the construction of interstate natural gas pipeline facilities, a pipeline company is permitted (but not required) to initiate the environmental review process six to eight months before the application itself is filed. So-called “pre-filing” has become the preferred approach at the FERC and requires that the pipeline submit the same environmental information detailed above that would have been submitted at a later time when the application is filed. The pre-filing process also assumes that the pipeline company will attempt to resolve issues raised by landowners, environmental/conservation groups, agencies, and public officials in order that

disputed environmental issues which must be resolved by the FERC will be minimized.

The FERC review process culminates in the issuance of an order (otherwise referred to as

a “certificate of public convenience and necessity”) by the FERC that grants, with or without

project modification, or denies the requested authorization for the project. The order may

mandate certain changes to the project (not just the physical project, but in areas such as how

rates are calculated or accounting entries made) and has extensive construction-related

conditions attached to it that will govern when and how construction, restoration and post

construction compliance proceed. If the order issued by the FERC is acceptable to the pipeline,

construction (very broadly defined) cannot begin until certain pre-construction conditions are

met as dictated by the order approving the project.

8 42 U.S.C. §§ 4331, et seq.

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The entire process, including the pipeline company’s planning activities and public

outreach efforts (that start long before the application is filed with the FERC), takes 9-14 months for a simple project (of which FERC review takes five to six months), 20-25 months for a moderately complex project (of which FERC review takes six to eight months) and 34 to 40

months for a complex project (of which FERC review takes 10 months minimum, and longer if

public opposition is particularly vocal and/or certain hot button issues are raised by the project

proposal).

Among the most significant grants provided to the pipeline company in an order approving a project is the power of eminent domain as set forth in the NGA. This power is conveyed by the NGA via the certificate order to permit the pipeline company to acquire land rights which are necessary for the approved project but not obtainable by voluntary acquisition means. FERC prefers pipelines keep eminent domain use to a minimum even though the NGA

itself has no such limiting theme. Without it, it would be difficult if not impossible for interstate

natural gas pipelines to build, replace and expand pipeline and storage facilities in today’s

congested areas, and even in areas where there is opposition to energy infrastructure

construction.

Any party, including the pipeline company, who is dissatisfied with the order may ask the

FERC to reconsider the order within 30 days. There is no time deadline for FERC to act on

those requests. Ultimately, after FERC has issued its final rulings, parties can seek review in the

United States Courts of Appeals for either the D.C. Circuit or in the federal circuit in which the pipeline company is located or has its principal place of business. Such a petition for review must be filed within 60 days of the issuance of the final FERC order. There is no time deadline for a federal circuit court to act on a petition for review of orders from the FERC.

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