FERC Issues New Policies for Review of Applications for New and Modified Natural Gas Pipelines, Including Consideration of Greenhouse Gas Emissions for Pipeline and LNG Facilities

The Federal Energy Regulatory Commission (FERC) issued two policy statements on February 18, 2022 that could significantly affect the approval process for new interstate natural gas pipelines and liquefied natural gas (LNG) projects, as well as substantial expansions or modifications to existing projects. The first of these is a revision to FERC’s general policy statement regarding the standards under Section 7 of the Natural Gas Act (NGA) for determining whether to issue certificates of public convenience and necessity for interstate natural gas transportation projects (Updated Certificate Policy Statement).¹ This changes FERC’s general policy guidance from standards issued in a 1999 policy statement on this subject. The second statement provides interim guidance on how FERC will evaluate the climate change impacts of natural gas infrastructure projects in carrying out its obligations under the National Environmental Policy Act (NEPA) and making public interest determinations under the NGA (GHG Interim Policy Statement).² The impact of these two policy statements will be to require proponents of new (or substantially expanded or modified) interstate natural gas pipeline facilities to provide additional justification of the public need for their projects and to more fully evaluate the impacts of such projects on emissions of greenhouse gases (GHGs) such as carbon dioxide and methane. In addition, the new GHG Interim Policy Statement will apply not only to pipeline facilities but also to facilities for import or export of natural gas (including LNG) under Section 3 of the NGA.

Updated Certificate Policy Statement

The 1999 version of FERC’s certificate policy statement reflected changes to the natural gas pipeline industry during the 1990s as a result of unbundling natural gas transportation service from the sale of the commodity itself and deregulation of the natural gas supply sector. Since then, there have been significant increases in natural gas supply in the United States, including from shale formations in many states that were not previously major natural gas producers. This required construction of many new pipeline projects, which led to additional involvement by many parties with an interest in those projects, including landowners, states, local communities, Tribes, and environmental organizations. At the same time, many parties—and FERC—began to consider more fully the impacts of natural gas infrastructure projects on GHG emissions and the implications of such projects on environmental justice and equity.

FERC issued the Updated Certificate Policy Statement in response to these developments. The factors that FERC will weigh under its updated policy are as follows:

• Project Need. FERC will no longer follow its prior practice of allowing the proponent of a gas pipeline project to demonstrate need by showing—with nothing more—that it has one or more shippers willing to contract for the capacity of the project under precedent agreements. FERC indicated that it has particular concerns about relying on precedent agreements in cases where the parties are affiliates. Instead, FERC will consider additional factors, such as the circumstances surrounding the precedent agreements (including any competitive solicitation process used), and FERC encourages applicants to provide information on “how the gas to be transported by the proposed project will ultimately be used, why the project is needed to serve that use, and the expected utilization rate of the project.” Other information that may be considered includes consumer benefits or contributions to more efficient system operations to be provided by the project, as well as an assessment of alternatives to the project.
• Adverse Effects on Existing Customers. FERC stated that it will continue its policy against proposals that would require existing customers of a pipeline to subsidize a pipeline expansion (or suffer a degradation of service), although costs can be borne by existing customers who will receive commensurate benefits through improved service. FERC also will consider whether the project may result in “overbuilding” that would saddle captive customers of competing pipelines with costs of unsubscribed capacity, emphasizing that it is not only “unfair” competition that can harm customers of competing pipelines.
• Environmental Impacts. FERC clarified that it will consider environmental impacts concurrently with economic impacts in its public interest determinations under the NGA, in addition to considering environmental impacts in fulfilling its NEPA obligations. FERC expects applicants to propose measures to avoid or minimize adverse environmental impacts and for mitigating impacts that cannot be avoided, and FERC notes that it has authority to condition certificates on additional mitigation that FERC may find necessary to reach a public interest determination. FERC’s environmental review will include evaluation of reasonably foreseeable GHG emissions, as discussed in the separate GHG Interim Policy Statement.
• Effects on Landowners and Communities; Environmental Justice. Under the new policy, FERC will use a more expansive approach to review impacts on landowners and communities as opposed to the prior policy that focused more on the economic effects of rights-of-way on the property of specific landowners. FERC will consider steps that applicants are taking to address impacts to landowners, including “respectful and good faith negotiation,” and plans to minimize the use of eminent domain. FERC also encourages applicants to provide data to identify environmental justice communities that may be affected by a project and states that it will assess cumulative impacts on such communities and will consider measures to avoid or mitigate a project’s impacts on these communities.

GHG Interim Policy Statement

In the GHG Interim Policy Statement, FERC explained how it will assess the impacts of natural gas infrastructure projects on climate change in carrying out its responsibilities under the NGA and NEPA. FERC also requested comment on its new policy in general and, in particular, its approach to assessing the significance of the proposed project’s contribution to climate change.

A key element of the policy is the threshold to determine whether a proposed project is “significant” and requires the preparation of an Environmental Impact Statement (EIS), which FERC set at 100,000 metric tons per year of reasonably foreseeable CO₂ equivalent emissions, based on a projection of the actual utilization rate of the project (instead of a 100% utilization rate). FERC will also consider mitigation measures or other factors that may reduce or offset reasonably foreseeable emissions from combustion of the transported gas. FERC stated that it may approve projects with emissions (including after mitigation) exceeding the threshold, but only if it is able to conclude that the proposed project is required by the public convenience and necessity or consistent with the public interest.

Consistent with current policy, FERC will consider direct emissions from construction and operation of the project (including fugitive methane emissions as well as emissions of CO₂). For downstream emissions associated with gas transported by the project—including from combustion of the natural gas as well as fugitive emissions of methane—FERC provided additional guidance, based in part on its view of several appellate court decisions addressing the extent to which downstream emissions are reasonably foreseeable effects of the proposed projects and FERC’s statutory authority to consider the effect of such downstream emissions. With respect to upstream emissions associated with production of natural gas to be transported by a project, FERC stated that it will continue to apply a case-by-case approach to determine whether such emissions are reasonably foreseeable consequences of FERC’s approval of a project. Importantly, FERC would exclude consideration of upstream and downstream emissions with respect to applications for LNG export terminals, so that only direct emissions from construction and operation of the project would be addressed. (Any consideration of downstream emissions from LNG projects would fall under the purview of the Department of Energy, which has jurisdiction over natural gas export licenses.)

In summary, FERC “proposes to:

• Consider direct emissions of a project a reasonably foreseeable effect;
• Find that an NGA Section 3 export facility project is not the legally relevant cause of upstream and downstream emissions;
• Consider on a case-by-case basis whether downstream emissions are a reasonably foreseeable effect of an NGA Section 7 interstate project; and
• Consider on a case-by-case basis whether upstream emissions are a reasonably foreseeable effect of an NGA Section 7 project.”

FERC also provided additional guidance on how the amount of reasonably foreseeable GHG emissions should be calculated (including, as discussed above, the use of the projected utilization rate of the project in making such calculations); FERC specifically seeks comments on the proposed 100,000 metric ton per year of CO₂ equivalent emissions threshold for significance.

Finally, FERC asserted that, although it does not have jurisdiction over activities that are upstream or downstream of a proposed project, it does have authority to require project sponsors to mitigate impacts associated with a project’s GHG emissions (including emissions from upstream or downstream activities that are reasonably foreseeable and causally connected to FERC’s authorization of a project). FERC encourages project sponsors to propose mitigation measures to minimize climate impacts, including, for example, purchase of renewable energy credits (RECs), participation in mandatory GHG emission reduction programs (such as the Regional Greenhouse Gas Initiative), participation in voluntary carbon offset markets, or physical mitigation (such as reducing fugitive methane emissions, incorporating renewable energy or energy-efficient technologies into the project, or using carbon capture and storage technologies). FERC stated that project sponsors may propose to recover the costs of mitigation measures in the rates for the project.

Next Steps

FERC stated that it will apply the approaches set forth in the Updated Certificate Policy Statement to both new and pending applications for new certificates for natural gas transportation facilities under Section 7 of the NGA. Similarly, FERC also will apply the policies in the GHG Interim Policy Statement to new and pending applications under Section 7, even though these policies are subject to revision based on comments received. The GHG Interim Policy Statement also will apply to new and pending applications for siting, construction, and operation of LNG and other natural gas import or export facilities under Section 3 of the NGA. FERC will allow applicants to supplement the record in pending applications to address issues raised in the new policy statements (and stakeholders to respond to supplemental filings).

This process could significantly delay FERC action on pending applications and increase the time and expense of filing new applications, in addition to changing the outcome of FERC’s response to an application for a particular project relative to what the outcome would have been (including changing the type and extent of measures that the applicant may need to implement to mitigate adverse effects of the project).

FERC asserted that neither of these policy statements constitutes a final rulemaking and therefore that they are not subject to appeal; instead, FERC stated that parties may challenge the application of these policy statements in final orders on specific applications. Nevertheless, it is possible that some parties may disagree with FERC’s view on this matter and seek judicial review of one or both of the policy statements in an effort to resolve issues faster and without the cost and time associated with first litigating the issues in the context of a specific application.

Dissents

Each of these policy statements were approved with the votes of just three Commissioners (Chairman Richard Glick and Commissioners Allison Clements and Willie L. Phillips). Commissioners James Danly and Mark C. Christie wrote separate dissents from the issuance of both policy statements.

Commissioner Danly’s objections include the implications that the policies will have on the ability of natural gas companies to secure capital, the timelines for processing of certificate applications, and the costs to pipelines and consumers of “potentially unmeasurable mitigation,” as well as his view that the policies contravene the purpose of the NGA to encourage supplies of natural gas at reasonable prices. He states that the Updated Certificate Policy Statement may create substantial uncertainty for project sponsors and lead to delays that will have implications for electric reliability in areas that depend heavily on natural gas-fueled generation. He criticizes the majority’s findings regarding the scope of FERC’s authority to condition its certificate approval on mitigation measures, opining that this extends beyond the Commission’s jurisdiction. And he opposes any view that the Commission always must look beyond precedent agreements in determining the need for a project, disagrees with the consideration of end use in determining need, and objects to certain expansions of the scope of factors that the Commission will consider in determining whether a project meets the public convenience standard as being outside the scope of the purposes of the NGA. With respect to the GHG Interim Policy Statement, Commissioner Danly states that the majority mistakenly substitutes emissions of GHGs—rather than changes in the human environment—as the reasonably foreseeable effects of a proposed project that it seeks to evaluate for purposes of fulfilling its NGA and NEPA responsibilities without any showing of a “reasonably close causal relationship” between a proposed project and climate change. Among other objections, he states that consideration of upstream production and downstream use of natural gas violates the NGA and applicable regulations under NEPA. From a procedural perspective, Commissioner Danly raises issues about whether these policy statements are non-binding, as the majority asserts, or are subject to judicial review (and his dissent—as well as the dissent of Commissioner Christie—may serve as a road map for certain parties seeking judicial review).

While Commissioner Christie agrees with certain updates to the 1999 certificate policy statement (including with respect to precedent agreements among affiliates and guaranteeing due process with landowners), he finds the new policy statements as a whole to be unreasonable both as a matter of law (by seeking to exercise authority beyond what is provided by Congress under the NGA and NEPA) and policy (by making it more costly and difficult to build infrastructure needed to provide reliable power service to consumers, including infrastructure needed to facilitate incorporation of wind and solar power into the generation mix). He argues that Congress—through the NGA and NEPA—has not vested in the Commission the authority to reject a certificate—or attach conditions to a certificate—based on a GHG analysis (including one conducted under NEPA) if the proposed facility is both “convenient and necessary” to provide gas supply to the public. And he objects that these orders seem to assume that the Commission’s authority to impose conditions related to GHG analysis has “essentially no limit.” Commissioner Christie characterizes the orders as advancing a policy goal of many interest groups to reduce or eliminate natural gas use—by imposing additional costs and delays—through the action of an administrative agency that has not been granted such powers by the elected legislature.

¹ Certification of New Interstate Natural Gas Facilities, Docket No. PL18-1-000 (issued Feb. 18, 2022); available at https://ferc.gov/media/pl18-1-000.

² Consideration of Greenhouse Gas Emissions in Natural Gas Infrastructure Project Reviews, Docket No. PL21-3-000 (issued Feb. 18, 2022); available at https://ferc.gov/media/pl21-3-000.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. John Rousakis, an O’Melveny partner licensed to practice law in New York, Monica Hwang, an O’Melveny partner licensed to practice law in Texas, Hugh E. Hilliard, an O’Melveny senior counsel licensed to practice law in the District of Columbia, John D. Renneisen, an O’Melveny senior counsel licensed to practice law in the District of Columbia, and Eric Rothenberg, an O’Melveny of counsel licensed to practice law in New York and Missouri, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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