CONSTITUTION PIPELINE: The 2d Circuit Reaffirms a State’s Right to Veto a FERC-Approved Interstate Pipeline Project

Frederick M. Lowther

On August 18, 2017, the U.S. Court of Appeals for the Second Circuit issued a long-awaited decision in Constitution Pipeline Company LLC v. New York State Department of Environmental Conservation et al., Docket No. 16-1568 (“Constitution”). At issue—once again—was whether a single State (in this case, New York) has the power under §401 of the Federal Clean Water Act, 33 U.S.C. §1341 (“CWA”), to deny a water quality certification for an interstate pipeline previously certificated by the Federal Energy Regulatory Commission (“FERC”), when the effect of the denial is to veto a pipeline project that would serve multiple States. In 2008, the 2d Circuit determined that such a veto power exists. Islander East Pipeline Co. v. McCarthy, 525 F.3d 141 (2d Cir, 2008) (“Islander East”). Although the factual situation in Constitution differs in some respects (noted below) from that in Islander East, the end result is the same: if a State determines that a FERC-approved pipeline is not consistent with its water quality standards approved by the Environmental Protection Agency, and the Court finds (as it did here) that the determination was not arbitrary and capricious (i.e., is supported by “sufficient evidence to provide rational support” for the denial, Constitution, sl. op. at 24), the federally-approved interstate pipeline cannot proceed.

In Constitution, New York Department of Environmental Conservation (“NYDEC”) based its denial, not on the existence of specific facts, but on the failure of Constitution to provide facts and analysis requested by NYDEC. In other words, the denial was based on the absence of information.[1] In Islander East, the State of Connecticut denied the §401 certification based on conclusions it reached from facts presented. While the outcome in the two cases is the same, Constitution demonstrates that a State has the power to determine what information it wants, and that determination is dispositive (even in the face of the argument, advanced by Constitution, that NYDEC was pursuing a course which “the regulated industry has eschewed.”) Constitution, sl. op. at 25. The State determination cannot be arbitrary or capricious, but in this context, the standard is whether the relevant information (or lack thereof) is a “sufficient” basis for the State’s action, not whether it is a “substantial” basis. Considering that a single State can exercise this power and, by doing so, supersede a Federal certificate issued under a comprehensive Federal energy law (the Natural Gas Act)—and thereby deny benefits that would accrue to other States—this is without question a very significant power.

In the aftermath of Islander East, which was the first case to be reviewed directly by a U.S. Court of Appeals under the Energy Policy Act of 2005, 15 U.S.C. §717r(d)(1), the industry and legal community debated whether the concept of “cooperative Federalism,” under which a State acting under one Federal statute could veto actions by the Federal government under another Federal statute, was workable. The debate centered in part on whether disharmony between State and Federal actions should be judged on the “arbitrary and capricious” standard, or whether the standard of review should focus more broadly on the national interest. See “The Role of FERC and the State in Approving and Siting Interstate Natural Gas Facilities and LNG Terminals After the Energy Policy Act of 2005 – Consultation, Preemption and Cooperative Federalism,” Darby/Robins/Webb, Texas Journal of Oil, Gas and Energy Law, Vol. 6, 2010-2011, Number 2 (2011).[2] In that regard, attention was paid to the standard of review under another powerful Federal statute, the Coastal Zone Management Act of 1972, 16 U.S.C. §§1451-1465 (2006) (“CZMA”). The CZMA operates in similar fashion to the CWA in that the State in which a FERC-regulated facility is proposed to be constructed can determine whether the proposed project is consistent with that State’s federally-approved Coastal Management Plan (“CMP”). Denial of a consistency certification[3] has the same effect as denial of a §401 water quality certification under the CWA—it acts as a veto. The difference between the CWA and the CZMA, however, is that the denial of a consistency certification under the CZMA is appealable, not to the Court of Appeals, but to the Secretary of Commerce. Under 16 U.S.C. §1456(c)(3)(A), the Secretary “may on his own initiative or upon appeal by the applicant” conduct a de novo review of a State’s denial of consistency and may override the State’s determination if he finds that the proposed activity is “consistent with the objectives of the [CZMA]” or “otherwise necessary in the interest of national security.” An adverse determination by the Secretary can only be challenged in a Federal District Court.

Nothing concrete came of the debate after Islander East. However, in light of the Constitution affirmation of the standards set forth in Islander East, and the dramatic impact of a §401 CWA denial, not just on the FERC-approved project but potentially on the interests of other States, the question arises again whether the standard of review under the CZMA—which not only takes into account the interests of the statute but also the broader national interest—is the more suitable standard. Amending the CWA to harmonize its review provisions with the CZMA would be a difficult task, at a time when the passage of any legislation, let alone environmental legislation, is fraught with difficulties. Nonetheless, it is an approach well worth considering.[4]

[1] The primary issue was a disagreement between NYDEC and Constitution regarding the viability of trenchless crossings (e.g., directional drilling) of small streams (less than 30’ wide). NYDEC asserted that Constitution refused to provide sufficient information from which NYDEC could make a determination about water quality impacts to streams.

[2] The authors of the Texas Journal article, together with the author of this blog post, represented the Islander East Project in Islander East.

[3] Under the CZMA, the applicant certifies that the project is consistent with the State’s CMP, and the State has the power to accept or object to the consistency certification. The shorthand “denial of consistency certification” is used here.

[4] Constitution also addressed the issue whether NYDEC, by taking years to make a determination, waived its right to do so. The Court found that it was without jurisdiction to consider that argument, and this blog post does not address the “waiver” issue.