Category: Energy

Breaking with Precedent, D.C. Circuit Holds FERC Lacks Authority to Issue Tolling Orders under the Natural Gas Act

Mark R. Haskell, Brett A. Snyder, and Lamiya N. Rahman

On June 30, 2020, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) struck down the Federal Energy Regulatory Commission’s (“FERC” or “Commission”) practice of issuing tolling orders that extend the time FERC may take to consider applications for rehearing of its orders under the Natural Gas Act (“NGA”). In a recent decision on en banc rehearing in Allegheny Defense Project v. FERC,1 the D.C. Circuit ultimately denied landowners’ and environmental groups’ challenges to FERC’s approval of the Atlantic Sunrise interstate natural gas pipeline on the merits. However, the court’s rejection of FERC’s tolling order practice—which breaks with longstanding precedent and creates a circuit split—significantly affects proceedings under the NGA and likely implicates FERC’s rehearing procedures under the Federal Power Act (“FPA”).

The NGA requires natural gas companies to obtain a certificate of public convenience and necessity from FERC in order to construct and operate an interstate natural gas pipeline.2 Once such a certificate is issued, the NGA confers upon certificate holders eminent domain authority to obtain necessary rights-of-way.3

The NGA further provides that before a party can seek judicial review of a FERC order, it must apply for rehearing of the order.4 Upon receiving such an application, the NGA provides FERC the “power to grant or deny rehearing or to abrogate or modify its order without further hearing.”5 If FERC does not act on the application for rehearing within 30 days, the application “may be deemed to have been denied.”6 Given the complexities inherent in its proceedings, FERC’s practice has often been to issue tolling orders intended to “act upon” the rehearing requests within the 30-day timeframe (i.e., to avoid the requests from being deemed denied), without making a substantive merits decision on such requests. Petitioners in Allegheny Defense Project argued that FERC’s tolling order process unfairly stalls judicial review of FERC’s pipeline approvals, while pipelines are permitted by FERC and district courts to proceed with construction and exercise eminent domain authority, respectively, in the interim.

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Energy Infrastructure Today: Permitting & FERC Case Law Updates

Margaret Anne Hill, Brett A. Snyder, Lamiya N. Rahman, Frank L. Tamulonis III, and Stephen C. Zumbrun

Stakeholders in the U.S. infrastructure industry should note that ongoing litigation and new court decisions issued in the first half of 2020 are reshaping the development of energy projects.

Energy developers should carefully review the impact of new rulings that have interpreted environmental analyses required for Clean Water Act (“CWA”) permitting as greenhouse gas emissions (“GHG”) on the complex regulation of infrastructure projects. At the same time, several other recent proceedings have raised questions about practices and procedures of the Federal Energy Regulatory Commission (“FERC” or “Commission”) regarding natural gas infrastructure.

In our recent webinar, Today’s Energy Industry: The Impact of Case Law on Energy Infrastructure Projects, we highlighted what you should know about recent legal developments related to energy infrastructure:

Permitting Update

  • Status of Nationwide Permit 12. In Northern Plans Resource Council v. U.S. Army Corps of Engineers, the Montana District Court vacated the U.S. Army Corps of Engineers’ Nationwide (“Corps”) Permit 12 disrupting permitting and enforcement under the CWA. The court later clarified that the ruling applies to new projects and not existing pipeline projects and the Ninth Circuit recently denied a request to stay the implementation of the order pending appeal.
  • Navigable Waters Protection Rule. Significant litigation is expected to challenge a new restrictive rule of what constitutes “waters of the United States” under the CWA. Infrastructure projects will also be impacted by the Supreme Court’s recent decision in County of Maui v. Hawaii Wildlife Fund.
  • National Environmental Policy Act GHG Review. The District of Montana ruled in Wildearth Guardians et al. v. U.S. Bureau of Land Management, that the Bureau of Land Management must consider cumulative GHG impacts of oil and gas lease sales. Litigation is expected to challenge whether the Corps has adequately considered GHG for Section 404 permits.
  • Climate Change Litigation. Many state and local governments continue to file common law lawsuits against oil and gas companies seeking damages for climate change mitigation measures. The 9th and 4th Circuits have rejected arguments that federal law applies to these disputes and similar cases are pending in the 1st, 2nd, and 10th Circuits. Also, in v. Exxon, the District of Massachusetts ruled that a suit alleging Exxon violated state fraud statutes should be litigated in state court.

FERC Update

  • Precedent Agreements as Evidence of Market Need. In a 2019 case, City of Oberlin v. FERC, the D.C. Circuit held that FERC failed to adequately explain why it is lawful to consider a proposed pipeline’s precedent agreements with foreign shippers serving foreign customers as evidence of market need for the pipeline. FERC recently addressed City of Oberlin and explained why precedent agreements between a proposed pipeline and LNG terminal were lawfully credited as evidence of market need for the pipeline.
  • FERC’s Tolling Order Practice. In Allegheny Defense Project v. FERC, the D.C. Circuit granted en banc rehearing over whether FERC violated the Natural Gas Act (“NGA”) and landowners’ due process by issuing tolling orders to extend the time to consider rehearing requests of FERC’s pipeline approval, while allowing a pipeline to begin construction and exercise eminent domain. On June 9, FERC issued a final rule to preclude natural gas projects under sections 3 and 7 of the NGA from proceeding with construction until FERC issues a decision on the merits of any request for rehearing.
  • Pipeline Right-of-Ways (“ROWs”) through the Appalachian Trail. In February, the U.S. Supreme Court heard oral argument over a 4th Circuit ruling that the U.S. Forest Service lacks authority to grant a pipeline ROW across the Appalachian Trail. On June 15, the Supreme Court ruled 7-2 that the Forest Service had authority to issue the pipeline ROW through the Appalachian Trail.
  • FERC Authority over Pipeline Transportation Service Agreements (“TSAs”) in Bankruptcy. Several pipelines recently have filed petitions for declaratory orders, requesting FERC to declare it has concurrent jurisdiction with bankruptcy courts over natural gas pipeline TSAs and that FERC approval is required to in order to modify or reject such contracts in bankruptcy. We are continuing to follow this area for developments.

We invite you to read, watch, and share the below resources from our recent webinar for further details. Contact any of us if you have questions about the impact of recent cases, decisions, and regulations on your energy project(s).

Please click here for the presentation materials and here to listen to the recording.

FERC Establishes Revised ROE Methodologies for Public Utilities and Pipelines

Mark R. Haskell, Brett A. Snyder, and Lamiya N. Rahman

On May 21, 2020, the Federal Energy Regulatory Commission (“FERC”) issued two orders addressing methodologies for analyzing the base return on equity (“ROE”) components of rates of FERC-regulated entities. In Opinion No. 569-A, FERC revised the methodology used under section 206 of the Federal Power Act (“FPA”) to evaluate the base ROEs of public utilities.1 In a separate Policy Statement, FERC clarified that the methodology established in Opinion No. 569-A applies, with certain exceptions, to natural gas and oil pipelines.2

Opinion 569-A

To change a public utility’s rates, including ROE, in a complaint proceeding under section 206 of the FPA, FERC must (i) make a finding that an existing rate is unjust and unreasonable; and (ii) determine a just and reasonable rate.3

FERC’s recent order arose from two complaint proceedings challenging the base ROE of Midcontinent Independent System Operator, Inc. (“MISO”) transmission owners.4 In November 2019, FERC issued Opinion No. 569, establishing a revised methodology to determine whether the existing base ROE was unjust and unreasonable under the first prong of FPA section 206, and if so, to establish a new just and reasonable replacement ROE under the second prong.5

Among other things, Opinion No. 569 relied on the discounted cash flow model (“DCF”)6 and capital-asset pricing model (“CAPM”)7 in the first prong of its FPA section 206 analysis, and declined to use two other models—i.e., the Expected Earnings8 and Risk Premium9 models. FERC adopted the use of ranges of presumptively just and reasonable ROEs that would be based on the risk profile of a utility or group of utilities. FERC gave equal weight to the DCF and CAPM models to establish composite zones of reasonableness. Absent evidence to the contrary, an ROE within the zone of reasonableness would be presumptively just and reasonable while an ROE outside this range would be presumptively unjust and unreasonable. FERC also relied on the DCF and CAPM models (and declined to use the Expected Earnings and Risk Premium models) in the second prong of its section 206 analysis in order to establish a new just and reasonable ROE.10

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EPA Reverses Course with the Mercury and Air Toxics Regulations for Power Plants

Margaret Anne Hill, Frank L. Tamulonis III, and Stephen C. Zumbrun

The saga for regulating mercury and air toxics from coal- and oil-fired power plants continues with a final rule promulgated by the U.S. Environmental Protection Agency (“EPA”) on April 16, 2020. EPA initially determined that it was “appropriate and necessary” under Section 112 of the Clean Air Act to regulate hazardous air pollutants (“HAPs”)—including mercury—for these types of power plants, commonly referred to as electric utility steam generating units (“EGUs”).[1] In a change of policy, EPA has now decided that the “appropriate and necessary” determination to regulate HAPs for these power plants—after two decades of additional EPA rules, and corresponding litigation—is no longer correct.[2]

A significant part of the backstory here is related to the U.S. Supreme Court’s decision in 2015 in Michigan v. EPA.[3] Briefly, the Court held that the EPA needed to consider costs in evaluating whether it was “appropriate and necessary” to regulate HAP emissions from coal- and oil-fired EGUs, especially the costs associated with compliance. Following the Supreme Court’s decision, EPA, under the Obama Administration, conducted a study in 2016 to evaluate these costs and concluded that it was still “appropriate and necessary” to regulate HAPs emitted from these sources.[4] The Trump Administration has now reversed course in issuing the April 16 final rule, effectively concluding that the EPA’s decision in 2016 was wrong. Continue reading “EPA Reverses Course with the Mercury and Air Toxics Regulations for Power Plants”

FERC Provides Additional Regulatory Relief and Guidance in Response to Coronavirus Pandemic

Mark R. Haskell, Brett A. Snyder, and Lamiya N. Rahman

On April 2, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) announced several measures intended to provide relief to regulated entities responding to the COVID-19 pandemic. A summary of FERC’s previous COVID-19-related relief and guidance can be found here.

In a Policy Statement, the Commission indicated it will prioritize and expeditiously act on requests for relief filed by regulated entities in connection with ensuring business continuity of their energy infrastructure. In a series of notices and orders, the Commission also extended or clarified the relief available to regulated entities that are unable to meet certain deadlines or regulatory requirements as a result of their COVID-19 response. This relief includes:

    • Extension to June 1, 2020 for the following deadlines:
      1. Form Nos. 60 (Annual Report of Centralized Service Companies) and 61 (Narrative Description of Service Company Functions);
      2. Form No. 552 (Annual Report of Natural Gas Transactions); and
      3. Electric Quarterly Report Form 920.
    • Extensions to May 1, 2020 for the following deadlines for categories of filings that would otherwise be due on or before May 1, 2020:
      1. interventions, protests, or comments to a complaint;
      2. briefs on and opposing exceptions to an initial decision;
      3. answers to complaints and orders to show cause; and
      4. initial and reply briefs in paper hearings.
    • Waiver of FERC regulations governing the form of filings submitted to the Commission (e.g., provision of sworn declarations) through May 1, 2020.
    • Shortening of the answer period to three business days for motions for extensions of time due to COVID-19 emergency conditions. The Commission indicated it will also consider requests to shorten the comment period for motions seeking waiver of requirements in Commission orders, regulations, tariffs, rate schedules, and service agreements to as short as five days.
    • Temporary blanket waivers from document notarization and in-person meeting requirements established under open access transmission tariffs, or other tariffs, rate schedules, service agreements, or contracts subject to the Commission’s jurisdiction. These waivers are effective through September 1, 2020.
    • Extension of time for filing regional transmission organization (“RTO”)/independent system operator (“ISO”) Uplift Reports and Operator Initiated Commitment Reports required pursuant to Order No. 844 that were originally due between April and September 2020. These reports are now due to be posted on the RTOs/ISOs websites by October 20, 2020.

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FERC Issues Guidance and Regulatory Relief in Connection with Coronavirus Response

Mark R. Haskell, Brett A. Snyder, Lamiya N. Rahman, and Jane Thomas

On March 19, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) announced several regulatory responses to the coronavirus pandemic and FERC Chairman Neil Chatterjee held a press conference to discuss the agency’s initiatives. The Chairman emphasized the capabilities of the Commission and its staff to work in a timely manner throughout the pandemic response, while striving to provide necessary flexibility to regulated entities.

The Chairman named Caroline Wozniak, a Senior Policy Advisor in the Office of Energy Market Regulation, as the point of contact for all energy industry inquiries related to the impacts of COVID-19. Members of the regulated community may e-mail PandemicLiaison@FERC.gov with questions for Commission staff.

Chairman Chatterjee clarified that the Commission will provide regulated entities with flexibility when needed, but emphasized the Commission is fully functioning and will try not to delay decisions. Chairman Chatterjee also stated his goal is to issue certain rehearing orders involving pipeline certificate projects challenged by affected landowners within 30 days, consistent with guidance from the Chairman issued on January 31, 2020.

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FERC Issues Penalty Assessment in Vitol CAISO Market Manipulation Proceeding

Mark R. Haskell, George D. Billinson, and Lamiya N. Rahman

The Federal Energy Regulatory Commission issued an Order Assessing Civil Penalties, imposing approximately $1.5 million in civil penalties on Vitol Inc. and one million dollars in penalties on a Vitol trader. In a departure from prior cases, the Commission assessed penalties well below Enforcement Staff’s recommended six-million-dollar penalty for the company, in light of the individual trader’s significant involvement in the alleged scheme. The next step for Respondents wishing to challenge the Order will be de novo review in federal district court.

On October 25, 2019, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued an Order Assessing Civil Penalties (“Order”), imposing civil penalties of $1,515,738 against Vitol Inc. (“Vitol”) and one million dollars against Federico Corteggiano, a Vitol trader, in connection with an alleged market manipulation scheme in the California Independent System Operator Corporation’s (“CAISO”) markets.[i] Additionally, the Commission ordered Vitol to disgorge unjust profits, plus interest, of $1,227,143.

As we have previously discussed, the Commission began this proceeding by issuing an Order to Show Cause and Notice of Proposed Penalty to Respondents on July 10, 2019. In that order, the Commission directed Vitol and Corteggiano to show cause why they should not be assessed civil penalties of six million dollars and $800,000, respectively, and why Vitol should not be required to disgorge unjust profits of $1,227,143, plus interest. Respondents elected to have the Commission assess an immediate penalty if it finds a violation and then proceed with de novo review before a federal district court.

In the instant Order, the Commission found that Vitol and Corteggiano (collectively, “Respondents”) violated the anti-manipulation prohibitions in the Federal Power Act (“FPA”) and FERC’s Anti-Manipulation Rule[ii] through a cross-market scheme in which Respondents sold power at a loss in the CAISO wholesale electric market to avoid greater losses in Vitol’s positions in a separate financial product—congestion revenue rights (“CRRs”).[iii]

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[i] Vitol Inc., Order Assessing Civil Penalties, 169 FERC ¶ 61,070 (2019).

[ii] FPA § 222 (2012); 18 C.F.R. § 1c.2 (2019).

[iii] Specifically, the Commission found Respondents intentionally engaged in fraudulent physical energy imports during the period October 28-November 1, 2013, at the Cascade intertie to relieve congestion at Cragview, which in turn lowered the Cragview locational marginal price (“LMP”) and economically benefitted Vitol’s CRRs sourced at that location. Order at P 34.

Pennsylvania Plans to Join the RGGI CO2 Cap-and-Trade Program

Margaret Anne Hill, Christopher A. Lewis, Frederick M. Lowther, Frank L. Tamulonis III, and Stephen C. Zumbrun

At the outset of 2019, Pennsylvania Governor Tom Wolf set a goal for Pennsylvania to significantly reduce greenhouse gas emissions. Now, Governor Wolf plans to achieve that goal by taking the bold step to establish a carbon dioxide cap-and-trade program through executive action. On October 3, 2019, Governor Wolf issued an Executive Order directing the Pennsylvania Department of Environmental Protection (“DEP”) to begin the process for Pennsylvania to join the Regional Greenhouse Gas Initiative (“RGGI”, pronounced “Reggie”). RGGI is a market-based cap-and-trade program implemented by several Northeast states to reduce power sector CO2 emissions. Governor Wolf’s Executive Order made national headlines because of the potential implications of Pennsylvania—a state known for its coal and natural gas reserves—joining RGGI. But this news is only the start of a long regulatory process, one that could realistically take years to become implemented. At this stage, Pennsylvania fossil-fuel power generators should familiarize themselves with RGGI’s requirements and procedures as well as the rulemaking process by which the Commonwealth might join RGGI.

The RGGI Program

RGGI is a collective effort by its member states to create a Northeast regional cap-and-trade program affecting fossil-fuel power plants greater than 25 megawatts. Member states—currently Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont, with New Jersey in the process of rejoining—each enact statutory or regulatory programs in their respective states that are RGGI compliant. CO2 emitting power plants then participate in RGGI regional auctions to purchase CO2 emission allowances for usage, or to sell on secondary markets. RGGI caps the total amount of CO2 emission allowances, measured in tons of carbon, with the most recent cap being 80.2 MM-tons. Beginning in 2021, the cap will be set at 75.1 MM-tons, which will then be reduced by 30 percent between 2020 and 2030. Proceeds from the auctions are distributed to the respective states for investment in programs to further reduce CO2 emissions, such as energy efficiency, renewable energy, or consumer benefit programs. Continue reading “Pennsylvania Plans to Join the RGGI CO2 Cap-and-Trade Program”

FERC Further Clarifies Its Orders Reforming Generator Interconnection Procedures and Agreements

Mark R. Haskell, George D. Billinson, and Lamiya N. Rahman

On August 16, 2019, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order granting in part and denying in part requests for further clarification of its reform of Large Generator Interconnection Agreements (“LGIA”) and Procedures (“LGIP”).[1] Order No. 845-B affirms FERC’s prior findings that the expansion of an interconnection customer’s option to build does not impede transmission owners’ ability to recover a return of and on network upgrades. The order also reiterates FERC’s determination not to revise the pro forma LGIA’s indemnity provisions.

Order No. 845—FERC’s Final Rule revising the pro forma LGIP and LGIA—made various reforms to “improve certainty for interconnection customers, promote more informed interconnection decisions, and enhance the interconnection process.”[2] Among these changes, the Commission expanded interconnection customers’ ability to exercise the option to build transmission providers’ interconnection facilities and standalone network upgrades beyond instances where the transmission provider is unable to meet the interconnection customer’s preferred construction timeline.

A subsequent decision, Order No. 845-A, among other things, rejected arguments that the option build revisions contradicted the United States Court of Appeals for the District of Columbia Circuit’s (“D.C. Circuit”) decision in Ameren Services Co. v. FERC. According to the Commission, “Ameren stands for the principle that the Commission cannot prohibit a transmission owner from earning a return of, and on, the cost of its network upgrades.”[3] In that case, the D.C. Circuit vacated FERC’s orders requiring the Midcontinent Independent System Operator, Inc. (“MISO”) to remove an option under its tariff allowing transmission owners to unilaterally elect to initially fund network upgrades and to thereafter recover the interconnection customer’s portion of the cost burden through periodic network upgrade charges that included a return on the capital investment (i.e., the “transmission owner initial funding option”). Although the Commission initially found the transmission owner initial funding option unjust and unreasonable, the D. C. Circuit remanded the orders directing the Commission to “explain how investors could be expected to underwrite the prospect of potentially large non-profit appendages with no compensatory incremental return.”[4] The Commission reinstated the transmission-owner initial funding option on remand.

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Council on Environmental Quality Seeks Public Comment on Draft NEPA Greenhouse Gas Emission Guidance

Brett A. Snyder and Lamiya N. Rahman

The Council on Environmental Quality has published Draft Guidance to federal agencies to evaluate the effects of greenhouse gas emissions under the National Environmental Policy Act. The Draft Guidance is largely consistent with the approach taken by the Federal Energy Regulatory Commission in recent natural gas infrastructure orders. Comments are due on July 26, 2019.

Introduction

On June 26, 2019, the Council on Environmental Quality (“CEQ”) published new draft guidance to clarify the scope of review federal agencies should undertake when considering the effects of greenhouse gas (“GHG”) emissions under the National Environmental Policy Act (“NEPA”) and related regulations.1 The Draft Guidance is intended to replace CEQ’s prior GHG-related guidance, which was adopted in 2016 and later rescinded pursuant to an Executive Order in 2017.2 The Draft Guidance is largely consistent with the approach taken by the Federal Energy Regulatory Commission (“FERC”) in recent natural gas infrastructure orders.

CEQ’s Draft Guidance

NEPA is a procedural statute that requires federal agencies to analyze the environmental impacts of any major federal action significantly affecting the quality of the human environment.3 Although NEPA does not mandate any particular substantive outcomes, it requires an agency to consider the direct and reasonably foreseeable indirect effects of a proposed action.4

The Draft Guidance states that “[a] projection of a proposed action’s direct and reasonably foreseeable indirect GHG emissions may be used as a proxy for assessing potential climate effects.”5 While direct effects are caused by an action and occur at the same time or place, indirect effects are caused by the action and are later in time or farther removed in distance but are still reasonably foreseeable. Thus, the proposed guidance suggests that quantification of emissions is sufficient to meet an agency’s obligation to assess effects of emissions.

Please click here for the full client alert. 

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