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

Mark R. HaskellBrett 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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FERC Establishes Revised ROE Methodologies for Public Utilities and Pipelines

Mark R. HaskellBrett 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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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 Reaffirms Its Final Rule on Rate Changes Relating to Federal Income Tax Rates for Natural Gas Pipelines

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

The Commission’s recent order upholds the Form No. 501-G filing requirement, which was designed to determine whether pipelines are over-recovering on their cost of service in light of recent federal income tax rate and policy changes. Thus far, the Commission has initiated investigations into the rates of six pipelines pursuant to its authority under section 5 of the Natural Gas Act. These proceedings are ongoing.

On April 18, 2019, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order (“Order No. 849-A”)1 denying requests for rehearing of its final rule on federal income tax rates for jurisdictional natural gas pipelines (“Order No. 849”).2 Order No. 849 adopted procedures for determining whether pipelines may be collecting unjust and unreasonable rates in light of income tax reductions established by the Tax Cuts and Jobs Act and the Commission’s revised tax allowance policy following the United Airlines, Inc. v. FERC decision.3 These procedures included a requirement that certain interstate natural gas pipelines file a FERC Form No. 501-G to estimate cost of service reductions and changes in returns on equity (“ROE”) resulting from the income tax changes. Continue reading “FERC Reaffirms Its Final Rule on Rate Changes Relating to Federal Income Tax Rates for Natural Gas Pipelines”

Pennsylvania Superior Court Fractures Long-Standing Rule of Capture

Christopher A. Lewis and Stephen C. Zumbrun

Citing distinctions between hydraulic fracturing and conventional gas drilling, the Pennsylvania Superior Court held on April 2, 2018, in Briggs v. Southwestern Energy Production Company[1] that the rule of capture does not preclude liability for trespass due to hydraulic fracturing, reversing a summary judgment that had been granted by the trial court in favor of Southwestern Energy Production Company. The Briggs ruling exposes operators to potential tort liability where subsurface fractures, fracturing fluid, and proppant cross boundary lines and extend into the subsurface estate of an adjoining property, resulting in the extraction of natural gas from the adjoining property. Continue reading “Pennsylvania Superior Court Fractures Long-Standing Rule of Capture”

Section 401 of the Clean Water Act: Is It Time to Update?

Margaret Anne Hill and Frederick M. Lowther

On Wednesday April 18, 2018, from 1:00 to 1:30 p.m. (EDT), Blank Rome Partners Margaret Anne (“Peg”) Hill and Frederick M. Lowther will present a live webinar where they will discuss adjustments that might be made to the Clean Water Act to restore the originally-intended cooperation between state and federal authorities, and what remedies might be available in lieu of congressional action.

The federal Clean Water Act (“CWA”) has been in existence since 1972. For the states that implemented EPA-sanctioned water quality standards, the CWA (specifically Section 401) gave those states the power to enforce those standards by granting or denying certifications to federally-regulated projects impacting state waters. The concept of state veto power over federally-regulated projects was known as “cooperative federalism.”

By 2005, it became clear that Section 401 rights provided a means for states to delay or frustrate projects on grounds only tangentially related to water quality. In the Energy Policy Act of 2005 (“EPACT”), Congress responded by providing for direct, expedited review of adverse state action in the U.S. Courts of Appeals. Notwithstanding EPACT, several states continued to use Section 401 for purposes broader than originally intended and the direct appellate remedy proved ineffective.

Starting with Islander East in 2007, and culminating recently in Constitution Pipeline, states have effectively blocked a number of federally-approved interstate pipeline projects. The impact of these decisions suggests that it is time to revisit the “cooperative federalism” concept.

For more information about this event or to register, please click here.

Pennsylvania Supreme Court Improperly Expands the Definition of “Commonwealth” in Article I Section 27 of the Constitution to Include Local Governments

Jeremy A. Mercer

The Pennsylvania Supreme Court recently expanded the definition of “Commonwealth” in the Pennsylvania Constitution to include local governments but without any reasoned support. See Pa. Envtl. Def. Found. v. Commw., 161 A.3d 911, 931 n.23 (Pa. 2017) (“PEDF”). In a footnote, which arguably is dicta, the Supreme Court said that the trustee referenced in the “Natural Resources and the Public Estate” provision of Pennsylvania’s Constitution (Article I, Section 27) includes local governments despite the Constitution’s express selection of the “Commonwealth” as the trustee. Continue reading “Pennsylvania Supreme Court Improperly Expands the Definition of “Commonwealth” in Article I Section 27 of the Constitution to Include Local Governments”

It’s Catching On—Hydraulic Fracturing Is Not an Abnormally Dangerous Activity in Pennsylvania

Jeremy A. Mercer, Amy L. Barrette, and Elizabeth E. Klingensmith

Yes, a federal court made the determination in 2014 and 2015 that hydraulic fracturing associated with unconventional oil and gas development in Pennsylvania is not an abnormally dangerous activity that is subject to strict liability. See Ely v. Cabot Oil & Gas Corp., 38 F. Supp. 3d 518 (M.D. Pa. 2014) (Report & Recommendation issued in January; adopted in April); see also Kamuck v. Shell Energy Holdings GP, LLC, Civil No. 4:11-CV-1425, 2015 U.S. Dist. LEXIS 37538 (M.D. Pa. March 25, 2015) (concluding hydraulic fracturing is not abnormally dangerous or subject to strict liability). In the Ely decision, the court undertook an extensive review of the factual record developed after years of discovery and concluded that there simply was no support for a view that hydraulic fracturing was an abnormally dangerous activity. Now, a Pennsylvania appellate court has reached the same conclusion—twice. Continue reading “It’s Catching On—Hydraulic Fracturing Is Not an Abnormally Dangerous Activity in Pennsylvania”

Not So Fast—Your Oil and Gas Lease Primary Term May Be Longer Than You Thought

Jeremy A. Mercer, Amy L. Barrette, and Elizabeth E. Klingensmith

Under Pennsylvania law, a defined primary term of an oil and gas lease may actually be longer than that stated term of year. In a September 12, 2017, unreported decision, the Pennsylvania Superior Court remanded a case to the trial court for consideration of whether a “limitation of forfeiture” provision, which required notice and opportunity to cure, extended the primary term by the length of the cure period. See L.D. Oil & Gas Enters., Inc. v. Loop, No. 1883 WDA 2016, 2017 WL 4001655 (Pa. Super. Ct. Sep. 12, 2017). In overturning the trial court’s grant of judgment on the pleadings to the lessor, the Superior Court returned the case to allow the trial court to take parol evidence of the impact of the “limitation of forfeiture” provision on the length of the primary term. Continue reading “Not So Fast—Your Oil and Gas Lease Primary Term May Be Longer Than You Thought”