The energy industry has been at the forefront of the 2020 election, and energy development is an issue that polarizes Americans and our businesses and political leaders in choosing the path for the future. Energy developments are inextricably linked to our economy and national security, and the decisions and policies that will be implemented over the next four years are critical to the nation and our participation and role in world affairs.
On September 3, 2020, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued an Order on Remand from the U.S. Court of Appeals for the District of Columbia Circuit, providing a more robust explanation regarding how the NEXUS Gas Transmission, LLC (“NEXUS”) pipeline project, which relied in part on precedent agreements that would export natural gas to Canada, merits authorization under section 7(c) of the Natural Gas Act (“NGA”), thus giving NEXUS eminent domain authority.
On August 25, 2017, the Commission had issued a certificate of public convenience and necessity under section 7(c) to NEXUS. The Certificate Order approved the Project, which allowed for the use of eminent domain to build an approximately 250-mile-long pipeline in Ohio and Michigan. NEXUS had executed eight precedent agreements, accounting for 59 percent of the capacity of the Project, and the Commission found that these agreements demonstrated a need for the Project. Two of the eight precedent agreements were with Canadian companies.
Protesters argued that NEXUS should not be permitted to use eminent domain because some of the project’s capacity would be used to export gas and exports are subject to NGA section 3 authorization, rather than section 7, which does not allow for eminent domain. The Commission affirmed its underlying decision on rehearing and stated that Commission policy did not require FERC to look beyond precedent or service agreements to make judgments about the needs of individual shippers.
Protesters appealed to the D.C. Circuit. In September 2019, the D.C. Circuit, in City of Oberlin v. FERC, 937 F.3d 599, remanded the case to FERC and directed the Commission to supply an explanation for why it allowed the crediting of export precedent agreements with foreign shippers when analyzing market need for a domestic pipeline project. The D.C. Circuit also asked FERC for more robust explanation for why eminent domain was needed or appropriate.
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.
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.
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.
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.
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
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
Two recent cases have the potential to dramatically alter the state of permitting and enforcement under the federal Clean Water Act (“CWA”) with far reaching implications to energy infrastructure project proponents and the regulated community.
In the first case, Northern Plans Resource Council v. U.S. Army Corps of Engineers, No. 4:19-cv-00044-BMM (D. Mont), the Montana District Court last month vacated the U.S. Army Corps of Engineers Nationwide Permit 12 (“NWP 12”) for the Keystone XL Pipeline Project, concluding that the Corps failed to consult under the Endangered Species Act (“ESA”) Section 7 when it reissued NWP 12 in 2017. Although that case involved only the Keystone XL Pipeline Project, the Order enjoined the Corps from authorizing any work under NWP 12 until an ESA consultation is completed, effectively resulting in a nationwide injunction of work permitted under NWP 12. NWP 12 provides a streamlined CWA permitting process for thousands of linear “utility line activities” (i.e., pipelines and electrical or communication transmission lines) that would otherwise be forced to apply for numerous individual CWA permits to complete a single project. The nationwide vacatur of NWP 12 created significant uncertainty for project proponents who were left with three options: 1) apply for other potentially applicable nationwide permits, 2) apply for individual CWA Section 404 permits, or 3) redesign a project to avoid impacts to regulated waters.
Just last week, however, the court clarified and slightly narrowed the scope of the April Order. Specifically, the court clarified that NWP 12 cannot be used for new oil and gas pipelines, but the permit remains otherwise valid for 1) maintenance, inspection, and repair activities on existing pipelines, and 2) non-pipeline constructive activities (i.e., electric, Internet, and other cable lines; certain renewable energy projects). The court reasoned that large-scale oil and gas pipeline projects pose the greatest threat to ESA-listed species, and the public interest in ensuring that the Corps complies with ESA trumps the tax and energy benefits of the new pipelines. The court further reasoned that the potential disruption to pipeline projects is overblown in light of the continued availability of the more cumbersome individual Section 404 permit process.
The court’s clarification provides relief to proponents of linear projects that do not involve the construction of new oil and gas lines. The wind industry, for example, which is heavily reliant on the installation of utility transmission lines, is no longer impacted by the ruling. Thousands of other oil and natural gas pipeline projects, however, remain impacted by the decision.
The second case involves the Supreme Court decision of County of Maui v. Hawaii Wildlife Fund, No. 18–260, __ S. Ct. ____, 2020 WL 1941966 (Apr. 23, 2020), where the Supreme Court created a “functional equivalent test” to analyze when discharges to groundwater require a CWA permit. Only weeks after that decision, we are starting to see the “functional equivalent test” in practice. Last week, in a case where a party was attempting to settle Clean Water Act violations with the United States and the State of Indiana, an intervening party argued that the County of Maui decision renders the current settlement insufficient because the settlement did not include penalties for discharges to groundwater. See U.S. et al. v. U.S. Steel Corp., 2:18-cv-00127 (N.D. Ind., Dkt. No. 74).
The important takeaway here is that parties looking to settle Clean Water Act violations should expand their focus beyond just a “direct” discharge to surface water violation (i.e., from a pipe or trench, etc.), but also ensure that a settlement would include violations for “functionally equivalent” direct discharges (i.e., discharges that may have been to soil or groundwater that eventually travelled to surface water). In practice, this will ensure that settlements attempt to resolve as much liability as possible for a site on the front-end. If these “functional equivalent” discharges are not included, then a party could instead possibly face additional CWA liability—perhaps years later—if groundwater, arguably contaminated by a point source, migrates to a CWA navigable water.
As discussed, both Northern Plans Resource Council and County of Maui cases are going to have immediate impacts on the regulated community, but the full story is far from over. For Northern Plans Resource Council, an appeal to the Ninth Circuit Court of Appeals is already underway. Last week, the government filed an emergency motion for stay pending appeal and requested an immediate administrative stay while the motion was being decided. The Ninth Circuit rejected the government’s request for an immediate administrative stay during the pendency of the motion, but granted an expedited briefing schedule requiring all briefs to be submitted by the end of this week. If granted, the district court’s partial injunction and vacatur of NWP 12 will be stayed while the Ninth Circuit resolves the appeal. On the current briefing schedule, we expect a decision from the Ninth Circuit on the emergency motion on or before May 29. And as we previously wrote about, we anticipate that the EPA may issue guidance to address the “functional equivalent discharge” test. Stay tuned for further developments.
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:
Form Nos. 60 (Annual Report of Centralized Service Companies) and 61 (Narrative Description of Service Company Functions);
Form No. 552 (Annual Report of Natural Gas Transactions); and
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:
interventions, protests, or comments to a complaint;
briefs on and opposing exceptions to an initial decision;
answers to complaints and orders to show cause; and
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.
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.
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.
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.
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”