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 July 16, 2020, the Federal Energy Regulatory Commission (“FERC” or “Commission”) issued Order No. 872 (“Order”), a final rule that significantly revised its rules implementing the Public Utility Regulatory Policies Act of 1978 (“PURPA”). Congress enacted PURPA to reduce the country’s reliance on oil and natural gas by promoting “Qualifying Facilities” (“QFs”) that rely on alternative energy sources or more efficient generation. Since their promulgation, FERC’s regulations implementing PURPA have been largely unaltered. FERC opined that the energy industry has substantially evolved since PURPA was promulgated and that the final rule is necessary to address the changing landscape and more closely align with underlying congressional intent.
Among other things, PURPA requires electric utilities to offer to purchase electric energy from QFs, which are categorized as either small power producers or cogenerators. The rate that a QF may receive for energy must be a rate “not to exceed the incremental cost to the electric utility of alternative electric energy,” which is “the cost to the electric utility of the electric energy which, but for the purchase from such cogenerator or small power producer, such utility would generate or purchase from another source.” In other words, “the purchasing utility cannot be required to pay more for power purchased from a QF than it would otherwise pay to generate the power itself or to purchase power from a third party.” This is referred to as the utility’s “avoided cost.”
Rates for energy are generally categorized as either fixed or “as-available.” Fixed rates are generally fixed at the time of the contract or other legally enforceable obligation (“LEO”) between the QF and the utility and do not vary over the term of the contract or LEO. For example, many renewable energy projects, which generally produce only to sell into the market and rely on a fixed revenue stream for financing, often rely on fixed energy rates. Conversely, other types of generators, such as cogeneration facilities, might only sell into the market when they have excess energy and will take the prevailing price at the time of sale. This rate is referred to as an “as-available” energy rate and is variable. Rates for capacity are generally fixed at the time of contract or LEO. QF rates for energy and capacity are set by state commissions.
Order No. 872 follows a technical conference, notice of proposed rulemaking (“NOPR”), and multiple rounds of industry comments. The Order adopts most of the NOPR proposals and substantially alters the rules for QFs.
On July 10, 2020, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) denied challenges1 to the Federal Energy Regulatory Commission’s (“FERC” or “Commission”) final rule on electric storage participation in Regional Transmission Organization (“RTO”) and Independent System Operator (“ISO”) markets (“Order No. 841”).2
Order No. 841 aimed to facilitate the participation of electric storage resources (“ESRs”) in RTO/ISO markets, with the goals of removing barriers to participation by ESRs, increasing competition within RTO/ISO markets, and ensuring just and reasonable rates. Specifically, FERC ordered RTOs/ISOs to establish participation models that recognize the physical and operational characteristics of and facilitate participation by ESRs.3
An ESR for these purposes is defined as “a resource capable of receiving electric energy from the grid and storing it for later injection of electric energy back to the grid,”4 and encompasses storage resources located on the interstate transmission system, on a distribution system, or behind the meter.5 Order No. 841 declined to allow states to decide whether ESRs located behind a retail meter or on a distribution system in their state could participate in RTO/ISO markets.6 On rehearing, the FERC reiterated that it would not provide state opt-out rights, arguing among other things that “establishing the criteria for participation in the RTO/ISO markets of [ESRs], including those resources located on the distribution system or behind the meter, is essential to the Commission’s ability to fulfill its statutory responsibility to ensure that wholesale rates are just and reasonable.”7 FERC further concluded that it was not required under the Federal Power Act (“FPA”) or relevant precedent to provide an opt-out from ESR participation.8
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.
Twenty-two years after the Supreme Court’s ruling in Bestfoods, a government contractor—PPG Industries, Inc. (“PPG”)—comes face to face with one of the most important tenets of that court’s decision: operator liability under Superfund.Although the Supreme Court’s decision in Bestfoods focused on operator liability in the context of a parent and subsidiary relationship, the Third Circuit Court of Appeals in PPG Industries, Inc. v. United States of America et al. relied on the Supreme Court’s analysis of operator liability in determining whether the United States should be held liable under CERCLA as an operator in connection with chromium production during World War II. This case serves as a reminder to private industry: you do not have to be physically operating a plant or facility in order to be liable as an “operator” under Superfund. Rather, you can acquire liability by managing, directing, or conducting activities specifically related to operations involving releases or disposal of hazardous substances, or by engaging in decisions regarding compliance with environmental regulations.
As the Third Circuit explained, chromium production was regulated by the government during both world wars given that chromium chemicals were designated as critical war materials for military use. Chromium distribution was controlled pursuant to orders issued during World War II by the Chemicals Bureau of the War Production Board (“Board”), although chromium production—including the processing of ore and management of waste—were not part of the government’s orders. PPG purchased a facility from a former chromium chemical manufacturer (Natural Products Refining Corporation or “NPRC”) in 1954, and continued to process chromium chemicals until 1963. PPG filed a private cost-recovery claim against the government seeking the recovery of CERCLA response costs that it expended ($367 million, to date), as well as contribution for past and future costs.
PPG’s main contention was that Bestfoods did not apply to its case since that ruling did not involve the government as an operator, and that if Bestfoods was applicable, operator liability should be imposed on those parties having “direction” or “general control” over a facility’s activities. The Third Circuit rejected these arguments and, applying Bestfoods’ definition of “operator” to the wartime operations conducted at the PPG facility, observed that although the government controlled certain aspects of chromium distribution, including pricing and quantities of chromite ore that NPRC could buy and to whom NPRC could sell, as well as what orders had priority, the government did not specifically control operations related to pollution. The Third Circuit considered evidence related to the stockpiling of waste outdoors (which caused the contamination) and rejected the proposition that the government was “directing” PPG to produce more wastes merely because of the government’s knowledge that ramping up chromium production would lead to an increased amount of chromium wastes to be managed. The court also noted that no court has said that the test for determining operator liability depends upon whether a potentially responsible party is a private party or a governmental entity, and cited its 1994 decision in FMC Corp. v. United States Department of Commerce (in which the court found the government liable as an operator based on its active involvement and substantial control of the facility). Further, the court noted that the FMC decision (which PPG argued was a similar case) was distinguishable because the government was directly involved with waste production and regulation at the plant.
The court’s decision and analysis in PPG offers some interesting insights to the concept of operator liability under Superfund and, further, provides instructive guidance to private industry on how to avoid CERCLA liability as an operator. Perhaps the most critical “takeaway” from this case is that operator liability depends on the relationship between the potentially responsible party and the waste-producing facility. “Actual control” of a facility is not necessary; the relevant inquiry will be whether an alleged operator exercises control over “operations having to do with the leakage or disposal of hazardous waste, or decisions about compliance with environmental regulations.” Under this analysis, the relationship between the potentially responsible party and the facility—and not the relationship between the potentially responsible party and the owner of the facility—is the focus of the inquiry. The Third Circuit has just reinforced the Supreme Court’s analysis of CERCLA operator liability as first explained in Bestfoods two decades earlier.
Notwithstanding that the Comprehensive Environmental Response, Compensation, and Liability Act (more commonly known as “Superfund”) has been around for 40 years, and the fact that numerous cases have made their way to the U.S. Supreme Court analyzing liability under the Act, debates continue as to who can be a Superfund “potentially responsible party” or a “PRP.” For those who still do not get the scope and reach of Superfund liability, the Supreme Court has, once again, provided a clear response with respect to liability under the Act in an April 20, 2020, decision, Atlantic Richfield Co. v. Christian et al. In that case, the Court reaffirmed its position set forth in a 2007 case, United States v. Atlantic Research Corp., 551 U. S. 128, 136 (2007), that even parties whose property has been contaminated by others, and who are innocent with respect to the contamination, fall within the broad definition of liable parties under Section 107(a) of Superfund (which uses the term “covered persons”), subject to the third-party defense set forth in Section 107 (b).
Atlantic Richfield involved a group of 98 property owners who filed claims against Atlantic Richfield in Montana state court in connection with the Anaconda Copper Smelter Superfund Site in Butte, Montana, a 300-square-mile site contaminated with arsenic and lead. The property owners’ claims included trespass, nuisance, and strict liability claims under state common law. The landowners sought restoration damages, among other forms of relief, which was the issue before the Court since Atlantic Richfield conceded that Superfund preserves claims for other types of compensatory damages under state law, including loss of use and enjoyment of property, diminution of value, incidental and consequential damages, and annoyance and discomfort. The property owners sought to implement a remedial restoration plan that exceeded the U.S. Environmental Protection Agency’s (“EPA”) selected remedial actions. The question regarding their PRP status was before the Court in the context of determining if they were prohibited from taking further remedial action without EPA’s approval under Section 122(e)(6). Continue reading “The Supremes Weigh in on Superfund and the Clean Water Act”
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”). 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.
A significant part of the backstory here is related to the U.S. Supreme Court’s decision in 2015 in Michigan v. EPA. 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. 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”