US Federal Energy Regulatory Commission adds GHG emissions to pipeline permit reviews

The US Federal Energy Regulatory Commission (FERC) waded forcefully into the GHG emissions arena with two policy statements on 17 February that increase the agency's review of the climate impact of new natural gas pipeline projects.

The new policies take effect immediately and will be incorporated into reviews of applications pending before FERC and all new applications, said Chairman Richard Glick, who added they reflect both the greater urgency of addressing climate change and federal court decisions that said FERC's prior permit reviews did not take into account a sufficient range of factors. Glick called the new guidance "long overdue [incorporation of] ... all stakeholder concerns and interests."

The first document is an update of a "1999 Policy Guidance" in which FERC is expanding the criteria to decide if a project meets the standard of "public convenience and necessity" for approval. Under the prior policy, if a project had contracts in hand for most of its capacity, known as a "precedent agreement," it was deemed to have met the public convenience and necessity standard for approval. Now, FERC will consider the environmental impacts of climate change, environmental justice, and effects on competition with other energy resources, non-economic impacts to landowners, and other factors in a "holistic" approach.

FERC warned that environmental impacts will be studied closely. "Should we deem an applicant's proposed mitigation of impacts inadequate to enable us to reach a public interest determination, we may condition the certificate to require additional mitigation," FERC said in the guidance.

The other document, "Interim Greenhouse Gas Emissions Policy Statement," potentially has even greater sway.

FERC for the first time defines any project with 100,000 metric tons (mt)/year of CO2-equivalent emissions as "significant impact on climate change." Any project exceeding this threshold will have to undergo an environmental impact statement (EIS). That EIS will include a weighting of the impact of increased GHG emissions caused by the project as part of its public need assessment. The interim rules are open for a comment period through 4 April, even though they are now in effect.

This guidance marks a change from FERC's prior practice. For the last several years, FERC has been calculating the downstream emissions as part of its permit review, such as from a power plant or for home heating, but in every case it had stated it "could not reasonably foresee" what the effect might be on climate.

FERC's role in pipeline permitting

The commission issues permits for all new construction and modifications to interstate gas transmission pipelines in the US (those that cross the boundary from one state to another). More than 320,000 miles of these lines are operating in the US. FERC also issues permits for all applications for LNG facilities.

According to the US Energy Information Administration (EIA), applications for nearly 13 billion cubic feet per day (Bcf/d) of gas pipelines and LNG projects are sitting in FERC's in-tray and would be affected by the new rules. For 2021, the US averaged 82.9 Bcf/d of gas use, plus net exports of gas and LNG of 10.5 Bcf/d.

"FERC's new policy is highly likely to slow down the permitting process," predicted Matt Palmer, S&P Global Commodity Insights research and analysis director, global gas. "It's worth noting that for the past two years IHS Markit's long-term view for North America has not included any significant new interstate pipelines after a much-delayed Mountain Valley Pipeline. The cost overruns from litigation at every step in the process have made it extremely difficult for new pipelines to get constructed."

The EIA reported in February that the US added 7.4 Bcf/d of new pipeline capacity in 2021, the lowest volume since 2016.

New policies

Looking more closely at the two new policy statements, the update of the 1999 Guidance adds criteria used under the Natural Gas Act (NGA) to consider if a project is needed, beyond the precedent agreements.

This is potentially a significant change to a process in which projects were almost never rejected. The Delaware Riverkeeper Network, which has opposed several pipelines in the eastern US, studied FERC's record for 1990 through 2020 and found that only two projects were rejected under the public convenience and necessity standard, Delaware Riverkeeper Maya van Rossum told Net-Zero Business Daily.

With the weighting of other factors in the decision, developers will be expected to provide information on demand projections for gas and potential cost savings to customers. FERC said it will "look for information about the intended end use of gas to help explain why a project is needed," potentially challenging a pipeline for a gas-fired power plant that competes with renewable energy.

"It is good to see FERC raising up environmental justice impacts in its review process and that it seems to be opening the door to considering the induced gas extractions operations that feed the pipeline infrastructure it is approving," van Rossum said.

The Interim Greenhouse Gas Emissions Policy Statement is entirely new. As noted, it sets a threshold of 100,000 mt of CO2e emissions per year under which a pipeline would have to go through an EIS. FERC estimates that any project that adds at least 5,200 dekatherms/day of capacity will hit the trigger point.

That's an extremely low threshold, said Michael Krancer, former secretary of the Pennsylvania Department of Environmental Protection, and principal of energy consulting firm Silent Majority Strategies. "This is all about controlling GHGs … just what the nongovernmental organizations wanted all the time," he told Net-Zero Business Daily. "It will impact any project important enough to be relevant for energy independence."

Attorneys for Texas-based law firm Vinson & Elkins said the new guidance signals a new "balancing test" of a project's merits and impact. FERC "encourages" pipeline developers to offer GHG mitigation measures that are "real and additional" in their application, the law firm noted.

Initial reaction

Environmental and public interest groups, which have appealed scores of projects and litigated against dozens of pipelines in the last five years, were pleased with the guidance. "These are changes both demanded by the courts and long overdue. FERC will now need to follow through and permanently establish a meaningful climate test for pipelines," said the Natural Resources Defense Council.

And US House of Representatives Energy and Commerce Committee Chairman Frank Pallone, Democrat-New Jersey, signaled his support as well. "I applaud FERC for taking these necessary and long-overdue actions to ensure that climate change and environmental justice are core considerations of its natural gas infrastructure certification process. The courts have repeatedly instructed FERC to take greenhouse gas pollution into account when deciding whether new gas infrastructure is in the public interest," Pallone said.

In contrast, the initial reaction from the oil and gas industry to the new rules has been negative, as trade groups said that they will make a lengthy and costly process even worse. They tied the need for gas infrastructure to reliability of both gas deliveries to homes and power plants.

"FERC's actions […] unfortunately insert more uncertainty into the process and will only add more delays on top of an already overly bureaucratic process that is hampering the vital pipeline and other energy infrastructure needed to deliver and export natural gas, which is the leading reason the US has reduced emissions to generational lows," said American Petroleum Institute (API) Vice President of Midstream Policy Robin Rorick in a statement.

Dena Wiggins, CEO of the Natural Gas Supply Association, said the impact could be substantial. "The orders … represent a major overhaul in the way FERC intends to analyze pipeline certificate applications," she said. "We are very concerned that these revisions will have a chilling immediate effect on pending and future projects."

For years, the energy industry has been frustrated by the slow pace of review. A federal study a decade ago found that permitting took an average of 558 days. The Interstate Natural Gas Association of America (INGAA) studied the issue more recently and found that a project typically takes more than a year to complete the review process, though some of that delay can be attributed to other federal and state agencies that also have a hand in the review missing their deadlines to provide analysis to FERC.

Divided FERC, angry Congress, concerned industry

The new policy statements were approved by 3-2 votes, with the two FERC Republican commissioners opposing them, and the three Democrats voting in favor.

During the 17 February open meeting at which the new policies were discussed, Republican Commissioner James Danly said Congress has stated through the NGA that FERC's mission is to "encourage the orderly development of plentiful supplies of ... natural gas at reasonable prices." This means that the sale of gas in the interstate market is in the public interest, he said.

By linking a permit decision to the emissions of a project, Danly said FERC is violating that law by implicitly saying natural gas is harmful. Danly and fellow Republican Mark Christie said during the open meeting and in written dissents that FERC does not have the authority to deny a pipeline certificate based on emissions of the use of the gas.

Whether or not the emissions are seen as harmful, S&P Global's Palmer said the new rules add complexity. "In particular, how downstream GHG emissions from a pipeline are calculated is going to be difficult, given that the destination and use of natural gas over the duration of its lifetime is not knowable," he said.

Despite the complexities of determining GHG emissions, the Democrats at FERC said that US federal courts since 2017 have repeatedly told the agency it must try to do so. Glick observed that in 2021 the US Circuit Court for the District of Columbia disagreed with FERC's conclusion on a pipeline that "it is not currently possible to determine localized or regional impacts from [greenhouse gas] emissions from the project" (Vecinos Para el Bienestar de la Comunidad Costera, et al., v. FERC).

That ruling hearkens back to the so-called "Sabal Trail" decision in 2017 (Sierra Club v. FERC), when the US Court of Appeals for the District of Columbia ruled that FERC did not take the required "hard look" at the environmental impact of the Sabal Trail Pipeline project in Florida. The 1.1-Bcf/d pipeline was proposed for a new gas-fired power plant that replaced a coal plant.

The court vacated the project's permit in August 2017—even though the Sabal Trail project had started to operate—because FERC failed to study the GHG impacts of downstream gas combustion.

In February 2018, FERC reissued the permit with a calculation that the Sabal Trail project would result in a net addition of up to 8.4 million mt/year of CO2-e, or 9.7% of Florida's annual emissions. However, in reissuing the permit FERC said that the increase in emissions "would have no significant environmental impact," and the court accepted that decision.

In the wake of Sabal Trail, the Republican majority on the commission interpreted the court's decision as requiring it to quantify the downstream emissions caused by the gas from the pipeline, but not requiring it to investigate the impact of those emissions. This led to a split on more than 30 permit applications over the past few years, with Democratic appointees Glick and Cheryl LaFleur dissenting repeatedly on the grounds that counting the projected emissions but not assessing if they have an impact is not taking a genuine "hard look" at the environmental impact as required under the National Energy Policy Act (NEPA).

Sabal Trail also led to FERC opening its 1999 Policy Statement in 2018 and the eventual issuance of the updated guidance last month. Although Commissioner Glick is confident the new rules will avoid litigation, Christie claims the impact will be the opposite. He argued that the new review standards are so vague that they will lead to more, not less, litigation.

More criticism

The new rules also brought criticism from members of Congress, with West Virginia Democrat Senator Joe Manchin calling them "reckless" and "putting the security of our nation at risk."

The US Senate Energy and Natural Resources Committee, which is chaired by Manchin, will hold a hearing on 3 March for all five members of the commission to speak about the need for and impact of the new policies.

Trade groups made the case that the policies can actually interfere with US efforts to reduce GHG emissions. Natural gas is a low-carbon tool that helps the US meet environmental goals, as well as contributes to energy security. The American Gas Association (AGA) pointed out that from 2005 through 2019, natural gas methane emissions have dropped by 14%, while production has increased by 50%, enabling the closure of coal-fired power plants and propelling a 12% reduction in overall US GHG emissions.

"FERC's actions today could hinder the ability of utilities and customers, including electric generators, to obtain the natural gas they need to meet their responsibility to serve customers affordably and reliably. These policy changes could also lead to further delays in the review process, which could impact system resilience and incumber the delivery of low-carbon fuels such as renewable natural gas and hydrogen using the natural gas delivery system," said AGA President and CEO Karen Harbert.

Legal challenges?

There are several potential avenues for opponents of the rules to challenge them in court, said energy attorney Krancer. In his opinion, the argument by Republican commissioners that FERC might be overstepping its NGA authority is legitimate. "FERC is giving itself discretion to say that a project's carbon impact is too big, so it will not approve it. Whether it should have that discretion should be decided by Congress, not by the regulatory agency itself," he said. "There's a chance that will be litigated … and a chance it could be struck down by the Supreme Court."

Commissioner Christie said the retroactive use of new standards could violate due process rights for developers.

INGAA raised another legal issue by calling the 100,000-mt emissions threshold "arbitrary," despite FERC pointing out that it's the emissions limit that the US Environmental Protection Agency uses in its review process. The trade group also pointed out that while FERC "suggests that developers may be required to mitigate the effects of emissions created by downstream natural gas consumption," it provides no information on how much mitigation would be needed nor be proven in an application. INGAA did not respond to a request for comment on whether it will challenge the regulation in court.

To be sure, the new policy statements are not the end of the story. One rule is interim and could be changed. Either rule could be litigated. And a major factor in the Biden administration's climate toolbox—the social cost of carbon (SCC)—isn't even yet part of the FERC's pipeline review.

At the open meeting in February, Glick said FERC did not include use of SCC to measure downstream emissions' impacts because a federal court in Louisiana had ruled that the Biden administration cannot raise the SCC from the current level of $7/mt. The EPA has been expected to increase the SCC to at least $51/mt, where it was under President Obama, but Glick said that plan is on hold while the government appeals the court ruling. When that dispute is resolved, Glick said FERC will revisit use of SCC in permit analysis.

Environmental activists—who want to see the new rules stick—also expect challenges. "That is why we need Congress to step in with clear mandates and reforms that will ensure climate change, environmental justice, and shale gas extraction impacts are mandated high priority considerations," van Rossum said.

Posted 02 March 2022 by Kevin Adler, Chief Editor

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.