Enbridge's Line 3 Need Determination: Takeaways for Regulated Gas Pipelines (and FERC)
Oil pipelines and interstate gas pipelines are distant cousins, regulated separately and with different market dynamics. For project developers seeking approval for new infrastructure, the standard of "Public Need and Necessity" justification also varies: state agencies have independent and disparate approval regimes for new-build oil pipelines, while FERC primarily considers whether a natural gas project has sufficient committed customers. That was the case...until FERC reopened the debate on what defines "need" for a new gas pipeline, and invited all stakeholders to comment on questions regarding potential updates to FERC's 1999 Certificate Policy Statement via its Notice of Inquiry (NOI).
With comments on the NOI due later this month, all of a sudden, natural gas stakeholders and the FERC can -- and should -- look to the Minnesota Public Utilities Commission (PUC) deliberations regarding Enbridge's Line 3 Replacement project for potential future risks, should FERC change its policy regarding how it assesses project need. The FERC NOI broaches strikingly similar issues to those debated extensively and publically during Minnesota's assessment of whether benefits outweigh the environmental risks of a new pipeline.
Defining Project "Need" and Market "Demand"
Like most states, Minnesota's statute applies its own standard of need. Specifically, the statute requires a four part determination, with the first that: "the probable result of denial would adversely affect the future adequacy, reliability, or efficiency of energy supply to the applicant, to the applicant's customers, or to the people of Minnesota and neighboring states." The Minnesota PUC clearly articulated its decision-making framework: whether Enbridge's demand forecast was accurate and robust enough to justify the project, and whether the integrity risk of a deteriorating pipeline, plus the benefits of supplying a handful of regional crude refiners and an unknown level of future global crude markets, outweighed the environmental impacts of project construction and socioeconomic impacts of regional landowner and tribal interests.
The vast amount of PUC time, record, and deliberation, however, focused on the definition of "demand." The merits and accuracy of global forecasts, renewable energy options, apportionment, and competing oil pipelines were all debated openly via expert testimony and cross examination from both pipeline proponents and their opposition. Ultimately, the PUC commissioners weighed the future integrity risk of the existing Line 3 as a deciding factor, so we may never know whether Enbridge's claims of oil demand were enough on their own merits. In any event, the decision clears a major hurdle for Line 3 and the project now faces additional approvals, including securing at least 29 state, local and federal permits, as well as up to a year of potential appeals from project opponents through the Minnesota legal system. (Perhaps oil and gas pipelines share some common themes, after all).
Parallels to a Review of the FERC Certificate Policy Statement
FERC's Certificate Policy Statement states that FERC considers whether a proposed project's anticipated public benefits outweigh its residual adverse effects on economic interests, and identifies various public benefits for new gas pipeline projects, the first of which is meeting unserved demand and eliminating bottlenecks. As evidence of unserved demand, project applicants have primarily presented precedent agreements with prospective customers, and FERC has admittedly not looked beyond these contracts for a determination of need.
Over the past 38 months since Enbridge's application was filed, the PUC received over 10,000 legal pages in evidentiary record and weeks of in-person testimony from subject matter experts and consultants. Should FERC open its process to such analysis that relies heavily on conflicting projections, future gas projects could face review processes even longer than those of Line 3, which was, after all, a replacement project. A review of the pending projects by region should certainly be of a concern for the industry, especially those planned or pending in regions shown below where there are a large number of similar projects.
Pending Natural Gas Projects by Region
As noted in the NOI, FERC wishes to consider a list of concerns regarding the need for new natural gas projects -- which are eerily similar to the contested issues hashed out over three years of evidence and testimony with Line 3. Below is a comparison of the Line 3 issues and those questions posed by FERC currently open for comment:
|
FERC NOI Areas of Focus |
Line 3 Need Balancing Factors |
FERC NOI Questions for Comment |
|---|---|---|
| Whether existing infrastructure can accommodate the incremental service to be provided by proposed project. | If the existing Line 3 was decommissioned, could rail and truck provide adequate replacement capacity? |
Should the Commission change the way it considers the impact of a new project on competing existing pipeline systems or their captive shippers? Should the Commission consider adjusting its assessment of need to examine...if existing infrastructure can accommodate a proposed project? |
| Whether anticipated demand in the project's markets will truly materialize. | Whether anticipated demand in the project's markets will truly materialize. |
How should the Commission take into account that end uses for gas may not be permanent and may change over time? Should the Commission consider adjusting its assessment of need to examine...if demand in a new project's markets will materialize? |
| Potential for renewable energy to meet future demand for electricity generation. | Will renewables reduce the need for crude demand for Line 3 altogether? | Should the Commission consider adjusting its assessment of need to examine...if reliance on other energy sources to meet future demand for electricity generation would impact gas projects designed to supply gas-fired generators? |
| Need to evaluate new gas pipeline infrastructure on a region-wide basis. | Should the Keystone XL and TransMountain projects impact the viability of Line 3? | Should the Commission assess need differently if multiple pipeline applications to provide service in the same geographic area are pending before the Commission? |
| Whether agreements with affiliates constitute a showing of market need. | Do local refineries alone, only a portion of Line 3 end users, provide enough justification for an increased oil supply? |
In its determinations regarding project need, should the Commission consider the intended or expected end use of the natural gas? Should the Commission consider requiring additional or alternative evidence of need for different end uses? |
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