Insights Needed in ’19 - Projects, Permian, Rates, LNG, FERC, DC, the Courts and More...

The holidays are a great time to step back from one’s routine, reflect on the past and project the future. This week’s Insights does the same by reviewing key issues from 2018 that will stay with us in 2019 and anticipating some new issues that energy infrastructure market participants will likely face in the coming year.
A review of the issues we highlighted at this time last year demonstrates that the regulatory process can be slow and also disruptive when a decision upsets the consensus view. So while we do our best at prognosticating the coming year’s big issues, stay tuned to

Insights for real time analysis of 2019’s unanticipated events as they occur. What we do know now is that we will continue to grow our analytics platforms and services to predict and explain regulatory, legal, and market events while striving to maximize our customers’ competitive advantage.

Issues We Identified Last Year That Remain Unresolved

Issues to Watch in 2019

Permian Project Progression

The Permian Basin will likely continue to see rapid growth in the production of all three products that use pipelines to reach markets -- crude (the primary product of the region), natural gas liquids, and natural gas. The need for pipeline capacity to serve this increasing demand will be a continuing issue for at least the next three years. We will introduce a product in the first quarter of 2019 that will track Permian pipeline project viability, progression, and in-service date expectations. (See Left Chart above).

LNG

A clear focus of Chairman Chatterjee is assuring LNG export projects currently pending before FERC are efficiently processed. The certificate decision for Venture Global Calcasieu Pass Terminal was on FERC’s agenda for action at its final meeting in 2018 but was removed. Chairman Chatterjee, when speaking with reporters after the meeting, acknowledged that he was “disappointed that [FERC wasn’t] able to act on the LNG certificate today." While acknowledging his colleague’s unidentified concerns, he seemed puzzled because, while serving as FERC Chair, Commissioner LaFleur had been a strong supporter of LNG exports. This could indicate LNG export terminals may not easily gain approval until FERC is restored to its full five votes. We are introducing a new recurring report in the first quarter to track the progress of LNG export projects and their related pipelines. (See Right Chart above).
Rate Cases
Two major rate cases were filed in 2018 that will be resolved in the first half of 2019, Transcontinental Gas Pipe Line (Transco) and Texas Eastern Transmission (TETCO). This is TETCO’s first rate case in almost 30 years. In addition, as a result of FERC’s 501G process, a number of smaller pipelines have filed to reduce their rates. Those cases will be worked through to a conclusion, but the vast majority of pipelines did not adjust their rates as a result of the tax cut, and FERC will need to decide how many Section 5 rate investigations it will launch against the companies. Next week’s Insights will recap the FERC 501G process and offer our view on who is most likely to be FERC’s first targets for a Section 5 investigation. But for now, it is almost a certainty that 2019 will be the year of the rate case for interstate pipelines.
Voting Issues at FERC
FERC was not immune from the polarized atmosphere that consumed Washington this year. This trend will continue into 2019 for at least three reasons: (1) it is unclear when Commissioner McIntyre’s health will improve enough to allow him to resume participating in votes regarding all types of matters pending before FERC; (2) Commissioner McNamee will start voting in the first quarter of the new year, and we will need to watch carefully how his voting impacts the various issues before the Commission; and (3) Commissioner LaFleur’s term ends on June 30. She is currently serving as a critical swing vote on a number of issues and the views of her replacement, if she is not renominated, could have a decisive impact on how the Commission rules in a number of key areas.

Canadian Takeaway

At the outset of 2018, Canadian oil markets hoped for three major takeaway conduits for oil sand production. It is safe to say things did not turn out as planned. The TransMountain project transferred from private to government control and remains a wildcard as it continues to sit in the crosshairs of the politics of environmental and tribal opposition and a federal versus provincial power struggle.
The two other projects through U.S. soil face their own challenges. Keystone XL’s construction schedule now faces some uncertainty while TransCanada and the Trump Administration decide how to deal with pushback from judicial reviews in Nebraska and Montana. The Nebraska Supreme Court will render a decision on the issue of PUC authority early in 2019, but a second unrelated legal issue regarding a new environmental review required by a Montana judge will either need to be appealed to a higher court or addressed through a new EIS, with further opposition group legal challenges likely.
Enbridge’s Line 3 Replacement may have the most visible near-term path to operation. While it has secured full Minnesota PUC approval, opposition parties and the state Department of Commerce have appealed to the Minnesota Court of Appeals regarding the merits of demand forecasts. Enbridge must still obtain a myriad of state and federal permits before starting construction.

Key Court Decisions

One of the biggest variables for major greenfield development is federal judicial review of the permitting process. As we discussed recently in Mounting Hurdles for Mountain Valley Pipeline and Atlantic Coast Pipeline, we fully expect that the Fourth Circuit will continue to be skeptical of the current administration’s willingness to strictly follow the laws it is charged to enforce. However, there is also a Veteran Affairs case, Kisor v. Wilkie, that the Supreme Court recently agreed to hear that our customers should be following as to its possible impacts on the deference given to federal administrative agencies, such as DOE and FERC.
The issue that will be argued in Kisor is whether the Supreme Court should overturn its decision in a prior case, Auer v. Robbins, 519 U.S. 452 (1997) (Auer). The Auer case is important for all companies that are regulated by federal agencies, because, as explained by the appeals court in the Kisor case, “[a]n agency’s interpretation of its own regulations is controlling unless plainly erroneous or inconsistent with the regulations being interpreted.”
The requirement under the Auer decision that the court should “defer” to the interpretation of the agency has been repeatedly questioned by the conservatives on the Supreme Court. With the addition of Justice Kavanaugh, there is some belief that the court intends to use Kisor as a way to completely overturn the Auer deference rule. Such a decision could have a profound effect on future litigation involving agency decisions about pipeline and LNG projects and rate cases by increasing the judiciary’s involvement.
As has been demonstrated in the Fourth Circuit’s review of the agency decisions concerning MVP and ACP, there are a number of existing regulations governing the issuance of required federal permits that are far from clear. Under the Auer deference rule, though, the agency can interpret its own regulations and have that interpretation upheld by the courts unless the interpretation is “plainly erroneous or inconsistent with the regulations being interpreted.” If the Supreme Court overturns the Auer rule in Kisor, the agency interpretations of these ambiguous regulations could lead to far more successful challenges of agency actions. If the agency is hostile to a pipeline project, such supervision by the court could be a positive. However, in situations where the agency supports a project, as the federal agencies did in MVP and ACP, having court supervision of an agency’s interpretation of an ambiguous regulation could lead to more court reversals of agency approvals.

States Also Have Power

While the federal level of regulation is a focus of many, one should never forget that state level action can also impact projects and the markets. The Southern California Gas (SoCalGas) Citygate price soared to a high of $39.31/dth due to a confluence of factors including regulatory actions, such as limits on use of SoCalGas’s Aliso Canyon storage facility, and operational issues, such as the lack of delivery capacity arising from integrity issues on SoCalGas’s transmission pipelines. Close environmental and regulatory oversight by the State of Pennsylvania on the construction of Mariner East 2 has delayed that pipeline’s in-service date from its late 2016 original plan. Similarly, the timelines and even proposed construction methods or routes for Enbridge’s Line 3 and Line 5 projects have been impacted by state review of those projects by Minnesota and Michigan, respectively.
If you have a particular group of projects or regulatory issues that we are not currently following and would like to discuss how our services could be extended to include coverage of those issues, please contact James Cahalin at (720) 771-0158 or cahalin@lawiq.com.

Links to Insights Mentioned

Insights Coming Soon

501G final report
Potential Line 5 opposition tactics