PennEast Gets Certificate, with Dissent Project Hurdles Remain and Industry Insights

On Friday night, in a long-awaited and controversial decision, the Federal Energy Regulatory Commission approved the application of PennEast Pipeline Company, LLC for a planned 120-mile major greenfield project, managed by UGI Energy Services, LLC and owned in equal parts by Spectra Energy Partners, LP and four other affiliated companies. Although an obvious step forward for the project, the hurdles that existed before approval, which are covered below, along with several recent developments, still remain.

The FERC decision, with one dissenting and two concurring opinions, also offers the first indications by Commissioners that, in a forthcoming proceeding to examine changes to the current Certificate Policy Statement, they believe developers should offer additional evidence for the Commission to assess the public benefits of a proposed project, as well as the project's potential adverse consequences. This customer note highlights our views on broadly applicable takeaways for the industry and major pending issues for the PennEast project.

Industry  Insights

Tax Cuts - Cost of Service

PennEast will need to adjust its proposed cost of service. As the Commission noted in its Order, PennEast used a federal corporate income tax rate of 35 percent in calculating its proposed cost of service. However, beginning this month, the recently passed Tax Cuts and Jobs Act changed several provisions of the federal tax code, including reducing the federal corporate income tax rate to 21 percent, while also allowing certain capital investments to receive bonus depreciation treatment. Because these changes impact PennEast's proposed cost of service and the resulting initial recourse rates, the Commission directed PennEast to recalculate its initial recourse rates consistent with the new tax law when it files its actual tariff records.
For the first time, the Commission addressed the tax cut issue in a major Order, which project developers will likely view as a more efficient approach than issuing data requests to pending projects, as FERC has done over the past couple weeks. In general, those data requests asked the project developers to submit working papers and explain how the tax cut would impact the proposed cost of service and the resulting initial recourse rate proposal. (LawIQ will provide a quantitative examination of the implications of the tax cut on operational pipelines and projects during a February 7 webinar and related white paper.)

Certificate Policy Statement - Changes Pending

Since FERC Chairman Kevin McIntyre's confirmation hearing, and more recently during a December Commission meeting, he and other Commissioners have announced plans to review FERC's 1999 Policy Statement on Certification of New Interstate Natural Gas Pipeline Facilities (Certificate Policy Statement). The PennEast Order clarified that the review will take place as part of a new FERC proceeding and offered the first window into the Commissioners' views on what, specifically, in the Certificate Policy Statement may need to change. At this point, based on the Commissioners' views expressed in the Order, industry should expect changes that will increase the scrutiny new projects receive when the Commission evaluates the need for development.
The Order notes that the Certificate Policy Statement establishes the criteria for determining whether there is a need for a proposed project and whether the proposed project will serve the public interest, with the general direction to the Commission to balance the public benefits of a proposed project with its potential adverse consequences. The Order explicitly adopted this guidance, with a goal to "give appropriate consideration to the enhancement of competitive transportation alternatives, the possibility of overbuilding, subsidization by existing customers, the applicant's responsibility for unsubscribed capacity, the avoidance of unnecessary disruptions of the environment, and the unneeded exercise of eminent domain."

In a concurrence to the Order, Commissioner LaFleur stated that she strongly supported Chairman McIntyre's intention for the Commission to undertake "a generic proceeding to look broadly at our pipeline certificate policies," while noting that the Order "highlights the issue of how pipeline developers engage with landowners, which I believe should also be explored in the upcoming generic proceeding," and stating that she would "continue to take a case-by-case approach to pipeline applications, carefully applying the existing law that governs our certificate process to the factual record developed in each case."   
Commissioner Glick, in a strongly worded dissent from the majority-approved Order, disagreed with the analysis and conclusion that there was a need for the PennEast pipeline, although his analysis seemed to hinge on prospective changes -- not the currently effective Certificate Policy Statement. Specifically, Commissioner Glick explained that the existence of precedent agreements between the pipeline developer and its affiliates is "insufficient to carry the developer's burden to show that the pipeline is needed." Commissioner Glick stated that the Commission should have considered additional evidence before approving the PennEast project.

Pending PennEast Hurdles

In approving the pipeline, the Commission noted that the project would cause some adverse environmental impacts, but concluded that these impacts would be reduced to less than significant levels by PennEast's proposed mitigation measures, as well by a number of mandatory environmental conditions. In addition to these environmental mitigation issues, a number of issues of interest, some addressed in the Order, others left unmentioned by the Commission, remain to be addressed as PennEast moves forward to begin construction. To begin, the number of outstanding federal and state permits at the time of receipt of a FERC Certificate is unprecedented. Many of these permits  must be obtained prior to receiving a notice to proceed with construction. LawIQ's permit table for PennEast offers a window into this issue (i.e., compare "outstanding" to "received" permits).   
Clean Water Act - Similar Story, With a Twist
As most are aware, the Section 401 Water Quality Certificate (WQC) is required to accompany the Section 404 permit, which, in most states, is issued by the U.S. Army Corps of Engineers. However, in New Jersey, the U.S. Environmental Protection Agency has delegated to the New Jersey Department of Environmental Protection (NJDEP) the authority to operate the State Freshwater Wetlands Protection Act (FWPA) program in place of the Section 404 program. This creates additional issues for PennEast that are not typically present in other states, such as:  

• Delegation to the NJDEP is conditioned on the state maintaining standards that are as strict as those implemented by the Corps, but New Jersey's review can be more rigorous than the Corps'.
• The one year time limit on a state's review of a WQC under Section 401 does not apply to a state's review under Section 404 of the Clean Water Act.
• The NJDEP administratively closed PennEast's FWPA application in June 2017, because it lacked sufficient survey information of the private land that the pipeline will traverse, because landowners have refused to grant PennEast survey access to their land. Now that FERC has approved the project, PennEast will seek court orders to compel access to the impacted land to complete the required environmental studies which will allow PennEast to resubmit the FWPA application to the NJDEP.

NJDEP regulations also have prescriptive timelines, but unlike a Section 401 WQC, there is no authority vested in FERC to find a waiver for failing to act one year after the application is submitted. PennEast will need approval by the NJDEP to move forward and that process could extend beyond into late 2018.  
Delaware River Basin Commission - Another Hurdle
In addition to the typical state and federal permits required by interstate pipeline developers, another hurdle for PennEast involves obtaining required approval from the Delaware River Basin Commission (DRBC) to withdraw and discharge water in connection with the project. PennEast has supplemented its February 5, 2016 application numerous times, but the DRBC has yet to schedule a hearing on the application. The process is complicated by the opposition from a number of environmental groups, including the Sierra Club, which has promised to oppose PennEast's application to the DRBC.  If the DRBC continues to push for hearings on PennEast, the timing could be problematic for the project, given DRBC's current preoccupation with the development of proposed hydraulic fracturing rules.