Pipeline "Rocket Docket" Ends with Commissioner Bay's Statement

After a frenzied week at the Federal Energy Regulatory Commission (FERC), the Commission is now down to two Commissioners and thus unable to rule on natural gas pipeline and liquefied natural gas terminal projects until a new Commissioner is approved. In a flurry of activity, the week involved the FERC granting Certificates for Energy Transfer Partners' Rover Pipeline, Trunkline Backhaul, and Panhandle Backhaul Projects; Williams Partners' Atlantic Sunrise Project; National Fuel Gas Supply Corporation's Northern Access 2016 Project; Kinder Morgan's Orion Project and Dominion's Transco to Charleston Project, as well as ruling on various other outstanding requests. As is customary, the FERC issued Certificates that require the applicants to satisfy numerous conditions before, during and following construction. Many of these conditions involve permits, consultations and other sign-offs from a panoply of other federal and state agencies, as well as affected landowners. 

No Nexus, for Now

Conspicuously absent from these FERC decisions was Spectra Energy's Nexus Project, which, unlike the four projects above, is not fully contracted. As FERC routinely explains in Certificate Orders and emphasized in these four, applicants must demonstrate a need for the project, which is most commonly demonstrated by project developers providing binding, precedent agreements for all or nearly all of the proposed capacity. It is unclear why FERC did not issue the Certificate for the Nexus Project, which officially ended its environmental review (issuance of the Final Environmental Impact Statement) on November 30, 2016 -- more recently than the other four projects -- but speculation remains that the Project's low subscription rate may be an issue (56% subscribed upon filing Certificate application). And while there is no specific percentage threshold requirement at which FERC will issue a Certificate for a project, if Nexus were to be approved, it would have the lowest contracted percentage. (Note: Boardwalk Pipeline's Northern Supply Access Project obtained approval with 73.95%. This occurred because a shipper, Triad Hunter, that had committed to 25% of capacity, pulled out of the project due to the bankruptcy of its affiliated parent company, Magnum Hunter. As such, Boardwalk accepted the risk for the unsubscribed capacity.)

A Cautionary View of Project Reviews

In an unprecedented move, former Commissioner Norman Bay filed a statement of his views on the approval process of natural gas pipeline projects, suggesting that improvements could be made to avoid "costly boom-and-bust cycles" and increased market exposure for pipeline assets. What makes his statements most noteworthy is that they offer an exceedingly rare glimpse into the issues being debated among Commissioners, both past and present, as well as those of FERC staff who are instrumental players in the decision-making process. Bay offered his concerns about pipeline infrastructure development being driven by the cyclicality of production capacity. He also suggested that the Commission should analyze the downstream impacts of the use of natural gas, especially in the Marcellus and Utica shale formations.

Of particular importance, given the above discussion about the need for the Nexus Project, are Bay's thoughts on how the FERC reviews pipeline projects. While Bay agrees that showing evidence of binding precedent agreements is a valuable proxy for demonstrating need, he also believes that the review process could be improved, because it may not take into account a variety of other considerations, including, among others, whether: 

• capacity is needed to ensure deliverability to new or existing natural gas-fired generators;
  
• there is a significant reliability or resiliency benefit;
  
• the additional capacity promotes competitive markets;
  
• the precedent agreements are largely signed by affiliates; or
  
• there is any concern that anticipated markets may fail to materialize.
  

And while Commission Orders routinely explain that shipper status (supply versus demand) is not a variable that impacts their decisionmaking, Bay offered a cautionary note about supply driven pipeline projects. For these projects, Bay cautioned that pipeline developers "may now be exposed to market risk not present with shippers that are local distribution companies with a reliable rate base and predictable revenue stream." These risks become even more acute, according to Bay, if basis differentials at major trading hubs disappear; thus, reducing the revenue -- and viability of certain projects -- of large interstate pipelines.

Commissioner Bay concludes his valedictory by offering his suggestion that the FERC, in the interest of "good government," should undertake an analysis of the environmental effects of increased gas production from the Marcellus and Utica shale formations, and also study the downstream impacts of the use of natural gas and conduct a life-cycle greenhouse gas emissions study. Most industry stakeholders would be content to see FERC, in the near term, focus on reviewing and approving projects more expeditiously, but Commissioner Bay's recommendations provide a cautionary note that at least he (and perhaps others at FERC) believe the review process should be more involved.