Spire and National Fuel Decisions - Impact on LNG Projects and FERC Certificate Policy

Recent Commission decisions suggest that Commissioner Powelson's vote may be sorely missed by proponents of LNG projects and associated pipelines after Powelson departs in mid August. Last Friday, with Powelson voting with the majority, FERC issued an order granting the long awaited certificate for the Spire STL Pipeline Project, which was followed on Monday by FERC issuing a rehearing order regarding National Fuel's Northern Access 2016 project.

As we recently discussed in Powelson Leaves and LaFleur Blooms - FERC Policy and Projects Stalled?, following Powelson's departure, Commissioner LaFleur will play a key role in Commission decisions. The Spire and National Fuel decisions only reinforce this view, as Commissioner LaFleur joined Commissioner Glick in dissenting against the Spire order, but sided with the majority in the National Fuel decision. In Spire, both Commissioner LaFleur and Commissioner Glick were troubled by the lack of evidence of need for the project. Commissioner Glick, however, also found that there was no evidence of need for the Northern Access project and was highly skeptical, in both cases, of projects that are supported by only a single precedent agreement with an affiliated shipper.

Therefore, the departure of Commissioner Powelson likely signals potential problems for the development of pipeline projects designed to support LNG terminals that are supported by a single precedent agreement signed by an affiliate. The Spire and National Fuel decisions also highlight an issue that has been raised in responses to FERC's Notice of Inquiry regarding its Certificate Policy Statement, which further support our position that there will be no action on that Policy Statement until Commissioner Powelson's replacement can be named.

Are Spire STL and Northern Access Needed?

The need for the Spire Project was the key difference between the majority and the two dissents. The split among the Commissioners was hinted at in February when the Staff issued data requests to Spire and Enable Mississippi River Transmission (MRT). In Spire's Data Requests Offers Lens into Project Timing and Certificate Policy, we discussed the unusual nature and timing of these data requests,and suggested that the certificate order may not come until mid to late June.

As it turned out, that view was slightly optimistic and may have been impacted by the further analysis we did in Spire, Columbia Gas and Transco Face Market Need Challenges, which discussed whether Chairman McIntyre would be able to vote on the Spire decision given his prior representation of MRT's parent company.

Spire Missouri is a local distribution company and an affiliate of Spire. Over 87% of Spire Missouri's upstream firm transportation capacity is under contract with MRT. Spire entered into a binding, 20-year precedent agreement with Spire Missouri as a foundational shipper for 350,000 Dth per day of firm transportation service, which represents 87.5% of the total design capacity of the project. Given that Spire Missouri is the only shipper that subscribed for capacity on the project, MRT urged FERC to not rely solely on the precedent agreement as evidence of need.

Despite MRT's objections, the majority found that, under the current Certificate Policy Statement, precedent agreements are substantial and sufficient evidence of need (emphasis supplied). In particular, the majority found that just because Spire Missouri is affiliated with the project's sponsor "does not require the Commission to look behind the precedent agreements to evaluate project need."

Both of the dissenting Commissioners found the majority's reliance on the precedent agreement, without any further demonstration of need, to be an abdication of FERC's role under the Natural Gas Act and the current Certificate Policy Statement. In support of this position, Commissioner LaFleur concluded:

FERC is obligated to "balance the public benefits against residual adverse effects" of a project; and
that such an obligation is not "simply a mantra to recite, but a standard that must be met to find a project in the public convenience and necessity."

Or, as Commissioner Glick stated:

Section 7 of the Natural Gas Act requires FERC to find that a "pipeline is needed, and that, on balance, the pipeline's potential benefits outweigh its potential adverse impacts"; and
the record before FERC was "patently insufficient to make these determinations, as there is neither evidence that the Spire Project is needed nor that its limited benefits outweigh its harms."

In National Fuel's Northern Access 2016 project, the project's only customer is Seneca Resources, an affiliate of the pipeline. The rehearing order reaffirmed the certificate order's determination that the pipeline had demonstrated need by showing that all of the proposed transportation capacity had been subscribed under long-term precedent agreements,and that the project "will provide benefits to all sectors of the natural gas market by providing producers access to multiple markets throughout the U.S. and Canada and increasing the diversity of supply to consumers in those markets." It is likely this last finding that allowed Commissioner LaFleur to join the majority in denying rehearing.

Commissioner Glick was apparently not persuaded by these facts and flatly stated in his dissent that he "disagreed with the majority's finding that the Project is needed." As Commissioner Glick saw it, the majority relied "exclusively on the existence of an affiliate precedent agreement to make its determination." While he acknowledged that precedent agreements are one of several measures for assessing the market demand for a pipeline, he stated his belief that "contracts among affiliates are less probative of that need because they are not necessarily the result of an arms-length negotiation." According to Commissioner Glick, the mere existence of a precedent agreement between "the pipeline developer and its affiliate is insufficient to carry the developer's burden to show that the pipeline is needed."

Impact on Pipelines Designed to Feed LNG Terminals

The question of FERC's reliance on affiliate contracts could become crucial for major pipeline projects that are designed to provide the gas to a number of currently proposed LNG export terminals.

Pending Pipeline Projects Providing Gas to LNG Terminals

As discussed in Powelson Leaves and LaFleur Blooms - FERC Policy and Projects Stalled? (linked above), we don't see a replacement for Commissioner Powelson taking office before next year. Therefore, unless Commissioner LaFleur can be persuaded that these projects provide better evidence of need than Spire did, any FERC certificate may need to wait for Commissioner Powelson's replacement.

Certificate Policy Statement Will Probably Need to Wait

Two key issues on which FERC solicited input in its Notice of Inquiry regarding its certificate policy statement were how it should assess project need for:

Projects designed to export gas to other countries, and
Projects supported by affiliated company precedent agreements.

Not surprisingly, Sempra LNG & Midstream, LLC (proponent of the Port Arthur LNG facility and the two pipeline projects designed to feed it) filed comments that encouraged FERC to continue to consider the public benefits provided by interstate pipelines associated with LNG export projects in its need analysis. According to Sempra, a recent DOE study "found consistently positive relationships between LNG exports and measures of U.S. economic performance under all scenarios studied." In addition, the LNG export projects "lead to overall international benefits to the U.S. as LNG exports reduce the overall trade imbalance and provide strategic allies and trading partners an alternative to reliance on energy resources from less secure sources."

Similarly, Driftwood Pipeline, LLC, owner of the pipeline designed to feed the Driftwood LNG facility, filed comments that urged FERC to "not distinguish between Precedent Agreements with affiliates and non-affiliates in considering project need." Driftwood argued that the affiliate status of the shipper is irrelevant and to make a distinction based on that fact, would be unduly discriminatory under the Natural Gas Act.

Some industry trade groups and environmental groups have a very different view. The Industrial Energy Consumers of America argued for a different set of standards for pipelines that are aimed at facilitating LNG exports because such exports serve the public good of other countries and not the US. A coalition of environmental groups argued that the non-arm's length, lucrative contractual arrangements between a pipeline developer and its affiliates "cannot serve to satisfy the Commission's obligation to examine independently market demand," when making its public interest finding.

While Commissioners LaFleur and Glick do not wholeheartedly adopt these positions, it is clear that they would not be in agreement with a Certificate Policy Statement that adopted the position of the majority in the Spire decision. Therefore, once Commissioner Powelson leaves, the Commission will be evenly split on these critical policy questions which likely means that FERC's review of its current Policy Statement will be stalled until Commissioner Powelson's replacement takes office.

Insights Coming Soon

Impact of Supplemental Filings by Pipeline Applicants
Project and other learnings from this quarter's earnings calls

Insights You May Have Missed

Rate Case Rulings Clarify Which Pipelines Are Entitled To An Income Tax Allowance
What the Fourth Circuit's Recent Decision Means for MVP, ACP and the Industry?