Zombie Projects - Constitution, Northern Access, and PennEast - Are They Dead?
The investment made in a project makes it very difficult for a company to give up on seeing it through to in-service, despite mounting odds against it. The shippers on such projects may be contractually bound to the project under their precedent agreements so long as the project developer is making commercially reasonable efforts toward its completion. This can leave reasonable alternative projects without enough contracts to support them until older “zombie” projects are formally abandoned by their sponsors.
Not surprisingly, the vast majority of these challenged projects are located in the Northeast, where opposition to fossil fuel infrastructure has been most active and successful with politicians and, more recently, at the U.S. Court of Appeals for the Fourth Circuit. We discuss that court’s decision from earlier this week against Mountain Valley Pipeline in greater detail below.
It is hard to predict when project proponents will abandon a project, but we look at three that are well beyond their original timelines and have yet to begin construction - Constitution, Northern Access 2016 and PennEast, and three projects facing substantial headwinds - two that are in construction - Mountain Valley Pipeline and Atlantic Coast Pipeline - and one, Northeast Supply Enhancement, that’s earlier in the process. For the first three projects, we identify events that could lead the developers to officially abandon the projects. For the second three, we identify lessons that could help them avoid a similar fate.
How Did We Get Here?
Constitution, PennEast, and Northern Access all have tangled histories. Assuming that they were all able to go into service by November 1, 2020, they would still be the outliers in our data set as shown below:
We cover high points below to shed light on our views on the timeline for each project’s decision to move forward. Until some of these projects are officially canceled, other developers, which currently have commercial teams circling the region, won’t be able to step in with viable alternatives. It’s a Catch 22.
I’m Not Dead, Yet
Constitution’s Court Conundrum:
Constitution’s path to a final decision seems narrow and short, but it is not likely to be formally abandoned before next summer. From the outset, New York was not satisfied with Constitution’s chosen route. But in a spirit of cooperation, Constitution twice agreed to withdraw and refile its application for a water quality certificate (WQC) to give the state more time to make its decision. Ultimately, the project became a test case of New York’s use of the WQC process to kill projects which the state opposed. Whether Constitution would have been approved had it modified its route more to New York’s liking is an open question. But the fact that it chose not to modify its route contributed to New York’s denial of the project’s WQC. The denial of the WQC led Constitution to fight protracted legal battles over both the process used in New York and the state’s ultimate negative decision.
Constitution has exhausted all litigation avenues, but one, which is currently pending before the U.S. Court of Appeals for the D.C. Circuit. Unfortunately, that last case was put on hold while the court decides a similar case which also challenges FERC’s determination that the one-year limit for acting on a WQC is extended by a party withdrawing and re-submitting its application. We expect the court to find FERC’s interpretation is appropriate, which will likely lead to a denial of Constitution’s appeal.
An expected appeal to the U.S. Supreme Court could be Constitution’s last gasp. Only when that request to be heard by the Supreme Court is denied will the project sponsors formally abandon the project. Shippers on Constitution will likely not be free to pursue other projects until next summer, unless they also negotiated a right to cancel their contracts by some date certain if the anticipated transportation service had not yet been made available.
Northern Access Might Still See the Northern Lights:
Northern Access’s paths forward are diverse, so we don’t see it being abandoned, if at all, until 2021. It benefited from watching Constitution and did not voluntarily withdraw its application for a WQC. However, that did not stop New York from denying the application more than one year after it was received. National Fuel then appealed the substantive denial of its application to the U.S. Court of Appeals for the Second Circuit. This case was argued in November of last year, but has yet to be decided. National Fuel also asked FERC to determine that New York had waived its right to act by taking longer than one year to act on its application, which FERC did this past August. The state asked FERC to reconsider this finding of waiver, but FERC has yet to act on the state’s request.
National Fuel would likely have to lose both of the pending appeals before it would abandon this project. It will likely be close to two years before the case pending before FERC is decided by the appeals court. Any near term decision to abandon would likely be driven more by a lack of commercial need by its affiliated shipper. This may explain why National Fuel stated on its earning call this quarter that it is “still a couple of years, and likely a few legal challenges, away from constructing this project” and that they “anticipate that this will likely be a 2022 project.” In the meantime, its affiliated shipper remains committed to the project.
PennEast’s Pendulum Isn’t Swinging Back In Its Favor:
PennEast’s path forward seems foreboding and long. PennEast has received comments from almost 6,000 individuals and entities and is the subject of substantial grassroots opposition, particularly in New Jersey. For the first few years, the governor of New Jersey was a Republican who did not seem to be particularly opposed to fossil fuels. So there was some belief that, despite grassroots opposition, the company would gain approval for the required federal wetland permits, which, unlike in most states, must be granted by the state’s Department of Environmental Protection (DEP).
With the election of a Democratic governor in 2018, who said he was against the pipeline during the campaign, the prospects for a positive outcome seem to have dimmed further. At this point, it appears PennEast is at least a year from getting a decision on its wetlands permits. If that decision is adverse, then it could be another year, at least, before it could overturn that decision. However, because the New Jersey DEP is watching the cases in New York, it would be surprising if it issued a decision vulnerable to a court challenge. We do not see the project being abandoned for at least two more years. Therefore, the shippers, which are predominantly demand driven shippers who can stay the course, are likely obligated to continue waiting.
Lessons for MVP, ACP and NESE?
EQT’s Mountain Valley Pipeline, Dominion’s Atlantic Coast Pipeline and Williams’ Northeast Supply Enhancement Project are nowhere near the zombie stage, but clouds loom over all three. In particular, the Fourth Circuit’s opinion issued earlier this week about a key permit needed by Mountain Valley could very well delay its in-service date beyond the end of 2019.
This week, the Fourth Circuit issued an opinion explaining its prior order that found MVP could not continue construction in wetlands and waterbodies under Nationwide Permit 12 (NWP 12) as authorized by the Huntington District of the United States Army Corps of Engineers (USACE). The court continued to express skepticism about the process followed by the USACE under the NWP 12 in the state of West Virginia. Prior to Tuesday’s opinion, the court had focused on a provision disallowing the use of the NWP 12 if any single stream crossing would take longer than 72 hours. In this week’s opinion, the court found another basis for invalidating the use of the NWP 12 for MVP, a condition that requires a project-specific WQC for any project involving a pipeline greater than 36 inches in diameter. West Virginia had originally issued just such a WQC for the project. But when that WQC was challenged in court, West Virginia withdrew the WQC and simply waived its right to review the project at all. According to the Fourth Circuit, an “individual permit will likely be necessary” to remedy the problems it has found in the USACE’s use of the nationwide permits.
ACP has similar, but separate, challenges pending before the same court about the use of the NWP 12 for its project. Both projects may benefit from a modified WQC that West Virginia issued for comment earlier this year that would allow the West Virginia DEP to “waive, change, or eliminate any of the Standard or Special Conditions of State 401 Water Quality Certification” if certain conditions are met. It is possible that once this new 401 WQC is final and issued, both of the projects will reapply to be covered by NWP 12 and the new WQC.
However, the use of the new WQC will undoubtedly be challenged, which could delay both projects if the court issues or continues a stay while it considers the new challenges. At this point, ACP may be in a slightly better position than MVP because a challenge to any use of the revised WQC may be argued in its pending case, which will likely be heard early next year. If MVP’s use of the new permit is challenged and the court issues a stay in that proceeding as it has in the others, that case will not likely be heard for three to four months after the challenge is filed, which would put it in early summer of next year. If this is the path followed, the projected in-service date for MVP could well be delayed beyond the end of 2019, but ACP may still be able to be in service by the 4th quarter of 2020.
It is possible that either of the projects could choose to pursue project-specific approvals from the West Virginia DEP or the USACE, or both, which appears to be the court’s preferred path, but for now, neither seems to be pursuing that option. One risk of using the revised WQC is that the court may refuse to accept that method as well, and the parties would then need to obtain a project-specific permit from the USACE. In the meantime, if the 2020 election were to cause a change in the administration, the parties may end up like PennEast - seeking a required permit from an administration that is less inclined toward its project.
While there is some concern about the ultimate viability of Williams’ Northeast Supply Enhancement Project because it requires approvals from both the New Jersey and New York departments of environmental protection, the project is in its infancy, as compared to the other projects discussed above. Its original projected in-service date is not until November 1, 2019 and so far it appears to be working through the typical environmental issues for a project of its scope. The benefit it has, of course, is that it knows well the paths followed by the earlier projects, including Constitution, and how to appropriately work with the reviewing state agencies without giving them an overly long review period. It also knows, from ACP and MVP, that it is crucial to make sure that even an approval of a federally required permit is obtained through a process that can withstand the most severe form of judicial scrutiny. While that does not mean there will be no bumps along the road, there’s still time to ensure the planning is as ironclad as possible.
Insights Coming Soon
- Forecast for Wave 3 of 501G filings
- TETCO Rate Case Review