Are Intrastate Pipelines the Future?

Originally published for customers April 1, 2022

What’s the issue?

The process for certificating even minor projects at FERC has slowed to a crawl and there is even concern that activities that in the past could have been conducted under a blanket certificate may become subject to an extended environmental review.

Why does it matter?

Developers of pipelines will seek the path that allows them to place a project into service without undue risk. In the past, for an interstate pipeline, FERC has often been viewed as just such a path, but that may be coming to an end. This will lead developers to look for other means that do not expose them to unacceptable risks.

What’s our view?

The regulation of intrastate natural gas transmission lines varies widely from state to state, with many states having almost no such pipelines and others, like Texas and California, having extensive networks. We think developers, even those with interstate pipelines, may look to form subsidiaries that can build laterals or supply pipelines within a single state to take advantage of a more favorable regulatory climate as FERC becomes less welcoming to such projects.


 

The process for certificating even minor projects at FERC has slowed to a crawl and there is even concern that activities that in the past could have been conducted under a blanket certificate may now become subject to an extended environmental review. Developers of pipelines will seek the path that allows them to place a project into service without undue risk. In the past, for an interstate pipeline, FERC has often been viewed as just such a path, but that may be coming to an end. This will lead developers to look for other means that do not expose them to unacceptable risks.

The regulation of intrastate natural gas transmission lines varies widely from state to state, with many states having almost no such pipelines and others, like Texas and California, having extensive networks. We think developers, even those with interstate pipelines, may look to form subsidiaries that can build laterals or supply pipelines within a single state to take advantage of a more favorable regulatory climate as FERC has become less welcoming to such projects.

 

FERC Delay Risk Remains a Problem

We have written extensively about the delays that project developers are experiencing at FERC. Most recently, in FERC Reverses Course, But Some Celebrate Prematurely, we showed that FERC’s decision to subject all projects to an extended environmental review process has led to the environmental review time period extending well beyond historic norms for even the period during which it typically took FERC to complete its environmental review and also to issue a certificate. Perhaps the frustration of all project developers is exemplified by a letter filed earlier this week by TC Energy with respect to its North Baja Xpress Project. Based on historic norms, our data shows that at the time that project was filed at FERC in December 2019, a project of that magnitude could have expected to complete its environmental review and receive its certificate in slightly less than one year.

Sadly, that is no longer the case. As outlined in its letter to FERC submitted on Wednesday of this week, TC Energy noted:

Over 27 months have passed since North Baja filed its Application;

Over 18 months have passed since FERC Staff completed a positive Environmental Assessment;

Over 14 months have passed since the date by which North Baja initially requested Commission approval, December 31, 2020; and

Over 5 months have passed since FERC Staff completed a positive Final Environmental Impact Statement.

In addition, other projects, filed after North Baja and with very similar purposes of providing much needed gas to export terminals necessary to lessen Europe’s dependence on Russian gas, were issued their certificates at March’s open meeting.

The risk of such extended delays, however, does not just apply to projects seeking a certificate under section 7(c) of the Natural Gas Act, but also to projects that pipelines can build under FERC’s blanket certificate policy. In FERC Chairman’s Actions Confirm that All Pipeline Expansions Require an EIS, we discussed a project filed by Adelphia Pipeline under its blanket certificate. As we noted there, the Marcus Hook project was for a simple 3,000 horsepower electric driven compressor that would have provided an additional 16,500 Dth/day of capacity at an estimated cost of $4.6 million, well below the $35.6 million prior notice limit. But when environmental groups objected, FERC determined it had to prepare an EIS. The preparation of that document took about ten months to complete from the date of the original filing. This inordinate delay led the project sponsor to simply withdraw its request for approval. Similar risks are undoubtedly now being factored into the planning processes across the industry.

 

What’s the Alternative?

The Natural Gas Act grants FERC authority over the movement of natural gas only by companies that own pipelines that transport gas in interstate commerce. Thus, FERC has limited or no jurisdiction over a pipeline, and has no siting authority over a pipeline whose sole purpose is to receive gas within a state and deliver all of that gas within the same state, provided that pipeline is not owned by an entity already subject to FERC regulation. These single state pipelines are referred to as “intrastate” transmission lines. While they are not regulated by FERC, they are regulated for safety purposes by the Pipeline and Hazardous Materials Safety Administration (PHMSA), and PHMSA’s annual reports for 2020, the most recent available, show that the extent of these intrastate pipelines varies widely.

 

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As seen above, twenty-three states have at least one thousand miles of intrastate transmission lines, with Texas and California being the leaders with over 30,000 and 10,000 miles, respectively. Not surprisingly, near the top of that list are gas-producing states like Louisiana and Oklahoma. The regulation of the siting for these intrastate pipelines would be dictated by state law and will vary from state to state, so determining whether the jurisdictional issues in a state is more favorable than being subjected to extensive delays at FERC would need to be determined by reviewing the process followed in each state.

 

Activity Varies By State

By looking further into the PHMSA data, it is possible to determine how many companies have constructed new transmission pipelines since 2010.

 

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As seen above, once again Texas is the leading state for the number of new transmission pipelines constructed since 2010 with over sixty. But Pennsylvania, Oklahoma and Ohio have all added more than ten new pipelines since 2010.

With the growing risk of delay at FERC, we anticipate that project developers will no longer assume that the default decision is to be regulated by FERC even if the developer currently owns an interstate pipeline in the state. By forming a subsidiary that is not already regulated by FERC, a pipeline developer can construct a pipeline within a single state and avoid regulation by FERC. Whether that is the best option will depend on the timelines for review by each state under consideration. Arbo has the requisite experience and can work with any developer who would like us to explore how long the siting reviews have taken in a particular state to help assess which regulatory authority will present the least risk to a project’s likely success.

 


 

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