Originally published for customers February 25, 2022.
What’s the issue?
Last week FERC issued an “interim” policy regarding how it will address greenhouse gas emissions with respect to pipeline projects.
Why does it matter?
While the policy is titled as being an “interim” policy, it applies to all pending and future applications. Most of its provisions claim to be only “suggestions” from the pipeline industry’s regulator in an effort to avoid judicial review. However, it does set one hard and fast standard in that FERC staff is now obligated to prepare a full Environmental Impact Statement for every project that proposes to increase the capacity of a pipeline by more than 5,200 dth/day because the Democratic majority at FERC found that the use of that much gas by end-users “may result in incremental GHG emissions that may have a significant effect upon the human environment.”
What’s our view?
While admitting that no federal agency has determined what level of GHG emissions may, in fact, have a significant effect on the human environment, the Democratic majority relied upon an EPA decision from 2011 that used 100,000 tons per year of GHGs as a reporting level for stationary sources. However, FERC ignored the reasoning in that decision, referred to as the tailoring rule, which recognized there is a declining return from setting the limit too low, and so the EPA chose a limit that would capture about 67% of all the emissions expected to be emitted by the covered facilities, without imposing too high of a regulatory burden on the regulated community and on the agency itself. Had FERC actually followed the logic of the EPA’s rule, it would have set the corresponding limit 100 times higher than it did, or at about 500,000 dth/day. We expect that the industry will either convince FERC to substantially modify this arbitrarily low standard on rehearing or will eventually convince a court to void it as being an arbitrary and capricious use of FERC’s authority.
Last week FERC issued an “interim” policy regarding how it will address greenhouse gas (GHG) emissions with respect to pipeline projects. While the policy is titled as being an “interim” policy, it applies to all pending and future applications. Most of its provisions claim to be only “suggestions” from the pipeline industry’s regulator in an effort, apparently, to avoid judicial review. However, it does set one hard and fast standard in that staff is now obligated to prepare a full Environmental Impact Statement (EIS) for every project that proposes to increase the capacity of a pipeline by more than 5,200 dth/day because the Democratic majority at FERC found that the use of that much gas by end-users “may result in incremental GHG emissions that may have a significant effect upon the human environment.”
While admitting that no federal agency has determined what level of GHG emissions may, in fact, have a significant effect on the human environment, the Democratic majority relied upon an EPA decision from 2011 that used 100,000 tons per year of GHG as a threshold for stationary sources. However, FERC ignored the reasoning in that decision, referred to as the tailoring rule. In adopting the standard, the EPA explicitly recognized that there is a declining return from setting the limit too low. Therefore, the EPA chose a limit that would capture about 67% of all the emissions expected to be emitted by the covered facilities, without imposing too high of a regulatory burden on the regulated community and on the agency itself. Had FERC actually followed the logic of the EPA’s rule, it would have set the corresponding limit 100 times higher than it did, or at about 500,000 dth/day. We expect that the industry will either convince FERC to substantially modify this arbitrarily low standard on rehearing, or will eventually convince a court to void it as being an arbitrary and capricious use of FERC’s authority.
We mentioned FERC’s new interim GHG policy in FERC Majority Blocks the Path Forward for Pipeline Projects, but at the time that was issued, FERC had not released the new policy that it had announced the day before. Since then, we have had the opportunity to read the new policy and the dissents written by the two Republican commissioners, Danley and Christie.
The policy statement describes how FERC intends to consider climate impacts, both those caused by a project’s contribution to climate change and the impacts of climate change on the project. While it discusses how FERC intends to integrate climate considerations into its public interest determinations under the Natural Gas Act, those discussions consist primarily of FERC requesting applicants to voluntarily mitigate operational and downstream GHGs. The only true policy pronouncement is that, for purposes of determining whether to prepare an EIS or an Environmental Assessment (EA), Commission staff is directed to use a 100% utilization or “full burn” rate for the proposed project’s emissions and to prepare an EIS if the project would result in 100,000 metric tons per year of CO2e, which the policy notes is the equivalent of transporting more than 5,200 dth/day.
The majority admits that this full burn is not a reasonable number when it rejects it for use in its own analysis under the NGA. But it notes that an EIS is required to be prepared for every “major [f]ederal action significantly affecting the quality of the human environment.” The policy does not discuss at all whether a project that provides 5,200 dth/day is a major federal action, but concludes that the admittedly inflated projection of emissions is sufficient to determine that such a full burn “may have a significant effect upon the human environment.”
The policy also notes that neither the Council on Environmental Quality nor the Environmental Protection Agency, the two regulatory authorities that purportedly are responsible for regulating GHG emissions, have ever established a quantity or threshold of GHGs for determining whether a proposed project will have a significant impact on climate, or human health — but that didn’t slow the majority down.
Without deciding whether 100,000 metric tons of CO2e is significant, the policy directs FERC staff to use that threshold for determining whether an EIS is required for a project. The policy requires staff to assume the entire new capacity of the pipeline will be used each and every day and burned downstream, the “100% utilization or ‘full burn’ rate for natural gas supplies delivered by the proposed project.” According to the policy, that means that if a project will allow movement of at least an additional 5,200 dth/day, the staff must complete an EIS rather than an EA. The majority asserts that establishing a threshold “provides Commission staff, industry, and other stakeholders clarity.” While that may be true, the 100,000 number has an interesting backstory and one that would indicate it is probably 100 times lower than it should be.
Because no agency has ever set a limit for GHGs, FERC looked back to a rule issued by the EPA in 2011. That was the regulation that “tailored” the limits applicable for determining which stationary sources and modification projects become subject to permitting requirements for GHG emissions under the Prevention of Significant Deterioration (PSD) and Title V programs of the Clean Air Act. The problem the EPA faced was that the applicable limits in those programs of 100 and 250 tons per year, respectively, while appropriate for all other pollutants regulated under that statute, were absurdly low for GHG emissions which always measure in the tens of thousands of tons and not the tens or hundreds.
The EPA decided on the 100,000 tons that FERC picked for its new policy, but FERC completely ignored the rationale behind that number. As the EPA stated in its tailoring rule, the 100,000 tons was appropriate for the sources it was regulating because it properly balanced the regulatory burden with the benefit of providing substantial coverage of the emissions it was trying to regulate. In particular, the EPA had originally proposed a limit of 25,000 tons, but was swayed by commenters who noted that higher thresholds would significantly reduce the regulatory burden of the rule while causing only a slight reduction in the percentage of GHGs that would be captured. The EPA found that by raising the level from 25,000 tons to 100,000 tons, it reduced the number of regulated projects from 13,661 to 4,850 while reducing the coverage of U.S. stationary source GHG emissions by only about 4 percent. The EPA moved away from the proposed 25,000 tons threshold to the 100,000 tons because at 25,000 “too many sources—many more than we thought at proposal—would be subject to high permitting costs. In addition, permitting at that level and at that time would not be administratively feasible. The resulting increase in the number of PSD and title V permitting actions and workload would create insurmountable resource demands for permitting agencies in the near term, which would jeopardize the functioning of these permitting programs.”
To determine how best to tailor the threshold, the EPA looked at three different levels and compared them to the current program.
As seen above, the total number of projects that would be subject to the regulation jumped as the threshold decreased. But at the chosen 100,000 ton threshold, the coverage of all emissions was still 67%, not much less than that at the 25,000 threshold, but caused an increase of only 3.5% in the number of projects that would be covered by the new regulations. Had the EPA chosen a lower threshold, the total emissions covered would not have increased substantially, but the projects subjected to the new regulation would have more than doubled. Even at the strictest level considered and rejected by the EPA, the percentage of total emissions that would have been covered was only 75%.
FERC notes this history of the tailoring rule for its adoption of the 100,000 tons limit, including how the EPA balanced the additional impact of the threshold and compared it to the total emissions to be subjected to it and then blithely ignores it by noting that:
“Based on an internal review of natural gas projects from 2008 to 2021, a 100,000 metric tons per year threshold will cover the vast majority of potential GHG emissions from natural gas projects authorized by the Commission. For context, projects that likely have 100,000 metric tons per year or more of GHG emissions include projects transporting an average of 5,200 dekatherms per day and projects involving the operation of one or more compressor stations or LNG facilities.”
We undertook a similar review of the Natural Gas Act Section 7(c) projects in our database over that same time frame and to say it covers the “vast majority of potential GHG emissions” may go down as the greatest understatement of all times.
As seen above, the 5,200 dth/day capacity threshold covers 99.9% of all emissions for projects subject to FERC’s review in that time period. For comparison, had FERC attempted to match the EPA’s coverage of about 70% of all emissions, it would have set a threshold 100 times higher than the one it picked or, in other words, it would have subjected projects transporting more than 500,000 dth/day to an EIS. This would have still increased the number of projects subjected to an EIA over that time period by about 25%, far higher than the EPA’s 3.5% increase, but perhaps a reasonable number. Picking a threshold that regulates 99.9% of all emissions by subjecting an additional 236 projects, by almost doubling the projects subject to the threshold, seems far from reasonable.
By looking back at the historical record, it becomes clear that a 500,000 dth/day threshold would have been far more consistent with past practices, while being somewhat more restrictive.
As seen above, a default position that all projects with a capacity greater than 500,000 dth/day would not be severely out of line with history, but 5,200 dth/day certainly is. Perhaps this is an indication that the threshold was chosen not in an effort to balance the benefits and burdens but to actually over-burden both the industry and FERC staff to discourage new filings by slowing the process for certificate review to a crawl.
The two Republican dissents noted that various aspects of the GHG policy are intended to make the policy non-reviewable by the courts. At the outset, the policy provides that it “does not establish binding rules and is intended to explain how the Commission will consider these issues when they arise.” Secondly, the majority does not mandate any type of offset or mitigation measures to reduce the GHG emissions from construction and operation of the facilities or end-use of the gas. However, it asserts that on a case-by-case basis, it may consider any mitigation measures proposed by the project sponsor and may require additional mitigation as a condition of the certificate and ultimately has the authority to deny a certificate if the downstream GHG emissions are too great.
These may well insulate the policy itself from direct appeal to the courts, but we do expect that the industry will seek a rehearing on a number of issues, including perhaps the use of the 5,200 dth/day threshold for requiring an EIS. The most likely way this policy will face scrutiny by the courts, though, is through its application to a specific project.
There are a handful of cases that have been substantially delayed by this policy, when FERC made staff go back and prepare a supplemental EIS for those projects after staff had already completed an EA. The sponsors of one or more of those projects may voluntarily do nothing and force FERC to issue a decision now that the policy has been issued. Perhaps the best candidate for such a challenge would be Iroquois Pipeline’s ExC project.
ExC is a compression-only project that is designed to provide 125,000 dth/day of new gas service to the New York City area. It is sponsored by the two major utilities in that area, Consolidated Edison and National Grid, who each hold 50% of the capacity. The State of New York required Iroquois to prepare a complete life-cycle analysis with respect to the expected GHG emissions from the project, which gives FERC a complete record on which to require mitigation. While the project is expected to cost less than $300 million, the EPA has filed comments indicating that the “total climate damages associated with the project [are] $3.78 billion.”
In a filing made at the end of January, in which it requested that FERC promptly act on the application that had been pending for over two years, Iroquois noted that the project:
There could hardly be a better project on which to base an appeal of any certificate that is issued which requires mitigation beyond that contained in the pending application, nor is there a likely application that is better poised for an immediate decision.
Chairman Glick apparently received a call from Senator Joe Manchin, who characterized the new policy as “reckless.” The chairman urged Senator Manchin to withhold judgment until he sees how the policy is implemented. However, Senator Manchin has already scheduled committee oversight hearings for March 3, 2022. It will be interesting to see if Chairman Glick issues any decisions before those hearings to prove the policy is not a roadblock. Approving ExC without condition would be a positive step, but we think Chairman Glick will find that untenable. We will be following this issue closely to see which of the pending projects is approved and under what conditions.
If you would like the data underlying our analysis of the 100,000-ton threshold, please contact us.