Is MVP Really Going to be the Last Pipe Built that Serves the Marcellus/Utica?

As Mountain Valley Pipeline has struggled to reach completion and as New York blocks all paths to New England, many are saying that if MVP ever gets built, it may be the last pipeline out of the Marcellus/Utica. If that were to happen, the current pipeline capacity for the region would act as a permanent limit on the annual production from the largest natural gas basin in the country.

Transcontinental Pipeline’s Regional Energy Access (REA) project may, however, offer a path for others to follow. Essentially by limiting the pipeline to be constructed to states that welcome such projects and otherwise using compression in the states that do not, it may have found a way out of the region. However, there remains one tremendous risk for future uses of this path and that is if FERC abandons the 1999 Certificate Policy Statement and its reliance on market signals as the best evidence of need.

Regional Energy Access Expansion Project

REA would provide an additional 820,000 dth/day of capacity out of the Marcellus/Utica region with deliveries along the East Coast to its list of anchor shippers that are primarily local distribution companies. That additional capacity is created through a combination of about 36 miles of new pipeline and installing one new electric-driven compressor station and increasing the horsepower at five existing stations. Critically, all of the pipeline additions are being made in Pennsylvania, a state that to date has not yet joined its neighbors in using the water quality certificate process as a way to block pipelines. For this project, Pennsylvania took the full year available under the Clean Water Act to make its decision, but ultimately approved the project even before FERC has issued its approval.

A New Path Out of the Region

While REA has not yet received FERC approval, it has a number of factors working in its favor. First, FERC staff has completed a comprehensive environmental impact statement, even though prior to Chairman Glick’s tenure an environmental assessment would likely have been enough. The staff’s conclusion is that the project’s environmental “effects would be reduced to less-than-significant levels, except for climate change impacts that are not characterized in this EIS as significant or insignificant.” Second, FERC has declared that it is reviewing all pending applications under its existing 1999 Certificate Policy Statement and, as we discuss below in more detail, that is significant because recent objections about the need for the project should be summarily rejected under that policy.

Other Pipelines Could Potentially Follow This Playbook if REA is Successful

Looking at a map of the pipelines that serve the Marcellus/Utica area and reach out to the south and east, we see a number of other pipelines in addition to Transco that may be able to apply this strategy as well.

As seen above, two of the pipelines represented, Eastern Gas Transmission and Columbia Gas, have major facilities in Pennsylvania and West Virginia, two states that to date have been open to construction of pipelines. Also, the systems of both pipelines can connect to longer haul pipelines outside of New Jersey, which has been hostile to pipeline development, and even outside of Maryland, which may soon join its northerly neighbors in resisting further pipeline construction. A third pipeline, Texas Eastern, has both a presence in the Marcellus/Utica and can reach all the way to the Gulf Coast, where demand is clearly growing due to the LNG exports, which we discussed in Interstate Pipeline Expansions to Feed Gulf Coast LNG Terminals. The other two pipelines, Transco and Columbia Gulf, offer that key interconnect in states other than New York, New Jersey and Maryland and can reach down to the Gulf Coast.

But a Key Risk Remains

While we are optimistic that REA can be completed under the current policies at FERC, a key risk for future projects is a change that FERC may make to its 1999 Certificate Policy Statement. As we discussed in FERC Reverses Course, But Some Celebrate Prematurely, in February of this year, FERC revised that policy statement, but then quickly withdrew it. While Chairman Glick regularly asserts that the revised policy statement was just a refinement of the 1999 policy, it was a wholesale rejection of a key component of that policy. Specifically, in the 1999 policy, FERC generally removed itself from the role of dictating which projects were worthy of proceeding and in most cases replaced that with the wisdom of the markets by relying almost exclusively on the existence of binding precedent agreements for a substantial portion of the new capacity. While FERC did not foreclose considering other evidence, the policy statement made it pretty clear that if a project was supported by binding precedent agreements, particularly by unaffiliated shippers, that FERC would accept that as conclusive evidence that the project was needed.

The policy adopted by FERC in February completely abandoned this concept and restored FERC to the role of omniscient predictor of the future by installing it as the ultimate judge of need, based on its own view of reports by “experts” about the future demand for gas in a region. The risk of this drastic change in FERC’s perspective is already playing out in the REA case and one on the opposite coast, GTN Xpress Project.

In REA, on July 11, the New Jersey Board of Public Utilities (BPU) and the New Jersey Division of Rate Counsel sought authority to intervene out of time in the proceeding and to file a report that the BPU had commissioned that determined that the state of New Jersey needed no additional pipeline capacity to serve its markets through 2030. The company that owns two of New Jersey’s gas utilities, SJI Utilities, filed a response on behalf of its subsidiaries, Elizabethtown Gas and South Jersey Gas. That filing noted a number of problems with the study submitted by the state of New Jersey. But that filing also noted a key fact, that it is the utilities themselves under New Jersey law, and not the BPU, that are charged with being the “providers of last resort” and must “ensure the adequacy of gas supply and associated pipeline capacity to serve the full needs of their customers.” As stated in the filing, the two subsidiaries have “entered into a binding precedent agreement with Transco to meet approximately 25 percent and 34 percent, respectively, of their projected increases in demand over the next 10 years.” Although the letter does not go so far as to say that should end the discussion on need, it does note that the utilities’ assessments are “not based on speculation—they are based on a market-driven need.”

FERC typically does not rule on such motions until it issues its order in the case, which it has yet to do in REA. But under the 1999 policy, which is the one applicable to REA, the fact that the project has binding precedent agreements should be the primary factor relevant to FERC’s consideration of need and therefore the intervention and proposed report should be rejected. But clearly, the state of New Jersey thinks the current FERC commissioners are receptive to such “speculation” and is willing to try and block the project with such a filing.

A similar process is playing out in the GTN Xpress project. There, the states of California, Oregon and Washington earlier this week filed comments on the Draft Environmental Impact Statement that asserts its concerns are environmental, but is also an attack on the need for the project. Once again the states in that project want to replace the voice of the markets with “expert” views. The states chastise FERC staff for placing too much emphasis on the applicant’s need to provide 150,000 dth/day of additional pipeline capacity to the markets in the Northwest. They assert that a “predictable effect of failing to increase methane gas supply is that Pacific Northwest energy users will turn to other energy sources.”

The support for this assertion is a report prepared for the Washington Attorney General by “a clean-energy consulting firm” that asserts, without any statutory support, that FERC’s consideration of “need” must be based on more than the contractual arrangements for incremental capacity between gas shippers, marketers, and suppliers. The “expert’s” primary support for this position is that the shippers’ willingness to sign long-term contracts must not be considered because their economic interest creates a clear conflict of interest. Such a position is a radical departure from the 1999 policy statement’s primary reliance on the wisdom of the market. In fact, it is the very economic interest that the expert finds disqualifying that led FERC to conclude in 1999 that such contracts are the best evidence of need.

The report then provides an analysis and references to statewide studies in California and Washington concluding regional gas consumption is “likely” to decline in the coming decades. By looking at only the demand side of the equation, the expert report confuses the “need” under the Natural Gas Act with the need of the gas for end-use. Because the report concludes that there is no growth in “demand” there is, consequently, no “need” for the project. But such an analysis completely discounts the “need” of one of the key shippers on the project, Tourmaline Oil Marketing, which the comments describe as Canada’s “largest natural gas producer.” Under the Natural Gas Act, FERC is charged with developing an orderly market for natural gas, which by necessity would include considering the interests of both buyers and sellers. As FERC regulations require pipelines to provide access to all shippers, any attempt to limit the concept of need to just the demand-side of the equation would be a violation of FERC’s role under the Natural Gas Act.

The risk that FERC will abandon its reliance on the markets and binding precedent agreements as the best indicator of need is a key risk for the future of projects designed to serve the Marcellus/Utica basin — and for that matter every basin in the U.S. If FERC chooses to supplant its own wisdom, informed by a battle of so-called experts about the “likely” future demand for natural gas, the risk to projects grows. In such a regulatory environment, state opposition will likely lead to FERC denying the certificate for a project simply because three commissioners determine that experts do not think the project is needed, even if the markets disagree.