10 June 2020

New FERC Rule May Delay U.S. Pipeline Construction Activities

On June 9, 2020, the U.S. Federal Energy Regulatory Commission (FERC) issued Order No. 871, a Final Rule Limiting Authorizations to Proceed with Construction Activities Pending Rehearing (Final Rule). The Final Rule is likely to increase project costs for natural gas infrastructure by delaying their regulatory approvals. It prevents FERC from issuing notices to proceed with construction once a developer has received a certificate under sections 3 and 7 of the Natural Gas Act (NGA) until (1) the time for filing of a request for rehearing has expired with no such request or (2) FERC has acted on the merits of a timely filed request for rehearing. NGA sections 3 and 7 are the statutory provisions that empower FERC to authorize natural gas import and export facilities, such as liquefied natural gas (LNG) export terminals and natural gas pipelines, respectively.

Prior to the rule change, a certificate holder would be able to commence construction as soon as it could meet the environmental conditions set forth in FERC’s certificate order and obtain an order from the Director of the Office of Energy Projects (or the Director’s designee) issuing a notice to proceed. Often, notices to proceed are granted in stages, after the construction project meets certain developmental milestones, permitting FERC staff to confirm that the project adheres to the certificate’s conditions.

A press release that accompanied the Final Rule stated that it is part of FERC’s commitment to transparency and fairness for landowners. The current authorization process described above has created controversies among landowners and other constituencies because of the time FERC typically takes to review rehearing requests. Requests must be filed within 30 days of a certificate order’s issuance. FERC similarly has 30 days to act on those requests but regularly issues “tolling” orders to extend the time, often taking several months, and up to a year or more to issue orders on rehearing. Because appellate rights do not ripen until the rehearing order issues, a pipeline could be built and in service before FERC’s construction authorization undergoes judicial review. This prompted Judge Patricia Millett of the U.S. Court of Appeals for the District of Columbia (D.C. Circuit) to refer to FERC regulatory process as a “Kafkaesque” regime in a case argued before that court in 2019. Her concerns were compounded by the NGA section 7 certificate holder’s statutory right of eminent domain, which attaches immediately upon receipt of a certificate order. That case, Allegheny Defense Project v. FERC, considered the legality of FERC’s tolling order process and remains pending on en banc review. In response to that proceeding, FERC Chairman Neil Chatterjee also has issued statements committing to reduce the use of tolling orders and increase the speed at which rehearing orders are issued through the creation of a rehearing processing group within its Office of General Counsel focused on landowner matters.

In a partial dissent to the Final Rule, Commissioner Richard Glick argued that FERC should go further to address whether developers can condemn private property while a certificate authorization is undergoing review. In the past, the FERC majority and pipeline advocates have argued in response that the right is statutory and beyond the agency’s control.

The Final Rule may face challenges in court for failing to abide by federal rules for notice and comment rulemaking set forth in the Administrative Procedure Act (APA). FERC states that the APA’s notice and comment procedures do not apply because the rule “concerns only matters of agency procedure.” However, the rule changes substantive rights that interstate natural gas pipelines have enjoyed for decades. The rule may also raise the costs of project development by extending the timeline for final decisions and delaying construction, even though FERC has committed to issue certain rehearing orders within 30 days. Other examples of Final Rules issued in this manner were for purely administrative matters, such as changing filing instructions for a FERC form or changing the contact phone number for pipeline disputes.

The new regulations will be found in 18 C.F.R. §§ 153.4 and 157.23. They take effect 30 days after date of publication in the Federal Register, which has yet to occur.

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