Hydrogen pipeline regulation

Hydrogen pipeline regulation

June 23, 2023 | By Christopher Psihoules in Washington, DC and Daniel Salomon in New York

The US has no clear framework for regulating interstate hydrogen pipelines.

There are three possible regimes. The Federal Energy Regulatory Commission may have authority to regulate them under the Natural Gas Act or the Interstate Commerce Act. Alternatively, the Surface Transportation Board may have authority to regulate them under the Interstate Commerce Commission Termination Act.

None of these regulatory frameworks specifically addresses the transportation of hydrogen.

While the Natural Gas Act (NGA) has been applied to the interstate transportation of hydrogen when hydrogen is blended with natural gas, it has not been applied to transportation of pure hydrogen.

The Interstate Commerce Act (ICA) has been used historically as the regulatory regime for the interstate transportation of oil or oil derivatives. FERC has extended its reach to other petrochemicals with potential energy applications and non-petrochemicals that directly compete with energy petrochemicals.

The Interstate Commerce Commission Termination Act (ICCTA) serves as a comprehensive umbrella statute over transportation of all commodities, especially if not regulated by FERC. It is the current source of transportation oversight for pure hydrogen pipelines. It does not cover transportation by pipeline of water, gas and oil.

The Surface Transportation Board engages in limited economic regulation over the rates and terms of service of interstate hydrogen pipelines, and it provides a forum to resolve disputes related to pipelines within its jurisdiction. Parties who wish to challenge whether a rate or another aspect of a pipeline's service is "just and reasonable" may petition the STB for a hearing.

Regulation of hydrogen pipelines is not expected to remain with the STB long term.

Interstate hydrogen pipeline transportation should eventually be regulated by FERC under the NGA or ICA. There is a good chance Congress will choose the NGA.

Regulating pipeline transportation of hydrogen under the NGA or ICA comes with benefits and drawbacks for pipeline project developers.

Natural Gas Act

The NGA is a federal law enacted in 1938 that governs the interstate transportation and sale of "natural gas."

It provides a regulatory framework to ensure a stable and reliable gas market. It grants FERC authority to regulate rates, terms and conditions of interstate natural gas transportation. The agency is charged with ensuring that prices are "just and reasonable." This promotes market stability, facilitates long-term investment in pipelines, and makes it more likely that gas will be available to consumers.

If hydrogen pipelines end up regulated under the NGA, pipeline developers would have to obtain a FERC certificate of public convenience and necessity to construct an interstate hydrogen pipeline. With a certificate come two important powers: federal eminent domain authority giving the pipeline developer the power to take or condemn property in exchange for just compensation, and state preemption allowing the pipeline developer to preempt conflicting regulation by state and local governments.

The process for obtaining such certificates may be lengthy. FERC commissioners are political appointees subject to political pressures. FERC is required to undertake an environmental assessment of each new pipeline project. FERC scrutinizes high-emitting pipeline projects, and its pipeline environmental review has been under attack by non-governmental organizations.

A low-carbon hydrogen pipeline may be a quicker way to secure a certificate. Under the NGA, FERC is the lead agency performing the environmental assessment. This should streamline the developer's environmental permitting process.

If a gas pipeline is converted to a pure hydrogen pipeline, the developer would also need abandonment authority from FERC to do so.

The NGA requires open access.

Open access is the principle that gas pipeline operators must provide non-discriminatory access to their pipeline systems to all shippers or customers who meet the necessary qualifications and requirements.

FERC promotes open access to gas pipelines to ensure fair competition and efficient operation of the gas market. Open access requirements for natural gas pipelines rely on a number of principles.

One is non-discrimination, or the idea that pipeline operators must offer the same terms, conditions and rates to all similarly-situated shippers without any undue preference or advantage given to any specific shipper or customer.

Open access means pipelines must file tariffs with FERC for approval. Tariffs are the rates, terms and conditions for transportation services. The tariffs must be made available to all potential shippers and customers, and the tariff rates must be just and reasonable.

The pipeline must be transparent about the capacity allocations it makes to the shippers and customers it serves.

It must post information about available capacity, rates and terms where it will be accessible to the public. This allows potential shippers and customers to make informed decisions and encourages competition.

Open access under the NGA will help to facilitate hydrogen market participation.

The NGA has no common carrier requirement and allows for pipelines and its customers to contract for capacity in bilateral agreements that may charge higher or lower rates than the pipeline's tariff rate.

Without a common carrier obligation, pipeline developers are able to lock in capacity commitments before building the hydrogen pipeline, which is important to secure financing. Capacity commitments are often secured through precedent agreements under which developers seek reimbursement for certain construction costs. Pipelines regulated under the NGA receive a set rate of return that applies to the rate base in order to cover the cost of capital.

It is unclear whether FERC could regulate hydrogen pipelines under the NGA without Congressional action. The NGA defines natural gas as "either natural gas unmixed, or any mixture of natural and artificial gas." FERC could arguably assert jurisdiction over pure hydrogen pipelines by treating hydrogen as an artificial gas.

Congress is likely to act. The Senate Energy Committee chairman, Joe Manchin (D-West Virginia), is proposing as part of an "Energy Independence and Security Act" that could be debated later this year to amend the NGA to treat hydrogen as a "natural gas."

Intrastate pipelines that move gas received from interstate gas pipelines to which they are connected are not regulated under the NGA but under the Natural Gas Policy Act (also administered by FERC). If hydrogen pipelines end up being regulated under the NGA, an interesting question is whether the NGPA will require amendment so that intrastate hydrogen pipelines can interconnect to interstate hydrogen pipelines to provide interstate service.

Interstate Commerce Act

The ICA was enacted in 1887 and puts jurisdiction over oil pipelines with FERC.

Broadly speaking, it provides a regulatory framework to ensure fair and equitable practices in the transportation of goods, including oil, through pipelines.

It does not require pipeline developers to obtain certificates as FERC does not regulate pipeline siting, construction or abandonment under the ICA. Lack of FERC siting scrutiny may have the effect of fast-tracking construction of new hydrogen pipelines. Some states, such as Texas and Louisiana, have very limited looks at pipeline siting.

Regulation under the ICA would mean that pipeline developers would not need abandonment authority from FERC to convert an oil pipeline to pure hydrogen. However, lack of certificates means that pipeline developers will not have the power of eminent domain or state preemption. In states where pipeline siting is regulated by the public service commission, this may make it more difficult to secure rights-of-way required to site hydrogen pipelines. FERC does not serve as the lead agency for environmental permitting, leaving environmental permitting to the individual states.

Pipelines regulated by FERC under the ICA must have tariffs on file and approved by FERC that include tariff rates, rate schedules and terms and conditions of service. The tariff rates must be just and reasonable. Many tariff rates are subject to annual indexation based in part on inflation. Any changes to the rates and terms and conditions of service must be approved by FERC. The pipelines are not allowed to charge more or less than the tariff rates. NGOs have not provided much opposition at FERC with respect to ICA-regulated pipelines.

The focus of regulation under the ICA is to ensure that pipelines satisfy their obligations as "common carriers." Hydrogen pipelines regulated under the ICA cannot be fully committed: they must have at least 10% capacity reserved for new shippers.

FERC generally approves contracts with committed shippers that underpin a pipeline construction or expansion. It allows committed shippers priority to use pipeline capacity, as long as enough capacity is reserved for walk-up shippers. If the nominations of walk-up shippers are greater than available walk-up shipper capacity, the available capacity is usually allocated pro rata based on the nominations of the walk-up shippers. Also, the requirement of having a tariff on file is waived for pipelines that transport only their own product or that of the pipeline's affiliate as long as no third party requests transportation service.

The ICA has been interpreted by FERC to apply to interstate transportation of petrochemicals with potential energy application, such as ethane and other natural gas liquids, and non-petrochemicals that directly compete with energy petrochemicals.

This wider scope could align more easily with hydrogen's different sources and applications. Hydrogen produced by electrolysis or other methods is arguably subject to regulation under the ICA because it competes directly with fossil energy commodities.

Pipeline Safety

The Pipeline and Hazardous Materials Safety Administration (PHMSA) has been regulating hydrogen pipelines since 1970. Its rules in this area are called the "Minimum Federal Safety Standards for the Transportation of Natural and Other Gas by Pipeline."

These regulations focus primarily on natural gas and treat hydrogen as a "flammable gas."

Pipeline operators must comply with various requirements, including materials, design, construction, metering, corrosion control, operations, maintenance, and reporting.

PHMSA has recognized the need to establish adequate codes and standards for all aspects of a hydrogen economy. Forthcoming regulations are expected to address the safety and operations requirements of hydrogen pipelines in particular. They will take into account such factors as the potential for hydrogen to cause metal brittleness, its wide range of flammable concentrations in air, and its lower ignition energy compared to gasoline or natural gas.

The Occupational Safety and Health Administration (OSHA) also has jurisdiction over regulating gaseous and liquefied hydrogen systems on consumer premises under its "Regulations Relating to Labor."

Regulatory authorities, gas suppliers and midstream service providers should still take these provisions into account to ensure consistency. Authorities should strive to avoid overlaps or discordances when issuing new regulations, suppliers should consider these rules when entering into supply agreements, and midstream service providers should align the technical specifications of their assets with the requirements of end-user facilities.

Importantly, these regulations also pose interpretation challenges when distinguishing midstream and consumer practices, especially in cases where hydrogen is processed into ammonia and requires additional downstream logistic services.


Hydrogen Transportation Agreements

Regardless of the statute under which pure hydrogen pipelines are regulated, pipeline developers should be sure to address the following subjects in transportation agreements with hydrogen producers.

Liability allocation: Hydrogen is more likely than natural gas to leak because it has lower density. The transportation contract should have indemnities to cover damages after a leak. Title and risk-of-loss provisions should be scrutinized as part of the liability allocation.

Gas quality and pressure: The product being offered to and received by the hydrogen pipeline must comport with the gas quality specifications to protect pipeline and downstream customer integrity. The hydrogen should be delivered at a sufficient pressure to be received by the pipeline and delivered to the delivery point.

Force majeure and curtailment: Hydrogen pipeline operators need protection in the event of force majeure or an upstream loss of hydrogen that requires shippers to be curtailed.

Priority of service: Pipelines prioritize service based on the class of service. Depending on whether jurisdiction falls under the NGA or ICA, negotiated rates and discounted rates may play a role in service class priorities.

Imbalances: Imbalance provisions and audit rights become even more important in hydrogen agreements than in other transportation agreement because hydrogen has a higher leak rate.

Nominations and scheduling: Scheduling coordination will be paramount for successful receipt and delivery of green hydrogen because production will rely on intermittent power sources.