FERC Reaffirms Its Lead Role in LNG

FERC Reaffirms Its Lead Role in LNG

April 01, 2004

A US government order in late March and an agreement reached among three federal agencies in February reconfirmed the supremacy of the Federal Energy Regulatory Commission over the permitting and regulation of onshore LNG facilities in the United States.

This is important because it means that developers should face a more streamlined process for getting approvals for construction of new LNG import terminals in the US.  LNG is liquefied natural gas.

The Federal Energy Regulatory Commission, or “FERC,” said in a declaratory order on March 24, 2004 that regulatory authority for the siting, construction and operation of liquefied natural gas import terminals rests exclusively with the federal government.  The order came in a dispute with the California Public Utilities Commission over who has jurisdictional authority over an LNG import terminal project under development in southern California.

A month earlier — on February 11, 2004 — FERC and two other US government agencies with regulatory jurisdiction over new LNG facilities in the US entered into an agreement that recognizes FERC plays a key role in the permitting and regulation of onshore LNG facilities in the US, and designates FERC as the “lead federal agency” for preparing the analyses and making decisions required under the National Environmental Protection Act for the approval of new LNG facilities.

FERC Supremacy

Developers of LNG import terminals must file an application with FERC for a certificate of public convenience and necessity under section 3 of the Natural Gas Act.  This certificate is a requirement before the developer can start construction and later operate his terminal.  The application requires extensive engineering design work and safety analysis, which can take six to nine months to complete before the application is ready to be submitted.  Upon submission, FERC then corresponds with the various federal and state agencies that have permitting authority, as well as with interested citizens through a public comment process, in order to receive input and prepare an environmental impact statement as required under the National Environmental Policy Act.

The whole process of completing the environmental impact statement through issuance of the certificate of public convenience and necessity can take 12 to 18 months for a relatively straightforward application to which there is no significant regulatory or public opposition.

The California Public Utilities Commission recently challenged this arrangement by asserting exclusive jurisdiction over an LNG import terminal project being developed by Sound Energy Solutions, an affiliate of Mitsubishi Corporation, at the Port of Long Beach, California for the import of LNG and resale of vaporized LNG mainly into the California market.  The CPUC argued that section 3 of the Natural Gas Act merely gives FERC jurisdiction over the decision whether to authorize LNG to be imported into the US, but it does not give FERC jurisdiction over the siting, construction and operation of the proposed terminal in Long Beach since the owners of the terminal plan to use it only in intrastate, as opposed to interstate, commerce.

FERC rejected the argument, comparing it to a similar, unsuccessful argument made by Dynegy in 2001.  Dynegy asked FERC to disclaim jurisdiction over an LNG import terminal that Dynegy planned to build in Hackberry, Louisiana on grounds that terminals making only “first sales” in the same state as the terminal is located are exempted from federal purview.

In the California case, FERC conceded that much of the case law and legislative history supporting its claim to exclusive jurisdiction involved interstate commerce activities.  However, it reminded the CPUC that while gas sales out of the terminal may well be made on a purely intrastate basis, the act of importing LNG still involves foreign commerce.  FERC said the distinction between interstate and intrastate commerce is not relevant to the issue of jurisdiction over LNG terminals involved in foreign commerce, and it referred to a 1979 US Supreme Court case and a 1974 appeals court decision involving the Distrigas LNG facility in support of this conclusion.

The California Public Utilities Commission argued it should have a role in overseeing the project because FERC has less ability to regulate market power abuses and protect the physical safety of California residents.  FERC said it was not persuaded.  It reminded the CPUC of its longstanding experience in regulating LNG and natural gas activities and the considerable resources it can bring to bear, and it questioned the need for a state regulatory body with no experience in regulating LNG projects and limited resources to engage in largely duplicative regulation.  At the same time, FERC reiterated the importance of cooperation between state and federal authorities and the critical role that state agencies can play in providing input in the assessment of certificate of public convenience and necessity applications under federal review.  Despite this stinging blow, FERC strongly encouraged the continued participation by the CPUC and other state agencies in the certificate evaluation process, and it promised that legitimate concerns raised by state regulators will be adequately addressed.

The FERC order was not yet final as the NewsWire went to press.  The CPUC has until April 24 to petition for a rehearing.  It remains to be seen whether the California commission wanted simply to fire a “shot across the bow” of FERC in order to get more attention for its concerns about the Long Beach terminal in the environmental impact review process or whether the CPUC seriously intends to try to displace FERC in the regulation of LNG facilities in California that are engaged in foreign commerce.

Assuming FERC retains exclusive jurisdiction over LNG facilities, the agency will be kept very busy over the next few years.  There are currently more than 40 planned or proposed LNG import terminal projects to serve the US market, and expansion plans are either under consideration or underway at another four existing US import terminals.  Responding recently to concerns about the likely flood of applications this year, FERC spokeswoman Tamara Young-Allen said applications will continue to be treated on a “first-come, first-served, case-by-case basis,” and FERC separately reconfirmed that it has no current plans to limit the number of facilities that are developed by turning away any applicants.

Mark Robinson, the director of energy projects at FERC, continues to encourage applicants to pursue a new environmental impact pre-filing process that involves a dialogue with regulators and the public seven to eight months in advance of the actual filing in order to identify the relevant federal and state regulatory agencies and key issues with the aim of streamlining the permitting process.  Robinson emphasizes that the environmental impact pre-filing process is not a fast-track mechanism to shorten the time period required to obtain the required permits.  It will still probably take one to two years from the date of application to receive the various required permits due to the long time periods to perform the necessary analysis and prepare and receive comments on the environmental impact statement.  Rather, the hope is the pre-filing process will ease the burden on the applicant and the regulators during this one-to-two-year process and provide regulators with some extra breathing room to consider the increased number of applications that are likely to be made.

Federal Interagency Agreement

When more than one federal agency has permitting authority for an energy project, the agencies will often designate a lead federal agency to coordinate the preparation and review of the necessary environmental impact statement.  In the past, federal agencies have allocated lead responsibilities either by way of a formal memorandum of understanding or through an ad hoc, informal understanding based on the agencies’ good working relationships and mutual respect.

There are three key federal agencies with an interest in LNG facilities: FERC, the US Coast Guard and the Research and Special Programs Administration in the US Department of Transportation.  The three agencies formalized their respective roles in oversight of onshore LNG terminals on February 11 by entering into an “Interagency Agreement for the Safety and Security Review of Waterfront Import/Export Liquefied Natural Gas Facilities.” The agreement designates FERC as the “lead federal agency” for the preparation of the analysis and decisions required under the National Environmental Protection Act for the approval of new LNG facilities.

The focus of the interagency agreement is US government oversight over land and marine safety issues tied to LNG facilities.  The roles and responsibilities of the three agencies in connection with such matters as the siting, approval, operation and inspection of LNG facilities, information sharing, participation in safety and security studies, and resolution of any resulting interagency disputes, are described in a fair amount of detail.  Among the topics discussed are LNG tanker operations and potential hazards, operating controls to mitigate hazards, project-specific operating plans, potential hazards and risks to the nearby population, marine terminal operation and risks, and land terminal operation and risks.

FERC will take the lead role.  The other two agencies will participate as “cooperating agencies” in the environmental impact review process.  Their charge is to ensure that the environmental impact statement conveys complete information to all of the interested stakeholders.  The designation of lead and coordinating agency roles will help minimize duplication of effort and save time.

The interagency agreement and the FERC order in the California case in late March should clear up any remaining confusion over what authority FERC has over the siting, construction and operation of onshore LNG terminals in the US.  The hope is it will help speed the construction of needed new terminals.