Since adopting its natural gas pipeline Policy Statement 20 years ago, the Federal Energy Regulatory Commission has approved 474 gas pipeline projects, representing 23,773 new miles of pipeline around the nation. It has rejected only two projects.

This outcome, along with the significant changes that have occurred in the natural gas industry, led me two years ago to call on FERC to update its Policy Statement, which has guided how the Commission considers pipeline projects since 1999. In April 2018, FERC decided that it would consider changes and it requested stakeholder comment. The fact that more than 1,600 comments, from a broad spectrum of industry participants, were filed with the agency suggests the intense interest this debate is generating.

Change long overdue

I conducted a thorough review of those comments, and can confirm, as outlined in a new report, that most outside the industry agree that change is long overdue.

Many public officials (including state regulators), landowners, academics, environmental organizations, think tanks, publicly-owned gas utilities, and private citizens agree that FERC must conduct more thorough reviews of proposed pipeline projects. They argue, correctly in my view, that when FERC decides whether a new pipeline is needed, the agency ignores the external costs of new pipeline projects and gives insufficient attention to the rights of landowners and the environmental impacts of new pipelines, especially their climate impact.

While commenters propose dozens of policy changes, at the core is one key refrain: It’s long past time for FERC to end its near-exclusive reliance on so-called “precedent agreements” as the basis for determining that a project is needed.

Here’s how it works at present: When FERC reviews a pipeline project, it looks to see if the developer has an agreement with someone who wishes to purchase capacity on the pipeline (called a “shipper”). FERC treats such agreements as decisive in determining if a project is needed. The theory is that, if a shipper wants to purchase capacity along a new pipeline (instead of an existing pipeline), then there must be a market demand for the new project.

As a result, since 1999 FERC has approved every proposed gas pipeline project that has had at least one precedent agreement. In the two instances where FERC rejected a project application, each lacked any precedent agreements. One of those is now back at FERC with a precedent agreement in place.

The problems with precedent agreements

There are two major problems with relying on precedent agreements to demonstrate project need.

First, such agreements reflect the private interests of two parties, and therefore a precedent agreement alone cannot universally demonstrate that a pipeline project is needed to meet the “public convenience and necessity”—the standard under the Natural Gas Act. No doubt, the existence of a precedent agreement is a relevant factor, but it is not the only relevant factor.

FERC’s near-exclusive reliance on these agreements undervalues the many other factors — such as demand forecasts, availability of capacity on other pipelines, impacts on landowners and local communities, states’ energy and environmental policies, and the findings from the agency’s own environmental reviews — that are relevant when reviewing whether a particular pipeline is needed to serve the public interest. Such a review should compare the anticipated project benefits against the anticipated economic and environmental costs of the project. 

The good thing is that consideration of such other factors is entirely within FERC’s technical abilities and the confines of the law. Doing so would return FERC’s reviews to the letter of the current Policy Statement which states that the agency will consider “all relevant factors” to determine pipeline need. In other areas of its work, FERC does not shy away from compiling and reviewing complicated records with substantial technical information.

Considering environmental externalities

In its role as an economic regulator, FERC is well situated to take into consideration the existence of environmental externalities of pipeline projects, just as FERC now looks to assure that a new project’s costs are not being subsidized by existing customers of the pipeline. 

Second, increasingly, precedent agreements are between entities under the same corporate umbrella and where one subsidiary company (e.g., the shipper that may own a power plant or provide local gas distribution service) agrees to buy capacity on a pipeline proposed by its sister company. Although such agreements among affiliates may be legitimate, FERC does not look behind the curtain to ensure that they are. 

FERC’s overreliance on precedent agreements is especially problematic in cases where pipeline developers use eminent domain to take land for their projects. The U.S. Constitution says that such takings must be for a public purpose, and the existence of precedent agreements alone does not demonstrate that there is a public purpose for the project. FERC’s approach enables private developers to take private (and, in some cases, even publicly-owned) land, without first ensuring that the project is actually for a public use.

Three more adjustments

Beyond the fundamental recommendation that FERC administer a more fulsome review of project need, there are three other adjustments that many commentators are looking for, so that FERC’s review comports with the essential goal of its pipeline certification authority: ensuring “the orderly development of plentiful supplies of natural gas at reasonable prices.”

• FERC should expand its environmental reviews to include an examination of the direct, indirect and cumulative impacts of proposed facilities on greenhouse gas emissions;  
• FERC should incorporate the implications of states’ policies, regional infrastructure considerations, and energy markets, as well as environmental, cultural and natural-resource concerns, into the agency’s public convenience and necessity reviews; and
• FERC should give great weight to states’ emissions policies and laws that may render gas pipelines in that state obsolete and lead to stranded costs, so as to ensure that FERC’s approvals avoid the disorderly development of gas infrastructure.

Industry commenters have asked FERC to maintain its current approach, because, they say, it is working. But maintaining the status quo does not engender confidence that FERC is only approving pipeline projects that are truly needed, consistent with the “public convenience and necessity.” This requires FERC to adopt a different test.

For the sake of its credibility — and the good of our nation — FERC should conduct much-more thorough reviews of new pipeline proposals, and should make a concerted effort to give citizens a fair chance to make their voices heard.