How could the Obama administration's recent proposed guidance for considering climate change as part of the government's environmental reviews impact the Federal Energy Regulatory Commission's process for reviewing natural gas pipelines and LNG export terminals? During today's OnPoint, Marc Spitzer, a partner at Steptoe & Johnson and a former commissioner at FERC, discusses how a change to FERC's process could affect natural gas infrastructure investments.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Marc Spitzer, a partner at Steptoe & Johnson and a former commissioner at the Federal Energy Regulatory Commission. Marc, nice to have you back on the show.
Marc Spitzer: Great to be back, Monica. Thank you.
Monica Trauzzi: Marc, the Obama administration recently released proposed guidance for how climate change should be considered in the government's environmental reviews. It has the potential to have direct impacts on FERC's process for natural gas pipeline reviews as well as LNG export terminal reviews.
Marc Spitzer: Correct.
Monica Trauzzi: How could what the White House has proposed change the game for FERC?
Marc Spitzer: Sure, and just to give sort of a global overview, the Council on Environmental Quality is the agency that has proposed this regulation. They're an executive agency within the White House. FERC, my former tribunal, issues certificates for natural gas pipelines and for LNG terminals and under the National Environmental Policy Act gives EIS or EA certifications and then uses those as the lead agency to issue the certificates.
So folks on the left think the FERC has been too liberal and generous in granting certificates and should deny them because of climate change issues. Folks on the right think FERC has been too difficult and the process is too burdensome so, as usual, the left and the right don't agree, but we had an election in '12 and so the regulations have come out, and they changed the rules governing the NEPA process that FERC is in charge with. The $1 million question is going to be do they, one, do these regulations change FERC's procedures, and secondly, do they change the outcomes in these certificate cases for pipelines and for LNG terminal?
Monica Trauzzi: Is the guidance rooted in the overarching Climate Action Plan established by the Obama administration?
Marc Spitzer: It's different. It's certainly motivated by a great description of climate change and the rule is very careful at going through all the climate change issues, and for example, many of the applicants in arguments at FERC have said the project is a very small project; it's a pipeline going from X to Y. It's an LNG terminal being built in Lake Charles, Louisiana.
It doesn't have a global impact on global emissions. And the draft CEQ advice says that's not a basis to conclude that there's not a climate change impact that the agency, and this case FERC, has to consider the entire natural gas supply chain and make a decision as to whether there's a significant climate impact. Just because China and Russia are spewing out an awful lot of emissions is not an excuse for a project in the United States, says the new rule.
Monica Trauzzi: Right, and so would this have a material impact then on the pacing of licensing of new infrastructure?
Marc Spitzer: I think FERC would have to consider more arguments. The first application that came through right when I was leaving FERC was the Sabine Pass, 1.8 bcf a day. We'll use that as an example. The FERC decided the greenhouse gas emissions issues relate to the location in Louisiana of the facility and the EIS said these can be mitigated; they're temporary during construction. They're not an undue burden and, therefore, the authorization to proceed with the LNG export terminal is in the public interest.
Would that case come out differently with these new CEQ rules and say you have to consider the upstream natural gas fracking that's taking place and supplying this 1.8 bcf a day? FERC didn't consider those upstream impacts. The CEQ is suggesting that they should have. Does that change the case? I think it does. Does it change how FERC analyzes the case? I think it does. Does it reverse the decision? That's the $40 million question that remains to be answered.
Monica Trauzzi: But that's not to say this is an important element to consider in the approval of projects. I mean we're talking about climate change.
Marc Spitzer: Right. And it changes the law and you can make arguments on both sides. The folks more on the political left are saying climate change is the issue of our time. It's galvanized these folks and they're saying just because other countries are emitting greater amounts and the relative emissions of this project in the U.S. are small isn't a basis to go forward with these projects.
Those on the right say, well, wait a second here. You know, if we shut down the entire U.S. gas industry, it's not going to make a dent in global emissions. All it does is make more money for Putin's Gazprom and Rosneft. This rule comes down more on the side of the left, although there is language that talks about reason and foreseeability and a rule of reason and it doesn't demand the rejection of these applications. It just expands what FERC in the past has considered in terms of the natural gas supply chain and the cumulative emissions from each project.
So Monica, really, the challenge here is you've got the world of policy and politics on one side and then the world of law and regulation on the other side. And FERC is a quasi-judicial body that considers application X to build a gas compressor in site Y based on a record in that case. It's a very granular, legalistic analysis, whereas the CEQ advice is much more global and policy-oriented in nature, and it's very difficult to assimilate the policy into the legal and regulatory regime.
Monica Trauzzi: So what are FERC's options then for responding?
Marc Spitzer: Well, obviously we'll have to see what FERC does. FERC, in considering cases in the past, given a more narrow view of the entire natural gas supply chain, this regulation suggests that the scope be broader and it may, there may be a large number of cases where it doesn't make any difference. FERC says a gas pipeline from X to Y is not going to increase global emissions based upon what is reasonable and foreseeable.
On the other hand, some of these LNG export terminals 1.8 bcf a day does generate upstream production where that case could be at a minimum require much greater explanation and potentially reverse going forward some of these decisions. Now the advice is prospective in nature so it doesn't apply to certificates that have been issued. It will be ongoing.
It's, I think, like any other agency. When I was at FERC, new statutes and regulations arose and we sort of took them as they came. In some cases the new law or regulation required quite a bit of effort on the part of FERC to comply; others not so much. This one is I think really interesting because there were comments from both sides in the regulation that were addressed, were very heated.
The one everywhere I would disagree with the comment's conclusion by CEQ is some folks said NEPA has been abused and has caused a lot of unnecessary litigation that slowed down the process. That's certainly the view of those who are applicants before FERC. Not exactly the view of the people who intervene like the Sierra Club who seek to have the projects rejected. CEQ thinks that this guidance will clarify the issue and reduce litigation. My view is what is reasonable and foreseeable in both upstream and downstream effects in natural gas is much more complicated and will tend to protract the proceeding and create more litigation.
Monica Trauzzi: All right. Very interesting. Thank you for coming on the show.
Marc Spitzer: Thank you.
Monica Trauzzi: All right. And thanks for watching. We'll see you back here tomorrow.
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