A federal appeals court in the nation’s capital ruled June 22 that FERC must verify that a natural gas pipeline is necessary before granting a developer a necessary permit under the Natural Gas Act. The U.S. Court of Appeals for the District of Columbia Circuit decision involved a proposed 65-mile, $285 million pipeline near St. Louis, Mo.
FERC authorized the Spire STL pipeline in 2018 and it began to carry natural gas in November 2019. One affiliate of the developer, Spire Missouri, Inc., agreed to a contract to use that natural gas. The deal committed Spire Missouri, Inc. to buy 87.5% of the fuel carried by the pipeline.
Environmental Defense Fund, a nonprofit advocacy organization, objected to the developer’s application for a certificate of public convenience and necessity on grounds that the agreement between Spire STL and its affiliate “should have only limited probative value in FERC’s assessment of Spire STL’s application because the two companies were corporate affiliates,” wrote Judge Harry Edwards for the D.C. Circuit panel.
The Natural Gas Act, a 1938 statute that is the bedrock of U.S. regulation of the natural gas industry, mandates that FERC issue a pipeline license only if the infrastructure “is or will be required by the present or future public convenience and necessity.”
When FERC receives an application for the required NGA permit, it must “first consider[] whether there is a market need for the proposed project,” Edwards explained. “If there is a need for the pipeline, FERC then determines whether there will be adverse impacts on existing customers of the pipeline proposing the project, existing pipelines in the market and their captive customers, or landowners and communities affected by the route of the new pipeline.”
The D.C. Circuit panel, which also included Judges Patricia Millett and David Tatel, pointed out that natural gas use in the St. Louis metropolitan area has not risen during recent years and is not expected to increase. As recently as 2016 Spire Missouri refused to commit to accepting natural gas deliveries from other proposed pipelines in the area.
According to the panel, another pipeline company claimed in a separate effort to block the Spire STL pipeline that “the affiliate relationship between Spire Missouri and Spire STL had thwarted fair competition” and that “economic risks of the pipeline would be shifted onto Spire Missouri’s “captive ratepayers for natural gas and the ratepayers of pipelines that would experience decontracting due to the new pipeline.” EDF echoed this argument.
Agreements between one part of a company and another, known as affiliate contracts, might cause utility customers to bear “unnecessary costs” and “lock-in of greenhouse gas pollution over the 50-year life of new pipelines,” according to an EDF statement.
Edwards acknowledged that agreements between a pipeline builder and an entity who will take the natural gas it delivers “are always important evidence of demand for a project.” Moreover, he said, “in some cases, such agreements may demonstrate both market need and benefits that outweigh adverse effects of a new pipeline.”
In the case of the Spire STL pipeline, that demonstration was not made. Instead, FERC presumed market need based on the Spire STL-Spire Missouri agreement. The agency, according to Edwards, “was presented with strong arguments as to why the precedent agreement between Spire STL and Spire Missouri was insufficiently probative of market need and benefits of the proposed pipeline…But rather than engaging with these arguments, the Commission seemed to count the single precedent agreement between corporate affiliates as conclusive proof of need.”
The D.C. Circuit panel also appeared to be concerned about whether the close ties between the developer and the natural gas user raised the risk that FERC would not receive accurate economic data. “[E]vidence of ‘market need’ is too easy to manipulate when there is a corporate affiliation between the proponent of a new pipeline and a single shipper who have entered into a precedent agreement,” Edwards wrote.
The veteran jurist, appointed as a federal appellate judge in 1980, explained that FERC provided no clear evidence to support its conclusion that the pipeline would provide “enhanced access to diverse supply sources and the fostering of competitive alternatives” and “outweigh the potential adverse effects on existing shippers, other pipelines and their captive customers, and landowners or surrounding communities.”
The panel vacated the NGA permit granted Spire STL. “Given the identified deficiencies in the Commission’s orders, it is far from certain that FERC chose correctly in issuing a Certificate to Spire STL,” Edwards wrote. “We understand that the pipeline is operational, and thus there may be some disruption as a result of the interim change, i.e., de-issuance of the Certificate, caused by vacatur.”
The case is Environmental Defense Fund v. Federal Energy Regulatory Commission, No. 20-1016. FERC’s new court-imposed expectation that it more carefully examine the justification for the St. Louis-area pipeline follows a February announcement by the agency that it would reconsider a 1999 policy that governs its decision-making on applications to build natural gas projects.