The Federal Energy Regulatory Commission faced stiff questioning from federal appeals court justices over whether it should have done more to check a pipeline company's assurances about the need for a natural gas transportation project that was backed only by an affiliate.
A decision in the case could have implications for the level of scrutiny that FERC must use to assess the market need for gas infrastructure projects.
At issue is Spire Inc.'s 65-mile Spire STL Pipeline LLC project, approved by FERC in August 2018 and entered into service in November 2019. The pipeline moves 400,000 Dth/d of gas from the Rockies Express Pipeline LLC system into the St. Louis area.
The project faced a challenge from the Environmental Defense Fund, which argued that FERC should have looked beyond a contract for 88% of the pipeline's capacity with Spire STL affiliate Spire Missouri Inc. in the commission's review of the need for the project. Enable Mississippi River Transmission LLC, or MRT, and the Missouri Public Service Commission also raised objections during the FERC review that the project was not needed and would hurt competition in the St. Louis gas market.
While he was still commissioner, FERC Chairman Richard Glick had contended that neither Spire STL nor Spire Missouri had explained why capacity on an existing pipeline owned by MRT was not sufficient to meet Spire Missouri's needs. He said the commission had turned pipelines' requirement to demonstrate need for a new project into "a meaningless check-the-box exercise."
Questions from the bench
During oral argument on March 8, all three judges on a panel of the D.C. Circuit Court of Appeals pressed FERC on whether there was not a greater burden on the regulator in the Spire case to examine whether there was self-dealing between the pipeline company and its affiliate (Environmental Defense Fund v. FERC, 20-1016).
"What more do you need [as a reason to look closely at the arrangement] than constructing a pipeline for an affiliate where it's not serving new market and [is] providing no price benefit to customers?" Judge David Tatel asked. "That just leaves the obvious red flag that it's for the benefit of the shareholders, not the customer. What else do you need that would be more dramatic than this?”
Judge Harry Edwards pressed the point. "Judge Tatel is asking you very pointedly in this situation — where there are no new needs and no cost savings — is it enough for us to accept your argument that in this situation [Spire] offered what they claimed were business reasons and 'we had no reason to go behind it,'" Edwards said. "That's a strange argument."
Accepting business judgments
FERC attorney Anand Viswanathan noted that in a rehearing order the commission had found that Spire had provided adequate explanations to overcome concerns about overbuilding pipeline infrastructure in the area. According to these explanations, the Spire STL line would enhance reliability and supply security, reduce reliance on older pipelines and mature gas production basins, and eliminate dependence on propane peak-shaving infrastructure.
"Based on that record, FERC found no reason to second-guess the business judgments of the pipeline," Viswanathan said. "Based on that record, I don't think it's fair to say that the commission relied exclusively on the affiliate agreements here."
But the judges appeared skeptical of the FERC decision to accept the business judgments. If FERC commissioners are "saying nothing more than there is no reason to second-guess what has been offered, that is really not an agency doing its own independent analysis of the factors that would justify this proposal, if they have to go further than the precedent agreement," Edwards said.
Jonathan Franklin, an attorney representing Spire, argued that the existing pipeline systems could not meet demand needed to retire existing propane peaking facilities. "FERC is not in a position to tell the company it can't do that: 'you have to keep this stuff in place, when you're telling us that it has operational difficulties,'" Franklin said. The attorney also highlighted Spire's reliability concerns related to a major freeze-off or a storm.
“No market study FERC could have done would have predicted that there would have been record cold and a gas crisis in Texas in the year 2021, three or four years later," Franklin said. "That's the business judgment of the company."
The attorney also said that all of the alternatives to the Spire pipeline that FERC considered would have involved building additional facilities.
Maya Weber is a reporter for S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.