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Puerto Rico LNG importer tells FERC it did not need agency approval for terminal

The developer that built a natural gas import terminal in Puerto Rico without first applying for Natural Gas Act authorization from the Federal Energy Regulatory Commission said the agency's staff had repeatedly said the project would not need it.

The stakes are high for both the developer of the import facility, New Fortress Energy LLC, and an important customer, the island's Puerto Rico Electric Power Authority, or PREPA. The LNG receiving terminal is already in operation in the Port of San Juan, where it feeds a combined-cycle power plant belonging to the government-owned power company.

If FERC finds that the developer violated the Natural Gas Act, the commission could shut down the facility, temporarily or for good. PREPA and New Fortress said such a finding would be a severe setback for Puerto Rico's energy consumers and the island's power grid.

The case that New Fortress laid out in a July 20 filing came a month after the regulator issued a rare show-cause order demanding that the company explain why it did not seek agency approval before construction.

"FERC staff repeatedly expressed the view — not only to New Fortress but to the Puerto Rico Electric Power Authority and the U.S. Coast Guard — that the facility did not need commission approval under Section 3," New Fortress wrote, referring to a part of the Natural Gas Act that gives FERC jurisdiction over LNG terminals. "FERC staff's view was correct then and is correct now."

PREPA signed a contract in March 2019 with New Fortress subsidiary NFEnergía LLC for the conversion of two power generation units from running on diesel to natural gas supplied by the developer in an estimated $1.5 billion deal. New Fortress said in regulatory filings that it expects to supply the units, which have a combined capacity of about 440 MW, with an amount of natural gas equivalent to about 860,000 gallons of LNG per day, or about 70,000 MMBtu/d.

The project has faced some local opposition. It was the subject of a sharply critical report released in June by the Institute for Energy Economics and Financial Analysis, a sustainable finance think tank, and CAMBIO, an environmental group based in Puerto Rico. The report said that PREPA granted New Fortress "an unfair advantage" in the approval process for the island's first major generation project since Hurricane Maria devastated its power grid in September 2017. The report called for the island's bankrupt monopoly utility to cancel its contract with New Fortress and argued that the utility will need to shut down the LNG import facility to comply with Puerto Rico's 100% renewable energy goals.

New Fortress did not respond to a request for comment.

But PREPA, which sought and obtained bankruptcy court approval for the natural gas project, said the facility is critical for maintaining reliable service, cutting costs, and improving air quality.

On July 17, PREPA CEO José Ortiz wrote a letter to FERC urging regulators to find that New Fortress had a "legitimate basis" for concluding that the LNG facility did not require agency authorization. If FERC does decide to assert its jurisdiction over the facility, the commission should not disrupt operations "given the very substantial emissions reductions and cost savings the facility is enabling PREPA to achieve," Ortiz said.

"We are now entering hurricane season, and PREPA must be able to rely on San Juan Units 5 and 6 to maintain service to the San Juan region and beyond if PREPA's transmission system again were to sustain hurricane-related damage," Ortiz wrote.

New Fortress said it first met with FERC staff in October 2017 about its proposed project and discussed plans for a truck loading facility that would deliver LNG to industrial customers, with the possibility that the facility might also pipe gas to the power plant next door. New Fortress and PREPA described separately following up with FERC as plans for the power project developed, including a meeting between Ortiz and FERC staff in September 2018, and they said the U.S. Coast Guard also met with the agency.

FERC's permitting process entails sometimes lengthy environmental reviews, which opponents of the import terminal have said should have been done in this case.

A FERC spokesperson said the commission staff had heard from concerned citizens while the project was in development. "While commission staff had been aware of conceptional information regarding the project for some time, the commission was informed that construction was proceeding only after the fact," Tamara Young-Allen said in a July 21 email.

Young-Allen said FERC could not provide more comment nor speculate about what it might do in the ongoing proceeding.

While FERC has jurisdiction over most LNG import and export terminals, the agency does not regulate all facilities that handle LNG. Exceptions include facilities that cannot load LNG directly onto oceangoing tankers and facilities that do not send out the LNG as gas by pipeline. New Fortress argued that its facility does neither. The company said its facility should be lumped in with the majority of the 110 LNG facilities in the U.S., where only 24 have been found to be in FERC's jurisdiction under Natural Gas Act Section 3.

But FERC's June 18 show-cause order suggested the commission believed otherwise.

"Here, it appears that New Fortress Energy has constructed dedicated LNG facilities that directly offload LNG from tankers, regasify the LNG, and then transport the natural gas to an adjacent power plant, presumably via a short pipeline," FERC said in the order. "Given the above, it appears that New Fortress Energy's LNG import facilities located in San Juan are subject to the commission's jurisdiction."

The show-cause order followed an April letter from Democratic members of the U.S. House Committee on Natural Resources to Republican FERC Chairman Neil Chatterjee, asking commission officials to explain the commission's stance and its analysis of the facilities.

New Fortress said the commission's description of its facility was inaccurate. The developer made a series of legal and technical arguments for why the facility does not meet the test of what FERC considers a terminal under its jurisdiction. New Fortress argued that if FERC decides otherwise, it could have far-reaching implications for U.S. energy infrastructure.

For example, New Fortress said a small service pipeline between the import facility and the power plant does not qualify as a delivery "pipeline" under the terms of the Natural Gas Act. New Fortress said if FERC asserted jurisdiction over that sort of industrial line, "the result would be a great expansion of the government's regulatory scope." (FERC docket CP20-466)