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Pipeline builders caught up in political, market push and pull

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Essential Energy Insights - September 17, 2020

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Pipeline builders caught up in political, market push and pull

A weekly recap of SNL Energy'scoverage of major themes in the natural gas industry.

If Congress can send a broadenergy bill to the president's desk, it would send a strongsignal to New York and other statesthat the U.S. needs to build more natural gas infrastructure. Buta permitting showdown is looming.

"Whatwe are hoping is that this directive for the agencies collaborating with FERC[prompts them to] engage and provide guidance to the states," LouisFinkel, the American Petroleum Institute's executive vice president forgovernment affairs, said on an April 21 call.

Congressin December 2015 passedthe North American Energy Security and Infrastructure Act of 2015, or H.R. 8,which included provisions to speed the natural gas pipeline permitting process.H.R. 8 will be combined with the Senate-passed , the Energy Policy ModernizationAct of 2016.

TheSenate bill would support the FERC permitting process becoming more efficientthrough deadlines for FERC and cooperating agencies at the federal, state andlocal levels. With the provision, "a company that is trying to make asubstantial business investment that is going to benefit American consumers hasthe ability to engage in all their permitting at one time, instead of trying tolook at each permit individually," Finkel said, adding that the countryneeds to "get out from the politics of these projects at the state andfederal level."

Althoughany changes to the FERC process would be minor, Finkel said, anything thatexpedites evaluating LNG terminals or pipelines is important to bring energy tomarket.

"Self-imposednatural gas supply limitations due to pipeline constraints can be as costly asthey are unnecessary, especially in places like New England, where consumerspaid about 53% more for electricity than the rest of the nation last year,despite an abundant supply of natural gas just a day's drive away," he said.

ButSteptoe & Johnson PLLC's Kurt Krieger, a lawyer who represents natural gasmidstream, distribution and pipeline companies at FERC and before state utilitycommissions, sees a showdown overgas pipeline approvals looming between FERC authority under by theNatural Gas Act and the state permitting requirements of the Clean Water Act.But he said "FERC should and will have the upper hand."

"Thecommission encourages cooperation between interstate pipelines and localauthorities. However, this does not mean that state and local agencies, throughthe application of state or local laws, may prohibit or unreasonably delay theconstruction or operation of facilities approved by this commission,"Krieger said.

Krieger has watchedthe conflict develop. Certain states and local governments use federalenvironmental law to fight off gas infrastructure that FERC has approved. FERCtries to suppress such challenges in every certificate it issues to pipelinesand LNG export terminals.

Stateor local permits "must be consistent with the conditions of thiscertificate," reads boilerplate certificate language that Krieger alludedto. "The commission encourages cooperation between interstate pipelinesand local authorities. However, this does not mean that state and localagencies, through the application of state or local laws, may prohibit orunreasonably delay the construction or operation of facilities approved by thiscommission."

But FERC authority does notpre-empt acts required by other federal statutes, Krieger said. The Natural GasAct lists an exception that says none of its requirements affect the rights ofstates under the Clean Water Act.

The conflict has not beenthoroughly explored in federal court, but Krieger listed several courtdecisions that might be relevant to any legalaction stemming from New York's recent decision to deny a CleanWater Act permit for the Constitution pipeline.

An April 25 Morgan Stanley research report said New England andSoutheast natural gas prices will remainelevated with the ramp-up of Northeast natural gas production thathad been expected over the next three years significantly altered by delays andcancellations of pipeline projects.

The New York State Department of Energy Conservation's of Constitution is one ofthe most recent impediments to the ramp-up in Northeast natural gas production,which will extend the already more than two-year delay to bring theConstitution pipeline in service.

Seven pipeline projects have been delayed thus far this spring,trimming year-end capacity estimates through 2018. Year-end 2016 pipelineexpansion totals have declined by 4.6 Bcf/d from original estimates, followingthe delays of Constitution, Rover, Northeast Access and Broad Run Expansion.For 2017, year-end totals have declined by 1 Bcf/d, though that could increaseby an additional 1.7 Bcf/d if the startup of Atlantic Sunrise falls to 2018from the current estimate of the second half of 2017. For 2018, with 's NortheastEnergy Direct off the table, year-end capacity estimates are 1.3 Bcf/d lower,according to the Morgan Stanley report.

These delays will significantly alter the ramp-up inMarcellus/Utica production in the next three years and put further pressure onlocal Northeast gas price hubs, such as Leidyand TGPZone 4, through 2017 as the region is already capacity-constrained and withlimited incremental expansion on the horizon.

Countering the Morgan Stanley report is a study by the Institutefor Energy Economics and Financial Analysis, or IEEFA, which found that FERC ""and that "FERC's approach to assessing the need for such projects isinsufficient."

"The high rates of return on equity that FERC grants topipeline companies (allowable rates of up to 14%), along with the lack of acomprehensive planning process for natural gas infrastructure, attracts morecapital into pipeline development than is necessary," according the study,released April 27, which was commissioned by opponents of the Mountain Valleyand Atlantic Coast natural gas pipeline projects.

IEEFA recommended that FERC suspend the applications for theAtlantic Coast and Mountain Valley pipelines "until a regional planningprocess can be developed for pipeline infrastructure; that FERC lower thereturns on equity granted to pipeline developers; and that an investigation beconducted into the relatively high failure rate of new pipelines."

FERC spokeswoman Mary O'Driscoll said the commission's policy isto not respond to these kinds of reports through the media. The report'sauthors said they will make the report part of the FERC record for MountainValley and Atlantic Coast, so the commission is likely to address the report'sarguments there.