In a legal ruling that could shake up the traditional process for condemning lands to build natural gas pipelines, a federal appeals court found that, because of states' sovereign immunity under the U.S. Constitution, a private pipeline company lacked the authority to take New Jersey land for a right of way.
The U.S. Court of Appeals for the 3rd Circuit found on Sept. 10 that nothing in the Natural Gas Act suggests that Congress intended to delegate to private companies the federal government's exemption from state sovereign immunity that would allow the companies to bring states into federal court for condemnation proceedings.
The case centered on PennEast Pipeline Co. LLC's efforts to condemn about 40 properties on the route of its 116-mile, 1.1-Bcf/d pipeline project between Pennsylvania and New Jersey. The properties are owned at least in part by New Jersey. Some of the properties were preserved for conservation, recreation or agriculture.
The ruling could give another weapon to states in their battles with pipeline developers at a time when the Trump administration is seeking to limit states' powers to slow projects under the Clean Water Act. And the decision came soon after the U.S. Appeals Court for the District of Columbia Circuit questioned the Federal Energy Regulatory Commission's grant of eminent domain powers to NEXUS Gas Transmission LLC to take property from landowners as a public utility, because the company's Midwest gas pipeline has Canadian customers.
The ruling also created another snag for the PennEast pipeline, a project proposed nearly four years ago that is designed to connect northeastern Pennsylvania production to major demand markets to the east. The project has faced state regulatory hurdles under the Clean Water Act.
Court finding
The 3rd Circuit decision vacated a district court order on the New Jersey property interests and remanded the matter for dismissal of claims. "We will vacate because New Jersey's sovereign immunity has not been abrogated by the [Natural Gas Act], nor has there been — as PennEast argues — a delegation of the federal government's exemption from the state's sovereign immunity," the court said.
State sovereign immunity goes to the core of the national government's constitutional design and therefore must be carefully guarded, the court said. "Yet accepting PennEast's delegation theory would dramatically undermine the careful limits the Supreme Court has placed on abrogation," it said.
Federal workaround
The 3rd Circuit recognized its ruling might disrupt an important part of the natural gas industry practice of using the Natural Gas Act to construct interstate natural gas pipelines over state-owned land for over 80 years.
"To be sure, such a change would alter how the natural gas industry has operated for some time," the court said. "But that is what the [Constitution's] 11th Amendment demands."
A possible workaround could be for "an accountable federal official" to file condemnation actions in place of a private developer, the court said. PennEast argued that the Natural Gas Act does not provide for the condemnation of property by the Federal Energy Regulatory Commission. The court said if the federal government needs different statutory authorization, "that is an issue for Congress, not a reason to disregard sovereign immunity."
Howard Nelson, an attorney and shareholder with Greenberg Traurig LLP, said the ruling could have a significant impact for pipelines that have to go through state lands administered by state governments with policies that may be at odds with natural gas development.
"If you're building a pipeline through Texas, you probably don't have a problem," he said. But in New York, if a project goes through state land, the ruling could give the state the hook it needs to stop the project. In states such as New York and New Jersey, pipeline companies might need to build around state land, he suggested.
Pipeline routes
"It will definitely mean routing decisions will be more difficult until this is resolved," said Gary Kruse, director at energy research firm LawIQ. New York, New Jersey and other states now have a strong lever that they did not have prior to the decision, he said.
In response to the ruling, PennEast said it would review the opinion in detail to determine next steps. The developer remained committed to moving the project forward.
Maya van Rossum of the Delaware Riverkeeper Network, an environmental group that has criticized federal pipeline permitting at FERC and supported states' use of their authority to withhold permits from such projects, said the ruling would "reverberate across the nation."
"Frankly, I think it's stunning that it came out of the 3rd Circuit," van Rossum said. "Finally, states' rights are winning the day."
New Jersey Attorney General Gurbir Grewal said he was pleased the court agreed that the 11th Amendment prohibits private pipeline companies from condemning state properties for private use. "We will not hesitate to stand up to private companies when their actions violate the law — or, in this case, the U.S. Constitution," Grewal said.
Carolyn Elefant, a lawyer who often represents landowners in pipeline cases, said the court's ruling appears to call into question whether the federal government can delegate its authority to a pipeline, as a private company, to take state property. "If that is the appropriate way to read the 3rd Circuit decision, then it is an extremely significant development and a huge victory for the state of New Jersey," she said.
Maya Weber is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.
