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EPA rule seen as unlikely to boost stalled pipeline projects

Highlights

EPA is advising adherence to plain language of Clean Water Act

Could make it incrementally easier for developers to sue states

Washington — Even as industry welcomes the US Environmental Protection Agency's latest proposal aimed at preventing states from blocking infrastructure projects, experts say the policy is unlikely to give natural gas pipelines the boost they want.

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The August 9 rulemaking proposal -- the latest volley in a battle between states and the Trump administration over lengthy delays to gas projects -- would limit states' authority under the Clean Water Act to block pipeline construction if a project does not meet state standards. However, while the policy would likely shake up federal-state dynamics on infrastructure projects and appears destined for lengthy court battles, the proposed EPA rule is unlikely to prevent states from denying pipeline developers critical water quality permits, several lawyers and energy analysts said.

"There is a plausible case to be made that this decision and that this proposed rule is more of a victory for style over substance in terms of being able to effectively rebut recalcitrant state governments that are not interested in permitting new natural gas pipeline," said Rob Rains, an energy industry analyst at Washington Analysis.

The EPA has said its new legal interpretation aims to shore up federal agencies' ability to advance projects and prevent states from using their authority under Section 401 of the Clean Water Act to stall construction.

Through the new guidance and the proposed rule, the EPA is advising states and tribes to adhere to the plain language of the Clean Water Act, which to the EPA means that they have to decide whether to issue a project a water quality certification in one year or less, regardless of extenuating circumstances often cited by state regulators.

That review period begins once a state regulator receives a "certification request" instead of a complete application from a project developer, under the EPA's interpretation, and the agency makes clear a full year to act on a certification request would not be guaranteed.

The EPA also says state regulators should only consider potential impacts on water quality, not factors related to other environmental concerns.

'A BIG CHANGE'

By limiting what states are allowed to consider during water certification reviews, the rule puts those federal agencies in a position to overrule states and invalidate their certification denials, according to Armando Benincasa, an attorney at Steptoe & Johnson, who focuses on energy and environmental law.

"Currently ... if the state were to deny a 401 certification, the project proponent would have to file some sort of a challenge in the court of appeals," Benincasa said. "Under the new rule, the state would actually have to initiate an action against a federal agency ... basically overturning a state decision on the 401 certification."

"The fact that the agency is basically looking toward other federal permitting agencies to basically have oversight over the 401 certification process is a big change," he said.

In its guidance, the EPA recommends that the Federal Energy Regulatory Commission and the Army Corps of Engineers exercise authority in a way that helps speed projects and limits states' ability to delay certification.

LITTLE RELIEF FOR PROJECTS

The rule could make it incrementally easier for developers to sue states over unfavorable decisions on Section 401 applications, but it would not cut state politics out of the review process, said Katie Bays, an energy analyst and co-founder of research and consulting firm Sandhill Strategy.

"Superficially, you would say that more favorable guidance from the EPA strengthens the legal position of pipeline projects and LNG projects that have struggled to obtain 401 certificates from states. ... That's the hope and that's what the administration is attempting to do here," Bays said. "However, because the guidance does not remove the ability of the states to reject an application for a water quality certificate, they can still do that."

Rains, too, said the scope of what the EPA can accomplish through regulation will remain limited, particularly if Congress is unwilling to change the underlying law.

"Yes, the EPA can initiate this rulemaking. They can tighten up these requirements," he said. "But there is already this prevailing dynamic where the states get a say in this. If Massachusetts or New Jersey or New York or whomever -- Virginia -- don't want a project going through, then they have tools at their disposal. It's not too complicated."

AVOIDING CONFRONTATIONS

The EPA's proposed rule could further politicize the Section 401 issue, Bays said. The Trump administration is taking what she described as a combative position, while some companies are seeking a less confrontational way through the state-developer impasse. The EPA proposal could put government and industry on different paths.

"Companies are aware that the 401 is not the only permit that you need from the state," Bays said. "If you go to war with the state over the 401, you put yourself in a very acrimonious position with the regulator, when you are better off trying to cultivate a collaborative relationship with the regulator and respond to their concerns around the 401."

-- Anna Duquiatan, Ciaralou Palicpic, Corey Paul, Tom DiChristopher, S&P Global Market Intelligence , newsdesk@spglobal.com

-- Edited by Bill Montgomery, newsdesk@spglobal.com