On April 12, 2019, the US District Court for the Northern District of California entered an order vacating the Department of the Interior’s (DOI) repeal of the 2016 Valuation Rule due to violations of the Administrative Procedures Act (APA). The 2016 Valuation Rule made changes to the government’s methods for valuing oil, gas and coal produced on Federal and Indian lands. The court’s ruling on the APA claims may impact the Trump administration’s repeal and replace rulemakings that are scheduled to be finalized in the near future. Continue Reading Decision Vacating DOI Valuation Rule May Impact Future Rulemakings
Over the past several decades, significant tension has developed between the federal role in overseeing and authorizing certain types of energy infrastructure projects and states’ roles in regulating water quality under the cooperative federalism structure of the Clean Water Act (CWA or the Act). This tension has played itself out in various contexts, but the most pronounced in recent years has been the battle over CWA Section 401 water quality certifications for energy infrastructure projects, in particular interstate natural gas pipelines.
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In Algonquin Gas Transmission, LLC v. Weymouth Massachusetts, a First Circuit panel last month ruled that a statute of limitations defense is inapplicable to a Natural Gas Act (NGA) preemption claim against a locality. The court also held that the Federal Energy Regulatory Commission’s (FERC) longstanding policy of “encourag[ing] cooperation between interstate pipelines and local authorities” doesn’t impose a legally enforceable duty on pipeline companies to go through local regulatory review processes before filing an NGA preemption suit.
In January 2017, FERC issued Algonquin Gas Transmission, LLC (Algonquin) an NGA Section 7(c) FERC certificate to construct and operate an interstate natural gas transportation project that included a new compressor station in the Town of Weymouth, Massachusetts. The certificate conditioned construction of the station on a consistency determination from the Massachusetts Office of Coastal Zone Management (OCZM) under the Coastal Zone Management Act (CZMA). OCZM, however, declined to issue the consistency determination unless Algonquin first obtained a local wetlands permit from the Town of Weymouth under a Massachusetts wetlands protection regime that allows localities to adopt and enforce regulations more stringent than those imposed by the state.
The Town denied Algonquin’s permit request, but the Massachusetts Department of Environmental Protection (MassDEP) reversed the locality after an administrative appeal by the company. The Town, however, appealed the reversal, which then prompted MassDEP to stay the proceedings pending a judicial determination of whether the local permit requirement was preempted by the NGA. As a result, Algonquin filed a declaratory judgment action in Massachusetts federal district court seeking a ruling that the NGA preempted the local permit requirement and an injunction prohibiting the Town from enforcing it. The district court granted Algonquin’s motion for summary judgment on both conflict and field preemption grounds and enjoined enforcement of the local regulations. Undeterred, the Town appealed that ruling to the First Circuit.
Statute of limitations inapplicable to preemption claim
The Town argued, among other things, that Algonquin’s preemption claim was time-barred. There being no applicable federal statute of limitations, the Town urged the First Circuit to “borrow” a Massachusetts 60-day limitations period applicable to state law writs of certiorari for challenging quasi-judicial actions. The court rejected that argument, however, holding that Algonquin’s suit for declaratory and injunctive relief was essentially “equitable in nature” as to which no statute of limitations applied.
FERC’s “cooperation” policy does not create a legally enforceable duty
Like most NGA section 7(c) certificates, Algonquin’s certificate referenced a longstanding Commission policy that “encourages cooperation between interstate pipelines and local authorities” with respect to any local permits potentially applicable to jurisdictional natural gas transportation facilities. FERC further explains, however, that any such local permits “must be consistent with the conditions of [the] certificate,” and that state or local regulators cannot “prohibit or unreasonably delay the construction or operation of facilities approved by the Commission.”
The Town argued that FERC’s cooperation policy imposed a legal duty requiring Algonquin to “make a reasonable attempt to obtain [local permit] approval” before asking the district court to declare the local requirements preempted. The First Circuit disagreed, noting that “Weymouth provides no support for the existence of such a duty under federal law,” and that FERC’s policy “does not require such cooperation from Algonquin; it merely ‘encourages’ it.”
Other arguments and rulings
The First Circuit panel also rebuffed the Town’s argument that the case wasn’t ripe because the FERC certificate imposed conditions on project construction other than the OCZM consistency determination that remained unsatisfied. Despite the unsatisfied conditions, the court found the case to be ripe because the relief Algonquin sought was “neither ‘advisory’ nor ‘irrelevant;’” if granted, it “would finally remove a principal impediment that stands in the way of a final action by” OCZM, thereby clearing “a procedural logjam that would not otherwise be cleared.”
The panel also disagreed with the Town’s argument that the district court’s preemption determination was erroneous. The appellate court, however, affirmed only on conflict preemption principles, holding it unnecessary to address the lower court’s additional ruling applying broader principles of field preemption. Among other things, the panel found that the Town based its local permit denial on conclusions that were directly at odds with FERC’s findings in the certificate concerning the project’s environmental, safety, siting and other considerations. In the court’s view, the locality’s permit denial created an “effectively complete obstacle to FERC’s ultimate determination that ‘public convenience and necessity’ ‘require’ that the Weymouth Compressor Station be built.”
Observations and implications
In Algonquin, the Town of Weymouth, wittingly or unwittingly, tried to use FERC’s cooperation policy together with a statute of limitations defense to put the pipeline company in an untenable “heads I win tails you lose” position. In one breath, the Town asserted that Algonquin breached a “duty” arising from FERC’s cooperation policy by not taking enough time to navigate the local permit and appeal process before filing a preemption suit. Then, in the other breath, the Town claimed that Algonquin waited too long to sue, arguing that the company’s lawsuit was time-barred under a short state law statute of limitations.
The First Circuit’s rejection of those two arguments should help prevent similar “Catch-22”  scenarios from arising in the future, but without unduly hampering cooperation between pipeline companies and local/state regulators of the type encouraged by FERC’s policy. By holding that FERC’s cooperation policy doesn’t create a legal duty, interstate natural pipeline companies aren’t forced to waste time and money slogging through unnecessary local or state permitting regimes before seeking judicial relief on NGA preemption grounds. At the same time, the court’s no-statute-of-limitations ruling should make pipeline companies feel less compelled to race to court the instant a potential preemption situation arises. Instead, they can try to work out potential conflicts with local or state regulators without fear that doing so might create a statute of limitations problem if a preemption suit were later to become necessary— a result that seems fully consistent with the letter and spirit of FERC’s cooperation policy.
 __ F.3d __, No. 18-1686, 2019 U.S. App. LEXIS 8097, at *12, 19-20 (1st Cir. March 19, 2019).
 The district court held that the local ordinance was not “promulgated under the rights” of Massachusetts under the CZMA, and, therefore, not saved from federal preemption by the NGA’s savings clause, 15 U.S.C. § 717b(d) – a ruling that apparently wasn’t challenged on appeal. See Algonquin Gas Transmission, LLC v. Weymouth Conservation Comm’n, No. 17-10788-DJC, 2017 U.S. Dist. LEXIS 213024, at *14-15 (D. Mass. Dec. 29, 2017).
 Algonquin Gas Transmission, LLC, 2019 U.S. App. LEXIS 8097, at *8.
 Id. at *11. The court ruled that the Town potentially could have relied upon the doctrine of laches, but the Town failed to raise that argument. Id. at *12.
 Id. at *20.
 Algonquin Gas Transmission, LLC, 158 FERC ¶ 61,061, at P61 (Jan. 25, 2017).
 Algonquin Gas Transmission, LLC, 2019 U.S. App. LEXIS 8097, at *19-20.
 Id. at *20.
 Id. at *14-15.
 Id. at *15-20.
 Id. at *19 (citations omitted; emphasis in original).
 Joseph Heller, Catch 22 (Simon & Schuster 1961).
On Wednesday, April 10, President Trump signed an Executive Order (EO), titled Promoting Energy Infrastructure and Economic Growth, that requires the US Environmental Protection Agency (EPA) and other federal agencies to undertake a series of regulatory actions to clarify the Clean Water Act (CWA) § 401 water quality certification process. CWA § 401 provides states with the opportunity to evaluate the potential water quality impacts from discharges of proposed projects by certifying whether the discharge will comply with applicable water quality standards. States can waive this requirement, and if they do not act within “a reasonable period of time (which shall not exceed one year) after receipt” of a request for certification, waiver is automatic. 33 U.S.C. § 1341(a). A handful of states have relied on this process to thwart the development of energy infrastructure projects, either by denying certification due to concerns unrelated to water quality (such as opposition to hydraulic fracturing, climate change concerns, etc.) or by ignoring the statutory time period to reach a determination.
On March 21, 2019, the Federal Energy Regulatory Commission (Commission or FERC) held its monthly open meeting. Highlights of the meeting included the following:
- Electric Transmission Incentives Policy (Docket No. PL19-4-000)
- The Commission issued a Notice of Inquiry (NOI) seeking comments on the scope and implementation of its electric transmission incentives regulation and policy.
- Section 219 of the Federal Power Act directs the Commission to use transmission incentives to help ensure reliability and reduce the cost of delivered power by reducing transmission congestion. The Commission issued Order No. 679 in 2006 to establish its approach to transmission incentives and set forth a series of potential incentives that it would consider. The Commission subsequently refined its approach in a 2012 policy statement.
- The NOI seeks comments in response to questions addressing many matters, including several that have not previously been addressed by the Commission’s transmission incentive policy, including:
- Whether incentives should continue to be granted based on a project’s risks and challenges or should be based on the benefits that a project provides.
- Whether incentives should be used to incentivize projects that promote reliability, economic efficiency, address persistent geographic needs, make transmission system operation more flexible, enhance physical and cyber security, increase grid resilience, improve existing transmission facilities, encourage interregional transmission projects, unlock locationally constrained resources, place non-incumbent transmission developers on a level playing field with incumbents, and encourage development of transmission in non-RTO/ISO regions.
- Whether the types of incentives the Commission currently awards remain relevant and appropriate and whether the goals of the incentives could be incentivized more efficiently. This includes the ROE adder incentives for transmission-only companies, for joining an RTO/ISO, and for the use of advanced technology. This also includes non-ROE incentives, such as regulatory asset/deferred recovery of pre-commercial costs/CWIP, hypothetical capital structure, recovery of costs of abandoned plant, and accelerated depreciation.
- The mechanics, implementation, and evaluation of the effectiveness of incentives (including the potential development of metrics to evaluate their impacts).
- Commissioner LaFleur highlighted a number of matters in which she looked forward to comments. This included the Transco adder and the RTO participation adder, which she stated had been controversial in recent Commission or court orders. In addition, she referenced the interplay between Order No. 1000 and the Commission’s incentives policy. She noted that there was a clear need to construct new transmission to ease the interconnection of location-constrained renewables. She also noted that interregional transmission has proven tremendously difficult to site and construct and looked forward to comments regarding whether anything in the incentive policies could help this transmission built. Finally, she indicated that she looked forward to comments on changes to support competitive transmission processes.
- Commissioner Glick continued to express concern that the Commission has been too generous in rewarding incentives.
- Comments are due 90 days after the notice is published in the Federal Register, and reply comments are due 30 days later.
While coming from opposite ends of the political spectrum, the administrations of US President Donald Trump and Mexico’s recently elected chief executive, Andrés Manuel López Obrador (commonly referred to as “AMLO”), have each heralded significant policy shifts with potential to affect bilateral relations as well as international energy markets.
The Trump administration’s trade and immigration policies have attracted significant attention, but the current US administration’s environmental policy shifts also pose the potential for significant impacts on global markets, particularly in the energy sector. Under the Obama administration, for example, the executive branch often opposed or heavily restricted energy projects on the basis of environmental concerns ranging from alleged impacts of unconventional oil and gas production (e.g., hydraulic fracturing, or “fracking”) to asserted climate impacts of fossil fuel combustion for electric power generation—both domestically and in overseas markets, such as China. Continue Reading US-Mexico Energy & Environmental Policy Transition: Opportunity Amidst Uncertainty?
Last week the Federal Energy Regulatory Commission (FERC) made some headway in how it evaluates greenhouse gas (GHG) emissions from natural gas-related projects. In recent FERC pipeline certification proceedings, the two Democrats on the Commission have been critical of how FERC addresses a project’s potential GHG emissions and climate change impacts. With only four active commissioners, this dispute has made it difficult to obtain the majority needed for FERC approval. In last week’s order, however, the two Republicans were joined by Commissioner Cheryl LaFleur, a vocal critic of the Commission’s approach, in authorizing a new liquefied natural gas (LNG) export terminal and associated natural gas pipeline in Louisiana. The commissioners were able to persuade LaFleur to issue a concurring opinion by expanding the environmental analysis of GHG emissions. This suggests that FERC’s commissioners may have found some new common ground that could serve as a model for the evaluation of future projects.
The project at issue involved the construction and operation of an LNG export terminal and associated facilities along the Calcasieu Ship Channel in Cameron Parish, Louisiana. FERC’s National Environmental Policy Act (NEPA) analysis evaluated the annual direct GHG emissions from the terminal’s construction and operation and compared them to national GHG emissions data compiled by the US Environmental Protection Agency (EPA). According to this analysis, the project would emit nearly 4 million tons of GHGs annually, potentially increasing national CO2 emissions by 0.07 percent. Due to the pending repeal of EPA’s Clean Power Plan and the pending withdrawal from the Paris climate accord, FERC noted that there are currently no national emissions targets to use as a benchmark for the project. The environmental analysis acknowledged that the construction and operation of the project would contribute incrementally to climate change, but concluded that FERC could not determine whether such a contribution would be significant. Ultimately, because it found that the project would be in the public interest, FERC approved the LNG terminal.
Commissioner LaFleur’s concurring opinion first notes the Natural Gas Act (NGA) provides the US Department of Energy (DOE) with exclusive authority over the export of natural gas, including the responsibility to consider whether the exportation is in the public interest. In terms of its environmental review, Commissioner LaFleur states that DOE, rather than FERC, has the responsibility to assess indirect impacts of LNG exports, but FERC must still satisfy its obligations under NEPA. Within that context, LaFleur expressed her appreciation for disclosing the direct GHG emissions of the project and for comparing them to national levels. Yet, she was critical of the Commission for not making a significance determination, stating “The magnitude of the direct GHG emissions from the Calcasieu Pass Project certainly appear to be significant, as contemplated by NEPA [but] the Commission has not identified a framework for making a significance determination.” LaFleur called on FERC to use the Social Cost of Carbon, which assigns a dollar amount to each ton of CO2 emissions, to assess the significance of the climate change impacts. Thus, while Commissioner LaFleur ultimately approved the project, she did so recognizing that FERC’s LNG export responsibilities are different than its responsibilities for pipelines and encouraged the Commission to adopt a framework to make a significance determination.
Commissioner Richard Glick was the lone dissenter. He repeated his past arguments that the Commission’s public interest determination must include an assessment of a project’s impact on climate change. “Neither the NGA nor NEPA permit the Commission to assume away the climate change implications of constructing and operating an LNG facility.” While Glick found that quantifying the project’s GHG emissions is a “necessary step” toward meeting FERC’s NEPA requirements, he argued that simply counting the volume of emissions is insufficient. Glick also echoed LaFleur’s recommendation to monetize the harms of climate change by using the Social Cost of Carbon, concluding that a rigorous examination of a project’s impacts on climate change would reduce the legal risk on appeal.
FERC’s approach of calculating and disclosing potential GHG emissions and then comparing those totals to state, regional and/or national climate change goals may serve as a model for FERC’s environmental analysis going forward. For some interstate natural gas pipeline projects the DC Circuit has upheld a similar approach. For example, as recently as February 19, 2019, the DC Circuit dismissed claims that FERC failed to adequately consider the downstream climate impacts of the Mountain Valley Pipeline, noting that “FERC provided an estimate of the upper bound of emissions resulting from end-use combustion….” Given DOE’s substantial role in approving LNG terminals, however, it remains to be seen whether Commissioner LaFleur will concur with similar environmental analyses of GHG emissions in the context of interstate natural gas pipeline projects.
“According to FERC, it is now commonplace for states to use Section 401 to hold federal licensing hostage.”
These are the words the DC Circuit used in Hoopa Valley Tribe v. Federal Energy Regulatory Commission, No. 14-1271, p. 10 (D.C. Cir., Jan. 25, 2019), to describe the state of play on § 401 certifications affecting hydroelectric facility licensing or re-licensing applications. CWA § 401(a)(1) requires, as a prerequisite for federal permits for activities that may result in a discharge into the navigable waters, that affected states certify that any such discharge will comply with applicable, enumerated provisions of the Clean Water Act. But, if a state fails or refuses to act on a request for certification within “a reasonable period of time (which shall not exceed one year) after receipt of such request,” the statute deems the certification requirements waived. Continue Reading Act or Waive: DC Circuit Construes CWA § 401’s One-Year Deadline for State Action Applications
On Friday, a court ruling provided some clarity regarding the Clean Water Act (CWA) § 401 water quality certification process. As forecasted in our November 1, 2018 blog post (below), the US Court of Appeals for the DC Circuit has ruled that a state waives its CWA § 401 authority when, pursuant to a written agreement, an applicant repeatedly withdraws and resubmits its request for water quality certification in order to restart the one-year waiver clock. Hoopa Valley Tribe v. FERC, No. 14-1271 (D.C. Cir. Jan. 25, 2019). According to the Court’s opinion, this sort of arrangement serves to circumvent the Federal Energy Regulatory Commission’s (FERC) “congressionally granted authority over the licensing, conditioning, and developing of [the] project,” and “if allowed, the withdrawal-and-resubmission scheme could be used to indefinitely delay federal licensing proceedings and undermine FERC’s jurisdiction to regulate such matters.” Continue Reading UPDATE: During Oral Argument, DC Circuit Suggests Waiver Period for State Water Quality Certification May Be Less Than One Year
2018 was a banner year for M&A activity in the energy space, with numerous high dollar value transactions in the upstream, midstream, downstream and oil field services (OFS) segments. As investors in the public securities markets have shown a significantly decreased appetite for new issuances of equity by energy companies, the preferred exit or growth strategy for 2018 has been through strategic mergers, acquisitions or divestitures. These transactions have manifested themselves in various forms: asset acquisitions and divestitures, private equity investment into “drillcos” with strategic oil and gas companies, public-public mergers between OFS companies and upstream shale drillers, and simplification transactions by master limited partnerships (MLPs) in the midstream space. In addition to all this M&A activity, one element has become significantly more prevalent in the oil and gas industry throughout 2018 and shows no signs of letting down for 2019: water. Continue Reading Oil & Gas… & Water!