FERC, CFTC, and State Energy Law Developments

Concurring and dissenting statements issued with the Federal Energy Regulatory Commission’s (FERC’s) February 21 order granting construction and operating authorization for a liquefied natural gas (LNG) export terminal highlight the increased scrutiny that gas construction projects are receiving concerning their potential effects on climate change. Despite misgivings from some Commissioners, FERC issued a 3-1 decision conditionally authorizing the construction and operation of the Calcasieu Pass Terminal and TransCameron Pipeline Project (Project), an LNG export terminal and an associated lateral pipeline project that will be located along the Calcasieu Ship Channel in Cameron Parish, Louisiana. The decision found that FERC Staff’s quantitative and qualitative assessments of greenhouse gas (GHG) emissions impacting the climate on a regional and global scale were sufficient.[1] However, even if FERC would like to use the decision as a blueprint to greenlight similarly stalled or pending terminal construction and expansion projects, it is unclear whether appellate courts might have the appetite to agree in analogous cases.

On February 19 and 21, the Federal Energy Regulatory Commission (FERC) issued several more determinations concerning whether jurisdictional natural gas service providers’ cost-of-service rates are just and reasonable given the recent reduction to the federal corporate income tax rate under the Tax Cuts and Jobs Act (TCJA). The recently released determinations ended approximately 21 separate “one-time report” proceedings without further action[1] and initiated a Natural Gas Act Section 5 rate investigation into Southwest Gas Storage Company’s rates (RP19-257).[2] FERC required the entities to file FERC Form No. 501-G, referred to as a “one-time report,” in light of the reduction from 35% to 21% of the federal corporate income tax rate. Morgan Lewis has developed several publications describing the “one-time report” proceedings, the most recent of which included a status update on the more than 100 proceedings that were initiated based on those submissions.

As discussed in our January 18 LawFlash, the Federal Energy Regulatory Commission is continuing to investigate whether jurisdictional natural gas pipelines’ current cost-of-service rates are appropriate in light of reductions to the federal corporate income tax rate under the Tax Cuts and Jobs Act.

That publication also included a table providing the status of numerous pipeline rate proceedings associated with the “One-time Report” the Commission requires pipelines to file in order to facilitate its investigations. Please feel free to reach out to the authors with any questions.

The US Energy Information Administration (EIA) updated its website on January 7 to report that, once all its data is finalized, natural gas prices, production, consumption, and exports will reflect record increases in 2018. According to the preliminary release, the average annual Henry Hub natural gas spot price in 2018 went up 15 cents from the 2017 average. Simultaneously, consumption, production, and exports all saw a rise in 2018.

The US Government Accountability Office (GAO) issued a report on December 18, 2018, identifying significant weaknesses in the Department of Homeland Security’s (DHS) Transportation Security Administration’s (TSA) Pipeline Security Program management and recommending improvements to address those weaknesses. The report was driven by a recognition that “pipelines increasingly rely on sophisticated networked computerized systems and electronic data, which are vulnerable to cyber attack or intrusion,” and that “new threats to the nation’s pipeline systems have evolved to include sabotage by environmental activists and cyber attack or intrusion by nations.”

A new report by the National Infrastructure Advisory Council (NIAC) concludes that the nation is not prepared to adequately respond to a catastrophic power outage. The NIAC is a special advisory council composed of representatives from private industry, state and local government, and academia that is tasked with providing the president with advice on issues facing the nation’s 16 federally designated critical infrastructure sectors. The NIAC issued the report after it was tasked with examining the nation’s ability to respond to and recover from a “catastrophic power outage of a magnitude beyond modern experience, exceeding prior events in severity, scale, duration, and consequence.” The NIAC generally considers these to be limited- or no-notice events with a long duration (i.e., lasting weeks or months due to damage) impacting a broad geographic area (e.g., multiple states and affecting tens of millions of people) that could be further complicated by a cyber or physical attack.

Central to the NIAC’s report is examining the extent to which a catastrophic power outage that causes a failure in one critical infrastructure sector could lead to severe cascading impacts and force other critical sectors to operate in a degraded state for an extended period of time. The report reflects the NIAC’s view that, while the roles and responsibilities for emergency authorities are understood generally, the actual implementation of roles and responsibilities in response to a catastrophic power outage (e.g., cyber and physical attacks and larger-scale disasters) is still very much unclear. In this regard, the report stresses the importance of strong federal leadership in responding to and recovering from large-scale emergencies.

The Federal Energy Regulatory Commission (FERC or the Commission) Office of Enforcement (OE) issued its 2018 Report on Enforcement on November 15. The report provides a review of OE’s activities during fiscal year 2018 (FY 2018), which begins October 1 and ends September 30 annually. Like last year, the report reveals likely areas of focus for FERC enforcement in the coming year, and provides guidance to the industry based on the wide variety of enforcement matters that are otherwise non-public by synthesizing some of the more disparate developments from audits, market surveillance, and other enforcement activities for the benefit of industry stakeholders.

The Federal Energy Regulatory Commission (FERC) and the US Department of Transportation’s (DOT’s) Pipeline and Hazardous Materials Safety Administration (PHMSA) released a Memorandum of Understanding (MOU) on August 31 to improve coordination throughout the Liquefied Natural Gas (LNG) permit application process for FERC-jurisdictional LNG facilities. The MOU describes FERC and PHMSA’s respective roles and responsibilities concerning siting, construction, and operation of LNG facilities pursuant to currently applicable statutory and regulatory law, and establishes a new coordination framework to streamline the approval process for those facilities. The agencies’ coordination has already helped streamline the environmental review schedules for 12 LNG export terminal applications pending before FERC. Those updated schedules were also released on August 31. The MOU supersedes and provides an updated and more concrete coordination framework than the prior iteration of the agreement between the two agencies that was signed in 1985.

On August 1, the Federal Energy Regulatory Commission (FERC or the Commission) issued a notice establishing the dates by which certain jurisdictional natural gas pipeline companies must file FERC Form No. 501-G, the “one-time” informational filing the Commission plans to review to ascertain whether the pipelines have, in light of the Tax Cuts and Jobs Act, accounted for reduced federal corporate income taxes in their cost-of-service rates (one-time report). The notice revises the submission dates in FERC Form No. 501-G’s Implementation Guide, which was released alongside FERC’s final rule in Order No. 849, the decision directing the natural gas companies to submit the one-time reports. The final rule is described in more detail in our previous LawFlash.

Under the revised Implementation Guide, natural gas pipeline companies that are required to FERC Form No. 2 or 2-A for calendar year 2017 are organized into three distinct groups. Group I must file FERC Form No. 501-G by October 11, 2018; Group II, by November 8, 2018; and Group III, by December 6, 2018. In its final rule, FERC explained that if a pipeline refuses to promptly submit the one-time report, or fails to correct a patently erroneous or incomplete one-time report, the Commission could consider the pipeline to be in violation of its reporting obligation under FERC’s rules and regulations, provided the Commission does not otherwise grant a waiver for good cause. FERC also emphasized that pipelines may file FERC Form No. 501-G earlier than these dates.

FERC is allowing interested parties to file interventions, protests, and comments in response to the submissions. Those filings will be due 12 days after each pipeline’s one-time report due date.

The Federal Energy Regulatory Commission recently issued two orders intended to alleviate concerns that jurisdictional natural gas pipelines may be over-recovering cost-of-service rates due to (1) a reduction of the federal corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act and (2) the DC Circuit Court of Appeals’ decision in United Airlines Inc. v. FERC, which found that FERC’s existing income tax allowance policy, when applied to pass-through entities such as master limited partnerships, creates a possibility of double recovery for income tax allowances under cost-of-service rates. The Commission will now require pipelines to submit informational filings identifying whether the benefits of federal tax reform have been passed on to ratepayers, and has also clarified its guidance that pass-through entity pipelines may eliminate the accumulated deferred income tax component from their rates when they exclude income tax allowances from their costs of service.

Read the full LawFlash.