D.C. Circuit Decision: Pipeline Developers Can’t Self-Deal in the Public Interest

By Jennifer Danis

In a major decision, Environmental Defense Fund v. FERC, et. al (here) the D.C. Circuit ruled in favor of the Environmental Defense Fund in its challenge to the Federal Energy Regulatory Commission’s decision making on the Spire Pipeline, holding that FERC requires more than private, self-dealing contracts to find public need to build fossil fuel pipelines.

The Natural Gas Act, which is aimed at regulating the gas industry to protect the public interest, requires FERC to find that new gas infrastructure is required by the public convenience and necessity.  Enter Spire: a pipeline company that proposed a new interstate gas pipeline whose capacity would be contracted for by one entity: its own regulated utility affiliate.  If Spire acquired a Section 7 certificate, it would condemn over 200 acres of land to build its gas transmission line, wreaking environmental havoc on lands it crossed.  But there was a catch – the regulated utility affiliate turned back capacity on existing pipelines, citing safety, cost, and reliability benefits to its contracting for new capacity. This affiliate-supported gas pipeline project model was one of several across the country, in which state-regulated utilities got together and created new gas pipeline companies solely for the purpose of building new capacity —  on which the average return on equity garnered hovered around 14%.  And even if the capacity contracts cost more than ones the regulated-affiliates already held, their ratepayers would foot the bill: win-win for the corporate entities and private shareholders, but lose-lose for the ratepayers, the environment, and landowners along the route.

Like all the other projects of this genre, FERC approved the Spire project.  Based on one self-dealing contract between the pipeline company and its affiliated shipper, and attendant vague assertions of public benefit (but acknowledged flat demand) by the project proponent, FERC found that the project served the public interest, and that there was public need for this gas infrastructure.  When challengers brought the case to the D.C. Circuit, FERC maintained that it had protected the public interest and appropriately discharged its obligations under its Gas Act mandate.[1]

Vacating Spire’s Section 7 Certificate, the D.C. Circuit stated unequivocally that, “there is a difference between saying that precedent agreements are always important versus saying that they are always sufficient to show that construction of a proposed new pipeline ‘is or will be required by the present or future public convenience and necessity.’” Describing the federal commission’s approach as “ostrich-like,” the court found that evidence of “market need” is easily manipulated when a pipeline builder contracts with its affiliates for its project’s capacity – and that the Natural Gas Act requires FERC to protect the public interest by ensuring that there is, in fact, a public need for more gas transmission.   It distinguished prior caselaw that FERC and pipeline companies alike argued stood for the idea that private contracts for capacity are enough to show that there is market demand, and that market demand is a corollary for public necessity.

The impact of today’s opinion is potentially enormous – FERC has operated under a court-approved regime of insisting that it is never required to “look behind” private contracts to independently assess whether or not new gas infrastructure is needed.  With Spire, the D.C. Circuit disabused FERC of this idea, just in time for FERC’s reconsideration of its own policy for authorizing Section 7 infrastructure. Ironically, its existing Certificate Policy Statement quite literally commands it to do just that – consider more than just precedent agreements when determining public need, but FERC had been insisting otherwise.  In its policy revision inquiry docket, Docket No. PL18-1, the Sabin Center and New Jersey Conservation Foundation filed extensive and detailed recommendations focusing on precisely what data and analyses FERC must require from pipeline applicants in order to determine whether a proposed project satisfies the stringent Natural Gas Act requirement that it only authorize projects serving the public interest. See FERC Docket # PL18-1 recommendations (May 26, 2021). When revisiting its certification process, FERC now has some baseline guidance from the D.C. Circuit about how it must steward the public interest when deciding whether to approve new fossil fuel pipelines conjured up by self-dealing affiliates. It must look beyond precedent agreements when analyzing whether such projects meet the statutory standard, particularly where such proposals are heavily affiliate-driven.

This decision will also have important bearing on challenges to FERC’s Certificate Order for the PennEast Pipeline project, which the D.C. Circuit is currently holding in abeyance pending the outcome of a related Supreme Court case (which the Court will decide before the end of June). The PennEast project is also predicated on self-dealing private contracts, and its litigation record contains significant evidence demonstrating that those contracts do not reflect market need for that new gas pipeline. Given the enormous climate impacts of gas pipeline infrastructure, and its other adverse impacts on water resources and landowners along pipeline routes, this opinion is a warning to fossil fuel infrastructure developers that the days of FERC’s rubber stamping are over.

[1] The author was counsel to Dr. Susan Tierney, an Amicus in this D.C. Circuit challenge. (Amicus brief available here).

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Amy Turner is the Director of the Cities Climate Law Initiative at the Sabin Center for Climate Change Law at Columbia Law School.