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Commission Watch

CPUC questioned historic oversight authority.
Fortnightly Magazine - June 2004

Commission Watch

CPUC questioned historic oversight authority.

To guarantee the continued growth of liquefied natural gas (LNG) importation and use in the United States, the energy industry needs to pay close attention to govern the regulation, siting, and operation of LNG import terminals-issues traditionally overseen by the federal government. States may have a number of reasons for wanting to establish oversight authority over LNG import terminals, but these efforts, no matter how well intentioned, would have the impact of curtailing the development of LNG facilities at a time when the United States is in urgent need of new sources of natural gas.

The latest such effort was launched by the California Public Utilities Commission (CPUC) in February and was rebuffed, quite forcefully, by the Federal Energy Regulatory Commission (FERC). This decision is good news for LNG terminal developers, state agencies, environmentalists, and, most importantly, consumers, because it clarifies and sets forth in decisive language the regulatory path that must be taken if a new terminal is to be built or an existing terminal expanded.

FERC's Decision

On March 24, 2004, FERC issued a declaratory order determining that it has exclusive jurisdiction over the siting, construction, and operation of onshore LNG import terminals. In so doing, FERC reaffirmed its 30-year precedent of reviewing and approving applications for construction and reactivation of LNG import terminals.

This decision came in response to a challenge by the CPUC, in which it had questioned FERC's authority in a February protest to an LNG project application filed by Sound Energy Solutions (SES), a Mitsubishi subsidiary. Surprisingly, the CPUC did not argue that the state commission has concurrent or overlapping jurisdiction, but rather that FERC has over LNG import terminals. This aggressive argument was based on four core components. First, since Section 3 of the Natural Gas Act (NGA) doesn't specifically mention "facilities" for the importation of natural gas or LNG, FERC has no jurisdiction over LNG facilities. Second, the Energy Policy Act of 1992 amended Section 3 of the NGA in such a way as to strip FERC of its authority over LNG terminal facilities. Third, because the terminal facilities and sales of gas would be entirely within the state of California and would connect to an intrastate system-and therefore the transactions were intrastate, not interstate, in character-FERC had no authority to regulate intrastate commerce. Finally, the CPUC contended that, since it has delegated authority from the U.S. Department of Transportation (DOT) to do safety inspections of intrastate pipelines under the Natural Gas Pipeline Safety Act, it should make the siting and safety determinations on the SES project.

In a strong and decisive order, however, FERC rejected all of the CPUC's arguments. The commission acknowledged that the SES proposal would not involve interstate commerce, but since LNG import terminals are engaged in foreign commerce, they are subject to the exclusive jurisdiction of FERC under Section 3 of the NGA, regardless of whether the imported supplies are subsequently sold or transported in interstate or intrastate commerce.

FERC noted that more than 30 years ago the U.S. Court of Appeals