Focus on LNG Siting: A State Perspective

Deck: 

Congress revamps LNG and storage, giving broad new powers to FERC. Why the Feds still must consult with local authorities.

Fortnightly Magazine - November 2005

A major objective of the Energy Policy Act of 2005 (EPACT) is to counter the worsened conditions in the natural-gas market that began in 2000 and are expected to continue over the next several years—namely, tight natural-gas supplies and high, volatile gas prices caused by a distinct shift in the supply-demand balance. The current quagmire assumes that the gap between U.S. demand for gas and supplies from traditional supply sources will grow continuously over the next 20 years.

According to the latest Energy Information Administration forecasts from the Department of Energy, the demand for natural gas in the United States will grow by 40 percent from 2005 to 2025, with domestic gas supplies projected to increase by only 15 percent over the same period. This translates to an increased gap of 5.9 trillion cubic feet (Tcf) by 2025, or about 15 percent of current consumption. Additional foreign supply sources—Canadian gas and liquefied natural gas (LNG)—will be required to serve the U.S. market.

Most industry observers now see the changed post-1999 market conditions as structural, rather than cyclical in nature, with long-lasting effects. In contrast, price spikes experienced in the 1990s were short-lived, caused mainly by brief periods of unusually cold weather or regional pipeline bottlenecks.

A corollary to this perception is the urgency for a package of major initiatives, affecting both the supply and demand sides of the gas market, to be implemented in the shortest possible time. EPACT closely reflects such a course of action.

However, proponents of an aggressive policy to increase gas supplies are most disappointed by the failure of the act to open up new areas (such as the Outer Continental Shelf) for natural gas exploration, development, and production. A vigorous debate in Congress over the expansion of gas exploration, development, and production, both in the Rocky Mountains and restricted offshore areas, is likely to ensue, especially if gas prices continue to remain high.

EPACT addresses these concerns through a variety of supply-side and demand-side measures, several of which are designed to eliminate or alleviate existing governmental barriers. The primary intent is to moderate the future price of natural gas in the United States, with industry experts advocating a two-pronged attack from both the demand and supply sides of the market.

A policy of coping with the recent trend in the gas-market environment cannot be tolerated, and EPACT reflects this. Some analysts argue that the most effective tactic for controlling gas prices over the next few years is to reduce demand growth by promoting energy efficiency and other measures (for example, encouraging fuel-switching capability for new vintage gas-fired generating facilities), but most industry analysts do not expect the act to have an immediate, or even short-term effect on natural gas prices.

Any noticeable reductions in gas prices that might be effectuated by the act will have little impact on natural-gas prices for a number of years: industry and regulatory inertia, in addition to the expected market delays in responding to the changed policies embedded in the act, will preclude any overnight "miracles" for the tight natural-gas market. Consumers therefore can expect high, volatile gas prices for the upcoming heating season and for the next few years.

Even in the long term, EPACT may not relieve the tightness in the natural-gas market. However, the act is expected to create downward pressure on natural-gas prices by spurring additional natural gas supplies and lowering the domestic demand for natural gas ().

Individual provisions of the act likely only will incrementally improve future supply-demand conditions in the natural gas market, but taken together, they could have a sizable effect on price and could produce significant benefits to gas consumers in the long run.

Multi-Front Attack

EPACT reflects the view that, given the uncertainty over the effects of individual provisions on future gas prices, it is best to approach the gas-price problem by attacking it from several fronts. Since many of the actions induced by the act can be considered substitutes in achieving more moderate future gas prices, it is conceivable that a portion of them will have only marginal effects.1

Another possible scenario makes lower gas prices less desirable if they stem from costly actions that outweigh the economic benefits. For example, financial incentives for encouraging additional energy efficiency may result in initiatives that fail to pass a cost/benefit test.

Arguably, the most controversial natural-gas provision—especially from the costal states' perspective—pertains to the siting of LNG terminals. Specifically, the act clarifies the exclusive authority of the Federal Energy Regulatory Commission (FERC) to site LNG facilities. As discussed later, the states still would maintain a crucial role in the permitting process, especially as it relates to safety and environmental matters. The LNG siting provision is a response to a perceived NIMBY (Not-in-My-Backyard) syndrome that allegedly has blocked or delayed the development of new energy facilities.2 A major concern of states and local entities centers on how much weight FERC will assign in examining input into the certification process.

Sections of the act affecting natural gas with the most interest to states are as follows: (1) LNG siting (for coastal states); (2) pipeline certification; (3) pricing of wholesale storage services; (4) repeal of PUHCA (affecting both the electricity and natural gas sectors); (5) energy efficiency; (6) LIHEAP authorizations; and (7) fuel diversity in electric generation.3 For most of these sections, the primary objective is to moderate future natural gas prices.

State Input and Federal Initiatives

Relative to the electricity subtitle, the act imposes few mandatory requirements on state public utility commissions (PUCs) in taking actions directly affecting the natural-gas sector. On the other hand, the act requires FERC to enact a number of regulations and undertake other actions in complying with various sections of the act. States will have ample opportunities to articulate their positions in FERC proceedings to enact regulations and other initiatives.

In the matter of studies required by the act, the lead federal agencies are, in most cases, required to confer with the states. For example, in the mandated study on natural-gas supply-demand conditions, the Department of Energy has to consult with the states in the preparation of the report. As with the required FERC actions, the states, while not playing the role of the primary decision-maker, conceivably can have telling influence.

Finally, several of the provisions of the act pertaining to natural gas are compatible with the resolutions passed by the National Association of Regulatory Utility Commissioners (NARUC) during the past two years. These resolutions include those relating to LIHEAP, LNG, energy efficiency, fuel diversity, and domestic gas production. Overall, the act appears to reflect the NARUC position on many of the prominent natural-gas issues, at least as articulated in recent resolutions passed by the organization.

LNG Siting

Section 311 of the act gives FERC exclusive authority to approve a permit for a LNG terminal. As discussed below, FERC is required to consult with state/local representatives on safety and environmental issues. The section, however, constrains these representatives to complete their review of an applicant's request within a specified time period. For example, Section 313 requires all federal and state agencies to comply with the deadlines set by FERC. When failing to comply, the applicant of a facility (such as an interstate pipeline, storage facility, or LNG terminal) under Section 7 of the Natural Gas Act can file an appeal with the U.S. Court of Appeals for the District of Columbia.

The overriding objective of this section of the act is to facilitate the permitting process for LNG terminals with the intent of increasing the availability of LNG in the U.S. natural gas market. According to most analyses, substantial amounts of LNG will need to be imported starting later in this decade to reduce gas prices from their current levels.

By clarifying the jurisdictional division of authority over LNG permitting, it is hoped that judicial appeals will be minimized. A driving force behind section 311 is the weakening of the ability of states and local governments to block the siting of LNG terminals.4

Most important, the section gives FERC the exclusive authority over the siting of LNG terminals, conditioned on the applicant meeting statutory requirements for various aspects of the proposed terminal. This clarification was partly in response to the judicial appeal by the California Public Utilities Commission of a March 24, 2004, FERC order that asserted its exclusive authority over siting of LNG terminals. The California commission appealed this decision before the U.S. Court of Appeals for the Ninth Circuit.5

Section 311 explicitly allows for state involvement in the decision-making process. First, FERC must consult with the states over the safety aspect of an LNG terminal. In fact, the section requires FERC to "review and respond specifically" to the safety issues raised by a state agency in an advisory report or some other medium.6

As clarified by the act, states also will retain their right to refuse a permit to an LNG applicant pursuant to the Coastal Zone Management Act, the Clean Water Act, or the Clean Air Act. States in effect can veto an LNG terminal that does not satisfy these statutory requirements, although the act in other ways has made it more difficult for state and localities to block the siting of an LNG terminal.

States, along with the U.S. Coast Guard and local agencies, also will provide advice on the development of an emergency response plan, which, in accordance with the act, is required for construction approval. Finally, states will have the option (which they previously did not have), upon written notice to FERC, of conducting safety inspections of an operating LNG terminal, pursuant to federal regulations and guidelines. States will not, however, have the authority to impose sanctions for alleged safety violations.7

Under section 311, FERC is required to enact regulations that will implement a pre-filing process (called such because an environmental review of the proposed terminal occurs prior to a formal application to FERC for a certificate of public convenience and necessity) for fulfilling the requirements of the National Environmental Policy Act (NEPA) of 1969. Based on past decisions regarding LNG terminals, FERC's role will be to determine whether a proposed site is environmentally acceptable and safe. An important source of information in deciding this comes from environmental impact statements required by NEPA.8

Overall, EPACT still allows states to become actively involved in the LNG-permitting process. On the surface this opportunity seems apparent, but it remains to be seen how much weight FERC will assign to the information provided by the states, especially regarding safety issues.

Finally, Section 311 codifies the Hackberry decision reached by FERC in December 2002, which fundamentally deviates from the position that LNG terminals should be treated similarly to "open access" interstate pipelines.9 The accompanying order stated that FERC would not require regulated cost-based rates or an open-access tariff for a new LNG terminal. The act explicitly prohibits FERC from requiring these conditions in granting approval of an LNG terminal, at least through 2014. Instead, bilateral negotiations will determine the rates, terms, and conditions.

FERC's Initiatives

The act requires FERC to undertake several actions in implementing the different sections.10 Table 2 lists those activities, along with their deadlines, that will directly affect the natural-gas sector. Of most immediate concern for FERC is the promulgation of regulations, within 60 days after enactment of the act, on the NEPA pre-filing process for LNG terminals. Other required FERC actions have less demanding deadlines.

While FERC has ultimate responsibility for these actions, the states can provide important input to the formal proceedings and other forums within which final action will be taken. Of particular importance to the states will be regulations for the "NEPA pre-filing process" and the new PUHCA provision under the act (which effectively takes responsibility away from the Securities and Exchange Commission and shifts it to FERC).

FERC will be under a tight time schedule for implementing the mandatory actions pursuant to the act. States should consider taking an active role in voicing their views and positions before FERC on these important matters. This may require state public utility commissions to devote additional resources to FERC matters, at least over the next year or so.

Required Studies and LNG Forums

EPACT requires several studies where a federal entity is designated as the lead agency responsible for conducting the study.11 In most cases, the lead agency is mandated to confer with the states. Most of the studies required by the act, as they pertain specifically to natural gas, deal with issues that have come to the forefront over the past few years.12 In addition to studies, the act requires the Department of Energy to hold, within the first year after enactment of the act, at least three forums on LNG in states where LNG terminals are under construction.13 All of these studies will provide information to policymakers, at both the federal and state level, that could lead to future initiatives. Based on the evidence presented for these studies, future policy initiatives may be taken that can improve natural-gas market conditions and lead to more moderate future gas prices.


Endnotes

  1. As an illustration, if the LNG-siting provision leads to substantially more LNG imports, the benefits from offering financial incentives to domestic gas production would be diminished.
  2. In addition to the underlying rationale for the LNG-siting section of the act, sections of the act involving gas pipeline and electric transmission-line certification are intended to counter the adverse effects that could come from giving local or state agencies primary or exclusive siting authority. These effects, frequently referred to as NIMBYism, can result in socially attractive facilities (although perhaps inimical to local interests) not being built, in many instances, to serve a market beyond the local level.
  3. For example, section 312 of the act allows FERC the authority to allow market-based pricing of storage services even when the natural-gas company fails to demonstrate the absence of market power. With the facilitation of market-based pricing, it is hoped that more investments in storage capacity will ensue, causing a downward pressure on future natural-gas prices. Regarding the certification of interstate gas pipelines, the act intends to shorten the time for siting pipelines, thereby bringing on line sooner additional capacity in different regions of the country.
  4. Overall, the new siting process is depicted by its proponents as both comprehensive and streamlined. Most analyses have shown that LNG will be critical in moderating gas prices in the U.S. over the next 20 years.
  5. The California commission argued that since the LNG terminal is an intrastate facility, FERC has no jurisdiction over its certification. On the other side, FERC contended that since an LNG terminal involves foreign commerce, it has exclusive authority. FERC found in its analysis no difference in pre-empting states in foreign commerce as it does for interstate commerce.
  6. Section 311 requires the governor of a state where a LNG terminal is being proposed to designate a state agency to consult with FERC on safety issues.
  7. These violations will be reported to the Office of Pipeline Safety for further review and determination of action.
  8. Specifically, the section requires the pre-filing process to start at least six months prior to the filing of an application for LNG-terminal construction and encourages the applicant to cooperate with state and local officials. The pre-filing process, which applicants have used before FERC in pipeline certification proceedings on a voluntary basis, is intended to expedite the review of LNG terminals, identify early on any environmental problems and allow for increased public involvement.
  9. FERC reasoned that consumers would not be affected by the project's costs since the sponsors would shoulder the entire economic risk of the project. In total, FERC believed that its decision will remove some of the economic and regulatory barriers to investment in LNG terminals.
  10. Some sections of the act give FERC the option to issue rules on specific matters ().
  11. Topics for these studies include: (1) the impact of the development of coal-bed methane on water use in six states (mostly Rocky Mountain states) (sec. 1811); (2) recommendations for balancing the natural-gas market through 2015 (sec. 1818); (3) policies and recommendations for fostering cost-effective energy conservation (sec. 139); (4) recommendations for whether the goals of energy efficiency standards should be viewed from end-use consumption or the full fuel cycle (sec. 1802); and (5) the effect of dual-fuel capability at gas-fired generating units and industrial facilities (sec. 1812).
  12. For example, the study on backup fuel capability is in response to the concern (especially in New England) that most new gas-fired generating facilities lack the ability to use a second fuel. The 2003 National Petroleum Council study, as well as other analyses, has shown that additional dual-fuel capability, especially done on a large scale, would contribute to stabilizing natural gas prices as well as improving electricity reliability.
  13. The act requires the department to consult and cooperate with different federal agencies in addition to the governors of the states within which LNG terminals are being proposed. The major intent of the forums is "to foster dialogue among federal officials, state and local officials, the general public, independent experts, and industry representatives." This dialogue is intended to "identify and develop best practices for addressing the issues and challenges associated with [LNG], building on existing cooperative efforts."