The New Balance of Power

Deck: 

Do states have any rights in siting LNG terminals?

Fortnightly Magazine - June 2007

Natural gas often is called the world’s most perfect fuel. And since it can be transported as liquefied natural gas (LNG), and, as LNG, is projected to meet 20 percent of the country’s natural-gas requirements by 2025, the construction of onshore LNG terminals is crucial for the United States, which has only 3 percent of the world’s proved reserves of natural gas.1 Those details notwithstanding, the siting of LNG terminals is contentious as states and a range of stakeholders challenge and seek to frustrate FERC’s permitting authority. It has been observed that:

There are substantial, and in some cases huge, natural-gas supplies outside of North America and Western Europe. The difficulty lies in creating the infrastructure that can make it accessible to consumers.2

In 2007, two events—a federal court action in AES Sparrows Point LNG v. Smith3 and a bill4 introduced in Congress have called into question the states’ role in the siting onshore LNG terminals. The occurrence of these two events is understandable because of citizens’ opposition to major energy projects in their state, but difficult to reconcile in view of the Energy Policy Act of 2005 (EPACT).

AES Sparrows Point LNG v. Smith: The Arguments

Shortly after the passage of EPACT—Pub. L. No. 109-58, 119 Stat. 594—which expressly granted FERC final authority over permitting in Section 311, it was predicted that states would test the limits of the authority granted to FERC:

Although [EPACT] pre-empted state’s powers in some areas, in other areas states have retained powers that directly could affect LNG terminal siting. These powers are not insignificant, but yet also are not well defined. As a result, this lack of definition will continue to spawn litigation in states and localities that are opposed to LNG. Moreover, the uncertainty created by the threat of litigation can jeopardize a terminal’s access to supply and commitments to consumer markets and cause delays that might result in abandonment of a project as market conditions change.5

Recent events confirm the correctness of this prediction.6 In this regard, the federal district court decision in AES Sparrows Point LNG dealt with an effort by Baltimore County to use its zoning authority to prevent the permitting of an LNG import terminal in the Baltimore Harbor area. Although recognizing that states and their citizenry have an important place in the debate concerning the siting of LNG terminals, the U.S. District Court in Maryland made clear that state and local governments are preempted from interfering with FERC’s permitting authority, although they may provide input in the federal agency’s decision-making process.

In AES Sparrows Point,7 the U.S. District Court in Maryland held that the Baltimore County Zoning Regulations that placed limitations on the siting of LNG importation facilities were unenforceable because they were pre-empted under the Supremacy Clause of the United States Constitution and by the Natural Gas Act (NGA), as amended by EPACT. At issue was the proposed construction of an LNG import terminal at Sparrows Point in Baltimore County. The Baltimore County Council amended its zoning regulations to provide “that an LNG terminal can only be constructed with a ‘special exception’ and must be at least 5 miles from residential zones and 500 feet from business zones.”8 This regulation would have precluded the development of an LNG facility at the Sparrow’s Point location.

Upon motion for declaratory and injunctive relief, the district court ruled that the county zoning regulation was pre-empted by Section 311(e)(1) of EPACT, which states that “[FERC] shall have the exclusive authority to approve or deny an application for the siting, construction, expansion, or operation of an LNG terminal.” The District Court, examining the text, context and legislative history of Section 311, found that Congress intended to pre-empt state and local governments in the area of LNG regulation, and, as such, state and local governments could not enact laws that frustrated FERC’s permitting authority for the siting of LNG facilities.9 With regard to a state or local government’s role in siting an LNG facility, the court made clear that:

State and local governments have a clearly defined role in providing input to the Federal Energy Regulatory Commission … during the application process for the construction of a liquefied natural-gas facility. That input includes consideration of local environmental requirements and any public opposition.10

EPACT: The New Federal Power

When EPACT became law in August 2005, it was believed that Congress had ended any controversy between the states and the federal government in the permitting of onshore LNG terminals. EPACT clearly set forth FERC’s and the states’ roles in the permitting process. Stated simply, Section 311(e)(1) of EPACT was explicit that FERC had exclusive authority to grant or deny a permit for an LNG terminal. By the express language of Section 311(e)(1), the states were pre-empted from barring the development or construction of an LNG terminal. From the legislative history of EPACT, it is evident that Congress’ intention was to grant exclusive and final permitting authority to FERC. For example, Congressman Murphy in speaking in support of EPACT stated that “the bill breaks the bureaucratic logjam that has stymied work on approximately 40 liquefied natural-gas facilities nationwide.”11

The Role for States

Notwithstanding, the role assigned by EPACT to FERC, Congress recognized that a state’s input was critical in connection with the siting of an LNG terminal. In addition to establishing FERC’s permitting authority, EPACT also set out an important role for the states. First, Section 311(d) expressly reaffirmed the state’s authority under the Costal Zone Management Act, the Clean Air Act, and the Federal Water Pollution Control Act. Second, Section 311(3A)(a) of EPACT requires FERC to consult with the agency designated by the state where a terminal is to be sited regarding an application before issuing an order authorizing construction of an LNG facility. FERC is required to consult with the state on a range of issues such as the “demographic characteristics of the location,” the “natural and physical aspects of the location,” and the “emerging response capabilities near the facility location.” Pursuant to Section 311(3A)(a) of EPAct 2005, FERC also must consult with the designated state agency as to the:

(1) Kind and use of the facility;

(2) Existing and projected population and demographic characteristics of the location;

(3) Existing and proposed land use near the location;

(4) Natural and physical aspects of the location;

(5) Emergency response capabilities near the facility location; and

(6) Need to encourage remote siting.

A state also can submit an advisory report to FERC regarding an application for an LNG terminal, and prior to FERC “issuing an order authorizing an applicant to site, construct, expand, or operate an LNG terminal, the commission shall review and respond specifically to the issues raised by the state agency.”12 For example, on Feb. 7, 2007, only 15 days after the court’s decision in AES Sparrows Point, the state of Maryland filed an 80-page advisory report, State of Maryland Advisory Report: A Response to the Proposed AES Sparrows Point LNG Project. This report stated that the state of Maryland is “adamantly opposed” to the construction of an LNG facility at Sparrows Point because of “very serious concerns regarding the safety of the proposed project, as well as, its impacts to the state’s environment and economy.” The main concern is with the safety issues presented in the unlikely event of a large LNG release, especially since the AES Sparrows Point LNG terminal would be located only one mile from a steel mill, which houses the second-largest blast furnace in the United States, and just south of the ethanol production plant proposed to be constructed.

On March 2, 2007, the chairman of FERC wrote to the governor of Maryland in response to the advisory report. In the letter, the chairman assured the governor that FERC would hold several public meetings in the project area to receive comments on AES’s application; that FERC will be drafting an environmental impact statement concerning the application; and that safety also was FERC’s foremost concern in reviewing an LNG project. The chairman further assured that “state agencies and the public will have multiple opportunities for comment and intervention …. [and that FERC will] continue to consult with state agencies throughout the proceeding.”

FERC’s Conditioning Authority

In addition to the specific role granted by EPACT, FERC welcomes states and stakeholders to raise concerns and provide input when reviewing an application. Also, FERC commonly uses its conditioning authority to address the concerns raised about the siting of a particular LNG terminal. When issuing an order authorizing the construction and development of an LNG terminal, FERC commonly attaches numerous conditions which a permitee must comply with in the construction and development of the LNG facility. Many of these conditions are imposed as a result of environmental and safety concerns voiced by the state.

For example, FERC’s order authorizing construction of the Freeport LNG Terminal in Brazoria County, Texas,13 required in regards to environmental concerns, that Freeport employ a team of environmental inspectors, prepare a final dredging plan and comply with revegetation methods. Also, in regards to safety concerns, the order required Freeport to file operation and maintenance procedures, emergency plans, and safety procedure manuals; to establish safeguards to protect above-ground, fire-water piping; and to file security personnel requirements for prior to and during LNG carriers unloading.

Similarly, FERC’s order granting authorization for the construction of the Cameron LNG facility near Hackberry, Louisiana14 required that Cameron prepare a wetlands mitigation plan in consultation with federal and states agencies including the Louisiana Department of Wildlife and Fisheries, the Louisiana Department of Natural Resources, and the Louisiana Department of Environment Quality.

Also, FERC’s order granting authorization for the Weaver’s Cove LNG facility in Fall River Massachusetts15 required that Weaver’s Cove “develop and implement an environmental complaint resolution procedure.” Also, in regard to safety concerns, FERC acknowledged that the construction of this facility raised “significant, unresolved safety issues, especially in the event of an intentional breach of an LNG vessel as it passes by densely populated shoreline communities.” Due to these concerns, the order required that Weaver’s Cove “develop emergency evacuation routes for the areas along the route of the LNG vessel transit prior to construction and to develop an initial Emergency Response Plan, including evacuation, prior to initial site preparation, in cooperation with local groups.”

As a matter of law and national energy policy, AES Sparrows Point got it right in its reading of EPACT. The energy supply/demand balance is a national and not a local issue, and as a consequence, FERC, a federal agency, must have the final permitting authority. However, national decision-makers should not give the states input mere lip service, but should assign it credibility particularly as to issues involving local knowledge affecting the environment and safety. If those local issues turn out to be significant, it does not mean that a permit for an LNG terminal should be denied, but that FERC should use its conditioning authority to mitigate any potential damage.

 

Endnotes:

1. In contrast, Russia and Iran, in the aggregate, have over 40% of the world’s proved reserves of natural gas. Russell Gold and Gregory L. White, Russia and Iran Discuss A Cartel For Natural Gas, WALL ST. J., Feb. 2, 2007, at A1.

2. Robert Ineson and Michael Zenker, Making Over an Industry: North American Natural Gas, WALL ST. J., Feb. 14, 2007 at A5-6.

3. AES Sparrows Point LNG v. Smith, 2007 WL 184736, *1 (D. Md. Jan. 23, 2007).

4. National Estuary Protection Act, H.R. 1564, 110th Cong. § 2 (2007).

5. Jacob Dweck, David Wochner & Michael Brooks, Liquefied Natural Gas (LNG) Litigation After the Energy Policy Act of 2005: State Powers in LNG Terminal Siting, 27 Energy L.J. 473, 474 (2006).

6.A bill, H.R. 1564, has been introduced to prohibit the siting of the Broadwater LNG project on the Long Island Sound. Congressman Bishop of New York introduced this bill to amend the Federal Water Pollution Control Act on March 19, 2007, to prohibit the siting on an LNG facility in an “estuary of national significance.” Specifically, the bill provides that “it is the national policy that given the environmental risk that a floating storage regasification unit poses to an estuary, the construction or use of such a unit in an estuary of national significance be prohibited.” National Estuary Protection Act, H.R. 1564, 110th Cong. § 2 (2007).

7. AES Sparrows Point LNG, 2007 WL 184736. As of the writing of this article, no appeal has been filed to the district court’s decision. However, on Jan. 16, 2007, the Baltimore County Council enacted another bill that has as its purpose “prohibiting the establishment … of a liquefied natural gas facility in the Chesapeake Bay Critical Area.” In an attempt to meet the requirements of EPACT, the bill frames the prohibition as a “land-use issue.” AES has filed an action in the U.S. District Court of Maryland challenging this bill.

8. AES Sparrows Point LNG, 2007 WL 184736 at *2.

9. Cf. In Natural Gas Pipeline Co. of America v. Iowa State Commerce Commission, 369 F. Supp. 156, 160 (S.D. Iowa 1974), the court ruled that an Iowa statute, which required a state permit for the operation of gas storage facilities, violated the Supremacy Clause of the United States Constitution because it was in conflict with the eminent domain power granted by the Natural Gas Act.

10. AES Sparrows Point LNG, 2007 WL 184736 at *1.

11. 151 Cong. Rec. H6949, H6962 (July 28, 2005).

12. 15 U.S.C. § 717b-1(c) (2006).

13. Freeport LNG Development, L.P., 107 FERC ¶ 61278 (2004).

14. Cameron LNG, LLC, 104 FERC ¶ 61269 (2003).

15. Weaver’s Cove Energy, LLC, 112 FERC ¶ 61070 (2005).