Determining whether to approve plans for interstate natural gas pipeline projects has never been an easy task for the Federal Energy Regulatory Commission. There are so many things to consider, chief among them the need for the pipeline, impacts on the environment and landowners along the route, and what it all means for gas customers. But as complicated as the decision-making process may be, at least pipeline developers, gas producers, and customers knew that once a new pipeline was approved by FERC, permitted, built, and put into service that the matter was closed — that is, the pipeline was here to stay. Now, in the wake of a groundbreaking court ruling on a new gas pipeline near St. Louis, things are not so certain. As it turns out, we’re intimately familiar with the matter, having just made the case that the 65-mile Spire STL Pipeline is an important addition to the regional pipeline network that provides supply diversity, improved reliability, and access to lower-cost gas. In today’s RBN blog, we consider the evolution of FERC regulation of gas pipelines and the new uncertainty that all affected parties face.
Decades ago, back when natural gas pipelines themselves bought and controlled most of the supply in the gas market, the process for certifying new pipelines was especially complicated and arduous. In essence, the pipeline company needed to prove to FERC beyond the shadow of a doubt not only that the proposed pipeline was really needed by real, provable demand, but that there was sufficient gas supply at the upstream end of the pipe to serve customers through the project’s lifecycle. Typically, that high bar was met via what you might call a package deal under which gas producers made long-term commitments to supply gas (and show that they had sufficient reserves of gas in place), pipeline companies contracted to buy and transport the gas, and local distribution companies (LDCs) committed to buy the gas from the pipeline. The pipeline’s bundled rates included charges for the gas itself and a range of services: transportation, storage, and peak shaving. Everything was locked down.
That all changed in 1992 with FERC Order 636. It said that gas pipelines would only transport and store gas, not buy and sell it, and that shippers would essentially rent space on pipelines between two or more points. Where gas came from and where it went was no longer the pipeline’s business — the new buzzwords were “open access” and “unbundled.” To give structure to how new facilities are reviewed in the post-Order 636 world, after some experience in the unbundled market, FERC in 1999 issued a statement of policy laying out the hurdles that need to be cleared to get project approval. One such hurdle was a requirement for firm precedent agreements on the project (commitments to sign firm service contracts when the project goes into service) to demonstrate customer demand and the need for capacity. In addition, many other standards were incorporated in the process having to do with the impact on other customers of the same pipeline, on competitors, on landowners, etc. (Pipelines already had to clear the very high hurdle of an environmental analysis under the National Environmental Policy Act, through either an environmental assessment or an environmental impact statement if it was warranted.) Notwithstanding these standards in the policy statement, reliance on precedent agreements became the primary test of need in most cases.
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