The Federal Energy Regulatory Commission's recent overhaul of its policy for permitting natural gas infrastructure dealt a blow to the U.S. midstream sector, threatening to leave projects in limbo as developers work out how to satisfy the new criteria.

The changes to the FERC policy, which were approved in a 3-2 vote Feb. 17 by the commission's Democratic majority, laid out an approach that will take a harder look at the need for projects and their impacts on the climate and communities (PL18-1 and PL21-3).

Critics — including U.S. gas industry groups, federal lawmakers and independent analysts — have warned of uncertainty over how the policy will be applied and its effect on construction timelines.

"To really assess this, it needs to be applied to a project, but we have no idea when that's going to happen," Christi Tezak, managing director of research firm ClearView Energy Partners LLC, said in an interview. "Because not only the goal post is moving, so is the end zone."

The U.S. Senate Energy and Natural Resources Committee scheduled a March 3 hearing to review the matter.

Proponents of the FERC policy shift praised it as an important step in bringing balance to permitting reviews and recognizing FERC's role in assessing climate impacts, but they said FERC needs to do more. Natural Resources Defense Council staff attorney Gillian Giannetti said FERC will need to "permanently establish a meaningful climate test for pipelines."

"For too long, FERC has been crippled by the evolving nature of this issue and has allowed the fact that it is evolving as an excuse to do nothing," Giannetti said in an interview. "FERC acknowledged that it has to do something to the best of its ability and to use the data and science available to the best of its ability. And that should be applauded."

Fundamental change for projects

The new policy for considering projects' climate change impacts encouraged developers to propose ways to mitigate greenhouse gas emissions. It said FERC can require mitigation measures or reject applications if climate concerns outweigh public benefits. The Democratic majority decided to issue the updated climate policy on an interim basis and planned to revisit the approach after a public comment period ends April 4. But the policy change was to take effect immediately, and the order contained no expiration date or estimate of when the change will be finalized.

FERC established a rebuttable presumption that projects resulting in at least 100,000 tonnes per year of CO2-equivalent emissions will have a significant impact on climate change. This threshold covers interstate pipelines that transport an average of 5,200 Dth/d and projects involving the operation of at least one compressor station or LNG facilities. FERC said this would capture 99% of emissions from gas projects that FERC regulates since it includes emissions from construction, operations and, where "reasonably foreseeable," downstream and upstream facilities.

Projects with emissions at or above the threshold will receive an environmental impact statement instead of a less-extensive environmental assessment that some projects could have received before the policy shift. The result could be a "major roadblock" for some projects because environmental impact statements typically take twice as long for FERC to process, according to Gary Kruse, managing director of research at Arbo.

Under the other policy changes issued separately, the commission will give less weight to gas transportation precedent agreements between gas companies and potential customers as evidence of the need for a project. Instead, the commission said it would consider circumstances surrounding the agreements and other factors, such as gas demand projections, estimated utilization rates, potential cost savings to customers, regional assessments, and the positions of state regulators and local distribution companies. FERC's balancing test will also look for information about the planned end use of gas to help explain why a project is needed.

The revised policy "is likely to fundamentally alter the way projects are designed, proposed, and constructed," S&P Global Platts Analytics said Feb. 18. The FERC policy had not been updated since 1999.

'See what we do'

Pipeline attorneys at the Washington, D.C.-based law firm Van Ness Feldman LLP described the policy changes as "profound" and likely to "reverberate through the natural gas pipeline industry for years." But they said important issues were unclear, including what level of evidence will be needed to demonstrate the need for projects and what kind of emissions mitigation measures the commission will accept.

Mizuho Securities analysts told clients that they expected the FERC policy to defer investment in new interstate pipelines.

FERC Democrats have repeatedly described considering environmental harms as a critical factor in determining whether projects are in the public interest and argued that considering climate change will make FERC permits more difficult to overturn in court.

Kruse disagreed. "This will create less durable orders, not more durable orders," Kruse said. "Because the more factors you throw into your substantive decision-making, the more avenues of attack you give people."

Democratic FERC Chairman Richard Glick pushed back on criticism of the policy updates and denied trying to create roadblocks for natural gas infrastructure. "I would ask that people give us time and see what we do with these orders," Glick said in a recent interview.

Opponents decry uncertainty

Rebukes from opponents of the policy changes were swift. Senate Energy Committee Chairman Joe Manchin, D-W.Va., called the FERC decision "reckless."

The Interstate Natural Gas Association of America, a pipeline trade group, said the new greenhouse gas policy "does not add clarity to the certification process, but instead creates more questions."

The American Gas Association, which represents investor-owned utilities, said the policy changes could hinder the ability of gas and electric utilities to secure gas supplies needed to serve customers and comply with state requirements. Both industry groups suggested FERC could be overstepping its legal authority.

FERC Republicans had argued that this was the case in dissents. Commissioner Mark Christie called the policy changes "radical" and described them as "the mother of all legal weapons" for opponents to block gas infrastructure projects.

Fellow Republican Commissioner James Danly blasted the greenhouse gas policy as "practically unworkable," raising a series of procedural questions that the majority did not specifically address. Danly said the commission failed to articulate how emissions will be determined and did not offer guidance about how much project emissions should be mitigated.

"This is the tyranny of vagueness," Danly wrote.

Analysts are watching to see what comments are submitted in April and whether the commission approves any pending pipeline projects in March, along with how project sponsors respond to the policy shift.

Pending court cases could also influence the course of FERC's effort to update its permitting process, including a U.S. district court case where a federal judge recently issued a preliminary injunction that prohibited federal agencies from relying on any social cost of greenhouse gases that is based on global effects. Glick, along with the U.S. Environmental Protection Agency, has advocated for FERC to use the social cost tool.

"Anyone who is interested in ensuring that FERC has legally justified opinions should support it taking the step to make sure that it is actually following the law," Giannetti said. "The whole purpose of these policy statements is to make sure that FERC is actually following the law when reviewing these projects."

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.