benefit of counsel: assessing the impact of FERC’s “lighter-handed” regulation of LNG terminals

Lee A. Alexander, Stefan M. Krantz, and C. Todd Piczak, Dickstein Shaprio Morin & Oshinsky

In December 2002, FERC approved the non-environmental aspects of the proposed Cameron LNG, LLC liquefied natural gas (LNG) importation terminal near Hackberry, Louisiana and ushered in a new era of “lighter-handed” regulation of LNG importation terminals. FERC shifted policy to spur increased development of LNG importation infrastructure. Until the Cameron terminal was proposed, not a single new LNG terminal had been proposed in the continental United States in more than twenty years. At a FERC conference on the state of the natural gas industry in the fall of 2002, industry representatives testified that investment in LNG infrastructure was lagging because FERC’s open-access requirements provided no certainty that project developers and sponsors would have access to capacity at their proposed terminals.

FERC responded to these concerns in the Cameron order and announced that it would no longer require LNG developers to obtain a certificate of public convenience and necessity pursuant to section 7(c) of the Natural Gas Act (NGA), but would henceforth authorize LNG terminals as importation facilities pursuant to section 3 of the NGA. Under NGA section 3 regulation, Cameron would be permitted to provide service with negotiated terms and conditions and at market-based rates.

Two years post-Cameron, it seems that FERC’s policy shift has achieved the intended result of spurring more investment in LNG infrastructure. Since the Cameron order, FERC has approved new LNG projects that would more than double the nation’s LNG importation capacity. In addition to these approved projects, there are seven applications for new LNG projects currently pending before FERC and four projects that are being assessed in FERC’s pre-filing review process. The geographic diversity of these proposed projects also offers the hope that more LNG importation capacity will be located closer to market centers in the Northeast and on the West Coast, thus avoiding costly transportation from production areas.

Despite the shift to NGA section 3 regulation, however, two limitations may ultimately serve to limit both this geographic diversity and the number of new LNG terminals that ultimately will be constructed. First, unlike section 7, section 3 does not convey to project developers the power of eminent domain. Second, the commission’s shift away from open-access regulation of rates and services has not, in any way, shortened the time-frame or reduced the scope of the comprehensive environmental review that FERC must perform under the National Environmental Policy Act.

The impact of these two statutory requirements has been felt in significant ways since FERC adopted the new policy. One of the most significant impediments to the development of new LNG projects has been not-in-my-back-yard (NIMBY) opposition from local governments, community groups and landowners. Without the lever of eminent domain, LNG developers have found it difficult to proceed with projects that lack overwhelming community support. Perhaps the power of eminent domain has been most sorely missed in the Northeast and on the West Coast where developers have elected to cancel proposed projects in the face of significant NIMBY opposition or after adverse votes by local governmental bodies. Without the power to site projects through eminent domain, developers may very well follow the path of least resistance and shift their focus to the Gulf Coast-a region that has traditionally been more accommodating of new natural gas infrastructure.

The commission’s environmental review process will most certainly continue to present challenges for LNG developers to overcome. Most recently, the sponsors of the proposed Weaver’s Cove project stated that the viability of the project could be threatened if time-of-year work restrictions suggested by the Massachusetts Division of Marine Fisheries (DMF) were imposed on dredging operations. The DMF suggested that the work restrictions were needed in order to protect fish and shellfish resources.

FERC’s shift to “lighter-handed” regulation has certainly spurred a significant increase in LNG terminal proposals on all coasts of the continental United States. Two years from the Cameron order, it is clear that while FERC’s changed policy may offer LNG developers new opportunities, but the absence of federal eminent domain authority and the existing environmental compliance requirements imposed by NEPA create new challenges that will require creative solutions.

Alexander, Krantz and Piczak are attorneys in the law firm of Dickstein Shaprio Morin & Oshinsky LLP.

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