U.S.: Another big pipeline project bites the dust—and FERC should take notice

PennEast Pipeline cancellation boosts case for change in commission policy

Yet another unnecessary pipeline—the PennEast project—has been cancelled after the Federal Energy Regulatory Commission (FERC) issued a permit for it. The incident provides compelling new evidence for FERC to adopt strong protocols to ensure a proper analysis of the need for a proposed pipeline project. FERC could have prevented wasted expenses, legal fees and effort on the part of all parties and stakeholders involved if it had vigorously examined the need for this project from the outset.

FERC needs to do a better job of analyzing pipeline projects. The mere fact that a company wants to build a pipeline, or can show that it has some buyers for the gas that the pipeline would transport, is not enough to establish the pipeline’s necessity anymore. Conditions have changed.

• Ratepayers have demanded a greater voice in decision-making, arguing they don’t want to be forced to pay for long-lived, costly infrastructure for gas when the market is rapidly moving away from fossil fuels and toward less costly renewables. 
• With recent technological advances, utility executives have more options for sourcing energy and are not dependent on pipeline developers to the extent that they used to be.
• Landowners whose property would be seized for the pipeline’s path have demanded proof of reasonable options that don’t involve taking their land.
• The level of need must be weighed against the growing understanding of the level of harm caused by gas pipelines. Environmental organizations have effectively marshalled the science that documents the quantity and harm of greenhouse gas emissions from drilling and transporting natural gas. Also, awareness has grown about environmental equity issues related to the disproportionate siting of pipelines in communities with low-income populations.

Background

The PennEast pipeline would have run from Luzerne County, Penn., north of Wilkes-Barre; crossed the Delaware River near Riegelsville, N.J.; and terminated at a pipeline interconnection near Pennington in Mercer County, N.J.  The project ran into opposition from New Jersey Gov. Phil Murphy, who described the project as unnecessary construction that was “wrong for New Jersey.” It was also strongly opposed by multiple municipalities, landowners along the pipeline’s proposed path, and environmental and historic resource protection organizations.

Like the now-defunct Atlantic Coast Pipeline project, the cancellation of PennEast occurred shortly after the U.S. Supreme Court had awarded the pipeline project developer a legal victory. On June 29, 2021, the U.S. Supreme Court overturned a 3rd U.S. Circuit Court of Appeals decision regarding the right of a private pipeline project developer to take New Jersey’s public land directly by eminent domain, as long as FERC had approved the project. Forty-two parcels of state land had been at stake. It was a major victory for pipeline developers and a significant loss for state sovereignty. But it didn’t stop the project from foundering.

The Cancellation

New Jersey Resources LLC, which controlled 20 percent of the PennEast Pipeline project through its NJR Pipeline Company subsidiary, announced the Supreme Court victory in its third quarter report for this year, but also reported a consolidated net loss of $111.8 million, including a $72.7 million after-tax impairment charge that it said was related to NJR’s investment in the PennEast Project. New Jersey Resources explained:  

“Despite the favorable outcome, PennEast continues to see regulatory and legal challenges that result in the continued delay of construction and commercial operation. As a result, the impairment of NJR’s investment is due to management’s estimates and assumptions regarding the timing uncertainty of regulatory and legal matters, construction and in-service dates, and NJR’s evaluation of the environmental and political climate as it relates to interstate pipeline development.”

About seven weeks later, PennEast officially announced that it had cancelled the project, emailing Reuters that it “has ceased all further development of the project” and that the development “no longer is supported.”

No one should have been surprised.

The Need for Robust Up-Front Analysis

The project sponsors had underestimated not only the scale but also the compelling substantive underpinning of the opposition to the PennEast pipeline. New Jersey Resources belatedly acknowledged in its third quarter report that it needed to consider the “regulatory and legal challenges” and the importance of the “environmental and political climate” as it related to the PennEast project. But what it had failed to do at the outset was objectively assess the need for the project in the context of the project’s adverse impacts on the environment, its inconsistency with state energy goals, and the controversies inherent in encroaching both on public and private land. Perhaps its desire to reap energy ratepayer-funded profits from a hoped-for return on its capital infrastructure investment obscured its vision of the practical feasibility of the project. It should have taken greater note of industry risk trends.

The inherent risks of gas pipeline project efforts in today’s energy market are significant. Moody’s Investor Services released a report in September 2020, “Shifting environmental agendas raise long term credit risk for natural gas investments,” presenting eight examples of derailed or high-risk projects where companies failed or were failing to recognize the implications of regulatory processes, community opposition, and market signals. Factors included oil and gas prices, carbon emission issues, utility investment choices, community opposition, state and local political decision-making and the rapid pace of renewable energy growth. The PennEast project was on this list. Moody’s concluded that new pipelines—both oil and gas—come with the highest risks, and declared it would reserve its long-term credit rating judgment based on actual completion and operation of pipeline projects.

FERC should take notice. As a commission whose job is to determine whether new interstate natural gas infrastructure is necessary and in the public interest, FERC has shown itself to be remarkably out of touch with current energy events and policies. A string of major pipeline projects approved by FERC—including the Constitution Pipeline, the Williams Northeast Supply Enhancement (NESE) pipeline, the Atlantic Coast Pipeline, and now the PennEast pipeline—have failed to go forward. These failures will likely be in the forefront of the commission’s considerations as it reviews its policy on the grounds for determining whether to grant a “Certificate of Public Convenience and Necessity” to a gas pipeline project.

FERC Chairman Richard Glick—who dissented from FERC’s original decision to approve the PennEast Pipeline and who recently took the reins of the commission—seeks to realign the agency to meet today’s needs. In a recent query about the status of the agency’s plan to revise its policy on granting certificates to gas pipelines, Glick said:

“Over the last several years, I became increasingly concerned that the Commission majority often cut corners in a manner that fell short of the Commission’s obligations under the National Environmental Policy Act (NEPA) and the Natural Gas Act (NGA). As I have explained, that dramatically increases the risk that the cuts will invalidate the commission’s decisions, which in turn adds substantial risks for the infrastructure developers who rely on Commission orders when investing millions, and sometimes billions, of dollars in new projects. When courts find flaws in the commission’s analysis, it can lead to lengthy delays and cost developers substantially more than they originally forecasted.”

Following on the heels of the Atlantic Coast Pipeline cancellation, the PennEast pipeline cancellation illustrates that FERC needs to do more than just avoid environmental corner-cutting that is overturned by the court system. It needs to scrutinize and challenge the underlying market assumptions of proposed pipelines, where appropriate.

Conclusion

The legal, political, regulatory and financial issues that are bringing down pipelines and other fossil fuel infrastructure flow from a fundamental new direction. A technological revolution is well underway that cuts across the entire spectrum of fossil fuel uses. Solar, wind and energy efficiency, as well as new grid integration technologies, new designs for home and commercial heating and growing lifecycle planning in the petrochemical industry are all cutting into future growth demands and fossil fuel markets. This is having an impact from the gas and oil drilling fields all the way through to final end-use products.

FERC must conduct a more vigorous analysis of pipeline necessity. The standard of proof of necessity must be set at a higher, more effective level.

Suzanne Mattei (smattei@ieefa.org) is an IEEFA energy policy analyst.

29 September 2021

IEEFA