On June 22, the U.S. Court of Appeals for the D.C. Circuit issued a decision in Environmental Defense Fund v. FERC vacating and remanding FERC’s order issuing a certificate of public convenience and necessity to Spire STL Pipeline LLC (“Spire STL”) under Section 7 of the Natural Gas Act.  The decision is a rare instance of the D.C. Circuit vacating a FERC certificate order upon finding that FERC’s determination regarding the market need for the proposed pipeline was arbitrary and capricious, and was not supported by the Commission’s Certificate Policy Statement. Thus, there is no clear precedent for how FERC may approach Spire STL’s application moving forward.  The D.C. Circuit’s decision also comes as FERC considers revising its Certificate Policy Statement, including the framework for determining need for a proposed project, after receiving over 100 comment filings from interested stakeholders in response to FERC’s February 18 Notice of Inquiry on certificate policy.

Spire STL Certificate and Rehearing Order

While FERC’s 1999 Certificate Policy Statement provides that the Commission will consider all relevant factors in determining need when evaluating a proposed pipeline project, it also notes that precedent agreements (i.e., binding service agreements with prospective shippers) will be important evidence of demand for a project. The Certificate Policy Statement provides that projects intended to serve new demand might be approved on a lesser showing of need than those intended to serve markets already served by another pipeline; however, in such instances, the evidence necessary to establish the need for the project will usually include a market study.

In its 2017 certificate application for the Spire Project, Spire STL conceded that the pipeline was not being built to serve new natural gas demand in the St. Louis metropolitan area where the pipeline’s delivery points would be located. Instead, the project sponsor claimed that pipeline would enhance reliability and access to new sources of natural gas supply, eliminating reliance on propane “peak-shaving” during periods of high demand.  Spire STL principally relied on its precedent agreement with Spire Missouri Inc. (“Spire Missouri”), an affiliate, for approximately 87.5 percent of the Spire Project’s capacity as evidence of need for the project.

In FERC’s August 2018 order granting Spire STL’s certificate application, the 3-2 Commission majority found that Spire Missouri’s willingness to sign a binding contract to pay for pipeline service showed need or demand for the Spire Project.  The majority rejected protestors’ arguments that the precedent agreement was not a sufficient showing of need and that a market study must be undertaken.  The majority noted that, since the issuance of the Certificate Policy Statement,  FERC has relied on precedent agreements for a substantial amount of a proposed project’s capacity as adequate evidence of need, even when the agreements are between affiliates, in the absence of anticompetitive or discriminatory behavior.  According to the majority, Spire Missouri’s affiliation with Spire STL did not require the Commission to look behind the precedent agreement to evaluate project need, principally relying upon the D.C. Circuit’s 2014 decision in Minisink Residents for Envtl. Pres. & Safety v. FERC, 762 F.3d 97, 114 (D.C. Cir. 2014).

Then-Commissioners Cheryl LaFleur and Richard Glick dissented from the 2018 certificate order, finding that the record did not demonstrate a need for the Spire Project.  Both believed that the Commission should have looked beyond the precedent agreement in evaluating market need, given the affiliation of Spire STL and Spire Missouri. Commissioner Glick (now Chairman) noted that, where the parties have raised considerable, credible concerns about whether a precedent agreement is a reliable indicator of need, reasoned decisionmaking requires the Commission to do more than simply reiterate its policy of accepting precedent agreements at face value. In November 2019, by a 2-1 vote, FERC denied requests for rehearing of the certificate order. Commissioner Glick again dissented, arguing that the certificate order represented “an unreasonable application of the . . . Certificate Policy Statement.”

D.C. Circuit Decision

The FERC certificate and rehearing orders were before the court pursuant to a petition for review filed by the Environmental Defense Fund (“EDF”), a protestor of Spire STL’s application.  EDF asserted that FERC’s decision to award a certificate for the Spire Project was arbitrary and capricious because the Commission exclusively relied on the Spire STL-Spire Missouri precedent agreement to find a need for the project, and failed to sufficiently justify its conclusion that the project’s benefits would outweigh its adverse effects. EDF argued that the precedent agreement should have only limited probative value in FERC’s assessment of Spire STL’s certificate application because Spire STL and Spire Missouri were corporate affiliates when the agreement was executed.

On the merits, the court agreed with EDF that the Commission’s refusal to “seriously engage with non-frivolous arguments challenging the probative weight of the affiliated precedent agreement under the circumstances of this case” was not consistent with reasoned and principled decision making. The court noted that FERC was presented with strong arguments as to why the precedent agreement between Spire STL and Spire Missouri was insufficiently probative of market need. Rather than engaging with these arguments, the court added, the Commission seemed to deem the single precedent agreement as conclusive. The court found that nothing in the Certificate Policy Statement endorses this approach.

The court distinguished this case from its opinions upholding prior certificate orders by noting that none of those cases involved precedent agreements with one affiliated shipper, and that FERC can put precedent agreements with affiliates on the same footing as non-affiliate precedent agreements only so long as FERC finds “no evidence of self-dealing.”  The court found that the Commission ignored record evidence of self-dealing by Spire STL, including that the pipeline was not being built to serve increasing load demand and that there was no indication the new pipeline would lead to cost savings.  If it was unnecessary for the Commission to look behind the precedent agreement under these circumstances, the court added, “it is hard to imagine a set of facts for which it would ever be required.” In summary, the court said that it found no judicial authority upholding a FERC certificate order when the proposed pipeline was not meant to serve any new load demand, there was no finding that the pipeline would reduce costs, the application was supported by only a single precedent agreement, and the counterparty to such precedent agreement was a corporate affiliate.

On the day the court issued its decision, FERC issued a statement saying that the Commission is considering what action may be appropriate in light of the court’s vacatur. FERC’s statement included a quote from Chairman Glick regarding his desire to revisit the Commission’s approach to assessing the need for an interstate natural gas pipeline as part of its February 18 Notice of Inquiry.

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Jonathan Wright

Jonathan Wright is a member of the firm’s Energy Industry Group, and counsels industry clients on a diverse range of transactional and regulatory matters. Mr. Wright counsels developers, investors and lenders in the development and financing of energy infrastructure assets, as well as…

Jonathan Wright is a member of the firm’s Energy Industry Group, and counsels industry clients on a diverse range of transactional and regulatory matters. Mr. Wright counsels developers, investors and lenders in the development and financing of energy infrastructure assets, as well as mergers and acquisitions, with a particular focus on renewable generation and battery storage facilities.

Mr. Wright also counsels clients on electric and natural gas matters before the Federal Energy Regulatory Commission, where he previously served as an Attorney-Advisor in the Office of the General Counsel. He specializes in matters involving electric generation interconnection, wholesale electric market design and participation, mergers and acquisitions involving jurisdictional assets, and natural gas pipeline rate proposals.