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FERC's Kelliher Says Energy Law Lifts Cloud Over LNG

In signing the 1,724-page 2005 Energy Policy Act into law last Monday as oil futures prices were hitting a new all-time high, President Bush conceded it would do little in the short term to bring down energy prices. However, the oil, gas and power industries will see immediate changes in regulation and in incentives to boost supply and reduce demand, which should in the long term lead to lower prices.

"This bill is not going to solve our energy challenges overnight," Bush said prior to signing the first comprehensive energy law in 13 years at the Sandia National Laboratory in Albuquerque, NM. "It's going to take years of focused efforts to alleviate those problems." Nevertheless, the president praised the legislation's potential impact on improving energy efficiency and conservation, on promoting alternative and renewable energy sources, increasing domestic production, modernizing the power grid, and encouraging the expansion of nuclear power.

The sweeping energy measure removes a "cloud" over FERC's exclusive jurisdiction tied to the authorization of liquefied natural gas (LNG) infrastructure, which in turn "should help the development of LNG import facilities," FERC Chairman Joseph Kelliher told reporters on Monday.

The new law will have broad implications for the entire energy sector, as well as the various state and federal regulatory entities that oversee the energy industry, including FERC.

"I think the LNG provisions of the new energy law are significant, but they're also overstated," Kelliher said in a press briefing at Commission headquarters following the Bush signing event. In terms of LNG jurisdiction, Kelliher said that the energy legislation was "frequently portrayed as some kind of aggrandizement of federal authority at the expense of states, and I actually think that's completely false -- that depiction."

In reality, the new law restores the "status quo that existed before" the California Public Utilities Commission challenged FERC's exclusive authority to license LNG import facilities -- "an area that we thought was settled back in 1973 in the Distrigas case."

The CPUC's challenge to FERC's jurisdiction is still pending in the Ninth Circuit Court of Appeals in San Francisco. "We thought the CPUC was wrong and we were fighting them, but Congress recognized that the leveling of the challenge itself posed pretty significant regulatory uncertainty and was threatening to slow down development of LNG projects," the FERC chairman said. "And that was a concern to Congress, so Congress intervened in the ongoing lawsuit and sided with" FERC against the CPUC.

But Congress didn't otherwise expand FERC's authority, "and it gave the states a new tool of safety inspection -- something they don't have now," Kelliher added.

"Congress has clarified the law and" FERC has "exclusive responsibility to authorize LNG import facilities. I think, by virtue of the fact that there's not a cloud over that any longer, it should help the development of LNG import facilities."

As a follow up, a reporter asked Kelliher whether FERC would now ask the court to dismiss the lawsuit, given that the energy bill has been signed into law. "That is certainly a possibility," he responded.

The new energy law places various mandatory requirements on FERC, as well as other federal agencies. For example, within 60 days after enactment, FERC must promulgate regulations on the National Environmental Policy Act (NEPA) pre-filing process for LNG projects.

"I don't expect we'll miss that deadline -- I think we will meet that one," Kelliher said in reference to the regulations for the NEPA pre-filing process for LNG projects.

"Some of it will be triage," Kelliher said in reference to the various rulemakings FERC will have to undertake as a result of the new law. "We'll have to look at what are the nearest term deadlines and try to act accordingly. But then also decide which ones require the most resources to implement, such as the reliability rulemaking."

Within 180 days of after enactment of the law, and every 180 days thereafter, FERC must submit to Congress a report on progress made in licensing and constructing the Alaska natural gas pipeline.

In addition, FERC is facing various mandatory actions under the new law that have no deadline. For example, the Commission must complete an MOU with the Secretary of Defense to ensure coordination of LNG facilities that may affect an active military installation.

Meanwhile, another reporter asked Kelliher if there were any provisions that he was disappointed weren't included in the energy measure.

"You never get everything you want," the FERC chairman noted. "The only provision that I could think of that's not in the energy bill was something that was late arriving to the party, really. It was something that I raised back in January for the first time in nearly a decade of developing this legislation and that was jurisdiction over offshore gathering facilities."

FERC for "a couple of years has tried to develop different legal rationales to support reasserting jurisdiction over offshore gathering facilities under certain circumstances and we have been consistently rebuffed by the courts," Kelliher said.

"We have tried to address it under current law -- I really don't think there's any way we can do that, personally," he added. "I'd be surprised if we can develop a sound legal rationale to support jurisdiction. We have certainly tried in the past and the cleanest approach would be for Congress to grant us that jurisdiction."

As for other gas-related impacts of Bush's signing the energy measure, within hours of the omnibus energy bill being enacted into law, sponsors of the stalled Islander East Pipeline project took advantage of language in the measure and challenged in federal court the state of Connecticut's refusal to issue a water quality permit for the Connecticut-to-Long Island natural gas pipeline (see related story).

With an initial Outer Continental Shelf (OCS) inventory report required by the law within six months, the Minerals Management Service (MMS) said Monday it will not have time to do any new 3-D seismic surveys. The agency said it plans to use "existing data and provide qualitative assessments" of the existing undiscovered OCS gas and oil resources.

MMS encouraged the oil and gas industry to provide data that may not have been shared previously. The agency's reports on the inventory will be public and will be updated at least every five years.

MMS touted other provisions in the new law that could help spur resource development, including new royalty relief incentives for producers to increase production in the deepwater and ultra deepwater Gulf of Mexico. The legislation also grants MMS new authority to regulate alternative energy on the OCS, including wind, wave and solar power. The states will share 27% of the revenues generated from alternative energy activities within the 8(g) zone.

As for the law's impact on the power industry, previously voluntary electric reliability standards will now be mandatory. Congress has directed FERC to finalize within 180 days new rules establishing an enforceable framework of mandatory power-grid reliability rules. The law also gives FERC new "backstop authority" responsibility to site power transmission facilities in "national interest electric transmission corridors." The Commission must adopt rules regarding permit applications for transmission facilities and long-term transmission rights, and providing incentive-based rates to promote transmission investment.

The law also orders the repeal of the Public Utility Holding Co. Act (PUHCA), which could usher in a wave of M&A activity. It creates new mandates for FERC to issue rules addressing access to utility holding company books and records. "We are optimistic that PUHCA repeal will bring sorely needed new avenues of capital investment into the U.S. electricity sector, particularly for the transmission grid where investment has been lagging growth for years," Kelliher said.

"While time will tell whether or not PUHCA repeal results in a significant uptick in mergers and acquisitions, I am nonetheless gratified that Congress saw fit to reinforce FERC's merger-review authority, particularly with regard to generation-only transactions. This added merger-review authority will strengthen the Commission's ability to prevent the exercise of market power," the chairman said.

The energy law also includes provisions addressing price transparency in electric and natural gas markets, and significantly revises FERC's enforcement and civil penalties authorities. "Putting FERC's civil penalty muscle on par with those of other federal agencies should be a significant deterrent to any repeat of the sort of unscrupulous behavior that occurred during the Western energy crisis in 2000 and 2001," Kelliher said.

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