If FERC loses a jurisdictional battle over the siting of Sound Energy Solutions’ (SES) liquefied natural gas (LNG) import terminal in Long Beach, CA, to the California Public Utility Commission (CPUC), that will spell serious trouble for all future LNG projects facing regulatory review, according to FERC Commissioner Joseph T. Kelliher. A bill was introduced in the House of Representatives last week to make sure that doesn’t happen (see related story).

The Federal Energy Regulatory Commission (FERC) in a late March order asserted exclusive jurisdiction over the SES terminal, but the CPUC responded that the terminal should be considered a state utility, and therefore, would fall under CPUC jurisdiction. The CPUC has filed for rehearing of the March order, but the Commission is not expected to alter its position [CP04-58]. FERC said its March order represented final agency action on the jurisdictional dispute, and that the matter would have to be settled in court.

“The stakes in this dispute are high,” Kelliher said in a speech at GasMart in Denver last week. “The exercise of federal jurisdiction is perhaps most desirable when a uniform system of regulation is needed to deal with matters of compelling national interest. This was recognized by Congress when it passed the Natural Gas Act, when it created the Federal Power Commission and gave it permission and responsibility to issue certificates approving the construction of interstate natural gas facilities. Absent this authority I doubt that the natural gas infrastructure in this country would have been anywhere near as developed and efficient as it is now.”

Kelliher said that if the CPUC ultimately prevails in its legal arguments, “one would expect it to become very difficult to license LNG import facilities in this country and one would suspect that the overall future of LNG in this country would be pretty bleak,” he said. “Given where we are now, that prospect is unacceptable in my opinion.”

He said that states also don’t have the expertise currently to make decisions regarding LNG terminals. “Those decisions have been made exclusively by FERC. Even if they were to create [the expertise] it would take time. Just look at the number of states where the terminals have been proposed. The states actually would be forced to duplicate the Commission’s expertise.”

He said the Commission takes its responsibility over safety “very seriously,” and recently commissioned a study on the potential dangers of LNG in the event of a spill.

And despite local opposition to several recent LNG terminals and their subsequent cancelation, Kelliher also said he believes the opposition is not uniform across the nation and the industry should not expect landowner disputes every time an LNG project is proposed.

During his presentation, Kelliher also touched on a variety of other issues facing the Commission currently. One significant problem is the regulatory constraints affecting development of more market-area storage projects.

The development of storage capacity has slowed in recent years. In 2002, working gas capacity grew by only 0.3% compared to 1.4% growth the previous year. Credit problems and the decline of gas trading and marketing had a major impact on storage development. But at least one much needed market-area storage project was cancelled due to a rejection of market-based rates by FERC.

The Red Lake storage project in Arizona “created a bit of a paradox,” said Kelliher. What should the Commission do when a market-area storage project applicant requests market-based rates for a project that would be located in an area where there is a strong need for storage because there currently are no other storage facilities? FERC was unable to grant the project market-based rates because of its potential market power in the region. As a result of the Commission’s rejection, the much needed project was never constructed.

“We are considering whether we need to reform the Commission’s market-based price policies to encourage the expansion of storage capacity in market areas,” he said.

However, when it comes to adding more pipeline capacity, the ball really is in the industry’s court, Kelliher said. The Commission has whittled down to 18 months the average time it takes to process pipeline applications and will continue to try to reduce processing time. “But it is probably true that the remaining efficiencies to be made with respect to pipelines are in the hands of the applicants…,” he said. “The quality of the applications still vary widely. Some applications are excellent; some are truly awful… If they have done their homework, it goes much quicker.”

He said that one tool the Commission could use to help speed up the pipeline certification process would be to grade applications. The applications that are more complete would receive higher grades and would go on faster track for processing.

One pipeline application that is unlikely to be moving on a fast track no matter how complete the application is the Alaska pipeline. Kelliher said that there are some significant regulatory hurdles to be crossed by the Alaska project. The problem is that a project application may be filed under the Natural Gas Act or under the Alaska Natural Gas Transportation Act (ANGTA) of 1976. The Commission potentially could end up with projects filed under both.

To make matters even less clear, if a project was filed under ANGTA, the Commission would have to determine whether using the prior 20-year-old environmental review would be in compliance with the National Environmental Policy Act or whether a supplemental environmental impact statement would need to be prepared. There are many unanswered questions regarding the regulatory process for the Alaska project, said Kelliher.

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