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Jul 02, 2020

Pipeline Infrastructure Developers Face Changing Legal Landscape

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PIPELINE INFRASTRUCTURE DEVELOPERS FACE CHANGING LEGAL LANDSCAPE

As America’s pipeline infrastructure has grown in recent years, project developers have encountered new and significant legal challenges from environmental groups, landowners, state governments and others. Several recent judicial developments threaten to inject deep uncertainty in two areas of central importance to the industry: developers’ power to condemn state-owned lands, and the practical ability to commence FERC-approved projects notwithstanding a pending rehearing challenge.

Background: The Natural Gas Act of 1938 (NGA) is the federal statutory scheme that regulates the interstate activities of the U.S. natural gas industry. Among other things, the law grants private developers the authority to exercise eminent domain—the mandatory sale of private or state-owned land for public use—to acquire rights of way necessary to construct and install interstate natural gas pipelines. Historically, upon securing a permit from the Federal Energy Regulatory Commission (FERC), developers that were unable to negotiate access rights could file suit in federal court to condemn lands along the pipeline route. What’s more, developers could commence work on FERC-approved projects even in the face of challenges by other stakeholders, due to FERC’s practice of “tolling” challengers’ right to seek judicial review during the rehearing process. Both aspects of this regulatory process have recently been thrown into doubt.

Eminent Domain Power vs. States’ Sovereign Immunity. The Supreme Court is currently considering whether it will weigh in on a question many in the industry thought was long settled: Does the NGA confer FERC certificate holders the authority to exercise eminent domain to condemn state-owned lands?

In PennEast Pipeline Company, LLC v. State of New Jersey, a developer and several key industry players have asked the High Court to review a Third Circuit decision that would severely curb eminent domain powers vis-à-vis state-owned lands. The project at issue is PennEast’s proposed $1.2 billion, 116-mile pipeline to transport natural gas from Northern Pennsylvania to New Jersey. The project was approved by FERC in 2018, but the State of New Jersey afterward denied the project access to run across tracts of state-owned land. The Third Circuit Court of Appeals agreed with the State’s argument that the NGA’s delegation of eminent domain rights to a private developer cannot override a state government’s 11th Amendment right to sovereign immunity, which protects states from suits in federal court. In short, PennEast could not use eminent domain to force the sale of state-owned land in a federal court.[1]

PennEast and industry groups say the Third Circuit’s decision disrupts long-standing precedent and will impede the development of energy infrastructure throughout the nation. The Supreme Court’s decision certainly would have wide-ranging effects, because most interstate pipeline projects cross at least some portion of state-owned lands or conservation easements. Importantly, these decisions do not hold that developers lack eminent domain authority over state lands, only that such condemnation proceedings cannot be brought in federal court. To the extent PennEast’s effort to overturn the Third Circuit is unsuccessful, pipeline developers may begin to consider filing condemnation suits against state entities in state, rather than federal, courts—an outcome PennEast argues would “give States unconstrained veto power” over interstate pipelines.

The Supreme Court earlier this week invited the U.S. Solicitor General to file a brief expressing the views of the United States on this dispute. Although the request may signal an inclination to take up the case, it also means that PennEast will be left in the lurch for several more months. If the Court eventually takes the case and upholds the Third Circuit decision, it would provide states that are opposed to new natural gas pipelines with a powerful new tool to block them.

FERC’s Use of Tolling Orders Rejected. On June 30, 2020, an en banc panel of the D.C. Circuit Court of Appeals struck down FERC’s long-standing procedural practice of “tolling” its own deadlines to resolve petitions for rehearing. Under the NGA, parties seeking review of a FERC order are required to first file a petition for rehearing with the agency itself—judicial review is unavailable until the agency-level petition is denied. Technically, the statute gives FERC a 30-day deadline to respond to a petition, after which time it is denied by operation of law. But, for years, the agency has adopted the practice of issuing so-called tolling orders to suspend its own 30-day response deadline, with the effect of delaying petitioners’ opportunity to seek court intervention. Because FERC orders are considered effective during pendency of rehearing, pipeline developers have historically been able to commence condemnation proceedings and begin construction upon initial approval from FERC, largely shielded from near-term court litigation over the agency’s decision.

But, this week the D.C. Circuit panel rejected FERC’s use of tolling orders as a violation of the NGA and remarked that the practice raised questions of fairness and due process. The ruling will undoubtedly change the strategy of entities seeking to challenge FERC orders, and will presumably lead to more widespread judicial review of agency orders after the thirty-day statutory period has elapsed. At a minimum, the ruling shortens the time period during which FERC may act on rehearing, which will detract from the agency’s ability to fully consider the often-complex issues presented by such challenges. This could severely impede energy pipeline projects by casting doubt on the finality of agency determinations and creating additional pre-construction procedural hurdles to an already cumbersome approval process. Whether FERC will attempt to develop a procedural solution remains to be seen.

Footnotes

[1] An identical dispute involving a different pipeline project is on its way to the Fourth Circuit. In 2018, the Governor of Maryland and the State Board of Public Works voted to deny an easement that would allow Columbia Gas Transmission LLC’s FERC-approved pipeline to pass under the Potomac River into West Virginia. After Columbia Gas filed a condemnation complaint, a Maryland federal district court ruled that the 11th Amendment barred a developer’s power to bring suit to condemn the state-owned land. Columbia Gas Transmission, LLC v. .12 Acres of Land, No. 19-2040 (4th Cir.).

Authors and Contributors

Omar Samji

Partner

Mergers & Acquisitions

+1 713 354 4887

+1 713 354 4887

Houston

Nathan D. Meredith

Partner

Mergers & Acquisitions

+1 214 271 5372

+1 214 271 5372

Dallas

Jacob Fields

Associate

Litigation

+1 512 647 1937

+1 512 647 1937

Austin

Erin Kaufman

Associate

Mergers & Acquisitions

+1 713 354 4858

+1 713 354 4858

Houston