Tennessee Gas Decision: Oil & Gas Implications

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On June 6, 2014, the U.S. Court of Appeals for the DC Circuit ruled that the FERC violated the National Environmental Policy Act (NEPA) by improperly "segmenting" its NEPA analysis of a four-part upgrade to Tennessee Gas Pipeline's 300 Line System. The Tennessee Gas 300 Line connects the booming gas fields of western Pennsylvania to gas-hungry locations in the northeastern U.S. The court held that FERC's NEPA review needed to consider the project in its entirety, not on a segment-by-segment basis.

The Tennessee Gas decision has important ramifications for the U.S. pipeline industry and other industries that construct complex multi-phased projects that are subject to NEPA. NEPA is often triggered by a federal agency’s approval of major construction activity, as was the case here. Where NEPA-affected projects entail segments that 1) overlap in time, and 2) are functionally, physically and financially interrelated, environmental groups often argue that NEPA review should focus extensively on the project as a whole, rather than each segment. The Tennessee Gas opinion will help to support this line of argument. The result could be more NEPA-related project delays for pipeline and other long-line construction projects that require federal approvals subject to NEPA.

Background

Between 2010 and 2013, four pipeline upgrades were constructed along the entire eastern leg of the 300 Line. Tennessee Gas submitted and ultimately received FERC approval for all four upgrades as separate projects. FERC found that each segment was a stand-alone project and decided to review each of the four projects individually for NEPA purposes. Under this approach, the FERC concluded that no single segment warranted the preparation of an Environmental Impact Statement (EIS). An EIS, in contrast to the simpler Environmental Assessment used in this case by the FERC, can significantly complicate and lengthen the overall NEPA review process. The FERC clearly wanted to avoid this kind of delay in bringing needed natural gas to the Northeast.

Environmental organizations challenged the third FERC certification for Tennessee Gas’ 300 Line upgrade (the “Northeast Project”) claiming that it was improper for the FERC to consider that segment in its NEPA review separately from the other three segments, one of which was already under construction and the other two pending before the FERC. A primary focus of the petitioners was the degree of ecological fragmentation caused by the project. The Northeast Project upgrade involved the clearing of 265 acres of forest, whereas the entire project entailed the clearing of 628 acres.

After their NEPA challenge was rejected by the FERC, the environmental groups petitioned the DC Circuit for review in 2013. In its June 6, 2014, opinion, a three-judge panel of the DC Circuit ruled that a federal agency impermissibly “segments” NEPA review when it divides “connected, cumulative or similar” federal actions into separate projects and thereby fails to address the true scope and impact of the activities that should be under consideration. The Court held that the segmentation approach used by the FERC in this case violated NEPA. The court went on to hold that this improper segmentation prevented the FERC from providing any “meaningful analysis of the cumulative impact” of the overall eastern leg upgrade project, a separate violation of the NEPA.

Significance of the Decision

The Tennessee Gas opinion marks the first time that the DC Circuit has fully applied NEPA’s segmentation policy to a pipeline project. Most of the court’s NEPA segmentation cases have dealt with highways and rail lines. The Court gave considerable deference to the applicable NEPA regulations on segmentation (40 CFR §1508.25) noting that the FERC’s brief did not attempt to square its position with these regulations. The applicable NEPA regulations make it clear that federal agencies must consider the effect of “connected actions” and “similar actions” when carrying out their responsibilities under the NEPA. The regulation defines actions as being “connected” if they trigger other actions, cannot proceed without previous or simultaneous actions, or are interdependent parts of a larger action and depend on the larger action for their justification. Id. The court found that all four segments were connected and similar, emphasizing the fact that all of the segments overlapped in time. In summary, the court concluded that all four upgrades were “physically, functionally and financially connected and interdependent,” thus warranting a single NEPA analysis. The case was remanded to the FERC, which will now have to decide how to apply the decision to a project that is already near completion.

The FERC sought to defend its segmentation approach by arguing that each of the four segments was tied to separate gas delivery contracts for the increased volume of gas that the upgrade would provide. This led FERC to contend that each segment had substantial independent utility so as to justify segmentation. The court rejected this line of argument, citing record evidence that the four segments were financially interdependent, i.e. the first segment made the other segments less costly. The FERC also claimed that since there were “no logical termini” for any of the four segments, it was appropriate for the FERC to segment the four projects according to the business considerations that led Tennessee Gas to segment them the way it did. The court likewise rejected this line of argument. The court reasoned that the absence of logical termini along the eastern leg of the 300 Line meant that the Line (and hence the four upgrades) should be considered as a single interdependent project not as four separate projects.

The Tennessee Gas decision has important ramifications for all NEPA-affected projects that are constructed in phases or segments that are related to each other in time and place. To support a segmented approach to NEPA review, the agency and the project proponent will need to marshal convincing evidence that each segment has independent utility and can stand on its own even if the other segments are not constructed. Because oil and gas projects are often developed in phases, the decision will have particular relevance for that industry. In short, projects that avoid full NEPA analysis through segmentation are now more likely to be challenged by environmental groups who will cite to the Tennessee Gas decision to argue for cumulative assessments of impact under NEPA.

Topics:  Energy, FERC, NEPA, Oil & Gas, Pipelines, Utilities Sector

Published In: General Business Updates, Energy & Utilities Updates, Environmental Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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