04/30/2019 - Regulatory Rollbacks

Energy EOs In Depth: Administration Opaque on Why It’s Studying Regional Energy Bottlenecks

by Ari Peskoe

This is part of a series analyzing the April 10th executive orders on energy infrastructure. See the links at the bottom of this page for the related pieces.

Section 7 of an April 10 Presidential Executive Order tasks the Departments of Energy and Transportation with filing reports on domestic energy transport bottlenecks. EO 13868 identifies only two such bottlenecks: natural gas constraints into New England and fossil fuel export limitations on the west coast. The Administration does not indicate what actions it might take in response to its findings about these so-called “barriers to a national energy market,” and it’s not clear that it has any legal authority to intervene. The reports, due in mid-October, may only fan the flames of long-standing regional debates.

New England and west coast states have, for decades, been among the most aggressive at reducing the environmental effects of energy production. Today, cutting greenhouse gas emissions is a focal point of most of these states’ energy and environmental policies. Expanding energy infrastructure to transport fossil fuels runs counter to this goal, but state climate-emissions policies only lurk in the background of regional discussions about the energy bottlenecks identified in the EO. As I explain, infrastructure expansion has stalled for numerous reasons, including lack of financing in New England and tribal treaties in the Pacific Northwest.

Transporting Natural Gas to New England

The EO orders the Secretary of Transportation to submit a report “regarding the economic and other effects caused by the inability to transport sufficient quantities of natural gas and other domestic energy resources to the States in New England.” The EO requires DOT to “assess whether, and to what extent, State, local, tribal, or territorial actions have contributed to such effects.” It also allows the Secretary of Transportation to discuss “States in other regions of the Nation.”

Oddly, DOT is tasked with spearheading this report, with DOE given only a consultative role. Energy transport encompasses natural gas and oil pipelines, liquefied natural gas (LNG) terminals, and electric transmission lines, subjects in which DOE has considerable expertise. DOT’s knowledge of railroads, highways, and waterways may be relevant to some energy transport issues, but they have no obvious relevance to natural gas bottlenecks into New England.

Natural gas fuels half of all electric power consumed in New England each year. Coal and oil fired generators in New England, which combined to provide more than one-third all electricity just twenty years ago, today produce less than three percent of the region’s power. Inexpensive shale gas transported by pipelines into the region burns cleaner than coal and oil and has helped maintain low wholesale power prices.

But when temperatures drop and heating demand goes up, utilities distributing gas to heat homes and businesses have priority access to gas that enters the region through interstate pipelines. In extreme conditions, natural gas power plants are unable to access all of the gas they need to power the grid. When piped gas is in short supply, the power sector keeps the lights by burning more expensive LNG and oil. This fuel switching raises power prices and increases pollution. The duration of these natural gas demand spikes is relatively short and inconsistent across years. During the most recent winter, for example, wholesale power prices were $1 billion lower than the prior winter that included a two-week stretch of brutally cold temperatures. The frigid winter of 2013/14 still ranks as the most expensive.

There is no consensus in the region, or even in individual New England states, about whether these brief periods of natural gas scarcity warrant construction of new pipelines. For example, in 2015 the Massachusetts Attorney General released a study that concluded new pipelines would be inconsistent with the state’s greenhouse gas emission reduction targets and that power market rules would maintain reliability. Environmental advocacy groups sided with the Attorney General, arguing that the region has sufficient LNG capacity to meet demand and that clean energy resources supported by state policies will help maintain reliability.

Despite this opposition, the Massachusetts Governor and state regulators finalized a plan to pay for new pipeline construction through retail electric rates. This financing scheme aimed to solve a market dilemma. Natural gas generators earn revenue through short-term auction markets and are unwilling to enter into long-term contracts with pipeline developers that are a pre-requisite for financing new projects. The state’s highest court ultimately ruled that the scheme violated state law. Pipeline developers have yet to develop an alternative financing mechanism.

Meanwhile, local activists and municipalities continue to oppose new infrastructure and have directed much of their efforts at state governments. For example, opponents of a new compressor station that would enable additional gas to flow through existing pipelines voiced their concerns to the Governor, state environmental regulators, and a state commission ordered by the Governor to study health impacts. Affected towns have vowed to appeal the state’s provision of an environmental permit. Importantly, the Federal Energy Regulatory Commission (FERC) has authority to site interstate pipelines and related infrastructure while states have authority to issue air and water permits for such projects.

With new pipelines off the table, action at FERC has focused on power market rules that address these winter scarcity periods. For years, the regional market operator ISO-New England has paid generators to maintain oil and LNG supplies. More recently, FERC approved a contract with a natural gas generator and nearby LNG facility that ensures the facilities remain operational regardless of market prices. This summer, ISO-NE anticipates proposing new market rules that incentivize generators to have fuel available during the winter. There have not been any blackouts due to fuel shortages.

Finally, it’s worth noting that DOT may include in its report discussion of energy transport limitations to other states. Siting high-voltage transmission lines to move renewable energy from remote locations where it is economically viable to population centers remains a tall task. State regulators acting pursuant to decades-old statutes often ignore regional and environmental benefits of new transmission lines, and federally regulated grid operators have created burdensome procedures for approving interregional transmission projects.

Exporting Fossil Fuels from the West Coast

The EO also tasks DOE with reporting on “the economic and other effects caused by limitations on the export of coal, oil, natural gas . . . through the west coast.” This report must similarly assess whether state, local, or tribal actions have contributed to such effects. The White House’s choice of agencies is again confounding. Although transporting and exporting fossil fuels involves railways and ports, the Administration provides DOT with only a supporting role. While the EO specifically mentions each fossil fuel, most controversies about exports from Western states have been about coal.

More than half of U.S. coal is produced in the Western United States, and Western mines are far more productive (as measured in tons per employee) than operations in the East. With domestic demand declining, coal companies are increasingly exporting, particularly to Asia. The most direct route is typically though ports in California, Oregon, or Washington. Each state or localities within them have opposed efforts to expand exports.

In California, the City of Oakland is currently in federal court defending its authority to block the development of a coal export terminal. Amid rumors that a company building a shipping terminal in the city intended to export coal, the City Council held hearings and commissioned a report about the health and safety effects of storing and transporting coal through the city. Concluding that coal storage and transport presented a substantial danger to the city, the Council enacted an ordinance banning those practices.

The company sued, alleging the city was unconstitutionally regulating interstate commerce and that it breached its development agreement it had signed with the company. A district court found that the “hostility toward coal operations in Oakland appears to stem largely from concern about global warming,” and concluded that the city’s claims about health and safety effects were unsupported by the record. It held that applying City’s ordinance to the company violated the development agreement, and enjoined the City from relying on the ordinance to restrict coal operating at the shipping terminal. The City has appealed to the Ninth Circuit.

In Oregon, state regulators denied a permit in 2014 to a developer who proposed to construct a dock and use it to export coal. The Department of State Lands concluded that the project would “not be consistent with the protection, conservation and best use of the state’s water resources” and would create adverse “impacts on tribal fisheries.” An administrative law judge hearing the appeal upheld the decision, rejecting claims filed by Montana and Wyoming that Oregon was unconstitutionally regulating interstate commerce.

Developers terminated two other export projects in Oregon early in the development process. In one instance, the developer sought permission from Portland General Electric, a utility serving nearly half of the state, to export from a site located near two of its natural gas power plants. The utility refused, citing concerns about coal dust and rail line expansion. Another potential development collapsed after foreign investors dropped out of the deal.

In Washington, permit denials doomed two projects. In 2017, state environmental regulators rejected a developer’s permit application, finding that the project would have caused significant harm to air and water quality, tribal resources, and other areas. The developer sued in state court, arguing that the regulators improperly applied the federal Clean Water Act and violated state procedures. The developer also filed suit in federal court, alleging the state was unconstitutionally regulating interstate commerce and making several additional claims. The court stayed the case until the state court proceedings conclude. Meanwhile, the Army of Corps of Engineers began its own environmental review in late 2018, a move that the developer hopes will ultimately preempt the state’s review.

In 2016, the Corps rejected a permit application for another potential export site, finding that the project would have harmed treaty-protected tribal fishing rights. The developer then abandoned the project. Elsewhere, the Quinalt Indian Nation and environmental advocacy groups sued the state about a proposed oil export terminal on another site that had been proposed to export coal. In 2017, the state’s highest court held that the state misapplied the law and remanded the permit proceeding back to the agency. The developer has since abandoned the project. Elsewhere in the state, regulators denied a permit to a developer proposing the largest oil export facility in the country, and the developer later abandoned the project.

While none of the proposed projects in Oregon and Washington failed due to a state’s climate policy, concerns about greenhouse gas emissions animated the opposition to these projects and informed state regulators’ decisions. Oregon Governor John Kitzhaber called on the federal government in 2012 to conduct a comprehensive review of the environmental effects of coal exports from west coast states. While raising conventional pollution issues, such as coal dust and mercury, Governor Kitzhaber also denounced coal exports as inconsistent with “moving to a lower carbon future.” In his first press conference as Washington Governor, Jay Inslee said that the decision of whether to site coal export terminals is the“largest [ ] we will be making as a state from a carbon pollution standpoint certainly during my lifetime.” Governor Inslee is currently running for President on a climate change platform.

Will the Administration Intervene?

Natural gas constraints in New England and fossil fuel exports out of West Coast states have been debated extensively in these regions for several years. It’s highly implausible that DOT/DOE studies on “economic and other effects” of these energy bottlenecks will lead to consensus. Rather than aiming to shift the debate, the Administration may be setting up its own intervention. DOE took this approach with regard to so-called baseload coal and nuclear plants; publishing a study in August 2017 and then proposing to bail out those plants the next month (FERC swiftly rejected it).

With these two issues, however, it’s not clear if the Administration has any options. Bloomberg recently reported that the White House discussed waiving federal shipping law requirements to ease the delivery of natural gas to Puerto Rico and the Northeast. Federal law requires that shipments between two U.S. ports be on U.S.-built, U.S.-flagged vessels. Because no such ships are capable of carrying LNG, terminals in the Northeast import expensive overseas supplies. Waiving these requirements might facilitate the transport of lower-cost LNG into the region. However, the President’s legal authority to do so is contingent on finding that it is necessary for national defense. The Administration’s conclusions about economic effects of the current constraints would carry no legal weight if unconnected to national defense.

With regard to energy exports, media reports in late 2018 indicated that the Administration was considering using coastal military bases or other federal lands to facilitate fossil fuel exports from the west coast. Analysts cautioned that there may not be any technically suitable sites in the continental United States. Moreover, using military sites for commercial purposes may be controversial in Congress. If the Administration does push ahead with this proposal, a new Administration might quickly undo it.

That said, perhaps the Administration has developed a legal theory that would enable it to intervene. The Administration’s baseload bailout marked the first ever instance of DOE invoking a rarely used statutory provision to propose a power market rule. Few in the industry anticipated that move. The DOT/DOE studies may lay the groundwork for further action.

Alternatively, the Administration may simply be shining a spotlight on these issues to support its energy industry allies and to point blame at its political opponents. New England and west coast states, two traditional democratic strongholds, have consistently opposed this Administration’s efforts to roll back federal environmental and energy rules. Moreover, these states continue to push forward on climate policies, in part as a response to the Administration’s intransigent opposition to greenhouse gas regulations. The forthcoming reports may further entrench states’ and environmental advocates’ positions and do nothing to alleviate any energy bottlenecks.

For more information on the energy EOs: