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The domestic energy revolution, largely fueled by new sources of natural gas, would not be possible without the interstate pipeline grid that transports that gas to market, every mile of which was authorized under the Natural Gas Act. That law declares the “business of transporting … gas for ultimate distribution to the public” to be “affected with a public interest.” The standard for approval of any interstate natural gas pipeline project is that it is required by “public convenience and necessity,” and that is determined by the Federal Energy Regulatory Commission (FERC). Approval by the FERC confers on the pipeline eminent domain authority. Therefore, how the FERC interprets public convenience and necessity, or public need, is significant, particularly for the many Texas-based energy companies that operate and/or transport natural gas on FERC-regulated pipelines. Recent signals suggest the FERC’s policy might be changing.

On Dec. 21, 2017, new FERC chairman Kevin McIntyre announced plans to re-evaluate the agency’s policy for determining whether a project meets the public convenience and necessity standard. The current policy, established in 1999, emphasizes market need, balanced against potential adverse impacts, in evaluating proposed projects. The FERC’s analysis relies heavily on precedent agreements as an indicator of market need. These are private contracts between the pipeline project and a prospective customer. They typically obligate the customer to sign subsequent binding transportation agreements, often for a term of several years, if the FERC approves the project. Pipelines, in turn, rely on commitments in executed precedent agreements to justify cost incurrence, obtain debt financing and seek out regulatory approvals to commence construction. It is common for these contracts to be governed by Texas law.

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