Dive Brief:

The Federal Energy Regulatory Commission on Friday approved the Spire natural gas pipeline in a 3-2 vote, with Democrat commissioners questioning the need for the project and legitimacy of contracts signed for its transport capacity.

The only entity that signed contracts for the 65-mile pipeline outside of St. Louis is Spire Missouri, a gas utility and affiliate of the pipeline developer. Critics said the companies used that relationship to argue there is market need for the project, when flat demand for gas in the region means it is actually not necessary.

The Republican majority on FERC, however, disagreed, writing that the affiliate relationship does not require it to more closely scrutinize the market need for a pipeline project. The issue is at play in FERC’s ongoing review of its pipeline approval process, which will likely conclude without GOP Commissioner Robert Powelson, who will step down this month.

Dive Insight:

FERC’s consideration of pipeline need is central to its permitting decisions for interstate natural gas pipelines, but it is a growing source of controversy.

Under current practice, FERC decides if there is market need for a pipeline based on precedent agreements —contracts for pipeline transport capacity signed with the developer before the project is built. Once market need is established, FERC’s underlying statutes require it to approve a project if it does not present undue environmental or cost risks.

Critics of the policy say it is too narrow and allows opportunities for "self-dealing" when the consumers of natural gas, like a local distribution company or power generator, are owned by the same company as the pipeline builders.

Interstate natural gas pipelines are a lucrative business, with companies making a 14% return on their investment for approved projects, so critics worry builders may abuse their affiliate relationships, making it appear that a pipeline is necessary when it is not.

Such concerns are at the heart of the Spire case. The builder’s gas utility affiliate holds 87.5% of the line’s capacity and is the only company that signed precedent agreements for the project. Because the utility is currently being served by another pipeline, and does not anticipate significant demand growth, critics said the new $43 million line may not be necessary.

“The Spire Project is the unusual case of a pipeline application that squarely fails the threshold economic test,” wrote Democrat Commissioner Cheryl LaFleur in her dissent, saying the project would “force duplicative gas transportation capacity into a regional market of flat demand, shifting gas supply away from an existing pipeline and adversely impacting rates for the existing pipeline captive customers.”

“It is especially noteworthy,” Commissioner Richard Glick dissented, “that Spire Missouri rejected offers to purchase new pipeline capacity from other proposed projects before turning around and entering into an agreement to purchase that capacity from its affiliate.”

Instead of solely relying on precedent agreements, the Democrat regulators and other critics said FERC should have considered ordering an independent study of market need. The Republican majority, however, disagreed that one is necessary.

“The fact that Spire Missouri is affiliated with the project’s sponsor does not require the Commission to look behind the precedent agreements to evaluate project need,” the regulators wrote. “An affiliated shipper’s need for capacity and its obligation to pay for such service under a binding contract are not lessened just because it is affiliated with the project sponsor.”

The fact that the precedent agreement for Spire’s pipeline “stemmed from prior discussions” between the developer and its utility customer “is not indicative of abuse or self-dealing,” regulators added. Instead, they wrote, FERC should only take a closer look at precedent agreements when there is concern that a pipeline developer may have discriminated against non-affiliated customers, which they said Spire did not do in this case.

The Democrats took issue with that stance.

“To conclude that a precedent agreement between affiliates will always represent accurate, impartial, and complete evidence of need, as the Commission appears to suggest today, is to abdicate our responsibility under the [Natural Gas Act],” Glick wrote.

The two Democrats on the commission may find themselves with more of a say over pipeline permitting in the near future. Commissioner Robert Powelson will leave FERC this month, allowing Glick and LaFleur to deadlock FERC votes in a 2-2 tie until a new commissioner is confirmed by the Senate.

The departure comes as FERC prepares to complete the first review of its pipeline approval process since 1999. Chairman Kevin McIntyre said in July that he hopes to conclude that review by the end of the year.