On January 7, 2019, the Federal Energy Regulatory Commission (FERC or “the Commission”) issued an Order approving a settlement between its Office of Enforcement (Enforcement) and Algonquin Gas Transmission, LLC (Algonquin) for violating the terms of the FERC certificate (“Certificate”) for the Algonquin Incremental Market (AIM) Project, which authorized Algonquin to expand its natural gas pipeline system in the northeast.1 While the violation appears to be relatively minor, Algonquin will nevertheless pay a civil penalty of $400,000 and submit semiannual environmental compliance monitoring reports for up to two years. As explained below, certificate compliance historically has not been a focus of FERC’s enforcement efforts, but this case and other recent FERC actions suggest that could be changing.
Overview of the Project and the Alleged Violation
The AIM Project involves an expansion of Algonquin’s pipeline system throughout the northeast, including in New York, Connecticut and Massachusetts. In May 2015, FERC issued a Certificate for the AIM Project pursuant to Section 7 of the Natural Gas Act. The Certificate adopted environmental conditions from a final Environmental Impact Statement. Part of the AIM Project involved new pipeline facilities that cross the Hudson River by boring a hole and installing pipe underneath the river using a horizontal directional drilling (HDD) technique.
On August 27, 2016, underground on the western slope of the Hudson River near the HDD exit hole where Algonquin expected the pipe to emerge as it was being pulled back, the drill stem became disconnected from the pipe. Algonquin believed that the stem was lost in the vicinity of an off right-of-way area that included wetlands and was not identified in the Certificate as an approved workspace. Algonquin decided to try to retrieve the drill stem via excavation using heavy construction equipment. Prior to Algonquin entering the off right-of-way area, FERC’s on-site compliance manager became aware of the issue and told Algonquin that construction to retrieve the drill stem could not occur without an approved variance from the Commission. The FERC compliance manager also gave Algonquin instructions about environmental mitigation steps that would need to be followed when work began. While Algonquin followed all of these steps, it began preparatory work in the off right-of-way area before receiving a variance from the Commission based on an apparent misunderstanding by some personnel that work could begin while Algonquin was seeking the variance. Algonquin stopped work when it became clear that the disconnect had not occurred where originally anticipated and that more extensive excavation work would be needed. Algonquin subsequently obtained a variance from the Commission and acted with due diligence to maintain and improve the environmental integrity of the off right-of-way area.
FERC found that Algonquin violated the Certificate when it entered into the wetlands without an approved variance. However, FERC determined that the violation affected a “relatively small area, approximately 381 square feet,” did not “result in significant or permanent environmental damage,” and did not unjustly enrich Algonquin in any way.2
New area of enforcement? The Order marks the first instance of FERC bringing an enforcement case against a pipeline for violating a certificate since FERC received substantial enforcement authority in 2005. There is some reason to think that this is an increasing area of enforcement focus, not just an outlier. In 2017, FERC disclosed that it had directed Enforcement to investigate potential certificate noncompliance by another pipeline developer.3 Also, FERC’s most recent Annual Report on Enforcement notes—where previous Annual Reports had not—that Enforcement’s Division of Investigations is collaborating with other FERC offices on potential enforcement matters regarding pipeline certificates.4 Further, increasing opposition by environmental groups to natural gas infrastructure development (and increased advocacy by such groups at FERC) could lead to more allegations of compliance violations.
Focus on environmental harm. The Order also reflects a focus by the Commission and Enforcement on environmental harm—here, unauthorized work in, and the risk of damage to, wetlands areas. The nonmonetary sanctions imposed by the settlement also have an environmental focus, with FERC requiring Algonquin to submit semiannual environmental compliance monitoring reports. While many environmental groups have criticized FERC’s certificate process and natural gas infrastructure policies, the Order reflects that FERC—including through Enforcement—takes environmental requirements imposed through that process seriously.
Basis for the large penalty amount unclear. The $400,000 fine strikes us as relatively high for this violation, at least without additional explanation that does not appear in the settlement. In particular, the violation occurred over a short time period, affected a small area, did not cause any lasting harm, and did not benefit Algonquin. The settlement language arguably sends mixed messages with respect to Algonquin’s understanding of when construction work not covered by a certificate could begin, stating on the one hand that Algonquin knew that FERC requires variances prior to commencing such work, but on the other that some personnel “appeared to believe that work could begin while the variance approval was being sought.”5 Based on the facts as discussed in the Order, and the penalty itself, it is not clear why the Commission thought a fine of this size was appropriate, or how it was calculated under the Commission’s Penalty Guidelines (though the Order does state that Enforcement considered the Guidelines when determining the penalty). Nonetheless, the Order cautions that pipeline personnel should seek clarification and guidance from the Office of Energy Projects before commencing construction activity if there are questions about certificate compliance.6 That message, plus the size of the fine, suggests FERC is trying to send a warning to pipelines that it expects strict compliance with certificate conditions.
1 Algonquin Gas Transmission, LLC, 166 FERC ¶ 61,012 (2019) (“Order”).
2 Order, Stipulation and Consent Agreement at P 11.
3 Letter from Terry L. Turpin, Dir., FERC Office of Energy Projects, to Joey Mahmoud, Senior V.P., Rover Pipeline LLC (June 1, 2017) (“Turpin Letter”).
4 FERC Office of Enforcement, 2018 Report on Enforcement at 34 (2018), https://www.ferc.gov/legal/staff-reports/2018/11-15-18-enforcement.pdf.
5 Order at P 5.
6 Id. at P 9, n.1.