SES Urges FERC To Reject CA PUC Asserted Regulatory Authority Over Proposed LB LNG Facility

I am disappointed that SES has neither complied with what the CPUC indicated is required nor left any dispute between FERC and CPUC up to those parties to resolve. Rather, SES has filed an aggressive, 55-page brief asserting the arguments it wants FERC to use to reject the CPUC's protest.

...I am gratified that CPUC seeks to guarantee that Long Beach and California residents will have a meaningful opportunity to be heard.

SES asserts we will be heard during the local EIR process conducted by the Port of Long Beach. But as SES points out, its application was developed in conjunction with the Port, and the public's right to appeal the Port's decision rests with the City Council.

The Port of Long Beach is already party to a binding, income-generating agreement with SES. The Council has authorized confidential negotiations it hopes will let our municipal utility earn franchise tax and ratepayer income from LNG. Thus, the Council, the Port and SES are all financially interested parties. We cannot expect impartiality from our council representatives or the Harbor Commissioners they have appointed.

The CPUC’s assertion of state regulatory jurisdiction over on-shore LNG import terminals casts a cloud of uncertainty over development of these essential facilities at a time when California and our country as a whole is facing increased demand for, and limited supplies of, natural gas. Separate and differing regulation of natural gas import facilities by the numerous coastal and border states instead of the centralized and exclusive federal authority intended by Section 3 of the NGA is bad law and worse policy. The controversy is immediate, concrete and grave. The CPUC’s defiance of this Commission’s exclusive jurisdiction is a serious threat to the effective administration of Section 3. As explained more fully below, the Commission has been granted plenary, flexible and exclusive jurisdiction over facilities for the importation of natural gas. That jurisdiction wholly preempts the CPUC’s. Therefore, ...SES is compelled to oppose the CPUC's protest.

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The CPUC’s action intrudes upon a field of foreign commerce completely occupied by federal authority under NGA [Natural Gas Act] Section 3. It asserts a duplicative regulatory jurisdiction that poses the possibility that the state commission will attempt to veto the project even if authorized by FERC. It thus frustrates the purposes of NGA Section 3 and current FERC policy implementing those purposes. That policy, announced in Hackberry LNG Terminal, L.L.C., 101 FERC ¶ 61,294 (2002) "("Hackberry") seeks to encourage the development of new LNG import facilities, at the risk of the developer, under free market principles. The CPUC’s assertion of jurisdiction to regulate the proposed terminal as a public utility is patently inconsistent with the Congress’s direction that federal authorities charged with administering NGA Section 3 shall authorize the importation of natural gas from a foreign country, and the facilities for such importation, unless they affirmatively find that such importation is not consistent with the public interest. (15 U.S.C. § 717b.)

SES has been in direct and constant communication with CPUC Commissioners and staff since the receipt of the October 30, 2003 letter. Although SES has fully explained the legal basis for and extent of the Commission’s exclusive jurisdiction over facilities for the import of LNG in foreign commerce, the CPUC has adhered to its intent to regulate the SES Import Terminal as a public utility under California law. The project’s development requires regulatory certainty. Accordingly, it is necessary for the Commission to address and reject the CPUC’s contentions as soon as practicable.

The environmental, safety and economic concerns that the CPUC expresses are all matters that will be addressed by this Commission in its review of SES application under Section 3, in its processes for implementing the National Environmental Policy Act ("NEPA"), 18 C.F.R. Part 380, and in the joint NEPA/CEQA arrangements described in the Notice of SES’s Application, issued February 2, 2004. Thus, there is neither a need nor a legal basis for any other joint proceedings involving the CPUC. Nevertheless, on March 1, 2004, the CPUC filed in this docket a letter from its President, Michael R. Peevey, to Chairman Wood stating that as soon as SES files an application for a California CPCN, FERC and the CPUC can make arrangements for joint hearings. This statement is directly inconsistent with the CPUC’s assertions in its protest that the Commission has no jurisdiction over LNG import facilities under Section 3 of the NGA. The statement is also without foundation because the CPUC is preempted by Section 3 of the NGA from exercising any jurisdiction over LNG import terminals.

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Regulation of LNG Import Terminals by the CPUC Would Frustrate the Hackberry Policy.

The scope of CPUC jurisdiction over a gas utility is broad and intrusive, and presents a myriad of opportunities for conflict with federal regulation of LNG projects. A very abbreviated sampling of the breadth of CPUC jurisdiction would include the following matters. By statute, the CPUC can require that the utility use CPUC-mandated procedures, services, facilities, equipment, rules or practices, and can mandate the methods used to provide service to customers. A gas utility cannot issue debt, stock, or lease or sell its property without advance approval from the CPUC. A gas utility cannot merge with another entity, or enter into any transaction in which control of the utility is transferred without advance approval of the CPUC. Each gas utility must comply with a series of CPUC-adopted orders respecting the engineering requirements for documenting its systems, measuring the heat content of gas, and constructing gas pipeline facilities or gas holders. Each gas utility must file a tariff listing all services, rates, contracts, forms and rules related to its provision of service, and submit all proposed changes to the tariffs to the CPUC for review and approval. A gas utility is subject to a vast array of reporting requirements, including reports of stock or debt issuances, officer compensation, disclosure of all financial statements, and reports on the utility’s efforts to increase the purchase of goods and services from women, minority, and disabled veteran-owned businesses. In addition, a gas utility is subject to the continuing jurisdiction of the CPUC and may be compelled to respond to an investigation or rulemaking initiated by the CPUC, and to comply with any rules, orders, or regulations adopted in such proceedings.

Such intrusive regulation of the SES Import Terminal by the CPUC would totally frustrate the regulatory structure established by FERC in Hackberry. First, regulation of the commercial aspects of the SES terminal would place SES in the untenable position of being the only LNG import terminal in North America whose facility would be subject to state public utility regulation. None of the domestic onshore LNG terminals in other states, offshore terminals being developed throughout the nation (including California), or terminals proposed in Mexico and Canada have, as of yet, been subject to such regulation.

However, under the CPUC’s theory, other coastal or border states could seek to impose such intrusive public utility regulation, which could delay or defeat the siting of new LNG import terminals throughout the country. At the very least, CPUC regulation would place SES on an unequal regulatory footing relative to other import facilities and create a significant deterrent to investment in the project. The likely effect of state utility commission regulation would be a patchwork of varying regulatory approaches across the country that would discourage new development. This is exactly the type of situation the Hackberry policy was designed to avoid.

Second, and equally important, none of the sales of natural gas by domestic producers against whom SES must compete are regulated. Congress specifically determined, and the Commission has reiterated, that sales of imported gas from LNG terminals are first sales equivalent to domestic production facilities. FERC made clear in Hackberry that regulation of the commercial aspects of LNG import terminals was, therefore, not only unnecessary, but a deterrent to the development of much-needed new terminal capacity. To encourage development of additional LNG import capacity, these sales must be on a competitive footing with other first sales. Thus, CPUC regulation of the proposed SES Import Terminal would place SES at a competitive disadvantage and hinder development of import capacity.

Finally, the Hackberry policy states that the public interest is served by encouraging gas-on-gas competition. This public interest determination by the Commission, pursuant to its delegated NGA authority, preempts actions by any state that would undermine this national objective. FERC has acted, in direct and unequivocal terms, to encourage development of LNG terminals to foster gas-on-gas competition for the benefit of customers in California and nationwide. CPUC regulation of the SES LNG terminal would undermine this important national objective and is, therefore, inconsistent with the public interest.

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The CPUC’s Siting and Safety Concerns Will Be Addressed in Proceedings Before the Commission.

The Commission, the Coast Guard, and the Office of Pipeline Safety Have Established a Collaborative Process for Addressing Environmental and Safety Concerns Affecting LNG Terminals In Which the Commission is the Lead Agency.

The Commission has recently signed an interagency agreement designed "to ensure that the Participating Agencies work in a coordinated manner to address issues regarding safety and security at waterfront LNG facilities, including the terminal facilities and tanker operations, to avoid duplication of effort, and to maximize the exchange of relevant information related to the safety and security aspects of LNG facilities and the related marine concerns. This interagency agreement is intended to memorialize and improve the long-standing cooperation between the federal agencies with safety jurisdiction, and is further evidence that there is no regulatory gap in siting and safety jurisdiction to be filled by the CPUC.

The interagency agreement describes the roles of the Department of Transportation’s Research and Special Programs Administration ("RSPA"), and the U.S. Coast Guard ("USCG"). The RSPA promulgates and enforces safety regulations for the transportation and storage of LNG under 49 U.S.C. Ch. 601, including aspects of the siting, design, installation, construction inspection and maintenance of LNG facilities. (49 C.F.R. Part 193). The USCG is concerned with navigation safety, vessel engineering and safety standards and matters pertaining to the safety of facilities in or adjacent to navigable waters up to the last valve before the receiving tanks. It also is concerned with security plan review and siting as it affects vessel traffic in and around LNG facilities.

Under the interagency agreement, FERC will be the lead agency for environmental review under NEPA, and will be responsible for preparing the analysis and decision required under that statute for the approval of new facilities. This review will include all aspects of proposed projects, including: tanker operation; marine facilities; safety and terminal siting, construction and operation; as well as environmental and cultural impacts...CPUC can participate fully in the NEPA process.

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CONCLUSION

State jurisdiction over LNG import terminals is not only contrary to the law, but is contrary to sound public policy. The Commission should reject the contentions in the CPUC’s protest and declare that its jurisdiction over LNG import facilities is plenary, exclusive, and preemptive.

For the foregoing reasons, SES requests that CPUCs’ protest be denied and that the Application be granted.

Respectfully submitted,

/s/ Julia R. Richardson
Julia R. Richardson
Howard E. Shapiro
John H. Burnes, Jr.
E. Brendan Shane
Van Ness Feldman, P.C.
[address omitted]
Washington, D.C. 20007
Counsel for Sound Energy Solutions

/s/ Thomas E. Giles
Thomas E. Giles
Executive Vice President & Chief Executive Officer
Sound Energy Solutions
[address omitted]
Long Beach, CA 90802