South Coast Air Quality Mgmt. Dist. v. Fed. Energy Regulatory Comm'n

• Citation: 621 F.3d 1085
• Decision Date: 09 September 2010
• Docket Number: No. 08-72265.,08-72265.
• Parties: SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, and Public Utilities Commission of the State of California; Sempra LNG Marketing Corp.; North Baja Pipeline, LLC; Shell Energy North America (U.S.L.P.); San Diego Gas & Electric Company; Southern California Gas Company, Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

621 F.3d 1085

SOUTH COAST AIR QUALITY MANAGEMENT DISTRICT, Petitioner,

v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,andPublic Utilities Commission of the State of California; Sempra LNG Marketing Corp.; North Baja Pipeline, LLC; Shell Energy North America (U.S.L.P.); San Diego Gas & Electric Company; Southern California Gas Company, Intervenors.

No. 08-72265.

United States Court of Appeals,Ninth Circuit.

Argued and Submitted Nov. 2, 2009.

Filed Sept. 9, 2010.

COPYRIGHT MATERIAL OMITTED.

Daniel P. Selmi, Los Angeles, CA, and Deborah L. Keeth, Shute, Mihaly & Weinberger, San Francisco, CA, for the petitioner.

Holly E. Cafer, Federal Energy Regulatory Commission, Washington, D.C., for the respondent.

Harvey Y. Morris, San Francisco, CA, for Intervenor Public Utilities Commission of the State of California.

John R. Ellis, Los Angeles, CA, for Intervenors Southern California Gas Company and San Diego Gas & Electric Company.

Catherine E. Stetson and Lee A. Alexander, Hogan & Hartson LLP, Washington, D.C., for Intervenor North Baja Pipeline, LLC.

William D. Rapp, Sempra Energy, San Diego, CA, for Intervenor Sempra LNG Marketing Corp.

Jeffrey D. Watkiss, Bracewell & Giuliani, Washington, D.C., for Intervenor Shell Energy North America (US), L.P.

On Petition for Review of Orders of the Federal Energy Regulatory Commission. FERC Nos. CP06-61-000, CP06-61-001, CP06-61-002, CP06-61-003, CP06-61-004.

Before: MICHAEL DALY HAWKINS and SIDNEY R. THOMAS, Circuit Judges, and EDWARD R. KORMAN, ^* District Judge.

OPINION

KORMAN, District Judge:

Natural gas is generally regarded as the cleanest conventional fossil fuel. Nevertheless, as the dispute that forms the basis of this appeal demonstrates, the burning of this energy source releases air pollutants-namely, nitrogen oxides (NOx), the precursors that lead to the chemical formation of ozone and particulate matter, two federally-regulated pollutants and the focus of this litigation. The Wobbe Index (“WI”) is a measure of natural gas interchangeability. It is based on the heating value and specific gravity of the gas, and often referenced as a proxy for natural gas quality. Gas with a higher WI number produces more heat because it burns hotter than gas with a lower number. As the WI of a quantity of gas increases, the NOx emissions from the gas increase as well. The WI of gas may vary depending on its source-the gas historically burned in California originates exclusively in North America, and the five-year historical WI average for gas used in the Basin Region of Southern California (“Basin”) is 1332. Foreign-sourced natural gas, on the other hand, often has an average WI that is higher than that of domestic sources, but may be commingled or blended with other gasses to lower that value.

Foreign-sourced liquefied natural gas arrives in North America in condensed form after having been shipped on tankers. On arrival, it is regasified at terminals and ultimately transported through pipelines to end users. North Baja Pipeline, LLC (“North Baja”) operates an interstate natural gas pipeline system that extends eighty miles from an interconnection with El Paso Natural Gas Company near Ehrenberg, Arizona, through southeast California to the international border between Yuma, Arizona and Mexicali, North Baja Mexico, and currently transports gas in the southbound direction only. It commenced the underlying proceeding on February 7, 2006 by applying for a certificate of public convenience and necessity with the Federal Energy Regulatory Commission (“FERC”) pursuant to Section 7(c) of the Natural Gas Act, 15 U.S.C. § 717f(c). The certificate would authorize the expansion and modification of North Baja's existing pipeline system to allow for the transport of foreign-sourced natural gas in the opposite direction, from Mexico northbound into the Basin.

The Basin consists principally of four counties-Orange County and the non-desert portions of Los Angeles, Riverside, and San Bernardino Counties-that comprise the jurisdictional area of South Coast Air Quality Management District (“South Coast”). Once completed, the expanded pipeline would have the capacity to transport gas into the California system through an interconnection with Southern California Gas Company (“SoCalGas”), a public utility corporation that delivers gas throughout the Basin.

In 2007, FERC released an environmental impact statement (“EIS”) for the project, the purpose of which was to detail and consider any environmental impacts associated with the North Baja pipeline project. FERC filed the EIS with the Environmental Protection Agency (“EPA”) and included responses to all comments received during the public comment period. Both South Coast and the EPA filed written responses to this document. South Coast, which had intervened in the proceedings, claimed that FERC was in violation of its duties under the National Environmental Policy Act (“NEPA”), 42 U.S.C. §§ 4321-4370f, the Clean Air Act, 42 U.S.C. §§ 7401-7671q, and the Natural Gas Act. Specifically, South Coast alleged that FERC's EIS only examined the environmental impact relating to the construction and operation of the new pipeline itself, and urged FERC to also consider the impact of the emissions resulting from the eventual use of the pipeline's gas by consumers in the Basin and to adopt measures to mitigate that impact.

Shortly thereafter, FERC issued an order approving the project, which authorized the construction of new facilities to allow for the northward flow of gas. North Baja Pipeline, LLC, 121 FERC ¶ 61,010 (Oct. 2, 2007), reh'g denied, 123 FERC ¶ 61,073 (Apr. 24, 2008). The order confirmed FERC's earlier environmental review and adopted twenty-one enumerated environmental conditions relating to the construction of the pipeline and its continued transport of gas. FERC also required that the North Baja pipeline only deliver gas that meets the strictest gas quality standards imposed by state regulatory agencies on downstream end-users and pipelines, which, in light of California's gas standards, meant that the North Baja gas could not exceed a WI level of 1385. FERC found that compliance with these standards “should not result in a material increase in air pollutant emissions and, therefore, should not result in material changes in air quality in the Basin.”

Moreover, although South Coast had argued previously for a maximum WI of 1360 in California, FERC observed that “[t]he record contains no analysis or evidence showing a material change in air quality impacts as a result of the consumption of natural gas with a WI of 1385 ... compared to that of [South Coast's] proposed WI limit of 1360.” South Coast, acting alone, filed a Request for Rehearing of FERC's Order. FERC denied the request and South Coast filed the instant petition for review.

I. Regulatory Background

Before turning to the arguments in this case, we briefly outline the statutory and regulatory history of the natural gas industry in order to provide the background for FERC's role in regulating the burning of natural gas in California. “By 1938, in a series of Commerce Clause cases, the Supreme Court established that states could regulate the intrastate and interstate transportation and sale of natural gas to ultimate consumers....” Mich. Consol. Gas Co. v. Panhandle E. Pipe Line Co., 887 F.2d 1295, 1299 (6th Cir.1989). The states, however, “could not reach indirect sales for resale, such as a pipeline's sale to [a local distribution company] for resale.” Id. This inability to regulate wholesale interstate transactions created a “regulatory void,” Gen. Motors Corp. v. Tracy, 519 U.S. 278, 292, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997), and “handicapped their ability to regulate the natural gas industry and left consumers at the mercy of producers and pipeline companies,” Mich. Consol. Gas, 887 F.2d at 1299 (citing Panhandle E. Pipe Line Co. v. Pub. Serv. Comm'n of Indiana, 332 U.S. 507, 515-16, 68 S.Ct. 190, 92 L.Ed. 128 (1947)).

In response, Congress passed the Natural Gas Act, “a comprehensive scheme of federal regulation of ‘all wholesales of natural gas in interstate commerce.’ ” Northern Natural Gas Co. v. State Corp. Comm'n, 372 U.S. 84, 91, 83 S.Ct. 646, 9 L.Ed.2d 601 (1963) (quoting Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 682, 74 S.Ct. 794, 98 L.Ed. 1035 (1954)). Through the Natural Gas Act, Congress “ ‘meant to create a comprehensive and effective regulatory scheme’ of dual state and federal authority.”

Fed. Power Comm'n v. La. Power & Light Co., 406 U.S. 621, 631, 92 S.Ct. 1827, 32 L.Ed.2d 369 (1972) (quoting Panhandle E. Pipe Line, 332 U.S. at 520, 68 S.Ct. 190). It accomplished this by granting FERC exclusive jurisdiction to “fill the regulatory void” described above. Gen. Motors, 519 U.S. at 292, 117 S.Ct. 811; Mich. Consol. Gas, 887 F.2d at 1299. ¹ In Section 1(b) of the Natural Gas Act, Congress vested FERC with authority over just three domestic areas: 1) the “transportation of natural gas in interstate commerce,” 2) the “sale in interstate commerce of natural gas for resale,” and 3) “natural-gas companies engaged in such transportation or sale.” 15 U.S.C. § 717(b). Notably however, the Natural Gas Act specifically exempted from federal regulation the “local distribution of natural gas” i.e., the means by which end users obtain their gas. Id.; see also Fed. Power Comm'n v. Transcon. Gas Pipe Line Corp., 365 U.S. 1, 27, 81 S.Ct. 435, 5 L.Ed.2d 377 (1961); Panhandle E. Pipe Line, 332 U.S. at 516, 68 S.Ct. 190. Similarly, section 1(c) of the Natural Gas Act, the so-called “Hinshaw Amendment,” “exempts from FERC regulation intrastate pipelines [such as SoCalGas] that operate exclusively in one State and with rates and service regulated by the State.” Gen. Motors, 519 U.S. at 284 n. 3, 117 S.Ct. 811.

Federal regulation by FERC “was to be broadly complementary to that reserved to the States, so that there would be no ‘gaps' for private interests...