Unintended Consequences – Why a Limited Pool of Environmental Contractors Matters

Natural Gas Oil Projects

FERC is often accused by project opponents of being biased in favor of approving projects, and even being a “rubber stamp” agency. One piece of evidence often cited to support these allegations of bias is that the third party contractors (TPC) that FERC retains to assist it in conducting environmental reviews also work for the industry. While conflicts of interest are to be avoided, prescriptive rules can have the unintended consequence of causing the most qualified contractors to make the business decision to not provide services to FERC.

Why does this matter to the industry? Well, if a large number of TPCs perceive that doing work for FERC may preclude them from working for private industry, FERC could lose access to the expertise it needs. As a result, the quality and timing of the environmental analysis could be hampered.

This week, we review data on TPCs used by FERC and the applicants which shows that such work is highly concentrated among a handful of firms. And, with the Commission announcing yesterday a broad Notice of Inquiry into its longstanding Certificate Review Policy — a topic we’re using our data to analyze for customers — perhaps FERC will reconsider some of the limitations it imposes.

FERC’s “Open Your Books” Rules

In August of 2016, FERC issued an updated handbook concerning its use of TPCs to assist the Commission staff in reviewing the environmental aspects of applications and preparing the environmental documents required by NEPA. A substantial portion of that handbook is dedicated to defining and obtaining information about potential conflicts of interest of TPCs.

Any company seeking to become a TPC must provide detailed information about its business relationships with the applicant, and must also reveal business relationships with FERC regulated entities. The list of entities that a prospective TPC must disclose are vast, including, but not limited to, pipelines, gathering companies, brokers and marketers of natural gas, producers, and end users of natural gas. And the breadth of disclosures continues: the TPC must disclose whether it has contracted with any other company, within the last two years, to perform any services on a “similar” project in the “same” geographic area.

That’s a lot of information to disclose about one’s business. The purpose of these disclosures is to enable FERC to implement its policy of avoiding any conflicts before selecting a TPC.  A conflict of interest typically is found to exist if the TPC or its employees or affiliates have a past, present, or ongoing financial interest in the project or in a related project, or have a financial or business relationship with the applicant.

It doesn’t end there, however. The conflict decision is not simply made at the time the TPC is selected, but is a continuing obligation; so once the TPC begins work, it must provide annual updates and self-report changes. To avoid the potential for actual or perceived conflicts after becoming a FERC TPC, the contractor is prohibited from entering into agreements with the applicant to perform any function on the project until its work as a FERC TPC is completed. In addition, the TPC is prohibited from providing service to any other company on a “similar” project in the same “geographic area,” and over the “same time period” as the project on which it is acting as FERC’s TPC.

These continuing obligations, and particularly the work restrictions, have the greatest potential to limit the number of companies willing to take on work as a FERC TPC. This is especially true for projects that will require the preparation of an Environmental Impact Statement (EIS), because these restrictions will apply to the TPC’s future business interests for the substantial period of time it takes to complete the EIS, a median of 809.5 days from the initiation of pre-filing.

Who Performs the Work and Why that Matters

An analysis  of the contractors who are performing work for FERC and the applicants for projects that require the preparation of an EIS shows that the work is concentrated among three firms on each side, with only one contractor appearing on both lists. The FERC TPC for 33 of the 41 projects was either Cardno, Merjent or Natural Resource Group. At least one of the applicant’s environmental contractors for 30 of the 41 projects included either TRC, Natural Resource Group or Ecology and Environment. (Note that the applicants often employ multiple consultants, so the number of contractors is higher than the number of projects).

If FERC continues to strictly enforce the prohibitions against a contractor working for any other company on a “similar” project in the same “geographic area,” and over the “same time period,” we could see the contractors segregating between those that work exclusively for the industry and those who work exclusively for FERC. Such a self-selection by the contractors could lead to FERC consultants who may not understand the difficulties of actually constructing a project, and could also lead to industry consultants who are not well versed in FERC’s data needs for a thorough review of projects. For this reason, it’s possible that FERC will consider re-examining its work restrictions on TPCs, and both industry and FERC may want to broaden their lists of contractors so that geographic conflicts could be reduced without the need for an outright prohibition.

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