North America
The Energy Picture

prepared by

North American Energy Working Group

June 2002

(6) Legal and Policy Frameworks

Prior to the conclusion of the Canada-U.S. Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA), the key international trade agreement governing North American energy trade was the General Agreement on Tariffs and Trade (GATT). Both the FTA and NAFTA made some important changes in the rules governing energy trade. The inclusion of energy in these agreements ensured that trade in this increasingly significant sector would be based on internationally-recognized, non-discriminatory market access principles that were already applied in most sectors of economic activity.

The NAFTA has been instrumental in the emergence of an integrated North American market for energy goods. For trade between Canada and the United States, limits on the use of import restrictions and the narrowing in scope of the national security exception in the NAFTA have provided energy exporters with enhanced protection and predictability in terms of market access, while disciplines to limit the recourse to export restrictions help ensure that consumers have secure access to continental supplies of energy.

Canada

Mexico

In Mexico, constitutional provisions set the legal framework for the electricity industry. Article 27 establishes that generation, transmission, distribution, and supply of electricity to be used as public service^[1] is exclusively the Federal Government’s responsibility. Article 28 further establishes that all strategic activities carried out by the Federal Government shall not be considered a monopoly. Article 25 provides that the Federal Government is empowered to own and operate public companies with the exclusive purpose of implementing identified strategic activities such as the electricity sector.

Despite the strong presence of the Federal Government, there are opportunities for private sector involvement in the electricity sector. In December 1992, the Public Electricity Service Act (Ley del Servicio Público de Energía Eléctrica — LSPEE) was amended to allow private participation in generation activities. Article 3 of this Act lists five areas that are not considered as public service, and that are open to private sector participation:

• Self supply^[2]
• Cogeneration
• Independent Power Producer^[3]
• Imports and exports
• Small-scale generation.^[4]

In October 1995, the Energy Regulatory Commission Act (Ley de la Comisión Reguladora de Energía — LCRE) transformed the CRE from an advisory body on gas and electricity (as set out in its 1993 creation decree) into an autonomous agency, which regulates the electricity and natural gas industries. The CRE promotes and enforces the efficient development of the following activities:

Regulated activities (natural gas)

• Natural gas first hand sales
• Liquefied petroleum processing
• Natural gas transportation, distribution and storage

Regulated activities (electricity)

• Public service electricity supply
• Electricity generation of private parties
• Exports and imports between private parties
• Electricity acquisitions for public service
• Transmission services between the supplier and private generation permit holders.

Natural Gas Regulation (NGR) (November 25, 1995)

The NGR establishes the regulatory principles empowered by the Regulatory Act of the Constitutional Article 27 on Petroleum. The NGR provides the framework by which Pemex and private investors are regulated with respect to natural gas activities. For this matter, CRE may issue general directives to improve regulation in these activities. Accordingly, public and private participation in transportation, storage, and distribution activities are subject to permit regulation.

There are four directives regarding Natural Gas Regulated Activities:

• Directive on the Determination of Prices and Rates for Natural Gas Regulated Activities /DIR-GAS- 001-96 (March 20, 1996). The CRE establishes the methodologies, criteria and guidelines by which Pemex and the permit holder must estimate the natural gas price and rates, provide the required information and conform to all dispositions the Commission issues. Natural Gas “first hand sales” are regulated by price caps considering international market reference prices and the transportation cost within Mexico. The objective of this regulatory methodology is to find the opportunity cost and to develop competitive market conditions.



• Accounting Directive for Natural Gas Regulated Activities /DIR-GAS-002-96 (June 3, 1996). The Accounting Directive establishes criteria and accounting guidelines to be used by the regulated businesses pursuant to the Natural Gas Regulation and the Directive on the Determination of Prices and Rates for Natural Gas Regulated Activities DIR-GAS-001-1996. The Directive was formulated to establish uniform criteria and accounting guidelines for the calculation of prices as well as to determine the accounting status and performance of businesses in order to verify compliance with the applicable law and to avoid cross-subsidies among different businesses lines.

  Permit holders shall present their financial information according to the bulletins, documents and memorandums contained in the Generally Accepted Accounting Principles (GAAP) in Mexico, and other documents issued by the Mexican Institute of Public Accountants or PCGA.^[5] Furthermore, this Directive establishes a specific applicable methodology for the revaluation of nonmonetary assets and for the depreciation of fixed assets, items for which the PCGA does not establish a specific method.

  The Accounting Directive standardizes the information that Pemex and the permit holders must submit to the CRE.

• Directive on the Determination of Geographic Zones for Natural Gas Distribution/DIR-GAS- 003-96 (September 27, 1996). This Directive is aimed at setting the criteria and the guidelines that will be used by the Commission to determine geographic zones for natural gas distribution and to advise interested parties in developing natural gas distribution projects in the country. These zones are defined by economic, technical and urban design criteria, which foster profitable and efficient distribution systems according to regional and national environmental priorities.

Geographic Zones were created to facilitate the commercialization of natural gas, so as to make possible the development of a local pipeline distribution network located within a zone. Most of the time, these zones are established within the limits of the urban centers, and the entity that obtains the license for gas distribution is expected to create this distribution network. The conduction of gas and the pipelines located outside of these geographic zones are considered as transport and are operated and developed by Pemex.

These criteria and guidelines are the result of a comprehensive review of different types of population centers in the country, of the objectives and strategies of the National Urban Development Program (Programa Nacional de Desarrollo Urbano), of the National Urban System (Sistema Urbano Nacional) and of the specific urban development programs for various population centers.

These guidelines help the Commission clarify the process for the determination of geographic zones, through the evaluation of the proposed zones and the resolution of proposals to modify such geographic zones. Moreover, the directive provides parties interested in natural gas distribution projects the guidance to define and propose a geographic zone consistent with national environmental and regional priorities.

These guidelines are expected to promote the efficient and profitable development of the natural gas distribution services and should foster the development and growth of the transportation systems.

• Directive on Natural Gas First-hand Sales/DIR-GAS-004-00 (February 23, 2000). This Directive establishes the guidelines and criteria that Pemex and subsidiary agencies must follow regarding obligations and accounting information for natural gas “first hand sales”. The Directive was formulated with the objective of introducing certainty and supplying the “first hand sale” regulation for an efficient performance of the gas industry.

Electricity

Constitutional Articles 25, 27 and 28

In Mexico, constitutional provisions set the legal framework for the electricity industry. The Constitution establishes that generation, transmission, distribution and supply of electricity to be used as public service are exclusively Federal Government responsibility and shall not be considered monopolistic activity. According to law, generation, transmission, distribution and sale of electricity for public service are carried out by two government-owned electric utilities: the Comisión Federal de Electricidad (CFE) and LFC. CFE has an obligation to supply electricity as a public service to the entire country, with the exception of the Ciudad de México (Mexico City) and some municipalities of the States of Mexico, Morelos, Hidalgo, and Puebla, where LFC is the supplier.^[6]

Public Electricity Service Act

The objective of this Act is the regulation of the public electricity service and of the activities defined in this Act that do not constitute public services. In December 1992, the Public Electricity Service Act was amended to allow private sector participation in generation activities such as cogeneration, self supply, independent production, small-scale generation, importation, and exportation of electricity.

Public Electricity Service Ruling Act

The Public Electricity Service Ruling Act explains in detail the Public Electricity Service Act as it applies to public service supply. Moreover, this Ruling Act establishes CRE’s mandate to grant generation permits to private parties and sets up the general principles to be followed.

Public Electricity Service Act Ruling on Contributions

The Public Electricity Service Ruling Act on Contributions (Contributions Ruling Act) is aimed at regulating the costs that private parties requesting public electricity service must meet when the extension or modification of the suppliers (CFE and LFC) facilities is required.

Energy Regulatory Commission Act

The CRE Act, passed in October 1995 by Congress, established the CRE’s independence and defined its powers and duties. Furthermore, it enhanced the clarity, transparency and stability of the regulatory framework for the natural gas and electricity industries. The Act strengthened the institutional framework by allowing legal reforms to take place. Additionally, it expanded the CRE’s purview by combining a range of regulatory functions previously spread across several government agencies.

Foreign Investment Act

The Foreign Investment Act establishes the guidelines and regulations by which foreign investments are governed in Mexico. This Act does not consider generation activities, such as small-scale production, cogeneration, self-supply, independent production and electricity imports and exports, to be State-exclusive activities. These generation activities are available for foreign participation.

3. Natural Gas and Electricity Regulated Activities

Natural Gas

Exploration and Production. The State owned company, Pemex, legally has the natural gas production monopoly. Also, Pemex maintains the natural gas “first hand sales” monopoly.

Transportation. This is a regulated activity with public and private participation. Pemex controls 85 percent of the installed capacity. Additionally, the CRE has granted 12 transportation permits, some of which are currently under a construction process.

Distribution. The CRE has granted 21 local private distribution companies permits to operate the natural gas distribution system. Some of them are expanding their own distribution networks.

Natural Gas Regulation. The CRE is responsible for the granting of permits for the development of natural gas infrastructure. This regulation establishes the maximum price of first hand sales that shall be set in accordance with directives issued by the Commission. The price calculation methodology shall reflect gas opportunity costs, competitive conditions in international markets, and the place where the sale is made considering price caps. Storage regulation is determined on a case by case basis. Domestic and international commerce are not regulated activities.

Electricity

Reforms to the Electricity Law in 1992 created a limited opening for private participation in the sector from both foreign and domestic sources. These reforms allowed private participation in electricity generation in Mexico.

In 1993, the Regulations of the Public Service of Electric Energy Law (the Regulations) were published. Among other topics, they include the criteria that govern the activities of electric energy generation, exporting, and importing by private entities.

The Law and the Regulations define six types of permits for the activities that are not considered public service: self-supply, cogeneration, independent power production, small production, importing and exporting, and establish the conditions under which each one of the permits shall be granted (Article 36).

The Ministry of Finance, with the involvement of the Ministries of Energy and Economy, determines, according to CFE proposals, the electricity tariffs as well as the tariffs’ adjustments and structure, considering the financial and the expansion requirements of the electricity services.

4. Jurisdiction

Ministry of Energy

The Ministry of Energy is responsible for Mexico’s energy policy within the current legal framework to ensure a competitive, sufficient, high-quality, economically feasible and environmentally sustainable supply as required by the ever growing national demand.

Energy Regulatory Commission

The CRE was created in 1994 as a consultative body reporting to the Ministry of Energy, and its role as an advisor was limited to the electricity industry. The CRE Act (1995) transformed its role to that of an empowered, independent regulator with technical and operational autonomy and provided the CRE with a legislative mandate to regulate the activities of both public and private operators in the electricity and gas industries.

The CRE Act defines the following activities subject to regulation:

• Supply and sale of electricity to public service customers
• Private sector generation, import and export of electricity
• Acquisition of electricity for public service
• Transmission services between agencies that provide public service and generation, export and import permit holders
• Natural gas and LPG first-hand sales
• Natural gas transportation and storage that is not related to exploration or production
• Natural gas distribution, and
• LPG transportation and distribution through pipelines.

The main functions of CRE are to grant permits, authorize prices and rates, approve terms and conditions for the provision of services, issue directives, resolve disputes, request information and impose sanctions, among others. The CRE Act also establishes the Commission’s organization and operation. Thus, it defines the CRE as a technical and operational autonomous agency that issues resolutions through a collegiate body.

United States

In the United States, the provision of electric power (notably transmission) was recognized as having the characteristics of a natural monopoly. This paved the way to Federal involvement in the regulation of electric utilities, with a particular emphasis on the regulation of interstate wholesale markets and transmission.^[7] The regulatory authority resides with the Federal Energy Regulatory Commission. The Commission uses market forces to regulate those activities that are not inherently natural monopolies (for example, generation and marketing), coupled with an active market monitoring for market power abuse. The U.S. Department of Energy issues Presidential Permits for the construction of cross-border electric transmission lines and regulates the export of electric energy. The Federal government does not regulate imports of electric energy.

State regulatory agencies have the primary role in regulating retail sales of electricity.

Natural Gas

The Federal Energy Regulatory Commission regulates both the construction of pipeline facilities and the transportation of natural gas in interstate commerce. Companies providing services and constructing and operating interstate pipelines must first obtain Commission certificates of public convenience and necessity. In addition, Commission approval is required to abandon facility use and services, as well as to set rates for these services. The U.S. Department of Energy regulates the imports and exports of natural gas. The Commission issues Presidential Permits for the construction of cross-border natural gas pipeline facilities that transport gas in interstate commerce.

The Department of Transportation’s Office of Pipeline Safety administers the national regulatory program to ensure the safe and environmentally sound transportation of natural gas and liquefied natural gas (LNG).

State regulatory agencies regulate local distribution of natural gas within their borders. States regulate the intrastate pipelines, local distribution companies, and prices to end-users: industrial, commercial and residential, as well as electric utilities that consume natural gas. They also regulate environmental impacts of gas use at the local level.

Petroleum

In the United States, private companies perform exploratory operations of oil and gas resources both onshore and offshore, under agreements with private land and mineral rights owners, with the exception of on Federal lands. The government does not establish contract terms between resource owners and developers. The contract laws of the United States and each of the 50 States provide a legal framework for commercial transactions, but not specific pricing or contractual terms. Only when the government acts as the steward of Federal lands does it become involved in the contractual aspects of resource development.

On Federal lands, the United States government holds public lease sales for exploration, development and production rights. This area is regulated by the Department of the Interior. Refining, distribution, and marketing activities are the sole province of private companies.

The Federal Energy Regulatory Commission regulates the rates and practices of oil pipeline companies engaged in interstate transportation. The Commission does not oversee the construction of oil pipelines or regulate the supply and price of oil or oil products.

The Department of Transportation’s Office of Pipeline Safety administers the national regulatory program to assure the safe and environmentally sound transportation of petroleum liquids.

The U.S. State Department has the responsibility for the issuance of Presidential permits for most cross border facilities, including pipelines carrying petroleum, petroleum products, and other liquids.

States can regulate oil and gas production rates but not to set, support, or dampen market prices for these commodities.

2. Legal and Regulatory Framework-Areas Subject to Regulation

Electricity

Federal Energy Regulatory Commission

The Federal Energy Regulatory Commission approves rates for wholesale electric sales of electricity and transmission in interstate commerce for private utilities, power marketers, power pools, power exchanges and independent system operators. The Commission acts under the legal authority of the Federal Power Act of 1935 (FPA), the Public Utility Regulatory Policies Act (PURPA), and the Energy Policy Act of 1992 (EPAct). The Commission oversees the issuance of certain stock and debt securities, assumption of obligations and liabilities, and mergers. The Commission reviews the holding of officer and director positions between top officials in utilities and certain other firms with which they do business. Finally, the Commission reviews rates set by the federal power marketing administrations, such as the Bonneville Power Administration, confers exempt wholesale generator status under the EPAct, and certifies qualifying small power production and cogeneration facilities.

Hydroelectric power regulation occurred after Congress passed the Federal Water Power Act of 1920. Subsequent statutes under which the Commission regulates non-federal hydroelectric power projects that affect navigable waters, occupy U.S. lands, use water or water power at a government dam, or affect the interests of interstate commerce include the FPA, the PURPA, the Electric Consumers Protection Act of 1986, and the EPAct. This work includes: issuing preliminary permits, project licenses and exemptions from licensing; ensuring dam safety; performing project compliance activities; investigating and assessing payments for headwater benefits; and coordinating with other agencies.

U.S. Regulation of International Electricity Trade

Within the United States federal government, the Department of Energy (DOE) has exclusive jurisdiction over the construction of cross-border electric transmission lines and the export of electric energy. The federal government does not regulate imports of electric energy. Under Executive Order (EO) 10485, as amended by EO 12038, no person may construct, operate, maintain, or connect an electric transmission line at the borders of the United States without first obtaining a Presidential permit from DOE. This authority originally resided with the President pursuant to EO 8202. In 1953, in EO 10485, this authority was delegated to the Chairman of the Federal Power Commission and in 1978 it was further delegated to the Secretary of Energy in EO 12038.

DOE’s process for issuing a Presidential permit relating to crossborder electricity transmission lines or electricity exports, with whatever conditions it deems necessary, is two-fold. DOE must first determine that the issuance of the permit is in the public interest and then secondly it must obtain concurrence from the Departments of State and Defense. In the event that there is a disagreement among the three agencies concerning the appropriateness of issuing a permit, the decision is referred to the President.

In determining whether the granting of a permit is in the public interest, DOE considers the impact of the proposed international transmission line on the reliability of the U.S. electric power supply system and on the environment. In conducting its reliability review, DOE relies heavily upon technical studies performed by permit applicants in conjunction with other electric utilities in the region and utility reliability organizations; i.e., reliability councils, Independent System Operators, regional power pools.

Under section 202(e) of the Federal Power Act, authorization from DOE is required for exports of electricity from the United States to a foreign country. After providing opportunity for public comment, DOE may grant export authorization if it determines that the export will not impair the sufficiency of electric supply within the United States and would not impede, or tend to impede, the coordination in the public interest of facilities subject to the jurisdiction of DOE. DOE also must consider the environmental impacts associated with authorizing exports; however, exports of electricity over existing international electric transmission lines usually are eligible for categorical exclusion under DOE’s regulations implementing the National Environmental Policy Act of 1969 (NEPA).

The States’ Role in Electricity Regulation

Traditionally, State regulatory commissions have required utilities to provide adequate, safe, and reliable electric service as a part of an obligation to serve requirement.

In about half of the States, the investor-owned electric utilities are vertically-integrated entities (i.e., utilities that own or control the bulk power generation and transmission facilities, as well as the local distribution facilities). Their facilities are principally State regulated, meaning that State commissions set the retail power sales rates, and the transmission and distribution rates of the utilities. However, some State commissions have ordered their vertically-integrated utilities to restructure and divest their generation assets, leaving them primarily with only State regulated distribution service functions.

Whether or not a State has restructured the electric industry within its borders, State commissions also have the authority to regulate the end use of electricity as well as its distribution and delivery. State commissions have the authority (if they choose) to regulate aggregators and others who sell electricity directly to end users. Because of that retail transaction jurisdiction, a large majority of State commissions have prescribed, established, or approved rules governing utility service to existing customers during either outages or curtailments.

State commissions or other State agencies are also typically in charge of the certification and siting processes for transmission, distribution, and generation facilities. This means that generation and/or transmission facilities cannot be built without State approval. Several State commissions that have implemented electric utility restructuring have eliminated the requirement for a finding of local (State) need for generation plants in those instances where the plants are built to sell electricity exclusively into the wholesale power sales market and are not included in State rate bases. Transmission expansion planning in the past has been subject to review by the State commission before the State commission approves locations or sites for future transmission lines. However, FERC Order No. 2000 provides that Regional Transmission Organizations (RTO’s), which are under FERC jurisdiction, will conduct transmission expansion planning on a regional basis. Currently, any transmission approved to be built by an RTO would still require certification and/or siting by the State commission of the State over whose land the transmission lines run.

Finally, many State commissions indirectly regulate generation or transmission reliability even if the underlying assets have been divested and sold or transferred to independent transmission companies. The State commission can do so by providing incentives, or requiring the local electric distribution-only companies that survive as a result of such divestiture and remain jurisdictional, to maintain reliability. This might be done through a variety of methods, including having formal standards for electric reliability. Such formal standards could include reporting and monitoring standards that identify the cause of major outages, that track poorly performing (more vulnerable) circuits, that have clear outage service restoration standards, and that include tree-trimming and vegetation management standards. Several State commissions provide incentives to utilities to maintain or exceed a set standard of reliability measured by one or more established reliability indices. In combination, these approaches raise the reliability of the electric network.

Natural Gas

Federal Energy Regulatory Commission

The Natural Gas Act (NGA) of 1938, the Natural Gas Policy Act (NGPA) of 1978, the Outer Continental Shelf Lands Act (OCSLA), the Natural Gas Wellhead Decontrol Act (NGWDA) of 1989, and the Energy Policy Act of 1992 (EPAct) are the primary laws the Federal Energy Regulatory Commission administers to oversee America’s natural gas pipeline industry.

Under Section 7 of the NGA, the Commission regulates both the construction of pipeline facilities and the transportation of natural gas in interstate commerce. Companies providing services and constructing and operating interstate pipelines must first obtain Commission certificates of public convenience and necessity. Commission approval is required to set rates for these services. In addition, Commission approval is required to abandon facility use and services. The Commission also regulates the transportation of natural gas as authorized by the NGPA and the OCSLA.

The Commission, under Section 3 of the NGA, authorizes the siting, construction, and operation of facilities needed by pipelines at the U.S. point of entry or exit to import or export natural gas. Further, those pipeline companies that propose to construct, operate, maintain, or connect facilities to import or export natural gas at the international land and maritime borders of the United States must file an application for a Presidential Permit.

The Department of Energy Legal Authority

Under Section 3 of the NGA, as amended, a company that wants to import or export natural gas is required to first obtain an authorization from the Department of Energy. The import/export authorizations are necessary for applicants to market, trade, or use foreign natural gas.

DOE issues two types of authorizations, blanket and long-term authorizations. The blanket authorization enables an applicant to import or export on a short-term or spot market basis for a period of two years. Under this type of authorization, the applicant is authorized to import and/or export natural gas for itself or act as a marketing agent for a third party. The applicant is not obligated to import or export natural gas when it receives a blanket authorization. Further, contracts are not required to be filed with the application. The long-term authorization is used when an applicant has, or intends to have, a signed gas purchase or sales agreement/contract for a period of time longer than two years.

The States’ Role in Natural Gas Regulation

State regulatory bodies regulate local distribution of natural gas within their borders. States regulate the intrastate pipelines, local distribution companies and prices to end-users: industrial, commercial and residential, as well as electric utilities that consume natural gas. They also regulate environmental impacts of gas use at the local level. Many States are in the process of deregulating or unbundling the provision of natural gas within their States.

State programs to allow residential natural gas users to select their gas suppliers are spreading throughout the country. However, the availability, characteristics, and participation rates of these “customer choice” programs vary widely across States. Four States (New Mexico, New Jersey, New York, and West Virginia) allow all residential consumers to choose their own natural gas suppliers, while seven States have begun to implement Statewide programs. Another 11 States and the District of Columbia have pilot or partial unbundling programs in place. An additional 10 States are considering action on customer choice, while 18 States have thus far taken no action. Two States have changed their unbundling status in the recent past. New Jersey has allowed customer choice Statewide since January 1, 2000, while Kentucky has approved a 5-year pilot customer choice program beginning February 1, 2000. State regulators and lawmakers, who are responsible for designing and implementing retail restructuring programs, have moved more slowly in implementing choice programs for residential and small-volume commercial customers, traditionally known as “core” consumers, until they could ensure reliable service.

Petroleum

Although the oil and gas marketplace determines the activities of the U.S. private sector oil and gas industry, the U.S. Federal government plays an important role in establishing and enforcing performance standards for industry and in protecting consumers, workers, and the environment through regulatory activity. Much of the Federal government’s role is defined by the inherent flaws of competitive markets due to externalities (e.g., air or water pollution) or other market failures. In this respect, the Federal government is involved in a variety of areas: environmental standards; pipeline safety; interstate pipeline commerce regulation; occupational health and safety; and financial reporting requirements.

Department of Transportation

The Department of Transportation’s Office of Pipeline Safety (OPS) administers the national regulatory program to assure the safe and environmentally sound transportation of natural gas, liquefied natural gas (LNG), and petroleum liquids. This regulatory program serves four primary functions:

• Assuring the safe siting, design, construction, inspection, testing, operation, and maintenance of pipelines and LNG facilities;
• Setting out parameters for administering the pipeline safety program;
• Requiring pipeline operators to implement and maintain anti-drug and alcohol misuse prevention programs for employees who perform safety-sensitive functions; and
• Outlining requirements for onshore oil pipeline response plans.

The Office of Pipeline Safety’s regulatory and enforcement jurisdiction extends over all interstate pipeline facilities in the United States. For intrastate pipelines, the OPS’s authorizing statutes provide for individual State assumption of all or part of regulatory and enforcement responsibilities. As an incentive to improve State program performance and to encourage States to assume responsibility for intrastate pipelines, the OPS is authorized to reimburse participating States up to 50 percent of the State’s annual costs of carrying out a pipeline safety program. Most States support this concept of common stewardship in pipeline safety. This collaborative relationship between the Federal governments and the States forms the cornerstone of the U.S. pipeline safety program.

Federal Energy Regulatory Commission

Under the Interstate Commerce Act (ICA) and the EPAct, the Federal Energy Regulatory Commission regulates the rates and practices of oil pipeline companies engaged in interstate transportation. The Commission does not oversee the construction of oil pipelines or regulate the supply and price of oil or oil products. Rather, it helps to assure shippers equal access to pipeline transportation, equal service conditions on a pipeline, and reasonable rates for moving petroleum and petroleum products by pipeline.

Department of State Presidential Permit Process for Petroleum Pipelines

Executive Order 11423 of 1968, as amended by Executive Order 12847 of 1993, governs issuance by the U.S. Department of State of Presidential permits for most cross border facilities except electricity transmission lines and natural gas pipelines, including pipelines carrying petroleum, petroleum products, and other liquids. In evaluating Presidential permit applications for these pipelines, the State Department is required to request the views of the Treasury, Defense, Justice, Interior, Commerce, and Transportation Departments, the Surface Transportation Board, and the Federal Emergency Management Agency. As a matter of practice, it often solicits comments from other Federal, State, and local government agencies as appropriate, including the Environmental Protection Agency and, in the case of facilities crossing the U.S.-Mexico border, the U.S. Section of the International Boundary and Water Commission. It also solicits comments from the public through the publication in the Federal Register of a notice of receipt of an application.

In evaluating applications, the State Department complies with the requirements imposed by the National Environmental Policy Act (NEPA). The State Department works with the applicant to ensure preparation of an environmental assessment that is used to determine whether a Finding of No Significant Impact (FONSI) is appropriate or whether an Environmental Impact Statement must be prepared with respect to potential significant environmental impacts within the United States. The State Department must comply with requirements imposed by other relevant authorities, including the National Historic Preservation Act and Executive Order 12898 on environmental justice. After consideration of the views obtained from various authorities, the State Department must determine whether the issuance of a permit to the applicant would serve the national interest. If it is determined that the issuance would serve the national interest, the State Department must prepare a permit with such terms and conditions as the national interest may, in the State Department’s judgment, require. The Department is further required to notify those agencies required to be consulted of its proposed determination. If any of those agencies disagrees with the determination within 15 days of notification, it may ask the State Department to refer the matter to the President for his consideration and a final decision. If no agency disagrees within the fifteen day period, the State Department may issue or deny the permit in accordance with the proposed national interest determination. Consistent with a recommendation of the U.S. National Energy Policy report, the State Department will propose a revised Executive Order to govern this process.

Department of the Interior

The Department of the Interior has management and resource protection responsibilities for approximately 450 million acres of Federal lands and three billion acres of the Outer Continental Shelf.

Significant oil and natural gas resources exist within these onshore and offshore Federal lands, which are under the jurisdiction of various agencies of the Department of the Interior. The National Park Service manages more than 80 million acres in 375 national park units. The Park Service also preserves numerous historic and archaeological sites and maintains many of the Nation’s prime heritage resources. Many of these are managed through partnership programs with Native American tribes, States, and localities. The Department’s Bureau of Land Management is responsible for more than 264 million acres of public lands and more than 560 million acres of subsurface mineral resources. The Fish and Wildlife Service manages the 92 million acre National Wildlife Refuge System, which includes national wildlife refuges and protected wetland management districts. The Minerals Management Service is responsible for managing energy and mineral development on the Outer Continental Shelf. Additionally, the Interior Department is responsible for migratory wildlife conservation, historic preservation, and the protection of endangered species. All of these agencies have to be involved when there is energy developed that affects their jurisdictions.

Onshore Federal lands produce eight percent of U.S. natural gas and five percent of its crude oil.^[8] Similarly, Federal offshore areas account for approximately 26 percent of U.S. crude oil production and 25 percent of U.S. marketed gas production.^[9] Federal lands deemed suitable for resource development are leased to private sector operators for oil and gas development. Companies competitively bid for the right to explore and develop Federal onshore and offshore lands. Successful lease holders pay an initial bonus and annual rents for the right to develop Federal properties. Moreover, in the event that hydrocarbon resources are discovered and extracted from these lands, the Federal government is entitled to a percentage royalty, based on the value of resource production.

A variety of Federal agencies are responsible for managing oil and gas leasing programs for Federal lands. The Department of the Interior’s Minerals Management Service oversees all aspects of offshore leasing, while onshore leasing activities are administered by the Interior Department’s Bureau of Land Management, National Park Service, and Bureau of Indian Affairs, as well as the Department of Agriculture’s U.S. Forest Service. All revenues associated with both onshore and offshore Federal leasing, however, are managed by the Minerals Management Service’s Royalty Management Program.

Environmental Regulations: Federal and State Roles

The U.S. Federal and State governments play significant roles, often in cooperation with one another, in setting environmental performance standards regarding onshore and offshore oil and gas operations. Within the past 25 years, several major Federal statutes have established Federal requirements governing air emissions, discharges to surface water, and the management and disposal of hazardous and non-hazardous solid wastes. These regulations have significant impacts on all phases of oil and gas operations including, for example:

• Subsurface injection of exploration and production wastes
• Atmospheric emission of chemicals from refineries
• Management and disposal of drilling muds and fluids
• Surface discharge of exploration and production wastes in onshore, coastal, and offshore areas
• Maintenance of underground oil and gasoline storage tanks
• Wetlands operations.

Although these standards are set by Federal statute and managed by various offices within the United States Environmental Protection Agency (EPA), in most instances, policy implementation and enforcement is the jurisdiction of individual States, which have typically developed regulatory programs that meet or exceed the minimum Federal requirements under each statute. As a result of this approach, there is widespread variation among States regarding specific environmental requirements and performance standards. Such variation is often necessary due to varying environmental conditions, geology, and production economics among the producing States. In cases in which a State’s regulatory program is deemed by the Environmental Protection Agency as insufficient under the minimum Federal requirements, the Federal government remains responsible for program administration at the State level.

In addition to State-led environmental programs, the Federal government is active in setting and enforcing environmental standards that address unique and precious habitats and wildlife throughout the Nation. To the extent that oil and gas operations interact with these environments, operators must comply with regulated standards and work in collaboration with a variety of Federal agencies to ensure environmentally sound operations. For example, the Department of the Interior’s Fish and Wildlife Service (FWS) oversees a regulatory and technical assistance program that protects endangered and threatened wildlife species. The Department of Commerce, through its National Oceanic and Atmospheric Administration (NOAA), works in partnership with States to oversee the effective management, beneficial use, protection, and development of sensitive coastal zones in the United States. Wetland areas, frequently impacted by oil and gas operations, are regulated by the U.S. Army Corps of Engineers, a branch of the Department of Defense.

Similarly, oil and gas operations on both onshore and offshore Federal lands are also subject to Federal review and oversight. As steward of these lands for the United States, the Federal environmental protection role must be significant in these areas. Offshore, for example, the Minerals Management Service conducts annual and periodic unscheduled inspections of operators to ensure that safety and environmental requirements are being met. Operations on onshore Federal lands are managed by the National Park Service (NPS), the U.S. Forest Service, the Bureau of Indian Affairs (BIA), and the Bureau of Land Management (BLM).

Proceed to (7) Background Data and Projections

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