Pipeline Industry Worried About Trump Domestic Content Memorandum

President Trump’s stated intention to require new and repaired pipelines to use “domestic content” has the potential to throw a large monkey wrench into future U.S. pipeline construction. But the ability of the president to turn his proposal into reality remains a significant question.

Pipeline trade groups responding to a Department of Commerce Federal Register notice point out that Trump’s authority to impose a domestic content requirement on privately funded investment is far from clear. That Commerce notice was published in an effort to help flesh out Trump’s Jan. 24 memorandum requiring new pipelines to use American materials “to the maximum extent possible and to the extent permitted by law.” The Commerce notice omits any reference to a legal rationale.

The requirement to use U.S.-produced materials and equipment would apply to all new pipelines, as well as retrofitted, repaired or expanded pipelines inside the borders of the United States, including portions of pipelines. The Commerce Department plans to finalize a policy by next January.

James Bowe, Jr., a partner in the energy practice at the law firm King and Spalding, represents interstate pipeline companies. “We have received some alarmed phone calls from current and potential pipeline project sponsors,” he said. “Some of them have negotiated rates with anchor shippers based on quotes from suppliers. But if the Trump proposal becomes policy in its stated form, it could raise costs considerably. Projects planning to use 48-inch, 42-inch and even, in some cases, 36-inch pipe might be canceled because those diameters are not available domestically in the quantities the projects require.”

In their response to Commerce, the American Gas Association (AGA), the Association of Oil Pipe Lines (AOPL), the American Petroleum Institute (API), the Interstate Natural Gas Association of America (INGAA) and GPA Midstream Association (GPA) point out that current, domestic capacity to produce certain materials and equipment used to construct, operate and maintain energy pipelines is limited. “For example, one commonly used line pipe material is grade X70 steel, which is not currently produced in any quantities above 0.750-inch thickness at U.S. steel mills; heavier thicknesses are necessary for certain pipelines,” they stated.

Eric Amundsen, vice president, Energy Transfer Partners, added, “There are also instances where the lack of domestic mill capabilities for special applications, such as low temperature, sour service and thicker wall requirements, has made non-North American mills the only viable suppliers.”

There are both domestic and international legal questions, which will have to be answered sufficiently before any Trump edict can be enacted. First, the World Trade Organization (WTO) has rules about domestic content laws. “There is no question that consistency with international treaty obligations is going to be an issue,” said Bowe.

Moreover, the Natural Gas Act, which is the authority the Federal Energy Regulatory Commission (FERC) uses to approve construction certificates, has no provision about the materials an applicant plans to use. Congress would probably have to pass a law giving FERC that authority, which could be a tough political task given the fact that House and Senate Republicans have generally opposed domestic content requirements.

Trump has said since sending the memorandum to Commerce, that it does not apply to the Dakota Access and Keystone XL projects because the first was already underway and the second already had pipe in place prior to its approval by the State Department after Trump took office. But Trump has not addressed projects approved by the FERC after he took office. A major one is the Rover Pipeline LLC approved by FERC on Feb. 2, 2017, the day Commissioner Norman Bay left office. FERC now has only two commissioners and is not legally able, minus a quorum of three, to approve any new projects. Energy Transfer Partners L.P. is the sponsor of Rover, a new interstate pipeline and related facilities extending from the Appalachian supply area to a proposed interconnection with Vector Pipeline LP in Livingston County, MI.

Preliminary Trump Budget For 2018 Has Good, Bad

President Trump’s proposed budget for fiscal 2018 eliminates funding for one key natural gas program, but leaves another one alone. America First: A Budget Blueprint to Make America Great Again contains proposed budgets for the year beginning Oct.1, 2017, and for cabinet departments and some federal agencies such as the Environmental Protection Agency. But it does not make any mention, for example, of the fate of the FERC and the 12.7 percent projected cut in the budget of the Transportation Department. Nor does it mention how that might affect the Pipeline and Hazardous Materials Safety Administration (PHMSA). The President will produce more specific numbers in May and that more complete request will go to Congress, where the appropriation committees in each house will refine the Trump proposal.

One of a number of programs Trump proposes to eliminate in the name of federal deficit reduction is the Low-Income Home Energy Assistance Program (LIHEAP) funded by the Department of Health and Human Services. The American Gas Association is a strong proponent of the LIHEAP. The Trump budget blueprint said that “compared to other income support programs that serve similar populations, LIHEAP is a lower-impact program and is unable to demonstrate strong performance outcomes.” According to the National Energy and Utility Affordability Coalition (NEUAC), in 2016, the program served more than six million households with home heating and cooling assistance, weatherization and/or energy-related low-cost home repairs or replacements.

Katrina Metzler, executive director of the NEUAC, says the LIHEAP was funded at $3 billion in fiscal 2017, the current fiscal year. That total was down approximately $400 million from the year before. “LIHEAP appropriations have fallen by more than a third in five years,” she explained.

There is some good news in the Trump budget blueprint, particularly its commitment for level funding for the Clean Water and Drinking Water State Revolving Funds. The Budget includes $2.3 billion for the funds, a $4 million increase over the 2017 annualized continuing resolution (CR) level (2017 levels for all federal programs are set at 2016 levels until Congress passes a final 2017 budget for the year that started last October 1). The proposed 2018 budget also provides $20 million for the Water Infrastructure Finance and Innovation Act program, equal to the funding provided in the 2017 annualized CR.

One of the independent federal agencies not covered in the Trump 2018 budget blueprint is FERC. It has been limping along since Feb. 3 when Norman Bay, the third commissioner, left the agency. Acting Chairman Cheryl LaFleur and Commissioner Colette Honorable do not make a quorum because the commission has five seats. Therefore, FERC is not able to approve any projects. Of course, FERC has kept a very low natural gas pipeline profile over the past decade, preferring to spend the dominant amount of its time on electric utility issues. That could change if Trump nominates, as rumored, Kevin McIntyre as chairman. An attorney at the law firm of Jones Day in its Washington office, McIntyre represents pipeline and electric utility companies. Twenty five years ago, he worked for a number of pipeline companies, some of which are now under the Enable Midstream umbrella, according to Bowe, who knows McIntyre well.

The administration also plans to appoint Neil Chaterjee and Robert Powelson to the fourth and fifth open FERC seats, according to Washington scuttlebutt. Chatterjee is a senior energy adviser to Senate Majority Leader Mitch McConnell. Powelson is a Public Utility Commissioner in Pennsylvania.

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