Second Circuit Sustains New Provision for Direct Review by Federal Appeals Courts Relating to Permits for LNG Facilities and Interstate Natural Gas Pipelines

In a precedent-setting case of first impression, the Second Circuit, in a 2-1 decision, has sustained and applied new section 19(d) of the Natural Gas Act (NGA), added to the NGA by section 313 of the Energy Policy Act of 2005 (Islander East Pipeline Co., L.L.C. v. Conn. Dept of Env. Protection, No. 05-4139). Section 19(d) provides applicants for authorizations from the Federal Energy Regulatory Commission, under section 3 of the NGA (liquefied natural gas facilities) or under section 7 (interstate natural gas pipelines), with direct review in a federal court of appeals of state permitting decisions issued pursuant to federal law requiring a permit for such projects (other than the Coastal Zone Management Act).

Prior to EPAct 2005, sponsors of LNG and interstate pipeline projects could challenge such state permitting decisions under federal statutes like the Clean Water Act (CWA) only through state courts. Congress enacted section 19(d) to eliminate the substantial delay that resulted. Under the new provision, if the federal appeals court finds that state agency’s order or action (1) is inconsistent with the federal law governing the permit, and (2) would prevent the construction, expansion, or operation of the proposed facility, the court must remand the proceeding to the agency to take appropriate action consistent with the court's order, and set a reasonable schedule and deadline for the agency to act. The provision does not, however, expressly give the courts authority to order the permit to be granted.

The Case

The case involves a proposed natural gas pipeline across Long Island Sound between North Haven, Connecticut and Brookhaven, Long Island that was approved by FERC under section 7 in 2002. The State of Connecticut Department of Environmental Protection (CTDEP) denied a water quality certificate to Islander East Pipeline Company, LLC (Islander East) that is required under the federal CWA. The Second Circuit rejected constitutional challenges to the statute, and on the merits held that the CTDEP’s decision was arbitrary and capricious and not supported by the record evidence. It remanded the decision to the state agency with directions either to conduct an appropriate review within 75 days of the court’s opinion or to relinquish its federally-delegated CWA authority to issue the certificate. Under the CWA, the federal permitting function defaults to the Environmental Protection Agency (EPA) if the State declines to undertake it.

Significance

First, the Court’s decision confirms that nothing in the Tenth and Eleventh Amendments prevents Congress from providing for federal judicial review of state agency decisions issued pursuant to federally-delegated authority under statutes like the CWA or the Clean Air Act. Second, it assures applicants an expedited process for obtaining review of state permit decisions in a federal appellate court. Third, it preserves the discretion of state agencies to grant or deny federally-required permits, so long as they adequately support their decisions, address substantial contrary evidence, and do not neglect important aspects of the issues raised by the permit application. Finally, if the State agency’s decision must be set aside, the agency nevertheless has an opportunity to correct it on remand.

Constitutionality of Section 19(d)

The court concluded that the State’s sovereign immunity was not infringed because section 19(d) is essentially a provision granting jurisdiction for federal judicial review of federal legal requirements. States are not required to accept federally-delegated permitting responsibilities, but if they do, they waive their Eleventh Amendment immunity from any federal court review Congress may provide. Connecticut chose to block the project by exercising federally-delegated responsibilities, instead of ceding its authority back to the EPA. Further, it waived its sovereign immunity by litigating the merits of its action under federal law in federal court. For the same reasons, the appellate court’s exercise of its jurisdiction under section 19(d) does not infringe upon Connecticut’s sovereign jurisdiction over its public trust lands under Long Island Sound. Because Congress has authority under the Constitution to extend the jurisdiction of federal courts to matters arising under federal law, there is no intrusion upon powers reserved exclusively to the States or the people under the Tenth Amendment. The court also concluded that because section 19(d) regulates only the conduct of the courts, and did not affect any rights of the State, its application to the CTDEP’s decision, which predated EPAct 2005, was not an improper retroactive application of the statute.

Standards of Review Under Section 19(d)

The court adopted a two-step approach to judicial review of state agency action under section 19(d). First, the court reviews de novo whether the state agency complied with the requirements of the relevant federal law. Second, if compliance is found, the court then analyzes the agency’s factual determinations under the deferential arbitrary and capricious standard of review applicable to review of federal agency decisions under the Administrative Procedure Act (APA).

After concluding that CTDEP properly complied with federal law in applying its state water quality standards to Islander East’s permit application, the majority concluded that CTDEP’s denial was nonetheless arbitrary and capricious. It determined that CTDEP had failed to adequately explain or support its denial with record evidence, and had failed to acknowledge or respond to data in the record that contradicted certain of the agency’s conclusions, providing no explanation for dismissing record evidence running counter to its findings. The relative brevity of CTDEP’s six-page denial and substantial contrary evidence in the record indicated to the majority that CTDEP knew it was not adequately prepared to support the denial, and that its issuance had become more a matter of “strategy” in opposing the pipeline than of fact-finding.

The Dissent

The dissenting Judge concluded that, in section 19(d), Congress had not made a clear statement of its intent with respect to the State’s Eleventh Amendment immunity. On the merits, the dissent argued that the majority had failed to exercise the deference due to the agency under the arbitrary and capricious standard of review. In a lengthy review of the record, the dissent concluded that the CTDEP had adequately indicated the basis for its denial and revealed a rational connection between the facts found and its decision, and that the decision was supported by evidence in the record as a whole.