**Question 2 Liquefied Natural Gas**

What should our expectations be regarding imported LNG as a supply
source, and what policies should be considered on LNG terminal siting
and safety?

-   National Commission on Energy Policy

-   Dominion Energy

-   Center for Liquefied Natural Gas

-   National Association of Regulatory Utility Commissioners

-   FERC

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**National Commission on Energy Policy**

**Executive Summary**

The National Commission on Energy Policy is pleased to respond to a
request by the Senate Energy & Natural Resources Committee for proposals
concerning natural gas supply and demand to be considered at a
conference scheduled for January 24, 2005. The Commission, which was
launched in 2002 by several foundations[^1] with the aim of developing
bipartisan recommendations for national energy policy, devoted
considerable attention to natural gas issues. Commission members --- who
include leading energy experts from the private sector, government,
non-profit community, and academia --- view recent adverse trends in
U.S. natural gas markets as among the most pressing and important
priorities for national energy policy. Accordingly, the Commission's
final report, *Ending the Energy Stalemate: A Bipartisan Strategy to
Meet America's Energy Challenges*,[^2] includes a set of specific
recommendations for comprehensively addressing current concerns
regarding natural gas supply, demand, and infrastructure.

The Commission strongly supports policies to ensure continued access to
reliable, affordable natural gas resources. No single measure can
accomplish this; rather, the Commission believes a variety of steps must
be taken to diversify and increase the supplies of natural gas available
to meet U.S. demand. As discussed in more detail below, the Commission's
priority recommendations are to encourage construction of a gas pipeline
from Alaska and to facilitate a significant expansion of infrastructure
for importing liquefied natural gas (LNG) from overseas. In addition to
these two priorities, the Commission proposes to improve the ability of
public land managers to make timely and well-informed land-use decisions
and to develop --- through a concerted research, development, and
demonstration (RD&D) effort --- techniques for better characterizing and
utilizing the nation's vast reserves of methane hydrates. Additional
options for ameliorating future stresses on natural gas markets include
making cost-effective, near-term demand-side efficiency improvements;
supporting clean coal technologies that produce synthetic gas (which can
be used like natural gas); and promoting more effective risk-hedging by
gas distribution companies by encouraging long- as well as short-term
supply contracts.

We elaborate on these recommendations and options below, in our detailed
responses to several of the specific questions posed by the Energy &
Natural Resources Committee. Additional information, including the
results of several independent, Commission-sponsored analyses, is
appended to this submission.

**2. Liquefied Natural Gas (LNG): What should our expectations be
regarding imported LNG as a supply source, and what policies should be
considered on LNG terminal siting and safety?**

In liquefied form, natural gas can be transported long distances by
ocean vessel. Increasing the nation's capacity to import LNG therefore
provides a means of accessing vast global natural gas supplies,
particularly as recent substantial cost declines in liquefaction and
shipping have made it economic to develop LNG projects that target the
U.S. market. Currently LNG plays only a small role in augmenting
domestic supplies: it accounted for just 2 percent (500 billion cubic
feet) of national consumption in 2003.[^3] Though a variety of factors
--- including the evolution of global LNG markets and the development of
liquefaction capacity to provide LNG for U.S. markets --- will determine
how much and how quickly LNG can contribute to meeting future gas
demand, expanded import capacity is clearly critical if LNG is to play a
significant role in easing the tight supply situation and helping to
dampen price increases and volatility in U.S. gas markets.

The primary obstacle to constructing new (or expanding existing) LNG
receiving terminals in the United States is local opposition, compounded
by regulatory and siting uncertainty in light of the fact that no new
facilities have been constructed in this country for more than 20 years.
Public opposition is largely motivated by safety concerns, which have
been heightened recently by increased awareness of terrorist threats. It
is clear that the cryogenic nature of LNG, its flammability under
certain conditions, and its dispersion tendencies do present a number of
potential safety hazards during transport and handling. But the
empirical evidence --- based on the extensive track record of the
industry and the numerous safety precautions typically incorporated in
LNG ship design and operation --- indicates that these hazards can be
adequately managed under normal operating conditions.[^4] Based on
current understanding, LNG does not appear to pose a greater societal
safety hazard than other widely used sources of energy such as petroleum
and its by-products.

The emergence of an ongoing terrorist threat in recent years has added a
new and potentially more challenging dimension to existing concerns
about the potential risks involved in importing large quantities of LNG.
As a result, the specific vulnerability of LNG transportation and
storage facilities to intentional acts must be thoroughly addressed
before policymakers, insurers, investors, and the public consent to
considerable expansion of the existing LNG infrastructure. Potential
attacks on LNG vessels or storage facilities are, of course, likely to
be most troublesome if they occur near a populated area. Some recent
proposals would locate the off-loading process off-shore. In such a
scheme, LNG vessels need not approach the coastline but would instead
off-load their cargo via a pipeline connection at sea. An off-shore
receiving facility of this type, located 116 miles off the coast of
Louisiana, recently received approval from the U.S. Coast Guard and
others are under consideration. In some cases, however, locating
re-gasification facilities off-shore may be quite costly. Meanwhile,
government and industry are making considerable efforts to address
terrorism-related LNG safety risks.

**Recommendation**

The Commission recommends that concerted efforts be made to educate the
public regarding LNG-related safety issues. The Commission believes that
an effective way to address public concerns about LNG siting would be
through objective, site-specific safety assessments. The federal
government is the most logical entity to convene balanced sets of
experts and coordinate these reviews; however, a variety of
institutional arrangements are possible.

While supporting a strong federal role in the siting of LNG facilities,
the Commission recognizes that "cooperative federalism" is necessary for
effective implementation of LNG proposals.  This framework recognizes
that the Coast Guard has been delegated the authority for siting
off-shore LNG terminals,[^5] and that the Federal Energy Regulatory
Commission (FERC) has authority for siting onshore LNG facilities.
States that have been formally designated as adjacent coastal states
also have an important role to play in the siting process for certain
off-shore LNG facilities and generally through the exercise of a coastal
state\'s responsibilities to carry out federal "consistency reviews" of
on-shore and off-shore facilities proposed in coastal zones under the
Coastal Zone Management Act (CZMA).    

The Commission sees encouraging evidence that this cooperative model is
emerging in practice. While federal law gives FERC the last word on the
construction and siting of on-shore LNG import terminals, states\'
substantial interests in environmental protection, land use, and other
issues are being accommodated through a variety of means. A prominent
example is the joint preparation of environmental reviews of proposed
LNG facilities by FERC and state agencies responsible for the issuance
of permits under the Clean Water Act, the Clean Air Act, and the CZMA.
 Also, applicants for LNG facilities often must comply with local
requirements concerning property acquisition since there is no eminent
domain authority for such facilities under applicable federal law.   The
Director of FERC\'s Office of Energy Projects recently noted that
\"\[a\]lthough FERC has jurisdiction over proposed LNG import projects,
certain permits, approvals and licenses are the responsibilities of
other federal agencies and state and local authorities,\" and
\"\[t\]here is nothing unusual about an energy project simultaneously
being subject to various regulatory requirements promulgated by other
federal, state and local authorities.\"[^6]  

While the Commission concurs with FERC\'s Chair that \"\[a\]t the end of
the day...it is the \[FERC\] that must approve and condition onshore LNG
facilities,\"[^7] the Commission also commends FERC for its recognition
of the important role that the states and other stakeholders have in the
siting process. Finally, the Commission believes that regulators should
take into account the nation\'s need for new natural gas supplies so
that siting and permitting decisions can reflect this important national
interest goal.  

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**Dominion Energy**

**Executive Summary**

***Policy Challenge:*** There are abundant sources of natural gas
located throughout the world that can be liquefied and economically
brought to the U.S. by ocean-going tanker. However, we must expand
existing and develop new LNG terminals throughout the country to meet
our growing needs.

***Dominion Cove Point LNG:*** Located on the Chesapeake Bay in Cove
Point, Maryland,

Dominion Cove Point LNG is one of the nation's largest LNG import
facilities. It has a storage capacity of 7.8 billion cubic feet (BCF)
and a peak day send-out capacity of 1 million dekatherms (Dt) \-- enough
energy to serve 3.4 million homes per day. Dominion has asked the
Federal Energy Regulatory Commission (FERC) to approve an expansion plan
at Cove Point to increase the peak day output capacity from 1 million Dt
to 1.8 million Dt. Storage capacity at the terminal would increase to
about 14.5 Bcf.

***Policy Objectives:***While FERC has regulated the siting,
construction and operation of LNG terminals for over 30 years, state
agencies are challenging that position. Legislation is needed to confirm
FERC's longstanding role and to help trigger the billions of dollars
required to invest in new LNG terminal development. Congress can
increase LNG imports to the United States by passing legislation that
accomplishes the following:

  •  Confirm FERC's authority under Section 3 of the Natural Gas Act and
reinforce its role as the agency with final authority over siting,
construction, expansion and operation of LNG import terminals.

  •  Codify the FERC "Hackberry" policy that allows owners and operators
of LNG import terminals to determine the most viable commercial
arrangements for their own facilities, whether they are new facilities
or expansions of existing facilities, and treat onshore LNG terminals in
the same manner as offshore LNG terminals.

  •  Expressly encourage the expansion and optimization of existing LNG
import terminal

facilities, as the most direct and least environmentally intrusive means
of increasing U.S.

markets' access to this vital energy supply.

  •  Provide onshore LNG facilities the same expedited review
opportunity, time limitations on consideration and related operating
policies applicable to offshore LNG facilities.

**Dominion**

**2. Liquefied Natural Gas**

**What should our expectations be regarding imported LNG as a supply
source, and what policies should be considered on LNG terminal siting
and safety?**

*The Economics of LNG.* In 2002, LNG imports to the U.S. totaled 229
Bcf, or 6 percent of imported gas. In 2003, imports totaled 506 Bcf, or
13 percent of all imported gas -- more than double the previous year's
imports. This increase is due in part to the 2003 reactivation of
Dominion Cove Point LNG. In the first half of 2004, U.S. imports
averaged 1.7 billion cubic feet a day, on pace to reach 600 Bcf for the
year. There is good reason for this rapid growth:

domestic natural gas production has been flat, imports by pipeline from
neighboring countries are declining, and natural gas demand continues to
increase. According to DOE, LNG imports helped the U.S. to meet our gas
storage requirements going into the last heating season of 2003,

averting a gas shortage.

According to the EIA, there could be as much as a five trillion cubic
foot (Tcf) natural gas shortfall in the U.S. by 2020. Current U.S.
imports of LNG are approximately 600 Bcf per year. The four terminals
currently operating have an estimated base load capacity of 880 Bcf a
year, and a combined peak capacity of about 1.2 Tcf a year. Existing
terminals are looking to expand (bringing their total capacity to over
1.6 Tcf). However, these expansion plans must be approved by FERC.
Additional new terminals will also be necessary. In recent years, the
economics of LNG have improved. It is estimated that LNG can be produced
and delivered to the U.S. at approximately \$2.50- \$3.50 per million
Btu (MMBtu). Advances in drilling technology and competition among
shipbuilders have reduced the costs associated with extraction and
shipping. In addition, liquifaction costs have been significantly cut
due to competing technologies and economies of scale.

*Dominion's Interest and Expertise in LNG.* In 2002, Dominion purchased
and reactivated the Cove Point LNG terminal located on the Chesapeake
Bay in Southern Maryland. Since reactivation in August 2003, 104 ships
have been received and more than 287 Bcf of natural gas has moved
through Cove Point and into the mid-Atlantic market. A major expansion
of the facility is underway and proceeding through the FERC permitting
process. Based on this direct experience, Dominion has a unique
perspective on the issues associated with operating and developing LNG
import terminals.

*The LNG Safety Record*. LNG is not a new technology but rather has been
deployed for more than 50 years. During this past half century of
operation, the industry has had an excellent safety record. Around the
world, there are numerous LNG facilities -- 17 export/liquifaction
terminals, 40 import/regasification terminals, and 136 LNG ships -- that
handle approximately 120 million metric tons of LNG each year. The U.S.
has the largest number of LNG facilities of any country

in the world -- with approximately 115 active facilities across the
country. The first LNG plant was built in the United States in 1912, in
West Virginia, and began operation in 1917. In 1959, the first LNG
tanker took a shipment of LNG from Lake Charles, Louisiana to Canvey
Island, United Kingdom. The four large marine import terminals in the
U.S. -- Lake Charles, Louisiana; Everett, Massachusetts; Elba Island,
Georgia, and Cove Point, Maryland -- were built between 1971 and 1980.
The latter two were mothballed in the 1980s and have since been
restarted. As noted above, commercial LNG transport began in 1959. Since
then, LNG has been safely transported, stored and delivered to densely
populated cities in the United States, Europe and Japan. Over 33,000 LNG
carrier voyages, covering more than 60 million miles, have arrived

safely without a significant accident or safety problem, either in port
or on the high seas.

According to DOE, over the life of the industry, eight marine incidents
have occurred with some spillage of LNG but without one cargo fire.

While there are safety issues and national security concerns associated
with any natural gas facility, the responsible federal agencies are
addressing the issues and concerns regarding LNG import facilities and
have established design criteria for the facilities. FERC reviews the
design of any new or expanded facility and ensures that criteria and
safety standards issued by the U.S. Department of Transportation are
applied. DOT regulations establish thermal exclusion zones and vapor
dispersion zones that ensure public safety near the facility. The U.S.
Coast Guard ensures that LNG vessels are safe, setting safety zones and
transport requirements. Finally, facilities comply with requirements set
forth by the National Fire Protection Association, which

address risks associated with earthquakes.

*Process for Siting an LNG Import Terminal.* Federal regulators at FERC
and the U.S. Coast Guard have streamlined the approval of onshore and
offshore LNG terminals. Still, just as with interstate pipeline
projects, the need for final approvals issued by other federal, state
and local agencies acting pursuant to federal and state law is a
significant factor affecting how quickly LNG developers can respond to
demands of the market. If the hurdles are too high or if the approval
process takes too long or is too uncertain, developers of LNG import
facilities will deploy their capital elsewhere.

The primary obstacle to constructing new or expanding existing LNG
terminals in the U.S. is local opposition, compounded by regulatory and
siting uncertainty. This uncertainty exists largely because no new
facilities have been constructed in this country for more than 20 years,
and no comprehensive national policy has been articulated. Legislation
could articulate the national policy on LNG and provide regulatory
certainty to all affected parties, including developers. In 2002,
Congress did provide certainty to developers of offshore terminal
through the Deepwater Port Act -- giving one federal agency the final
approval for any offshore facility. Similar certainty should be provided
for onshore LNG terminal development. Furthermore, legislation should
specifically encourage the expansion and optimization of existing LNG
import

terminals. Full utilization of existing terminal sites presents the most
efficient means to quickly expand access for U.S. energy markets to
incremental LNG supplies. Maximum utilization oftoday's operating sites
presents advantages by posing the least incremental impact to
surrounding landowners, and reduced environmental impact as compared to
greenfield terminal development.

*Regulatory Certainty for FERC, the Developer, and the Public.* FERC has
consistently exercised its authority under Section 3 of the Natural Gas
Act to approve the siting, construction, expansion and operation of LNG
import terminals for 30 years. However, current jurisdictional disputes
with states authorities may require clarification of the law. FERC's
ultimate authority over siting, construction, expansion and operation of
LNG import terminals should be confirmed. This can be done without
compromising the roles of state and local governments in the process.

As FERC is the agency with the greatest expertise in this area, it is
appropriate that FERC

continues to exercise this authority and determine whether such
facilities are in the public

interest. Additionally, there is an overriding national interest in the
importation and continued supply of natural gas -- one that is best
determined by federal government.

Finally, one established, clearly articulated process for LNG terminal
regulatory approval will provide the best opportunity for substantive
input by all interested parties -- federal agencies, state agencies and
governments, local entities, and interested citizens.

LNG developers also need economic certainty. This certainty was provided
by FERC in an opinion known at the "Hackberry decision." Hackberry LNG
Terminal, L.L.C. petitioned FERC for authorization to construct and
operate an LNG import terminal near Hackberry, Louisiana, FERC
determined that the traditional open-access requirements imposed on
import terminals were deterring investment in new LNG facilities in the
United States. For example, the vagaries of capacity auctions are an
impractical means of awarding regasification capacity to suppliers that
must match their import opportunities with substantial investments in
production and liquefaction facilities near the LNG source. To help
remedy this problem, FERC approved Hackberry's facility without
requiring that the terminal be "open access," that is, open on a
nondiscriminatory

basis to customers -- creating a comparable structure to the one
Congress created

for offshore facilities in the Deepwater Port Act of 2002. The
Commission decided that

decreased commercial regulation of LNG import facilities, such as rates,
tariffs, or terms and conditions of service, would stimulate the
development of more LNG terminals and encourage expansion of existing
facilities. The *Hackberry* policy effectively lifted all commercial
regulation of new LNG terminals or expansions of existing facilities and
paved the way for proprietary facilities, which has been a tremendous
factor in stimulating investment in LNG facilities. However, this is
merely current

Commission policy and is subject to change. The *Hackberry* policy
should be codified and made a permanent part of the regulatory framework
for onshore projects, just as it is for offshore facilities. DOE
estimates that more than \$100 billion must be invested in the LNG
production chain, from liquefaction plants to ships to receiving
facilities, to meet U.S. LNG needs by 2025. Those who are investing
resources of this magnitude, whether it is for new facilities or
expansion of existing facilities, must have some certainty over their
property and its economic return. Legislation is needed to confirm
FERC's longstanding role and to help trigger the billions of

dollars in investment that is required for new LNG terminal development.
Congress should:

  •  Confirm FERC's authority under Section 3 of the Natural Gas Act and
reinforce its role as the agency with final authority over siting,
construction, expansion and operation of liquefied natural gas import
terminals.

  •  Codify the FERC "Hackberry" policy that allows owners and operators
of LNG import terminals to determine the most viable commercial
arrangements for their own facilities, whether they are new facilities
or expansions of existing facilities, and treat onshore LNG terminals in
the same manner as offshore LNG terminals.

  •  Provide onshore LNG facilities the same expedited review
opportunity and related

operating policies applicable to offshore LNG facilities.

  •  Expressly encourage the expansion and optimization of existing LNG
import terminal

facilities, as the most direct and least environmentally intrusive means
of increasing U.S.

markets' access to this vital energy supply.

  •  Confirm FERC's role as the lead agency for NEPA compliance.

These policies will create the regulatory certainty needed to encourage
development of thenecessary LNG facilities to help restore natural gas
price stability.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**Center for LNG**

**Principle 1:** LNG is a critical component in meeting the growing
demand for natural gas in the United States.

**Principle 2:** LNG has a long and outstanding safety record. Potential
LNG risks must be placed in perspective.

**Recommendation:** Industry, regulators, the Executive Branch and the
Congress have a role to play in educating the public, so that the nation
can make informed decisions about constructing much needed energy
infrastructure.

**Principle 3**: CLNG supports the strong federal role that currently
exists concerning the

siting/permitting of LNG terminals *and* encourages coordination among
local, state and federal agencies in order to facilitate and streamline
regasification terminal permitting. CLNG supports an open, inclusive,
thorough and efficient regulatory process.

**Recommendations:**

1\. Congress should do all that it can to encourage all interested
parties to participate in the NEPA process and meet the timeframes
established by the lead NEPA agency.

2\. CLNG supports the The National Energy Policy Commission statement
that "...regulators should take into account the nation's need for new
natural gas supplies so that siting and permitting decisions can reflect
this important national interest goal." (NEPC, page 49)

3\. CLNG encourages Congress to make the lead agency (FERC / USCG)
record of the NEPA process the exclusive record for any subsequent
appeals or reviews.

4\. Congress should authorize expedited review by the US Court of
Appeals for the DC Circuit should federal or state agencies acting
pursuant to federal law either fail to act within a reasonable time
frame, or attach unreasonable conditions to a permit that have the
effect of frustrating a FERC approved project.

**Principle 4:** The expeditious development of the LNG infrastructure
the nation needs requires regulatory certainty.

**Recommendation:** CLNG strongly supports the FERC policy decision in
the Hackberry case and would encourage the Congress to guard against any
attempts to reverse this policy.

**Issue 2. Liquefied Natural Gas**

**What should our expectations be regarding imported LNG as a supply
source, and what policies**

**should be considered on LNG terminal siting and safety?**

**Introduction**

The Center for LNG is a broad coalition of over 60 LNG producers,
shippers, terminal operators and developers, trade associations and
natural gas consumers dedicated to the safe and secure development of
the North American LNG market. The extensive technical expertise and
experience of its members in the development and operation of LNG
shipping and terminals position CLNG as a

credible source of educational and technical information on the LNG
industry. Its goals are to enhance public education and understanding by
serving as a clearinghouse for LNG information and to foster development
of public policies that support LNG\'s increasing contribution toward
meeting the nation\'s energy needs and supporting economic growth.

**Principle 1: LNG is a critical component in meeting the growing demand
for natural gas in the United States.**

**Findings:**

1\. The Energy Information Agency (EIA) in the recently released "2005
Annual Energy Outlook" states that demand for natural gas in the United
States is expected to grow by 30% during the next 10 years. The National
Petroleum Council study (2003) and the EIA Energy Outlook agree that
LNG, along with the development of other domestic resources, will all be
necessary to meet future demand.

2\. Our current natural gas supply challenges will not be solved solely
by expanding production in the Rocky Mountain region or the Outer
Continental Shelf, or solely by building an Alaskan natural gas
pipeline, or solely by importing more LNG. In order to meet anticipated
demand, we must pursue all of these options, and more including
increased energy efficiency and conservation. (See Attachment 1)

3 . We must develop new supply options from multiple sources to keep
pace with growing demand. Traditional domestic gas fields are in decline
and, as access to the country's most promising potential resources
remain restricted, the outlook for new traditional supply is limited at
best. Abundant resources do still exist in North America and worldwide
that can supply this market with natural gas at reasonable prices,
provided that public policies do not unreasonably limit resource and
infrastructure

development.

4\. One of the benefits of LNG is that new supplies of natural gas could
enter the market within the next few years, well ahead of other
opportunities, and begin to offer relief to American consumers.

5 . The National Petroleum Council's September 2003 report, "Balancing
Natural Gas Policy," estimates that by 2025 14-17% of US supply will be
LNG. Foreign-supplied LNG will be an important, incremental addition to
total U.S. supply. More important, world natural gas resources are more
abundant and more evenly distributed throughout the world than are oil
supplies, which will provide the United States with more secure and
diversified natural gas supplies.

**Principle 2: LNG has a long and outstanding safety record. Potential
LNG risks must be placed in perspective. The robust worldwide trade in
LNG that takes place every day is proof that LNG can be handled safely
and securely.**

**Findings:**

1\. LNG has been delivered across the oceans for about 45 years without
major accidents or safety problems, either in port or on the high seas.
In that time, there have been more than 40,000 LNG cargo deliveries,
covering more than 60 million miles. Today, more than 150 LNG ocean
tankers safely transport more than 110 million metric tons of LNG
annually to more than 40 ports around the world.

2\. The October 2003 report, "LNG Safety and Security", by the Institute
for Energy, Law and Enterprise, University of Houston, concludes that
"LNG has been handled safely for many years and the industry has an
enviable safety record. Engineering design and increasing security
measures are constantly improved to ensure the safety and security of
LNG facilities and ships." (IELE, page 42)

3\. In its December 2004 report "Guidance on Risk Analysis and Safety
Implications of a Large Liquefied Natural Gas (LNG) Spill Over Water"
Sandia National Laboratories concludes in part:

*\* Risks from accidental LNG spills, such as from collisions and
groundings, are small and manageable with current safety policies and
practices.*

*\* Risks from intentional events, such as terrorist acts, can be
significantly reduced with*

*appropriate security, planning, prevention, and mitigation.*

*\* ...Multiple techniques exist to enhance LNG spill safety and
security management and to reduce the potential of a large LNG spill due
to intentional threats. If effectively*

*implemented, these techniques could significantly reduce the potential
for an intentional*

*LNG spill.*

*\* Management approaches to reduce risks to public safety and property
from LNG spills*

*include operation and safety management, improved modeling and
analysis, improvements in ship and security system inspections,
establishment and maintenance of safety zones , and advances in future
LNG off-loading technologies. If effectively implemented, these elements
could reduce significantly the potential risks from an LNG spill.*

*\* Risk identification and risk management processes should be
conducted in cooperation with appropriate stakeholders, including public
safety officials and elected public officials. Considerations should
include site-specific conditions, available intelligence, threat*

*assessments, safety and security operations, and available resources.
(*Sandia Report, page14*)*

4\. The Federal Energy Regulatory Commission (FERC), the United States
Coast Guard (USCG), the Department of Transportation, the Department of
Homeland Security and LNG ship and terminal operators have redoubled
their already-stringent efforts to ensure security of transportation and
the safety of terminals. LNG suppliers work closely with agencies
charged with national security, and many developers contract with
international experts who test their plans, procedures, people and

training to ensure they are sound. (See Attachment 2)

5\. The public does not fully appreciate the extent to which LNG
facilities and shipping are scrutinized by federal and state agencies to
ensure adequate precautions are taken to minimize risk of an incident.

6\. CLNG's members are committed to working closely with federal, state
and local officials to continuously review and improve safety and
security measures and continue the impressive safety record.

**Recommendation:**

**Industry, regulators, the Executive Branch and the Congress have a
role to play in educating the public, so that the nation can make
informed decisions about constructing much needed energy
infrastructure.**

**Principle 3: CLNG supports the strong federal role that currently
exists concerning the siting/permitting of LNG terminals *and*
encourages coordination among local, state and federal agencies in order
to facilitate and streamline regasification terminal permitting. CLNG
supports an open, inclusive, thorough and efficient regulatory
process.**

**Findings:**

1\. The FERC and the USCG, respectively, have the authority for the
approval and siting of on-shore and off-shore LNG import terminals. Both
agencies have done an excellent job in progressing improvements in the
approval process for these facilities and we encourage their efforts.
The USCG has demonstrated its willingness to consider off-shore terminal
siting proposals expeditiously.

2\. While FERC has exclusive jurisdiction under the Natural Gas Act over
the threshold decision on whether an LNG facility or interstate pipeline
can be constructed, other state and federal agencies still play a
substantive role in permitting this natural gas infrastructure. There
are a myriad of other state and federal permits that must be obtained
before a project sponsor may begin constructing its facility. FERC\'s
application process requires that a project sponsor list all other
permits that must be obtained.

FERC\'s orders authorizing these facilities routinely are conditioned
upon the sponsor obtaining these other authorizations.

3\. The industry\'s experience in the context of both LNG permitting and
interstate natural gas pipelines has been that FERC devotes significant
resources to working cooperatively with other agencies.

4\. All other federal, state and local permitting agencies are
\"participating agencies\" for purposes of the comprehensive NEPA
process. In that way, all of the interested federal, state and local
government agencies can come together under one concurrent and
comprehensive review, so that all parties have equal standing and
balanced decisions can be made.

5\. The National Commission on Energy Policy in its December 2004
report, "Ending the Energy Stalemate" concludes "... it is essential to
reduce the barriers that now hamper the siting of new, needed energy
infrastructure. Such siting reforms include implementing, across the
nation, the best practices which currently exist in some states' siting
processes, including: ... Providing clear and accessible agency rules,
timelines, siting criteria, other policies, and case precedents to
facilitate the filing and administration of complete and viable siting
proposals." (NCEP, page 87)

6\. It must be recognized that for such massive infrastructure projects
unreasonable delay is effectively denial. The nation can not afford to
jeopardize public health, safety and economic growth with an inefficient
regulatory process.

**Recommendations:**

**1. Congress should do all that it can to encourage all interested
parties to participate in the NEPA process and meet the timeframes
established by the lead NEPA agency. This ensures streamlined effort and
avoids wasteful duplication.**

**2. CLNG supports the The National Energy Policy Commission statement
that "...regulators should take into account the nation's need for new
natural gas supplies so that siting and permitting decisions can reflect
this important national interest goal." (NEPC, page 49)**

**3. As an essential element of an efficient regulatory process, CLNG
encourages Congress to make the lead agency (FERC / USCG) record of the
NEPA process the exclusive record for any subsequent appeals or reviews.
By doing so, all governmental agencies would be encouraged to get
involved with the NEPA review process that produces the record. Further,
by encouraging**

**interested parties to get involved early in the NEPA process, concerns
raised could be addressed early in the process and thereby avoid the
need for administrative and judicial appeals.**

**4. In order to get a fair and final decision on LNG projects in a
reasonable time, Congress should authorize expedited review by the US
Court of Appeals for the DC Circuit should federal or state agencies
acting pursuant to federal law either fail to act within a reasonable
time frame, or attach unreasonable conditions to a permit that have the
effect of frustrating a FERC or USCG approved project.**

**Principle 4: The expeditious development of the LNG infrastructure
this nation needs requires regulatory certainty.**

**Findings:**

1\. The billions of dollars needed to bring this additional gas to the
US will not be spent in an environment of uncertain regulatory
treatment.

2\. As a positive example of the impact of clear regulatory policy we
would point to the FERC's "Hackberry" decision. In this decision FERC
granted Hackberry the authority to provide terminaling services at
rates, terms and conditions agreed to by the contracting parties. FERC
also found that it was not necessary to require Hackberry to offer open
access service, or to maintain on file with FERC a tariff and rate
schedules for its terminaling service. FERC retained jurisdiction to
issue subsequent

orders if necessary to address complaints of undue discrimination or
other anti-competitive actions. This decision has encouraged the
development of much needed new LNG infrastructure and helped unleash the
financial capital needed to expand the industry in US.

**Recommendation: CLNG strongly supports the FERC policy decision in the
Hackberry case and would encourage the Congress to guard against any
attempts to reverse this policy. Without this clear guidance and the
resulting ability to negotiate the commercial agreements necessary to
justify the very large capital investments CLNG believes United States
consumers will be denied**

**a vital additional source of natural gas.**

**Conclusion**

LNG is vital component of a portfolio of energy sources which must be
made available to American consumers. The public health and safety and
economic well-being of Americans depends on the importation of
additional supplies of LNG as well as the aggressive but environmentally
protective development of additional lower 48 domestic supplies,
development of Arctic resources, alternative fuels, conservation and
fuel efficiency. LNG represents a safe and secure option for
diversifying natural gas supplies. This safety has been demonstrated by
an extremely impressive 45 year history of

safe transport around the world. The development of a viable US LNG
industry will depend on the ability to site new import facilities. The
responsible public agencies are working hard to implement an effective,
open, and inclusive regulatory environment in compliance with applicable
local, state and federal laws. The Congress can improve the
effectiveness of this process. Importantly Congress, the Executive
branch, state and local leaders must work to ensure that the important
debates around LNG facilities recognizes both the legitimate concerns of
citizens and the need this country has for additional

energy supplies.

**References**

"Annual Energy Outlook", Department of Energy, December 2004,
www.eia.doe.gov.

"Balancing Natural Gas Policy", National Petroleum Council, September
2003, www.npc.org

"Ending the Energy Stalemate", The National Commission on Energy Policy,
December 2004,

www.energycommission.org.

"Guidance on Risk Analysis and Safety Implications of a Large Liquefied
Natural Gas (LNG) Spill

Over Water", Sand2004-6528, Sandia National Laboratories, December2004,
www.fe.doe.gov.

"LNG Safety and Security", Institute for Energy, Law and Enterprise,
University of Houston, October

2003, www.energy.eh.edu/lng.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**National Association of Regulatory Utility Commissioners**

**Executive Summary**

The National Association of Regulatory Utility Commissioners (NARUC)
welcomes this opportunity to provide the United States Senate Energy and
Natural Resources Committee with our views on the nation's supply and
demand for natural gas. NARUC believes that any Federal policy will be
sustainable only if that policy includes "the triad" of: conservation
and efficiency; increasing supply; and diversification of energy
sources. Any policy must include all three dimensions or the goal of
energy security will not be met. In addition, any successful Federal
policy must respect and preserve the States' traditional roles in
regulating distribution systems, planning, siting approval, reliability
assurance, and consumer protection. As further detailed in the rest of
this document NARUC endorses the following positions:

-   Congress should encourage domestic exploration and production of new
    natural gas supplies, and expansion of natural gas transmission and
    delivery infrastructure, in an environmentally sound manner at
    reasonable costs, but should avoid an over‑reliance on natural gas
    for new electric generation.

-   Congress should invest in natural gas infrastructure R&D, and DOE
    should improve information-sharing with State and regional
    government entities.

-   Congress should facilitate diversification, conservation and
    efficiency as integral parts of any policy to improve the nation's
    natural gas situation. Increasing domestic supply alone is not a
    logical or sustainable solution for energy security.

-   Congress should continue to enact legislation providing for federal
    tax credits for cost-effective energy efficiency investments in
    residential and commercial buildings and the extension, expansion,
    and increasing the Renewable Energy Production Tax Credit as two
    measures to help reduce demand for natural gas.

-   Congress should enact legislation to invest federal royalty revenue
    received from gas production on federal land, up to a maximum of
    \$150 million, in an expanded research program on gas supply and
    delivery.

    Congress should foster the policies that encourage development of
    balanced natural gas portfolios, including elements of on-system and
    off-system gas storage, as well as adequate natural gas pipeline and
    distribution systems.

    **2. Liquefied Natural Gas**

    What should our expectations be regarding imported LNG as a supply
    source, and what policies should be considered on LNG terminal
    siting and safety?

In September 2003, Secretary of Energy Spencer Abraham announced the
Department of Energy/NARUC Liquefied Natural Gas (LNG) Partnership as a
means to assist in the education and outreach of critical energy
decision-makers on the opportunities as well as the impediments related
to the increased development of LNG Resources. A key goal of the
Partnership is to create a series of dialogues to assist in the
development of State and regional strategies relating to LNG resource
development and deployment. Since its inception, the Partnership has
conducted three educational forums for public officials at key LNG
storage facilities around the country. In addition to outreach, the LNG
Partnership is sponsoring two reports to be released in February 2005:
an LNG white paper for State public utility commissioners and a model
communication plan for State officials. The purpose of the white paper
is to provide an overview of LNG policy issues facing State public
utility commissions, State environmental officials and State
legislators. The model communication plan is intended for State
officials that have determined that building or expanding an LNG
facility is in the best interest of the ratepayers. A critical goal of
the communication plan includes encouraging better stakeholder
involvement (and early resolution of stakeholder issues) in relation to
LNG facility siting and operation. The communication plan will use a
case-study approach, involving appropriate states where new LNG
facilities are currently being proposed.

Because of changes in the costs of producing gas from domestic
resources, the United States and North America will turn increasingly to
imported LNG to sustain gas markets. LNG offers access to an additional
option for a source of supply as an alternative to increasingly more
costly domestic production. Domestic growth in gas consumption is being
driven, in part, by the use of gas for power generation. Without LNG,
gas and electricity prices can be expected to increase.

With over 40 LNG import facilities announced or proposed, there is great
concern and debate about the effect of LNG on gas markets, public safety
and the environment. State PUCs have a key role in this conversation and
in the decision making on individual LNG facilities as well as on
purchases of LNG by the Local Distribution Companies (LDC) they
regulate.

Both Federal and State governments have roles in approving the
construction and operation of LNG facilities. Additionally, State and
Local permitting are necessary for most proposed LNG projects. The
ambiguities created by this overlap of authorities have contributed, in
part, to LNG siting difficulties and controversies. There has not been a
case to date where FERC has approved a project over Local and State
objections -- indeed, FERC's pre-filing approach to LNG certification
encourages the resolution of differences early in the process.

Safety concerns have attracted the most attention in individual LNG
siting controversies. The long record of safe operations by the LNG
industry reflects purposeful decisions to implement conservative design
standards and operational safety procedures. Recent technical
disagreements about the adequacy of current regulations governing LNG
safety center on three questions: whether the studies of LNG accidents
to date adequately take into account terrorist capabilities; whether the
models used to measure the effects of LNG accidents are adequate; and
whether LNG facilities should be sited remotely. These issues are still
under discussion and no final resolution has been reached.

There are currently concerns about whether gas supplies from domestic
production will be adequate to meet projected increases in demand for
natural gas. In response many developers of LNG have proposed building
regasification terminals in North America to help bridge the potential
supply gap. In order for new LNG terminals to be expeditiously approved
and in service, cooperation in the permitting process between Local,
State and Federal authorities is essential. NARUC recognizes that LNG is
an important future source of energy for the United States and
encourages coordination among State agencies that oversee permitting for
regasification, and between Local, State and Federal government
agencies, in order to facilitate and streamline regasification terminal
permitting. Additionally, NARUC encourages States to hold public
hearings to educate consumers and stakeholders on the safety issues,
costs, and benefits of LNG.

The economics of the LNG trade are dominated by the large investment in
capital equipment necessary to liquefy the gas, transport and re-gasify
the LNG. As such, the industry is dominated by large international
energy companies, state oil and gas companies, and trading houses. The
web of contract commitments among these firms is designed to ensure
security of both supply and markets and to cover large investments. A
characteristic of the LNG contracts has been long-term contracts with
take-or-pay provisions. This is not unlike the contracting practices
that dominated the U.S. gas industry while it was under development.
Trends underway in the LNG trade suggest a more flexible system and a
growth of spot-type trading, yet long-term contracting will remain a
backbone element of the industry.

The interchangeability of LNG with domestic gas remains an unsettled
issue, mostly in States away from the Gulf Coast where LNG is less
easily diluted with pipeline gas. ("Interchangeability" means the extent
to which a substitute gas can replace gas normally used by a customer
without unduly interfering with the operation of the customer's natural
gas equipment.) PUCs should encourage and participate in regional
solutions to interchangeability to ensure public safety and quality of
service. This will involve resolving technical questions about appliance
performance and gas quality measurement standards.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**FERC**

**Executive Summary**

The items that appear below represent the issues or themes that should
appear in any natural gas bill proposed in the new Congress.  These
items can be divided into two broad areas -- infrastructure and market
rules and oversight.  Specifically, we propose that Congress enhance the
development of our nation's natural gas infrastructure by removing any
doubt about the Federal Energy Regulatory Commission's (FERC) exclusive
jurisdiction over the siting of onshore LNG import facilities in state
waters; authorizing eminent domain for such facilities; and streamlining
the review process by providing for a single Federal record.
Furthermore, we propose that Congress enhance FERC's authority to
discipline and correct harmful behavior by providing for or increasing
civil penalty authority under FERC's natural gas statutes.

**2. Liquefied Natural Gas**

What should our expectations be regarding imported LNG as a supply
source, and what policies should be considered on LNG terminal siting
and safety?

Imported LNG will become an increasingly important component of U.S. gas
supply in the short to mid-term. While still a small part of the U.S.
gas supply when compared to traditional domestic gas production and
pipeline imports from Canada, the U.S. imported twice as much LNG in
2003 as in 2002, and, in the first three quarters of 2004, the U.S.
imported more LNG than in all of 2003. However, this growth will, in
time, outpace the capacity of the existing U.S. LNG terminals in the
lower-48. It will be necessary to construct and place more LNG terminals
in operation. The FERC has been processing requests to site, construct,
and operate LNG terminals as quickly as possible under Section 3 of the
Natural Gas Act. Nevertheless, FERC is embroiled in a dispute with a
state over the jurisdiction for the approval of LNG terminals. This
issue is currently before the U.S. Court of Appeals for the Ninth
Circuit. Because resolution of the issue could take years through the
judicial review process, it would be preferable to resolve the dispute
in the near term by enacting legislation to establish one authority for
siting LNG terminals, not a state-by-state regime of LNG siting
regulations. Without this continuity of regulation, there will a
chilling effect upon LNG terminal sponsors who will be hesitant to
invest their money and, without the necessary timely investment, there
will be difficulty in securing the gas supply that the U.S. will demand
in the future. We make the following recommendation.

•        Section 3 of the Natural Gas Act (NGA) should be modified to
make clear and unambiguous that FERC has exclusive authority to site
liquefied natural gas (LNG) terminals onshore and in state waters and
the facilities that deliver gas from the LNG terminals.[^8]

[^1]: Commission sponsors include The William and Flora Hewlett
    Foundation, The Pew Charitable Trusts, the MacArthur Foundation, the
    Packard Foundation, and the Energy Foundation.

[^2]: The Commission's final report was released on December 8, 2004.
    The full report and additional information about the Commission are
    available at
    [www.energycommission.org](http://www.energycommission.org/).

[^3]: United States Department of Energy, Energy Information
    Administration, "U.S. Natural Gas Summary."

[^4]: National Commission on Energy Policy, Staff et. al. "The Safety of
    Liquefied Natural Gas," 2, in *NCEP Technical Appendix* (Washington,
    DC: National Commission on Energy Policy, 2004).

[^5]: DOT is responsible for issuing the licenses for offshore LNG
    terminals, while the U.S. Coast Guard regulates LNG ships and marine
    terminals, and is the lead agency on the environmental review for
    siting applications**.**

[^6]: J. Mark Robinson, Director of the Office of Energy Projects,
    Federal Energy Regulatory Commission, testimony on September 8,
    2004, before the Texas House Committee on Energy Resources, 78^th^
    Leg. , 4^th^ Called Sess., 2004

[^7]: Pat Wood, FERC Chairman, testimony on June 22, 2004, before the
    Subcommittee on Energy Policy, Committee on Regulatory Reform,
    United States House of Representatives, 108^th^ Cong., 2^nd^ Sess.

[^8]: This recommendation is not intended to affect the recent (2002)
    amendments to the Deepwater Port Act, which transferred jurisdiction
    over offshore LNG facilities in Federal waters to the Maritime
    Administration and the Coast Guard.