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Keystone Future Hinges on 19th-Century Railroad Reforms

The future of the Keystone XL oil pipeline may turn on a century-old measure to curb the influence of railroad barons.

If Nebraska’s Supreme Court decides Keystone has the same legal status as a rail line, it could trigger a review by the state’s Public Service Commission. That would push a decision on a project first proposed in 2008 into the second half of 2015 at the earliest, and may force pipeline builder TransCanada Corp. (TRP) to alter the route for a second time.

“I don’t think it’s a sure thing by any means that the PSC will say, ’yeah, we’re done,’” and approve the existing path, Sandra Zellmer, a University of Nebraska law professor who has testified before the state legislature on regulatory authority, said in an interview.

The Obama administration announced April 18 that it was suspending its review of Keystone until the legal questions are cleared up. This enraged backers of the $5.4 billion project, which is designed to pump 830,000 barrels a day of Canadian oil sands to refineries on the U.S. Gulf Coast and has been the subject of intense lobbying from Ottawa to Washington.

Nebraska Governor Dave Heineman is asking the state’s top court to reverse a trial judge’s February decision that declared the Calgary-based TransCanada a common carrier like a railroad. As such, a 2012 state law giving the governor authority over Keystone’s route violated a provision of the state’s constitution that gave that power to the Public Service Commission.

Photographer: Brett Gundlock/Bloomberg

The Hardisty tank farm, which includes the TransCanada Corp. Hardisty Terminal 1, in Alberta, Canada. Close

The Hardisty tank farm, which includes the TransCanada Corp. Hardisty Terminal 1, in Alberta, Canada.

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Photographer: Brett Gundlock/Bloomberg

The Hardisty tank farm, which includes the TransCanada Corp. Hardisty Terminal 1, in Alberta, Canada.

Supreme Court

The lower court “got it right,” in finding that a state law granting Heineman the authority to approve Keystone’s path in Nebraska was unconstitutional, Zellmer said.

Anthony Schutz, an associate professor of law at the University of Nebraska, said that the lower court’s ruling “stands a decent chance of being upheld.”

Because the state’s constitution doesn’t explicitly say that the Public Service Commission has authority over oil pipelines, however, there may be enough legal leeway for the court to overturn and cite deference to the legislative process, Schutz said.

“We didn’t have pipeline companies digging across the state,” when the commission was added to the state constitution in 1906, he said.

Commission’s Origins

The commission’s origins date to the wave of progressive reforms in the late 1800s and early 1900s that were designed to ensure people weren’t trampled in the name of progress. Legislatures established the boards to regulate industries deemed particularly important to the public good, and tried to insulate regulators from the lobbying of businesses that had grown into behemoths.

Initially called the Railway Commission, the five-member panel’s jurisdiction has expanded to include telecommunications carriers, natural gas utilities, furniture movers and taxi cab companies, and operators of grain warehouses.

“The whole idea was to give the power back to the people and to resist the political influence that large, important, and well-heeled companies could have on decision making,” Zellmer said.

Landowners opposed to Keystone argue the same philosophy applies, more than a century later, and that the ability to exercise eminent domain over private property needs to be granted by regulators, not the governor.

Lower Court

Nebraska trial judge Stephanie Stacy ruled in February that TransCanada was a common carrier like railroads because it transported people or goods for a fee.

As such, Keystone XL is subject to oversight by the Public Service Commission exclusively, including approval of the route, Stacy said.

Attorney General Jon Bruning, a Republican running to replace Heineman, has argued that the law isn’t unconstitutional because it retains a role for the commission by letting companies apply to it or the governor.

The court isn’t expected to hear the case until at least September. An opinion could take months.

The U.S. State Department cited the possibility that the Nebraska court case could result in a new route as a reason to suspend its review. The agency is charged with determining if the pipeline is in the national interest because it would cross an international boundary. The delay probably will enable President Barack Obama to avoid deciding a contentious issue before the November midterm elections to determine control of Congress.

Senate Vote

Senate supporters like Mary Landrieu of Louisiana, a Democrat and chairman of the Energy and Natural Resources Committee, criticized the delay. They are pushing a bill to approve Keystone over Obama’s objections.

Senator Charles Schumer of New York, the chamber’s third-ranking Democrat, said today that leaders had agreed to a vote on Keystone, though it isn’t clear whether it would be on a bill requiring approval or on a non-binding resolution expressing support for the project.

White House spokesman Jay Carney said at the daily press briefing the process has to “be run by the book outside of politics” and that the State Department should be allowed to complete its review.

New Application

If the Nebraska Supreme Court agrees with Stacy that Heineman doesn’t have the authority to approve the pipeline’s route, TransCanada will have to apply to the Public Service Commission.

By law, commissioners must consult with nine other state agencies before reaching a verdict within seven months of receiving an application. Among the factors they must consider are soil permeability and the distance to groundwater sources, according to a summary on its website.

Shawn Howard, a spokesman for TransCanada, which isn’t a party to the court case, said the company was confident any “reasonable review” would find the pipeline poses minimal environmental risks and should be approved.

Nebraska’s Public Service Commission’s first iteration was created by legislation in 1885. Such was the importance of its role, that the Legislature added its authorities to the state constitution in 1906.

Progressives started with the idea that “business corrupts politics” and worked on “institutional ways to try to curb this influence,” said William Novak, a law professor at the University of Michigan who has written about the history of regulation.

‘Changed Everything’

The initial target was railroads, he said.

“The railroads changed everything from the moment of their inception before the Civil War, but then they exploded as big businesses after the War,” Novak said in an e-mail. “It would probably be impossible to overstate their significance.”

Edward Balleisen, an associate professor of history at Duke University in Durham, North Carolina, said legislatures created the commissions because the issues involved were highly technical and believed their ongoing work “should be at least partly insulated from the normal give and take of electoral politics.”

In a brief filed with the state Supreme Court last week, Bruning argued that the trial judge set too low a threshold for taxpayers to bring court challenges to state legislation. Bruning also argued that not all crude oil pipelines qualified as common carriers falling under the exclusive jurisdiction of the Public Service Commission.

Nebraska Route

TransCanada has already had to alter Keystone’s route to ease concerns in Nebraska. State officials -- including Heineman -- objected that the original pathway threatened the Ogallala aquifer, which provides drinking water for 1.5 million people and irrigates almost half of Nebraska’s cropland.

Obama rejected the original application in January 2012 after Congress set a 60-day deadline for a decision. He invited the company to reapply with a different route.

TransCanada submitted a new application that May, charting a path further east that the Nebraska Department of Environmental Quality said avoided the aquifer as well as a network of wetlands known as the Sandhills.

TransCanada took advantage of the law passed a month earlier that gave it the option of seeking approval from the governor instead of the commission. Heineman, who approved the project after a state environmental review, criticized the State Department’s delay.

“It’s time for a yes or no decision on the Keystone pipeline,” he said in an interview with the Nebraska Radio Network.

The case is Thompson v. Heineman, S-14-000158, Nebraska Supreme Court (Lincoln).

To contact the reporter on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Steve Geimann, Elizabeth Wasserman

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