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At-Risk Label Will Weed Out 'Flaky' Northeast Projects

At-Risk Label Will Weed Out 'Flaky' Northeast Projects

Interstate pipelines should be allowed to build as much new capacity as they want into the burgeoning Northeast gas market providing they are put at risk for underrecovery of rates on the projects, pipeline customers told FERC last week. But absent such an at-risk approach, they urged the Commission to exercise restraint when assessing Northeast-bound pipe projects because while they concede additional capacity will be needed in the future, they are more guarded than pipelines about the extent of the need.

"We think that all pipeline projects that meet some basic standards should be approved, and let the market sort them out," said Edward J. Grenier, attorney for the Process Gas Consumers Group (PGC), which represents industrial users. Putting the pipelines at risk would prevent them from building "flaky" projects. "They're smart business people. We have confidence in the business ability of the pipeline project sponsors to do something that is sensible, that has a good chance to succeed," he noted.

"If a pipeline sponsor can get the financing and he meets all the other basic criteria and all the other elements are satisfied, why not let him do it because all of us.....on the consuming end certainly want maximum exposure to maximum supply basins. And you do that through more pipelines and more competition," Grenier said. Industrials are worried about a capacity shortfall in the years ahead. This is a real concern because the gas spigots to their plants usually are the first to be turned off during constrained supply and capacity situations.

Industrials believe a capacity shortfall could put them in a "bidding war" with electric generators. "We don't want to get crosswise with our good friends in the electric generation industry when state regulators start getting nervous and start saying, "Gee whiz, which is more important - industrial use or electric generation use," Grenier said. He estimated annual gas demand by industrials is expected to grow by 1 Tcf over the next decade.

"If they [pipelines] are held at risk by the Commission and kept at risk...then it doesn't impact the wellhead price, and I probably wouldn't care" how much new Northeast pipeline capacity is constructed, said Michael Strathman of Marathon Oil Co., who spoke on behalf of the Independent Petroleum Association of America (IPAA), an independent producer group. Major gas producers also supported an at-risk policy. As long as there would be "no unintended consequences" as a result, "we would certainly encourage all of that [capacity] that can be built to be built," said Richard J. Sharples of Anadarko Petroleum Corp., and chairman of the Natural Gas Supply Association (NGSA).

The interstate pipelines "need to start building now to meet even the lowest estimates" for growth in Northeast gas demand, said Lew Posekany, senior vice president of group planning and development for The Williams Cos. There's "no doubt new pipeline infrastructure is needed." He noted that operating existing pipelines at higher load factors won't solve anything since much of the capacity serving the high-growth areas in the Northeast already is tight.

The Commission must ensure an "expeditious and decisive" certificate process to meet Northeast gas needs, Posekany said, adding that regulatory delays would only lead to lost opportunities for pipes and other industry members. He urged FERC to restore its practice of issuing preliminary determinations on the non-environmental aspects of pipe projects, and to "look to market fundamentals and financial commitments as evidence of market demand and commercial necessity" when reviewing projects. He says FERC has a clear choice: either it can let its certificate policies become outdated or it can adapt them to the "new market realities."

Industry officials aired their views last Monday during a day-long Commission conference on the anticipated demand for natural gas in the U.S. Northeast quadrant, which includes the region east of the Mississippi River and north of Tennessee and North Carolina. FERC called the conference to examine the assumptions underlying the various - and often conflicting - gas demand projections for the region. Specifically, it wanted to know whether the demand growth would be sufficient enough to justify all the pipeline projects being proposed into the region.

The Energy Information Administration (EIA) forecasts natural gas will be the fastest growing fuel in the U.S. over the next two decades, increasing at an annual rate of 1.7% to achieve a 28% share of the energy market. In the Northeast, gas is expected to account for about one-third of the total fuel market by 2020, with demand climbing from about 7 Tcf to 10-11 Tcf annually, according to EIA Administrator Jay Hakes. Most of that growth will be fueled by the region's electric generation market, whose annual gas consumption is forecast to rise from 0.5 Tcf to about 3.5 Tcf by 2020.

Retiring nuclear facilities also will be a key contributor to growth in Northeast gas demand, Hakes said. "...[O]ur analysis suggested that 29 out of 46 gigawatts of nuclear plants in the region might retire" over the next two decades, he said. The EIA also believes it "would make sense" to retire about 24 GW of oil and gas steam plants and replace them with new facilities.

As for new capacity, it's estimated that planned pipeline projects would bring an additional 8.7 Bcf/d into the region between 1998-2001, Hakes noted. This would be an increase of "roughly 30%," and would be sufficient to handle expected demand until 2012. Another spurt of construction activity is likely to occur between 2010-2012, he said, increasing capacity by another 4.7 Bcf/d, up 46% over 1997 levels.

Absent an at-risk approach, IPAA's Strathman warned FERC against jumping the gun in approving too much new pipeline capacity to the Northeast. "Producers caution against the overly optimistic and simplistic analysis which concludes there's an immediate need to expand pipeline capacity to reach growth markets rather than more prudently waiting on consumption-driven increases in demand," he said.

Timing Important

Because there are so many unknown variables, even some pipelines urged the Commission to take a go-slow approach. FERC "should consider the expansion and rationalization of existing pipeline systems - in a period of extensive capacity turnback potential - to fuel this growth in the near term until the extent, timing, location and characteristics of this market can be fully ascertained," noted Craig Frew, president of Iroquois Pipeline Operating Co. But Iroquois, which already delivers Canadian gas to the Northeast and could not be expected to welcome competition, was in the minority among pipelines. Most agree there will be a "legitimate demand" for more natural gas and more pipe capacity additions in the Northeast, according to the Interstate Natural Gas Association of America.

"Yes...new capacity will be needed" into the Northeast eventually, Strathman acknowledged, but the real "question [is] when is it going to be needed." The EIA projects the greatest demand for additional capacity would be in the early part of the next decade. As for seasonal patterns, the agency indicated that the biggest need for pipeline capacity by electric generators would come in the summer, which historically is a time when demand for capacity by other uses is at its lowest. Strathman and others believe the seasonal nature of generators' capacity needs minimizes the urgency of new pipeline projects.

The source of the gas to supply Northeast demand is another critical factor that the Commission must consider, Strathman said. "The Maritimes [and Northeast] pipeline.....has opened up a whole producing [source in] the Sable Island area...It could conceivably be a major supply source for New England. When that happens, the capacity in the pipes that currently serve that market will become greater simply because they don't have to push the gas as far up into the marketplace. So the pipeline companies have to address what impact that has on their systems."

He also believes FERC should review historical basis differentials before approving projects. For example, the basis between the Chicago and New York markets - for which a number of pipeline projects have already been proposed - has varied from 10 cents to 20 cents in recent times. "That's not enough money to justify building a new pipe," Strathman concluded.

But Iroquois' Frew believes the current situation with the basis differentials is "anomalous," and will not last long. The differentials are distorted due to the "significant amounts" of firm capacity still being held by LDCs, he noted. Once the states have completed their unbundling programs "the true value of pipeline capacity will be established."

Examine Current Use

The Commission also should consider turned-back capacity when deciding the fate of projects, said Andrew J. Van Horn Ph.D., who spoke on behalf of CNG Transmission, a sharp critic of several proposed projects that could lessen its grip on key Northeast markets. The EIA estimates that 12.8 trillion Btu/d of firm contracts for capacity into the Northeast will expire between 1999-2003 - the period during which most of the new pipeline construction is planned. Of that amount, it projects that 2.71 trillion Btu/d is likely to be turned back to pipelines.

Chris Fleming of Sithe Northeast, the largest independent power producer in the nation, suggested that FERC should encourage pipes to make better and more efficient use of their existing capacity before doling out certificates for new projects. He also believes gas pipelines should be required to assume more risk, but for a different reason. As it stands now, he noted there's a "growing disconnect" between pipeline companies, which are guaranteed a certain return, and power generators that face the full risk of their decisions. It's because of this disconnect that merchant generators are reluctant to enter into long-term commitments for pipeline capacity, he told FERC.

Fleming further criticized FERC's policy requiring pipeline companies to demonstrate market demand for new projects. That policy has had the "unintended consequence of frustrating expansion of electric generation."

While the focus of the conference was on gas demand and capacity projections, NGSA's Sharples voiced concerns about whether producers would be able to meet the 30 Tcf market that has been projected for the U.S. by 2010-2015. "It's nice to have a goal out there for the industry, but I don't think that we should establish public policy based on the assumption that we're going to achieve 30 Tcf." Restrictions against drilling on public lands and the lack of capital support for producers may make 30 Tcf an impossibility, he said.

Susan Parker

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