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More Northeast Pipes Not the Solution, EIA Says

More Northeast Pipes Not the Solution, EIA Says

Building more greenfield natural gas pipelines to the Northeast is not the answer. In fact, widespread switching from distillate oil to natural gas will not shield the region's energy customers from a repeat of the heating oil price shocks that they experienced earlier this year. If anything, it could aggravate prices not only for distillate oil but for gas, the Energy Information Administration (EIA) said in a report issued last Wednesday.

At the same time, gas pipelines executives were on Capitol Hill testifying about the need for more pipeline capacity to the Northeast. "...[T]here is growing concern over weaknesses in the energy delivery system in the Northeast. These concerns were glaringly evident this past winter during the month of January," said Catherine Good Abbott, CEO of Columbia Gas Transmission and Columbia Gulf Transmission, during a House oversight hearing last week.

The EIA report, which was commissioned by President Clinton following severe price spikes in the Northeast heating oil market in mid-January, concluded that it "may not be economical" for the region's industrial customers and electric generators with dual-fuel capability to switch to "firm year-round" natural gas service. Nor, it added, would it be in the best financial interest of the Northeast LDCs.

First, the industrial customers in the Northeast would have to pick up the costs for any new incremental pipeline and storage capacity to meet an increased gas load. "Otherwise, costs to existing firm gas customers (usually residential and small commercial customers) will increase," said the EIA report, entitled "The Northeast Heating Fuel Market: Assessment and Options." LDCs also would have to make a "significant investment" to expand their systems to meet new firm gas load.

Second, existing firm gas customers "would no longer benefit" from the interruptible gas purchases of dual-fuel industrials in the Northeast if conversions were to occur, it noted. "Further, pipeline operators would be faced with more unused off-peak capacity to auction off, with a very limited base of seasonal users, thereby reducing the value of the interruptible capacity."

In short, fuel conversions by Northeast distillate customers might "reduce the potential for distillate fuel oil price spikes in the short term because of the over-capacity [that would be] created," but it "cannot eliminate their possibility in the longer term, and it could increase the volatility of natural gas prices," the Department of Energy (DOE) agency said.

A study by Charles River Associates, which was commissioned by the Independent Fuel Terminal Operators Association, reached the same conclusion --- that converting Northeast fuel oil consumers to natural gas would not be an economical move. It pointed out that natural gas prices have been more volatile than home heating oil prices over the past years, so conversions would offer little relief, if any.

Even if switching to natural gas were economical for Northeast customers, the EIA estimated that just-completed and proposed pipeline projects for the region would provide more than double the amount of new capacity that would be needed in the short term. The agency projected that 839 MMcf/d of additional capacity would be required to meet any increase in gas demand resulting from fuel-switching, and that the figure could grow to 2.24 Bcf/d by 2005. It pegged existing pipe capacity to the Northeast at 12.5 Bcf/d.

However, the proposed Northeast projects --- such as Millennium, Independence and associated expansions --- "represent about 2 Bcf/d of potential additional capacity, well in excess of the additional capacity that would be needed on a peak day (839 MMcf/d) to address the new demand resulting from switching out of distillate, and nearly enough for additional 2005 demand," the report noted. If the completed Sable Island expansion were factored into the equation, it would reduce the demand for additional Northeast pipeline capacity to 506 MMcf/d to support potential conversions through 2005, according to the DOE agency.

The gas needs of the "switchable market" can likely be accommodated with completed pipeline projects and expansions until 2002, the EIA report said. But even if proposed expansions --- such as Transcontinental Gas Pipe Line's MarketLink project --- are built, "at least 250 million cubic feet per day of additional capacity would be necessary to.....serve the new potential conversion customers in 2005."

Rather than looking to huge gas pipelines as the answer, the EIA noted that distillate and gas distributors already provide "simple and relatively low-cost market mechanisms" to protect customers against price shocks created by weather. Both oil dealers and gas distributors offer budget payment plans, and nearly half of the Northeast oil dealers provide price-cap programs on distillate fuel oil to residential customers for a small "insurance" premium, and guaranteed pricing. Other oil dealers offer a fixed-price-per-gallon charge for a 12-month period, according to EIA.

"These programs, for customers who had chosen them, would have lessened the financial pain of the 1999-2000 surge in winter distillate prices or completely insulated the customers from it," the report said. The EIA proposes that Northeast residential oil customers adopt one or more of these measures to avoid risks.

Also it believes large-volume, dual-fuel customers in the Northeast should maintain a greater distillate fuel oil backup at the start of the winter season to reduce the "potential for large intrusions into the heating oil market during very cold periods." The EIA further recommended that residential customers install larger oil tanks to reduce the number of required fill-ups during the peak period. In addition, it suggested residential customers take "additional conservation measures, buying more efficient heating systems when they need to be replaced, and, in some cases, switching to a different fuel."

Susan Parker

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