Building more greenfield natural gas pipelines to the Northeastis not the answer. In fact, widespread switching from distillateoil to natural gas will not shield the region’s energy customersfrom a repeat of the heating oil price shocks that they experiencedearlier this year. If anything, it could aggravate prices not onlyfor distillate oil but for gas, the Energy InformationAdministration (EIA) said in a report issued last Wednesday.

At the same time, gas pipelines executives were on Capitol Hilltestifying about the need for more pipeline capacity to theNortheast. “…[T]here is growing concern over weaknesses in theenergy delivery system in the Northeast. These concerns wereglaringly evident this past winter during the month of January,”said Catherine Good Abbott, CEO of Columbia Gas Transmission andColumbia Gulf Transmission, during a House oversight hearing lastweek.

The EIA report, which was commissioned by President Clintonfollowing severe price spikes in the Northeast heating oil marketin mid-January, concluded that it “may not be economical” for theregion’s industrial customers and electric generators withdual-fuel capability to switch to “firm year-round” natural gasservice. Nor, it added, would it be in the best financial interestof the Northeast LDCs.

First, the industrial customers in the Northeast would have topick up the costs for any new incremental pipeline and storagecapacity to meet an increased gas load. “Otherwise, costs toexisting firm gas customers (usually residential and smallcommercial customers) will increase,” said the EIA report, entitled”The Northeast Heating Fuel Market: Assessment and Options.” LDCsalso would have to make a “significant investment” to expand theirsystems to meet new firm gas load.

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

In short, fuel conversions by Northeast distillate customersmight “reduce the potential for distillate fuel oil price spikes inthe short term because of the over-capacity [that would be]created,” but it “cannot eliminate their possibility in the longerterm, 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 bythe Independent Fuel Terminal Operators Association, reached thesame conclusion — that converting Northeast fuel oil consumers tonatural gas would not be an economical move. It pointed out thatnatural gas prices have been more volatile than home heating oilprices over the past years, so conversions would offer littlerelief, if any.

Even if switching to natural gas were economical for Northeastcustomers, the EIA estimated that just-completed and proposedpipeline projects for the region would provide more than double theamount of new capacity that would be needed in the short term. Theagency projected that 839 MMcf/d of additional capacity would berequired to meet any increase in gas demand resulting fromfuel-switching, and that the figure could grow to 2.24 Bcf/d by2005. It pegged existing pipe capacity to the Northeast at 12.5Bcf/d.

However, the proposed Northeast projects — such as Millennium,Independence and associated expansions — “represent about 2 Bcf/dof potential additional capacity, well in excess of the additionalcapacity that would be needed on a peak day (839 MMcf/d) to addressthe new demand resulting from switching out of distillate, andnearly enough for additional 2005 demand,” the report noted. If thecompleted Sable Island expansion were factored into the equation,it would reduce the demand for additional Northeast pipelinecapacity to 506 MMcf/d to support potential conversions through2005, according to the DOE agency.

The gas needs of the “switchable market” can likely beaccommodated with completed pipeline projects and expansions until2002, the EIA report said. But even if proposed expansions — suchas Transcontinental Gas Pipe Line’s MarketLink project — arebuilt, “at least 250 million cubic feet per day of additionalcapacity would be necessary to…..serve the new potentialconversion customers in 2005.”

Rather than looking to huge gas pipelines as the answer, the EIAnoted that distillate and gas distributors already provide “simpleand relatively low-cost market mechanisms” to protect customersagainst price shocks created by weather. Both oil dealers and gasdistributors offer budget payment plans, and nearly half of theNortheast oil dealers provide price-cap programs on distillate fueloil to residential customers for a small “insurance” premium, andguaranteed pricing. Other oil dealers offer afixed-price-per-gallon charge for a 12-month period, according toEIA.

“These programs, for customers who had chosen them, would havelessened the financial pain of the 1999-2000 surge in winterdistillate prices or completely insulated the customers from it,”the report said. The EIA proposes that Northeast residential oilcustomers adopt one or more of these measures to avoid risks.

Also it believes large-volume, dual-fuel customers in theNortheast should maintain a greater distillate fuel oil backup atthe start of the winter season to reduce the “potential for largeintrusions into the heating oil market during very cold periods.”The EIA further recommended that residential customers installlarger oil tanks to reduce the number of required fill-ups duringthe peak period. In addition, it suggested residential customerstake “additional conservation measures, buying more efficientheating systems when they need to be replaced, and, in some cases,switching to a different fuel.”

Susan Parker

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