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
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
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
"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."