Recognizing the inevitability of heightened gas demand from theNortheast generation market over the next 20 years, a Department ofEnergy (DOE) study released last week calls for an acceleration ofthe FERC certificate process to pave the way for more gas pipelineand storage capacity to the region to help reduce its singulardependence on home heating oil and to avoid recurrences of lastwinter’s heating oil price spikes.

The study, which was conducted jointly by DOE’s EnergyInformation Administration (EIA) and Office of Policy, did notblame FERC for the drawn-out process, but rather pointed the fingerat other federal agencies whose “inputs to the determinationprocess are often not provided expeditiously.” As a result, theCommission “is…not provided the information and notifications ofpermit decisions that allow it to finish deliberations quickly.”

The two DOE agencies proposed that the White House Council onEnvironmental Quality and the National Economic Council undertakean initiative, which would involve the Commission and variousfederal agencies (the Fish and Wildlife Service, Advisory Councilof Historic Preservation and Bureau of Land Management, forexample), to establish guidelines for completing certification ofpipelines and storage projects in a quicker fashion.

This was one of a number of long-term initiatives that the DOErecommended the federal government take to expand the energy mix ofthe Northeast, lessening the region’s historical reliance onheating fuel and its vulnerability to price spikes. DOE alsoproposed initiatives to encourage the use of other forms of energy,such as distributed generation and renewable fuels.

President Clinton commissioned the study following theescalation in heating oil prices during last January’s cold snap inthe Northeast, which for the purpose of the study includes the NewEngland and Mid-Atlantic states and Washington D.C.

Part of the blame for the high fuel prices was pinned onNortheast industrial customers with dual-fuel capability, whose gasservice was interrupted by LDCs when temperatures plunged lastwinter, forcing them to turn to heating oil to fuel theirfacilities. Residential customers were irate that this practice haddeprived them of reasonably priced fuel.

But the study, titled “The Northeastern Heating Fuel Market:Assessment and Options,” concluded that it was “likely that priceswould have risen sharply even without the additional demand asother [dual-fuel] customers switched from natural gas.” In fact, itsaid the bulk of the demand surge last winter in the Northeastdistillate markets, which includes heating oil, “seems to have beena weather-induced increase involving the regular customer base.”Therefore, while an end to fuel-switching by Northeast industrialcustomers “could mitigate” the potential for distillate pricespikes, “it cannot eliminate their possibility” entirely, accordingto the DOE study.

The joint study follows an EIA report in May, which similarlyconcluded that requiring industrial users to switch from distillateoil to natural gas year-round would not shield the region’s energycustomers from a repeat of heating oil price shocks. Given thevolatility of gas prices this year, both DOE studies also agreedthat wide-scale conversions from heating oil to gas would beeconomically unwise for all classes of consumers.

Moreover, the joint EIA-Policy report contends that if theentire manufacturing and utility sectors in the Northeast convertedfrom distillate fuel to natural gas or another energy form, theywould only free up 13.6 million barrels of distillate for theresidential market. Combined, it noted that Northeast industrialand generation customers consumed less than 10% of the Northeast’distillate demand in 1997. As a result, the DOE said the completeconversion of “distillate fuel use to other fuels, particularly tonatural gas, is infeasible and probably unnecessary…”

DOE’s recommendation to streamline the FERC certificate processwas intended primarily for the benefit of future pipeline projects.For now, it said “pipeline capacity in many parts of the Northeastis adequate to meet current firm service demand…” It estimatedthe current design capacity of all the pipes serving the region is4.57 Tcf/year, “well in excess” of the region’s total capacityconsumption of 2.9 Tcfin 1998. And if all the proposed pipelinesto the Northeast are built, which isn’t likely, the reportestimated 5.9 Bcf/d (2.2 Tcf/year) of capacity would be added.

The DOE did concede there are some capacity-related troublespots or potential trouble spots on the Northeast pipeline system:New York City, the Leidy Hub area in Pennsylvania, northern NewJersey and the Boston metropolitan area.

In addition to accelerating the certificate process, the studyproposed that joint federal/state studies of regional gas storageopportunities be undertaken, with special focus given to lined-rockcaverns (LRCs). Such caverns store gas “in a manner similar to saltcavern storage, but [they] can be located in areas of the UnitedStates where salt caverns and conventional underground reservoirsare not present, including the Northeast.” The nearest storagefacilities for the Northeast are located in New York andPennsylvania.

As a long-term measure, the DOE said it will conduct a detailed,independent technical review of the LRC concept at specific siteswhere LRC storage facilities are planned. “DOE’s LRC data andanalysis would be valuable to federal and state regulatorsreviewing proposed projects,” the study noted.

The DOE agencies further proposed exploring options that wouldmake conversion/hookup costs for natural gas utilities nontaxable,as they are for electric utilities. Because such costs areconsidered taxable income now, “gas utilities are passing this taxobligation on to their new customers. As a result,customers…..pay a higher cost for connection” to gas service,they said. Gas LDCs estimate their conversions costs have risen by30-50% as a result of the unfavorable tax treatment, with largeindustrial customers paying as much as $1 million per hookup.

Furthermore, the study recommended taking steps to ease the wayfor increased shipments of liquefied natural gas (LNG) into BostonHarbor, where Distrigas Corp. receives and stores much of its LNGimports. Distrigas plans to double its LNG imports from Algeria andTrinidad over the next few years to meet the demand of electricpower plans.

“DOE will work closely with the Department of Transportation[and] U.S. Coast Guard to facilitate its review of [a] proposal toincrease deliveries of LNG to Boston,” the study said. But therewill be a price to pay – “increasing LNG tanker traffic will reducethe times, under current Coast Guard rules and practices, whendistillate deliveries can be made.”

The DOE agencies further said the department was “seriouslyreviewing a process to implement” a recommendation in the NationalPetroleum Council study, which was released in December 1999, thatcalled for an Interagency Work Group on Natural Gas to beestablished as part of the National Economic Council. The objectiveof the group would be to create a “balanced, long-term approach forresponsibly developing the nation’s natural gas resource base.”

Given that New England relies heavily on Canadian gas, the DOEalso recommended that the U.S. and Canada renew their formerpractice of meeting annually. “To improve understanding about [the]natural gas market, regulatory and trade issues, the administrationproposes that DOE and its Canadian counterparts, the NationalEnergy Board of Canada and the Department of Natural ResourcesCanada, should resume regular annual meetings.”

The Clinton administration already has taken some steps toprotect Northeast customers from more price spikes next winter. Itis in the process of creating a two-million-barrel home heating oilreserve in the Northeast as part of the existing StrategicPetroleum Reserve, and it has re-established DOE’s Energy EmergencyOffice to “enhance [the] communication and readiness” of thefederal government, states and industry to deal with energyemergencies. The administration also has requested advanced fundingto assist low-income households with their energy bills in 2001 and2002. At their fall conference, the EIA and the NationalAssociation of State Energy Offices “will highlight the winterfuels outlook for the Northeast,” the study noted. Lastly, the U.S.Army Corps of Engineers will assess the need to dredge and deepenports in the New England region to allow larger ships carryingdistillate fuel to dock and unload their supplies.

Susan Parker

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