Pipe Customers Caution Against New Capacity

Industrial gas customers yesterday endeared themselves to pipelines that are trying to build new capacity into the Northeast market, calling on FERC to give the go-ahead to any and all projects that meet "some basic standards." Major gas and power producers, however, urged the Commission to first encourage pipes to use existing capacity more efficiently before doling out certificates for new lines. They also proposed that pipelines be required to assume more risk for their projects to protect shippers against "unnecessary" construction.

"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. Also "we don't think you [FERC] need to go beyond the contract commitments that are signed up. We don't think you should be discriminating against pipeline affiliates. Those projects are needed..."

If the Commission should begin a practice of screening out certain projects, Grenier said industrial gas users are concerned they -- or electric generators -- could get the short end of the stick in the event this creates a shortfall of pipeline capacity into the Northeast region in the years ahead. "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."

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Grenier's remarks came during a day-long Commission conference on the anticipated demand for natural gas in the Northeast quadrant of the United States. 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 that 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, according to EIA Administrator Jay Hakes. Most of the growth in gas will be fueled by the electric generation market and retiring nuclear facilities.

"...[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 gigawatts 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.

Independent producers warned FERC against jumping the gun in approving new pipeline projects 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," said Michael Strathman of Marathon Oil Co., which represented the Independent Petroleum Association of America (IPAA) at the conference. "Where some would say 'if you build it they will come,' IPAA would say 'if you over-build it we will pay.'"

Chris Fleming of Sithe Northeast, the largest independent power producer in the nation, suggested that FERC first should encourage pipes to make better and more efficient use of their existing capacity before approving new projects. He further called on the Commission to require pipelines to assume more risk for their projects. 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 full risk for 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."

Richard J. Sharples of Anadarko Petroleum Corp., who spoke on behalf of the Natural Gas Supply Association (NGSA), agreed that "the existing gas pipeline system must operate with optimal efficiency" before permitting new construction. This would enable the gas market to grow in the "least costly manner."

Even with an efficiently-run system, there will be a need for new pipeline capacity into the Northeast and elsewhere, he acknowledged. He believes the Commission should place certificate applicants at risk for incrementally priced facilities to weed out "unnecessary" construction. "We would say that an appropriately administered...certification process will ensure that only capacity needed by the market will be built," Sharples said. He asked that pipelines be required to submit "genuine shipper contracts" to demonstrate project need.

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