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
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
"...[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
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.