At-Risk Label Will Weed Out 'Flaky' Northeast Projects
Interstate pipelines should be allowed to build as much new
capacity as they want into the burgeoning Northeast gas market
providing they are put at risk for underrecovery of rates on the
projects, pipeline customers told FERC last week. But absent such
an at-risk approach, they urged the Commission to exercise
restraint when assessing Northeast-bound pipe projects because
while they concede additional capacity will be needed in the
future, they are more guarded than pipelines about the extent of
"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. Putting the
pipelines at risk would prevent them from building "flaky"
projects. "They're smart business people. We have confidence in the
business ability of the pipeline project sponsors to do something
that is sensible, that has a good chance to succeed," he noted.
"If a pipeline sponsor can get the financing and he meets all
the other basic criteria and all the other elements are satisfied,
why not let him do it because all of us.....on the consuming end
certainly want maximum exposure to maximum supply basins. And you
do that through more pipelines and more competition," Grenier said.
Industrials are worried about a capacity shortfall in the years
ahead. This is a real concern because the gas spigots to their
plants usually are the first to be turned off during constrained
supply and capacity situations.
Industrials believe a capacity shortfall could put them in a
"bidding war" with electric generators. "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," Grenier said. He estimated annual gas demand by
industrials is expected to grow by 1 Tcf over the next decade.
"If they [pipelines] are held at risk by the Commission and kept
at risk...then it doesn't impact the wellhead price, and I probably
wouldn't care" how much new Northeast pipeline capacity is
constructed, said Michael Strathman of Marathon Oil Co., who spoke
on behalf of the Independent Petroleum Association of America
(IPAA), an independent producer group. Major gas producers also
supported an at-risk policy. As long as there would be "no
unintended consequences" as a result, "we would certainly encourage
all of that [capacity] that can be built to be built," said Richard
J. Sharples of Anadarko Petroleum Corp., and chairman of the
Natural Gas Supply Association (NGSA).
The interstate pipelines "need to start building now to meet
even the lowest estimates" for growth in Northeast gas demand, said
Lew Posekany, senior vice president of group planning and
development for The Williams Cos. There's "no doubt new pipeline
infrastructure is needed." He noted that operating existing
pipelines at higher load factors won't solve anything since much of
the capacity serving the high-growth areas in the Northeast already
The Commission must ensure an "expeditious and decisive"
certificate process to meet Northeast gas needs, Posekany said,
adding that regulatory delays would only lead to lost opportunities
for pipes and other industry members. He urged FERC to restore its
practice of issuing preliminary determinations on the
non-environmental aspects of pipe projects, and to "look to market
fundamentals and financial commitments as evidence of market demand
and commercial necessity" when reviewing projects. He says FERC has
a clear choice: either it can let its certificate policies become
outdated or it can adapt them to the "new market realities."
Industry officials aired their views last Monday during a
day-long Commission conference on the anticipated demand for
natural gas in the U.S. Northeast quadrant, which includes the
region east of the Mississippi River and north of Tennessee and
North Carolina. 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 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, with
demand climbing from about 7 Tcf to 10-11 Tcf annually, according
to EIA Administrator Jay Hakes. Most of that growth will be fueled
by the region's electric generation market, whose annual gas
consumption is forecast to rise from 0.5 Tcf to about 3.5 Tcf by
Retiring nuclear facilities also will be a key contributor to
growth in Northeast gas demand, Hakes said. "...[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 GW 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.
Absent an at-risk approach, IPAA's Strathman warned FERC against
jumping the gun in approving too much new pipeline capacity 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," he
Because there are so many unknown variables, even some pipelines
urged the Commission to take a go-slow approach. FERC "should
consider the expansion and rationalization of existing pipeline
systems - in a period of extensive capacity turnback potential - to
fuel this growth in the near term until the extent, timing,
location and characteristics of this market can be fully
ascertained," noted Craig Frew, president of Iroquois Pipeline
Operating Co. But Iroquois, which already delivers Canadian gas to
the Northeast and could not be expected to welcome competition, was
in the minority among pipelines. Most agree there will be a
"legitimate demand" for more natural gas and more pipe capacity
additions in the Northeast, according to the Interstate Natural Gas
Association of America.
"Yes...new capacity will be needed" into the Northeast
eventually, Strathman acknowledged, but the real "question [is]
when is it going to be needed." The EIA projects the greatest
demand for additional capacity would be in the early part of the
next decade. As for seasonal patterns, the agency indicated that
the biggest need for pipeline capacity by electric generators would
come in the summer, which historically is a time when demand for
capacity by other uses is at its lowest. Strathman and others
believe the seasonal nature of generators' capacity needs minimizes
the urgency of new pipeline projects.
The source of the gas to supply Northeast demand is another
critical factor that the Commission must consider, Strathman said.
"The Maritimes [and Northeast] pipeline.....has opened up a whole
producing [source in] the Sable Island area...It could conceivably
be a major supply source for New England. When that happens, the
capacity in the pipes that currently serve that market will become
greater simply because they don't have to push the gas as far up
into the marketplace. So the pipeline companies have to address
what impact that has on their systems."
He also believes FERC should review historical basis
differentials before approving projects. For example, the basis
between the Chicago and New York markets - for which a number of
pipeline projects have already been proposed - has varied from 10
cents to 20 cents in recent times. "That's not enough money to
justify building a new pipe," Strathman concluded.
But Iroquois' Frew believes the current situation with the basis
differentials is "anomalous," and will not last long. The
differentials are distorted due to the "significant amounts" of
firm capacity still being held by LDCs, he noted. Once the states
have completed their unbundling programs "the true value of
pipeline capacity will be established."
Examine Current Use
The Commission also should consider turned-back capacity when
deciding the fate of projects, said Andrew J. Van Horn Ph.D., who
spoke on behalf of CNG Transmission, a sharp critic of several
proposed projects that could lessen its grip on key Northeast
markets. The EIA estimates that 12.8 trillion Btu/d of firm
contracts for capacity into the Northeast will expire between
1999-2003 - the period during which most of the new pipeline
construction is planned. Of that amount, it projects that 2.71
trillion Btu/d is likely to be turned back to pipelines.
Chris Fleming of Sithe Northeast, the largest independent power
producer in the nation, suggested that FERC should encourage pipes
to make better and more efficient use of their existing capacity
before doling out certificates for new projects. He also believes
gas pipelines should be required to assume more risk, but for a
different reason. 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 the full risk of
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."
While the focus of the conference was on gas demand and capacity
projections, NGSA's Sharples voiced concerns about whether
producers would be able to meet the 30 Tcf market that has been
projected for the U.S. by 2010-2015. "It's nice to have a goal out
there for the industry, but I don't think that we should establish
public policy based on the assumption that we're going to achieve
30 Tcf." Restrictions against drilling on public lands and the
lack of capital support for producers may make 30 Tcf an
impossibility, he said.