Interstate pipelines should be allowed to build as much newcapacity as they want into the burgeoning Northeast gas marketproviding they are put at risk for underrecovery of rates on theprojects, pipeline customers told FERC last week. But absent suchan at-risk approach, they urged the Commission to exerciserestraint when assessing Northeast-bound pipe projects becausewhile they concede additional capacity will be needed in thefuture, they are more guarded than pipelines about the extent ofthe need.

“We think that all pipeline projects that meet some basicstandards should be approved, and let the market sort them out,”said Edward J. Grenier, attorney for the Process Gas ConsumersGroup (PGC), which represents industrial users. Putting thepipelines at risk would prevent them from building “flaky”projects. “They’re smart business people. We have confidence in thebusiness ability of the pipeline project sponsors to do somethingthat is sensible, that has a good chance to succeed,” he noted.

“If a pipeline sponsor can get the financing and he meets allthe other basic criteria and all the other elements are satisfied,why not let him do it because all of us…..on the consuming endcertainly want maximum exposure to maximum supply basins. And youdo that through more pipelines and more competition,” Grenier said.Industrials are worried about a capacity shortfall in the yearsahead. This is a real concern because the gas spigots to theirplants usually are the first to be turned off during constrainedsupply and capacity situations.

Industrials believe a capacity shortfall could put them in a”bidding war” with electric generators. “We don’t want to getcrosswise with our good friends in the electric generation industrywhen state regulators start getting nervous and start saying, “Geewhiz, which is more important – industrial use or electricgeneration use,” Grenier said. He estimated annual gas demand byindustrials is expected to grow by 1 Tcf over the next decade.

“If they [pipelines] are held at risk by the Commission and keptat risk…then it doesn’t impact the wellhead price, and I probablywouldn’t care” how much new Northeast pipeline capacity isconstructed, said Michael Strathman of Marathon Oil Co., who spokeon behalf of the Independent Petroleum Association of America(IPAA), an independent producer group. Major gas producers alsosupported an at-risk policy. As long as there would be “nounintended consequences” as a result, “we would certainly encourageall of that [capacity] that can be built to be built,” said RichardJ. Sharples of Anadarko Petroleum Corp., and chairman of theNatural Gas Supply Association (NGSA).

The interstate pipelines “need to start building now to meeteven the lowest estimates” for growth in Northeast gas demand, saidLew Posekany, senior vice president of group planning anddevelopment for The Williams Cos. There’s “no doubt new pipelineinfrastructure is needed.” He noted that operating existingpipelines at higher load factors won’t solve anything since much ofthe capacity serving the high-growth areas in the Northeast alreadyis tight.

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 opportunitiesfor pipes and other industry members. He urged FERC to restore itspractice of issuing preliminary determinations on thenon-environmental aspects of pipe projects, and to “look to marketfundamentals and financial commitments as evidence of market demandand commercial necessity” when reviewing projects. He says FERC hasa clear choice: either it can let its certificate policies becomeoutdated or it can adapt them to the “new market realities.”

Industry officials aired their views last Monday during aday-long Commission conference on the anticipated demand fornatural gas in the U.S. Northeast quadrant, which includes theregion east of the Mississippi River and north of Tennessee andNorth Carolina. FERC called the conference to examine theassumptions underlying the various – and often conflicting – gasdemand projections for the region. Specifically, it wanted to knowwhether the demand growth would be sufficient enough to justify allthe pipeline projects being proposed into the region.

The Energy Information Administration (EIA) forecasts naturalgas will be the fastest growing fuel in the U.S. over the next twodecades, increasing at an annual rate of 1.7% to achieve a 28%share of the energy market. In the Northeast, gas is expected toaccount for about one-third of the total fuel market by 2020, withdemand climbing from about 7 Tcf to 10-11 Tcf annually, accordingto EIA Administrator Jay Hakes. Most of that growth will be fueledby the region’s electric generation market, whose annual gasconsumption is forecast to rise from 0.5 Tcf to about 3.5 Tcf by2020.

Retiring nuclear facilities also will be a key contributor togrowth in Northeast gas demand, Hakes said. “…[O]ur analysissuggested that 29 out of 46 gigawatts of nuclear plants in theregion might retire” over the next two decades, he said. The EIAalso believes it “would make sense” to retire about 24 GW of oiland gas steam plants and replace them with new facilities.

As for new capacity, it’s estimated that planned pipelineprojects would bring an additional 8.7 Bcf/d into the regionbetween 1998-2001, Hakes noted. This would be an increase of”roughly 30%,” and would be sufficient to handle expected demanduntil 2012. Another spurt of construction activity is likely tooccur between 2010-2012, he said, increasing capacity by another4.7 Bcf/d, up 46% over 1997 levels.

Absent an at-risk approach, IPAA’s Strathman warned FERC againstjumping the gun in approving too much new pipeline capacity to theNortheast. “Producers caution against the overly optimistic andsimplistic analysis which concludes there’s an immediate need toexpand pipeline capacity to reach growth markets rather than moreprudently waiting on consumption-driven increases in demand,” hesaid.

Timing Important

Because there are so many unknown variables, even some pipelinesurged the Commission to take a go-slow approach. FERC “shouldconsider the expansion and rationalization of existing pipelinesystems – in a period of extensive capacity turnback potential – tofuel this growth in the near term until the extent, timing,location and characteristics of this market can be fullyascertained,” noted Craig Frew, president of Iroquois PipelineOperating Co. But Iroquois, which already delivers Canadian gas tothe Northeast and could not be expected to welcome competition, wasin the minority among pipelines. Most agree there will be a”legitimate demand” for more natural gas and more pipe capacityadditions in the Northeast, according to the Interstate Natural GasAssociation of America.

“Yes…new capacity will be needed” into the Northeasteventually, Strathman acknowledged, but the real “question [is]when is it going to be needed.” The EIA projects the greatestdemand for additional capacity would be in the early part of thenext decade. As for seasonal patterns, the agency indicated thatthe biggest need for pipeline capacity by electric generators wouldcome in the summer, which historically is a time when demand forcapacity by other uses is at its lowest. Strathman and othersbelieve the seasonal nature of generators’ capacity needs minimizesthe urgency of new pipeline projects.

The source of the gas to supply Northeast demand is anothercritical factor that the Commission must consider, Strathman said.”The Maritimes [and Northeast] pipeline…..has opened up a wholeproducing [source in] the Sable Island area…It could conceivablybe a major supply source for New England. When that happens, thecapacity in the pipes that currently serve that market will becomegreater simply because they don’t have to push the gas as far upinto the marketplace. So the pipeline companies have to addresswhat impact that has on their systems.”

He also believes FERC should review historical basisdifferentials before approving projects. For example, the basisbetween the Chicago and New York markets – for which a number ofpipeline projects have already been proposed – has varied from 10cents to 20 cents in recent times. “That’s not enough money tojustify building a new pipe,” Strathman concluded.

But Iroquois’ Frew believes the current situation with the basisdifferentials is “anomalous,” and will not last long. Thedifferentials are distorted due to the”significant amounts” offirm capacity still being held by LDCs, he noted. Once the stateshave completed their unbundling programs “the true value ofpipeline capacity will be established.”

Examine Current Use

The Commission also should consider turned-back capacity whendeciding the fate of projects, said Andrew J. Van Horn Ph.D., whospoke on behalf of CNG Transmission, a sharp critic of severalproposed projects that could lessen its grip on key Northeastmarkets. The EIA estimates that 12.8 trillion Btu/d of firmcontracts for capacity into the Northeast will expire between1999-2003 – the period during which most of the new pipelineconstruction is planned. Of that amount, it projects that 2.71trillion Btu/d is likely to be turned back to pipelines.

Chris Fleming of Sithe Northeast, the largest independent powerproducer in the nation, suggested that FERC should encourage pipesto make better and more efficient use of their existing capacitybefore doling out certificates for new projects. He also believesgas pipelines should be required to assume more risk, but for adifferent reason. As it stands now, he noted there’s a “growingdisconnect” between pipeline companies, which are guaranteed acertain return, and power generators that face the full risk oftheir decisions. It’s because of this disconnect that merchantgenerators are reluctant to enter into long-term commitments forpipeline capacity, he told FERC.

Fleming further criticized FERC’s policy requiring pipelinecompanies to demonstrate market demand for new projects. Thatpolicy has had the “unintended consequence of frustrating expansionof electric generation.”

While the focus of the conference was on gas demand and capacityprojections, NGSA’s Sharples voiced concerns about whetherproducers would be able to meet the 30 Tcf market that has beenprojected for the U.S. by 2010-2015. “It’s nice to have a goal outthere for the industry, but I don’t think that we should establishpublic policy based on the assumption that we’re going to achieve30 Tcf.” Restrictions against drilling on public lands and thelack of capital support for producers may make 30 Tcf animpossibility, he said.

Susan Parker

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