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DOE Urges Speedier Pipe Certificate Process

DOE Urges Speedier Pipe Certificate Process

Recognizing the inevitability of heightened gas demand from the Northeast generation market over the next 20 years, a Department of Energy (DOE) study released last week calls for an acceleration of the FERC certificate process to pave the way for more gas pipeline and storage capacity to the region to help reduce its singular dependence on home heating oil and to avoid recurrences of last winter's heating oil price spikes.

The study, which was conducted jointly by DOE's Energy Information Administration (EIA) and Office of Policy, did not blame FERC for the drawn-out process, but rather pointed the finger at other federal agencies whose "inputs to the determination process are often not provided expeditiously." As a result, the Commission "is...not provided the information and notifications of permit decisions that allow it to finish deliberations quickly."

The two DOE agencies proposed that the White House Council on Environmental Quality and the National Economic Council undertake an initiative, which would involve the Commission and various federal agencies (the Fish and Wildlife Service, Advisory Council of Historic Preservation and Bureau of Land Management, for example), to establish guidelines for completing certification of pipelines and storage projects in a quicker fashion.

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

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

Part of the blame for the high fuel prices was pinned on Northeast industrial customers with dual-fuel capability, whose gas service was interrupted by LDCs when temperatures plunged last winter, forcing them to turn to heating oil to fuel their facilities. Residential customers were irate that this practice had deprived them of reasonably priced fuel.

But the study, titled "The Northeastern Heating Fuel Market: Assessment and Options," concluded that it was "likely that prices would have risen sharply even without the additional demand as other [dual-fuel] customers switched from natural gas." In fact, it said the bulk of the demand surge last winter in the Northeast distillate markets, which includes heating oil, "seems to have been a weather-induced increase involving the regular customer base." Therefore, while an end to fuel-switching by Northeast industrial customers "could mitigate" the potential for distillate price spikes, "it cannot eliminate their possibility" entirely, according to the DOE study.

The joint study follows an EIA report in May, which similarly concluded that requiring industrial users to switch from distillate oil to natural gas year-round would not shield the region's energy customers from a repeat of heating oil price shocks. Given the volatility of gas prices this year, both DOE studies also agreed that wide-scale conversions from heating oil to gas would be economically unwise for all classes of consumers.

Moreover, the joint EIA-Policy report contends that if the entire manufacturing and utility sectors in the Northeast converted from distillate fuel to natural gas or another energy form, they would only free up 13.6 million barrels of distillate for the residential market. Combined, it noted that Northeast industrial and generation customers consumed less than 10% of the Northeast' distillate demand in 1997. As a result, the DOE said the complete conversion of "distillate fuel use to other fuels, particularly to natural gas, is infeasible and probably unnecessary..."

DOE's recommendation to streamline the FERC certificate process was intended primarily for the benefit of future pipeline projects. For now, it said "pipeline capacity in many parts of the Northeast is adequate to meet current firm service demand..." It estimated the current design capacity of all the pipes serving the region is 4.57 Tcf/year, "well in excess" of the region's total capacity consumption of 2.9 Tcf in 1998. And if all the proposed pipelines to the Northeast are built, which isn't likely, the report estimated 5.9 Bcf/d (2.2 Tcf/year) of capacity would be added.

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

In addition to accelerating the certificate process, the study proposed that joint federal/state studies of regional gas storage opportunities be undertaken, with special focus given to lined-rock caverns (LRCs). Such caverns store gas "in a manner similar to salt cavern storage, but [they] can be located in areas of the United States where salt caverns and conventional underground reservoirs are not present, including the Northeast." The nearest storage facilities for the Northeast are located in New York and Pennsylvania.

As a long-term measure, the DOE said it will conduct a detailed, independent technical review of the LRC concept at specific sites where LRC storage facilities are planned. "DOE's LRC data and analysis would be valuable to federal and state regulators reviewing proposed projects," the study noted.

The DOE agencies further proposed exploring options that would make conversion/hookup costs for natural gas utilities nontaxable, as they are for electric utilities. Because such costs are considered taxable income now, "gas utilities are passing this tax obligation 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 by 30-50% as a result of the unfavorable tax treatment, with large industrial customers paying as much as $1 million per hookup.

Furthermore, the study recommended taking steps to ease the way for increased shipments of liquefied natural gas (LNG) into Boston Harbor, where Distrigas Corp. receives and stores much of its LNG imports. Distrigas plans to double its LNG imports from Algeria and Trinidad over the next few years to meet the demand of electric power plans.

"DOE will work closely with the Department of Transportation [and] U.S. Coast Guard to facilitate its review of [a] proposal to increase deliveries of LNG to Boston," the study said. But there will be a price to pay - "increasing LNG tanker traffic will reduce the times, under current Coast Guard rules and practices, when distillate deliveries can be made."

The DOE agencies further said the department was "seriously reviewing a process to implement" a recommendation in the National Petroleum Council study, which was released in December 1999, that called for an Interagency Work Group on Natural Gas to be established as part of the National Economic Council. The objective of the group would be to create a "balanced, long-term approach for responsibly developing the nation's natural gas resource base."

Given that New England relies heavily on Canadian gas, the DOE also recommended that the U.S. and Canada renew their former practice of meeting annually. "To improve understanding about [the] natural gas market, regulatory and trade issues, the administration proposes that DOE and its Canadian counterparts, the National Energy Board of Canada and the Department of Natural Resources Canada, should resume regular annual meetings."

The Clinton administration already has taken some steps to protect Northeast customers from more price spikes next winter. It is in the process of creating a two-million-barrel home heating oil reserve in the Northeast as part of the existing Strategic Petroleum Reserve, and it has re-established DOE's Energy Emergency Office to "enhance [the] communication and readiness" of the federal government, states and industry to deal with energy emergencies. The administration also has requested advanced funding to assist low-income households with their energy bills in 2001 and 2002. At their fall conference, the EIA and the National Association of State Energy Offices "will highlight the winter fuels outlook for the Northeast," the study noted. Lastly, the U.S. Army Corps of Engineers will assess the need to dredge and deepen ports in the New England region to allow larger ships carrying distillate fuel to dock and unload their supplies.

Susan Parker

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