Industrial gas customers yesterday endeared themselves topipelines that are trying to build new capacity into the Northeastmarket, calling on FERC to give the go-ahead to any and allprojects that meet “some basic standards.” Major gas and powerproducers, however, urged the Commission to first encourage pipesto use existing capacity more efficiently before doling outcertificates for new lines. They also proposed that pipelines berequired to assume more risk for their projects to protect shippersagainst “unnecessary” construction.

“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. Also “we don’tthink you [FERC] need to go beyond the contract commitments thatare signed up. We don’t think you should be discriminating againstpipeline affiliates. Those projects are needed…”

If the Commission should begin a practice of screening outcertain projects, Grenier said industrial gas users are concernedthey — or electric generators — could get the short end of thestick in the event this creates a shortfall of pipeline capacityinto the Northeast region in the years ahead. “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’s remarks came during a day-long Commission conferenceon the anticipated demand for natural gas in the Northeast quadrantof the United States. 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 thatnatural gas will be the fastest growing fuel in the U.S. over thenext two decades, increasing at an annual rate of 1.7% to achieve a28% share of the energy market. In the Northeast, gas is expectedto account for about one-third of the total fuel market by 2020,according to EIA Administrator Jay Hakes. Most of the growth in gaswill be fueled by the electric generation market and retiringnuclear facilities.

“…[O]ur analysis suggested that 29 out of 46 gigawatts ofnuclear plants in the region might retire” over the next twodecades, he said. The EIA also believes it “would make sense” toretire about 24 gigawatts of oil and gas steam plants, and replacethem 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.

Independent producers warned FERC against jumping the gun inapproving new pipeline projects to the Northeast. “Producerscaution against the overly optimistic and simplistic analysis whichconcludes there’s an immediate need to expand pipeline capacity toreach growth markets rather than more prudently waiting onconsumption-driven increases in demand,” said Michael Strathman ofMarathon Oil Co., which represented the Independent PetroleumAssociation of America (IPAA) at the conference. “Where some wouldsay ‘if you build it they will come,’ IPAA would say ‘if youover-build it we will pay.'”

Chris Fleming of Sithe Northeast, the largest independent powerproducer in the nation, suggested that FERC first should encouragepipes to make better and more efficient use of their existingcapacity before approving new projects. He further called on theCommission to require pipelines to assume more risk for theirprojects. 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’sbecause of this disconnect that merchant generators are reluctantto enter into long-term commitments for pipeline capacity, he toldFERC.

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.”

Richard J. Sharples of Anadarko Petroleum Corp., who spoke onbehalf of the Natural Gas Supply Association (NGSA), agreed that”the existing gas pipeline system must operate with optimalefficiency” before permitting new construction. This would enablethe gas market to grow in the “least costly manner.”

Even with an efficiently-run system, there will be a need fornew pipeline capacity into the Northeast and elsewhere, heacknowledged. He believes the Commission should place certificateapplicants at risk for incrementally priced facilities to weed out”unnecessary” construction. “We would say that an appropriatelyadministered…certification process will ensure that only capacityneeded by the market will be built,” Sharples said. He asked thatpipelines be required to submit “genuine shipper contracts” todemonstrate project need.

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