|7/31/2014 10:31:00 AM|
Eye on Augusta: Maine PUC to Consider Up to $75 Million Per Year Subsidy for Natural Gas Pipeline Expansion
by Andy O’BrienThis week the Maine Public Utilities Commission (PUC) will take up a controversial proposal that would give the commission the authority to charge electricity and natural gas customers in Maine up to $75 million per year for the expansion of natural gas pipeline into the state.
The "Maine Energy Cost Reduction Act," signed into law last year, authorizes the PUC, in consultation with the Public Advocate and the Governor's Energy Office, to purchase up to 200 million cubic feet per day of pipeline capacity. According to PUC Chairman Tom Welch, that may require ratepayers to subsidize Kinder Morgan subsidiary Tennessee Gas Pipeline Company's brand new, 250-mile-long pipeline from upstate New York through western Massachusetts to connect with a pipeline into Maine.
"It's well known that there are a number of pipeline proposals out there, of which Kinder Morgan is one," said Welch in a phone interview. "If the question is, could theoretically what we do in Maine impact [the Kinder Morgan project], the answer is 'yes.' Whether it will, I think is one of the key questions in the case."
Supporters of the proposal before the PUC say that a large public investment in natural gas could result in lower energy costs because over half of the region's electricity generation is now reliant on the fuel. Although the recent shale gas boom in the Marcellus Shale formation in Pennsylvania and New York has led to record low prices at the well head, New England does not have enough pipeline capacity to take full advantage of the low prices. As a result, during peak demand times in the winter, as gas flows into New England for heat and electrical generation, congestion in the pipeline occurs.
This allows pipeline owners to charge a premium to consumers. Last year that premium (also known as the "basis differential") sent the average wholesale electricity rate up 57 percent over 2012 rates. According to regional electric grid operator ISO New England, the wholesale cost of electricity spiked from $44 million in January 2012 to $175 million in January of this year, all due to a lack of enough pipeline.
"That's a big number," said Welch. "It appears to be principally a winter problem, but that ripples on the overall average effect. I think it's pretty clear, and I don't think anybody disagrees, that there's an issue to be looked at here. The real question is what the best way there is to resolve it."
Supporters of the public subsidy say that a policy to flood the market with natural gas can lower energy costs for all. A recent study by Sussex Economic Advisors commissioned by the PUC concluded that a reduction in the basis differential by 75 percent would save New England electricity customers more than $1.5 billion a year and would save Maine electricity customers more than $120 million a year.
However, on March 20, PUC Commissioner David Littell expressed caution about moving too quickly, arguing that the proposal could also add $1.5 billion to Maine's electricity and gas rates. He said that the case would be the first time in history that any U.S. utility regulator has considered charging ratepayers to subsidize the construction of natural gas pipelines.
"This proceeding is precedential; it will examine economic and legal issues never before considered by a state commission; it could involve the largest singular investment by Maine ratepayers authorized in this Commission's 100-year history," wrote Littell. "It may involve entering into a contract to buy capacity on an interstate gas pipeline, an endeavor with which this Commission has no legal, technical or economic experience. Large sophisticated parties can make or lose billions of dollars on natural gas contracts - as the nation learned with the collapse of Enron Corporation several years ago."
The law also states that the PUC may not execute a contract to purchase pipeline capacity if it concludes that market and rule changes will achieve the same energy cost reductions as public subsidies. However, while Welch would not comment on the merits of the case in a recent interview, in July of last year, he expressed skepticism that the market alone would lower the cost of natural gas at peak winter times.
"The Maine legislation recognizes the possibility and in my view the probability that private interests alone may not have sufficient incentives to add new pipeline capacity for the purpose of keeping electricity prices low," said Welch at an energy forum in Brunswick.
The New England States Pipeline Strategy
The law also requires that the state explore cross-regional strategies for funding pipeline expansion. Welch is currently representing Maine in talks with the other five New England governors through the New England States Committee on Electricity (NESCOE) to address what could end up being a $3 billion project.
"This is a different effort, though obviously related to [the PUC case] and there could be some interesting overlap between what happens at the regional level and what happens at the Maine level," said Welch.
The group has outlined two energy objectives that essentially amount to a likely trade-off: Maine wants natural gas and southern New England wants renewable energy. In order to meet carbon reduction targets, Connecticut and Massachusetts have driven the demand for low or zero-carbon-emitting energy, which would likely be transmitted through Maine from wind projects and Canadian hydro plants. According to Chairman Welch, while the ideal would be the regional investment model for pipeline expansion so that Maine isn't footing the bill for the rest of the region, the current case on the PUC docket will decide whether Maine should buy up pipeline on its own.
Push-Back from Environmental Groups
The PUC case has ignited a backlash from environmental groups, including the Conservation Law Foundation and Environment Northeast, who say Maine is putting too much investment into natural gas and not enough resources into pipeline-efficiency measures and renewables. Although CLF originally led the effort to transition New England away from coal power to natural gas as a "bridge-fuel" to renewable energy in the 1990s, the group is concerned about the environmental impact of natural gas. Although natural gas emits a lot less carbon than oil, it is still a fossil fuel that is made up mostly of methane. The EPA estimates that the impact of methane on climate change is around 20 times greater than carbon dioxide when it leaks. The gas extraction technique known as hydraulic fracturing ("fracking") has also been known to pollute groundwater.
Environmental groups also worry that building pipelines and transmission lines to big Canadian hydro plants is discouraging the development of locally distributed solar and wind projects, which they say have the potential to also meet carbon reduction targets while creating more local jobs.
Welch and proponents of the plan counter that solar and wind are intermittent, since the wind needs to be blowing and the sun shining for them to work. Because natural gas plants can ramp up quickly, they can absorb the problems associated with renewables. On the other hand, say critics of the pipeline expansion, renewable sources like offshore wind have great potential because the winds are most strong at the same time as peak winter demand.
Greg Cunningham, a senior attorney at CLF, says that given the region's goals to reduce carbon emissions by up to 80 percent by 2050, a massive investment in natural gas is counterproductive. He argues that if such an investment were made, New England would likely be deriving up to 60 percent of its electricity from natural gas when there are other more sustainable options.
"We're not going to achieve that goal if we build out massive pipeline," said Cunningham. "Now if we do this incrementally and we work our way in small steps as the need arises, it will mean less pipeline build-out and more opportunity for renewables, efficiency and new technologies."
CLF and Environment Northeast have recommended increasing the efficiency of existing liquefied natural gas (LNG) terminals - like Canaport in St. John, New Brunswick, and GDF Suez in Everett, Massachusetts - to reduce peak demand. Cunningham said that the pipeline constraint issues are coming from the West, but that LNG terminals in the East have the potential to compete. He added that the proposed Downeast LNG pipeline near Eastport could also play a role in lowering the basis differential.
Cunningham also pointed out that Spectra Energy and Kinder Morgan are already scheduled to complete pipeline expansions into New England by 2016, which could alleviate some congestion. In addition to the latter project, Spectra Energy has also announced that it intends to expand its Algonquin and Maritimes and Northeast Pipeline, which runs from Nova Scotia through Maine to Massachusetts, to be completed in late 2017.
Environmental groups also say that natural-gas-fired electric generators have not been held accountable for keeping enough fuel in reserve to meet peak demand. This year ISO New England filed a proposal with the Federal Energy Regulatory Commission (FERC) to offer pay-per-performance for natural-gas-fired electric generators to ensure they get a firm supply of fuel to avoid winter shortages.
"All studies reflect that those will both drive down the basis differential as of 2016," said Cunningham. "In a couple of years, the problem that the Maine PUC is talking about alleviating by making this big purchase on the backs of ratepayers is going to be virtually eliminated."
Welch did not comment on CLF's alternative proposals, except to say that the PUC would consider all options. However, in June he told New Hampshire Public Radio that he believed CLF's proposals would only serve as band-aids and wouldn't ultimately fix the pipeline constraint issues.
Critics of the proposal also point out that gas is a volatile commodity that is subject to the demands of the world market. The Department of Energy has received 39 applications to export liquefied natural gas, according to the DOE's website. Downeast LNG has also recently announced a revised plan to build a $1.3 billion import-export facility, which would not only have the capacity to import natural gas from abroad, but it would also be able to export domestically produced gas to global markets. The facility would have the capacity to liquefy 2 million tons of natural gas per year or re-gasify 100 million cubic feet of liquefied natural gas. The company plans to submit its application to FERC in January 2015 and hopes to begin construction in 2016, although it continues to face stiff opposition from some local groups.
According to the company, countries in Eastern Europe, which have been trying to loosen ties with natural-gas-producing Russia, will be a target market. Once natural gas exports ramp up, critics argue that so will prices. On the other hand, supporters of the proposal before the PUC cite EIA estimates that the price of natural gas will remain below 2008 levels for at least the next 25 years.
Alleged Conflicts of Interest & Transparency Issues
In the lead-up to the PUC hearings, CLF launched an opening salvo with the release of 48 public documents it says show evidence of conflicts of interest and a lack of transparency in NESCOE's negotiation process.
In one August 8, 2013, email, NESCOE staffer Ben D'Antonio tells Welch that the group's plan should "be formulated behind closed doors" because "the court of public opinion can be fickle and recalcitrant." Welch replied in an email that he agreed.
Welch says CLF's charges are overblown. He pointed out that any potential NESCOE agreement would ultimately need to receive FERC approval, which would be a very public process. He said it's important for NESCOE's managers to have some frank discussions behind closed doors concerning each state's objectives.
CLF has also requested NESCOE documents concerning the natural gas expansion project, but NESCOE replied that, as a private nonprofit, it is not subject to Freedom of Access laws. CLF has maintained that since NESCOE is funded with public money, it is bound by the same laws as governments. CLF says it is considering legal action against NESCOE for the release of the documents.
CLF has also charged that the gas industry has had too much influence over the NESCOE process, citing emails that show Welch used a memorandum written by Tony Buxton, a lobbyist for Kinder Morgan and the paper industry, to make his case for public investment in cross-regional pipeline development. Buxton did not return repeated requests for comment. Welch said he was personally offended that CLF would make the accusation and said it was necessary to consult with gas companies because the project concerned them.
"I've been the chairman [of the PUC] on and off since 1993, and you can ask pretty much anybody who ever practices in front of us as to whether or not we're in anybody's pockets," said Welch. "I'm insulted. It's not true. [CLF has] got their litigation strategy, and I suppose this is part of it."
Meanwhile, as NESCOE talks continue, all eyes are on Kinder Morgan's Northeast Energy Direct project as the most likely recipient of public subsidies, either by a regional authority or solely Maine ratepayers. The expansion project, which would be operated by Kinder Morgan subsidiary Tennessee Gas Pipeline Company, would provide up to 600 million cubic feet per day and would run through upstate New York through the Berkshires in Western Massachusetts before finally connecting to the Maritimes and Northeast Pipeline through Maine.
The proposal has drawn opposition from many residents on the route who have expressed concerns about land takings by eminent domain and potential pipeline leaks. According to the AP, at least 14 towns on the pipeline route have passed resolutions against the proposal. According to the company, pending regulatory approvals, the project is estimated to be completed by November 2018.
The Maine PUC Case
Formal hearings on the PUC case to consider Maine's investment in pipeline expansion projects will begin on July 31 and continue until at least August 7. Welch said that the commission could make a decision on the case by the end of the year. Written comments from the public can be submitted until the end of September by visiting http://www.maine.gov/
mpuc/online/index.shtml and entering in docket number 2014-00071.
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