In the end, there were too many uncertainties for Kinder Morgan to justify continuing the $3 billion Northeast Energy Direct (NED) project.
In order to be approved by the Federal Energy Regulatory Commission (FERC), the project had to show sufficient customer demand.
However, the size of the pipeline had been slashed due to lack of customers. The success of the Massachusetts plan to have ratepayers pick up the slack was, according to Kinder Morgan’s farewell press release, “[ultimately] not assured.” Canadian export contracts were not materializing. And largely rerouting the project to New Hampshire had failed to dampen white-hot citizen and landowner outrage in both states.
Rock bottom gas prices couldn’t support two pipelines for exports
Kinder Morgan made its intentions clear in a 2014 press release. When asked if the NED pipeline would be used for export to Canada or overseas, the company’s answer was an indirect “yes.” It said, “There are currently four proposed liquefied natural gas (LNG) export projects in Atlantic Canada and one LNG export project in northern Maine that could find capacity on the NED Project useful to serve their proposed LNG export facilities.”
Attorney Vincent DeVito, who represents Northeast Energy Solutions, a coalition of environmental and land trusts that opposed NED, told WBUR, “This particular pipeline is only being built to satisfy profiteers who want to export to Europe.”
Spectra Energy’s Access Northeast was the other contender for supplying natural gas from the Marcellus Shale to LNG processing facilities in Nova Scotia, Canada.
However, certain events had to occur first. The Marcellus Drilling News summed up the necessary steps: “1) The Maritimes & Northeast pipeline has to get FERC approval to reverse its flow, which will send Marcellus and Utica gas northward; 2) the gas has to get to the Maritimes & Northeast in the first place via new pipelines from either Kinder Morgan or Spectra Energy (currently a battle royale) and; 3) the price of oil has to rise to make the whole thing economical since LNG is so closely tied to the price of oil.”
In 2014 when Kinder Morgan began planning NED, the price of natural gas was about $6/MMBtu; today it is $2/MMBtu. Gas producers in the Marcellus and Utica shale areas who might have been eager to sell to Canadian LNG projects – transporting the gas by pipeline – are less enthusiastic now. Hammered by falling prices, many have folded.
One way to look at NED’s downfall is that it lost the “battle royale” with Spectra Energy in a market too small for two pipelines. An Energy Analyst with Poweroptions Inc., Sean Burke, believes that “only one of these projects could possibly be built in the current New England political climate…[and] if one is, then the other one is likely dead in the water.”
In February, the Department of Energy approved applications by two natural gas exporters, Pieridae Energy and Bear Head LNG to export U.S.-sourced natural gas to Canada, where it will be liquefied and re-exported. Both projects were authorized to export to countries that do not have Free Trade Agreements with the U.S. as well as countries that do have such agreements.
U.S. Sen. Edward J. Markey (D-Mass), a member of the Environment and Public Works Committee, sharply criticized the Bear Head project, the first LNG export project to be approved, calling it “a disaster for our consumers and our region.”
Senator Markey said, “If we allow natural gas to be exported out of New England to foreign markets, it will only add to the hardship our consumers are facing from high prices and link us to higher-priced international markets.”
Although NED is out of the picture, Spectra Energy is seeking approval from FERC for its Access Northeast pipeline, which would include upgrading its existing Algonquin line and reversing the direction of the Maritime & Northeast pipeline so that it would run north to Nova Scotia. The winner of the Canadian export business is likely to be Spectra.
A good business to be in if a company can swing it
Under the Natural Gas Act, FERC must determine “just and reasonable rates” for interstate pipeline gas contracts. The Commission states, “Under cost of service ratemaking, rates are designed based on a pipeline’s cost of service plus a reasonable rate of return on its investment.”
A typical return is at least 10 percent – not bad for 20-year contracts when bank interest rates hover around 1 percent.
If Kinder Morgan had obtained a Certificate, and if the price of gas had bounced back, Canadian LNG projects would likely have needed it to transport copious amounts of natural gas from the Marcellus shale formation through New York and New England to the export terminal that will link with the Maritime and Northeast pipeline in Dracut.
But the pipeline would have had to run the gauntlet of New England before reaching the steady riches of export contracts.
Before building the infrastructure, the energy titan would have had to obtain all the easements, necessitating considerable time and legal work, as roughly half of the landowners in the planned pathway had refused to allow the company to survey their property.
And it would be crucial to demonstrate to FERC adequate levels of domestic customer support and market need in Massachusetts.
Demonstrating need proved to be challenging, and, ultimately, fatal for NED.
Flat demand for energy in Massachusetts
If Kinder Morgan had taken a close look at the Commonwealth before launching NED, the company would have seen that Massachusetts has cut energy demand so dramatically that it has little need for more natural gas.
For the last five years, Massachusetts has been first among all states in reducing energy demands through energy efficiency. The Department of Energy and Environment web site boasts on its web site that Massachusetts was again ranked #1 for 2015 by the American Council for an Energy-Efficient Economy.
“On an annual basis the amount of electricity we consume as a state has been flat, and that is because of the energy efficiency programs,” said Mark Sylvia, energy undersecretary in the Patrick administration.
There are only a few winter days in a year that require supplemental energy measures. ISO-NE, the regional grid, is addressing such peak winter conditions with market reforms and winter reliability measures – use of oil and LNG, additional demand response, and increased dual-fuel capability – to insure that energy needs are met in even the harshest winter weather.
Attorney General Maura Healey’s November report, “Power System Reliability in New England,” reinforced this point, concluding that there is no need for new interstate natural gas pipeline capacity both because of long-term declining peak winter demand and dual-fuel capable units that can generate on oil during peak winter periods.
When Kinder Morgan held its “open season” – when local distribution companies, industrial companies, generators, marketers, and liquid natural gas projects sign contracts for gas – only about 43 percent of the pipeline capacity was reserved. Berkshire Gas, National Grid and several others signed up for capacity.
In July 2015, Kinder Morgan shrunk the size of the pipe from 36 inches to 30 inches and the capacity from 2.2 billion cubic ft/day to 1.3 billion cubic ft/day.
In a press release issued at the time the company filed for FERC approval last November, Kinder Morgan said, “TGP [Tennessee Gas Pipeline, Kinder Morgan’s subsidiary] is confident it will secure additional contractual commitments as a result of the initiatives underway with five of the six states in New England to facilitate the ability of electric distribution companies to contract for pipeline capacity and recover the costs in their rates.”
Absent adequate market participation, Kinder Morgan’s hopes rested on contracts subsidized by electric ratepayers.
Baker Administration authorizes ratepayer financing of pipeline projects
The Baker Administration did not disappoint. In October, it made an unprecedented and legally questionable decision which, if implemented, will throw Massachusetts’ ratepayers into the financially risky international arena of a notoriously volatile commodity.
The Department of Public Utilities (DPU) issued an order that authorized Electric Distribution Company’s (EDCs or utilities) to enter into long-term contracts with pipelines to facilitate pipeline expansion, paid for by electric ratepayers. The EDC’s would then give priority to natural gas generators to buy the gas.
Since passage of the Massachusetts Restructuring Act of 1997, EDCs, which are large, shareholder-owned companies that operate the electricity transmission system, have been forbidden to carry on activities related to ownership or management of electricity generators.
In a 180-degree reversal, they will now be contracting for supplies of natural gas and distributing it to generators through a “Capacity Manager.”
In December, Eversource petitioned the DPU for approval of two 20-year contracts for gas transportation and storage with Algonquin Gas Transportation, the Access Northeast pipeline project.
And in January, National Grid also petitioned the DPU for approval of two 20-year contracts with the NED, and for two 20-year contracts with Algonquin and Access Northeast. The NED contracts are now moot.
Attorney General, Maura Healey, said about the Eversource filing, “Eversource’s initial filing proffers a market analysis of the purported need for an extraordinary, state-authorized out-of-market intervention by EDC’s in the wholesale production of electricity in order to affect wholesale power prices….”
She added, ”The filing also offers details on a proposed rate mechanism that would insulate the Company’s shareholders from the costs of the proposed long-term contracts and permit it to fully recover those costs from electric distribution customers.”
Both petitions assert that great financial benefits will accrue to the New England region in the way of reliability and reduced electricity costs. (See accompanying article on FERC investigation of excessively high electricity rates.)
Massachusetts’s electric ratepayers who use oil, solar, or wind energy rather than natural gas will still be charged for the natural gas contracts.
John Rogers of the Union of Concerned Scientists reacted incredulously, saying, “So the idea of you paying for natural gas pipelines supplying power plants that you might not even sign up to get power from – an investment in infrastructure that might not even serve our broader long-term needs – is…odd.”
State lawsuits filed, federal lawsuits loom
The NED pipeline project had been facing numerous lawsuits. Access Northeast alone will now be impacted by their resolution.
Soon after the DPU order was issued last October, the Conservation Law Foundation (CLF) and Engie, which operates a LNG terminal in Everett, each filed appeals of the Order with the Massachusetts Supreme Judicial Court. CLF claimed that the Order allows “an unprecedented scenario” in which ratepayers finance and assume the risks associated with multi-billion dollar contracts between shareholder-owned, regulated utilities and natural gas pipeline companies.
CLF had also challenged in Supreme Judicial Court the three long-term contracts between NED and Berkshire Gas Co., National Grid, and Columbia Gas. The contracts had provided crucial ballast for the NED project, and an adverse decision would have been a severe blow.
An issue even more problematic for NED (faced alone now by Access Northeast) arises out of federal law. The purpose and effect of the DPU Order is to lower electricity prices for the entire New England region. Yet FERC has exclusive control of interstate wholesale gas and electric prices, preempting any conflicting state activities.
On Tuesday, the U.S. Supreme Court unanimously rejected a Maryland program that gave incentives to new natural gas power generation through state-mandated contracts. The Court held that the program infringed on FERC’s jurisdiction over wholesale rates for electricity and transmission that crosses state lines.
The Massachusetts DPU Order providing state subsidized natural gas from an interstate pipeline to power generators could similarly be challenged as infringing on FERC ‘s jurisdiction over interstate gas and power. It is possible that this holding factored into NED’s suspension decision. Its announcement was made the day after the Supreme Court opinion was issued.
No agreement among states on pipeline funding
When National Grid filed for approval of its proposed contract with NED in January (at which time it also sought Northeast Access contract approval), a note of desperation was evident in the filing. Pleading for Massachusetts to help it obtain support from other New England states, the company said:
“[Approval] from Massachusetts on these projects is critical in moving the entire process forward given the relative magnitude of the Massachusetts load share and the significant role Massachusetts plays in driving public policy for New England. If other approvals do not follow in one or more New England states, [Kinder Morgan] will need to make a determination whether to proceed with fewer…agreements; reconfigure the project and renegotiate the existing precedent agreements; or terminate the project.”
But Massachusetts could not strong arm the other New England states into funding pipelines.
New Hampshire has introduced state legislation, HR 1101, “prohibiting charges to New Hampshire residents for construction of high-pressure natural gas pipelines.” Maine commissioned a report from London Economics that concluded that it made no economic sense for the state to fund a natural gas pipeline. Vermont had never even considered one. Connecticut had enacted legislation similar to the Massachusetts DPU order that approved ratepayer funding and EDC contracts, but fierce opposition to a pipeline – including large demonstrations in Hartford – has thrown its fate into doubt.
The fleeting regional cohesion achieved in late 2013 by the New England States Committee on Electricity (NESCOE) has long ago dissolved. The original Incremental Gas for Reliability pipeline plan that was supported by all the New England governors at that time has been replaced by widespread anxiety about fossil fuels and global warming coupled with reduced energy demand.
Kinder Morgan shareholders cut their losses
Over the last six months, the energy giant has undergone a number of reversals. In December, it slashed its dividend by 75 percent as the price of oil tanked and natural gas followed.
In January, following years of extremely bitter and hard-fought protests by environmental and safety groups, the company’s Trans Mountain pipeline expansion that would have run from Alberta to the Canadian West Coast was rejected by the Canadian National Energy Board.
And in March, Kinder Morgan was forced to suspend work on a $1 billion petroleum pipeline in Georgia after lawmakers voted to terminate it while studying its impacts.
More and more state and federal lawmakers were jumping on the anti-NED bandwagon. Landowners were determined to preserve their land despite looming eminent domain battles. There was paltry need for gas transportation, and it appeared that Massachusetts might not legally be able to supplement the pipeline’s skimpy customer base. Kinder Morgan called it a day.
Asked if NED might be revived at some point, Richard Wheatley, speaking for Kinder Morgan, said, “It would be very unlikely that the project would be reincarnated in its present configuration.” Mr. Wheatley also said that, while he had no details, Kinder Morgan “wants to make sure that its customers have alternative sources of natural gas available.” He added, “We won’t leave Berkshire Gas, National Grid, Columbia Gas and the others in the lurch.”