Natural gas pipeline adversaries escalate battle, funding challenged

Although Massachusetts Attorney General Maura Healey is sharply questioning whether there is any legal authority or need for a ratepayer-funded natural gas pipeline, two Canadian companies have quietly secured the permits needed to export liquid natural gas, and a state legislator has introduced a bill that would eliminate the protected status of a Berkshire forest to make way for such a pipeline.

DER and DPU support ratepayer-funded pipeline, but Attorney General pushes back

Last spring, at a meeting in Connecticut, the New England governors agreed that the region’s high electric prices were caused by the lack of natural gas pipeline infrastructure. The Massachusetts Department of Energy Resources (DER) then sprang into action.

Massachusetts Attorney General Maura Healey
Massachusetts Attorney General Maura Healey

Elizabeth Mahony, Legal Counsel to the DER sent a letter to the state Department of Public Utilities (DPU), asking DPU to “open an investigation into the means by which new gas delivery capacity may be added to the New England market,” including the possibility of electric utilities entering into long-term contracts with natural gas pipelines, with the with the utilities’ customers assuming the costs in their monthly electric bills.

In response, the DPU launched an investigation into the DER proposal, taking comments from 52 stakeholders, including the electric generators’ association, conservation groups, pipeline companies, and energy marketers.

“Of the fifty-two sets of comments received,” the Attorney General said, “only eight support DER’s proposal to have [utilities] enter into long-term pipeline capacity contracts; unsurprisingly, of those eight commenters, five are [utilities] or pipelines (National Grid, Eversource Energy, Tennessee Gas Pipeline, Portland Natural Gas Transmission System, and Algonquin Gas Transmission/Spectra Energy) that stand to profit from the proposal, one is an industry group that promotes natural gas and one – Coalition to Lower Energy Costs – is an end user group,” comprised largely of industry representatives.

Many of the commenters pointed out that there are, indeed, serious legal and policy impediments to a plan in which the electric utilities (Electric Distribution Companies or EDCs) would contract for natural gas capacity with a pipeline with ratepayers footing the bill in the form of a “cost recovery tax.”

The route of the Northeast Direct natural gas pipeline across Massachusetts
The route of the Northeast Direct natural gas pipeline across Massachusetts

Several pipeline projects are vying for Massachusetts’ funding. Kinder Morgan’s Northeast Energy Direct, Spectra Energy’s Access Northeast, and Portland Natural Gas Transmission System are all pressuring the state to contribute to funding the construction of pipeline projects that will transport massive quantities of natural gas from the Marcellus shale in Pennsylvania through New York and New England, with some gas eventually making its way north to the Canadian Maritime Provinces.

Attorney General Healy commented, “DER’s proposal to authorize EDCs to enter into the long-term capacity agreements to facilitate pipeline expansion – with the costs and risks of such long-term obligations borne exclusively by electricity ratepayers – suffers from numerous factual and legal infirmities.”

“The very facts surrounding the need for additional gas capacity are highly disputed,” she stated.

The plan Is preempted by the Natural Gas Act and FERC prohibitions

The Attorney General and other commenters believe that the Commonwealth has no legal authority to create a scheme for ratepayer-funded natural gas expansion because the Federal Energy Regulatory Commission (FERC) has exclusive authority to regulate the sale of gas in interstate commerce. Federal courts in New Jersey and Maryland, in fact, have rejected similar plans on the ground that FERC’s Congressionally mandated authority “preempts” states’ authority to adopt them. In addition, the scheme appears to violate the Massachusetts Restructuring Act, because it grants to utilities powers that were reserved exclusively for generators.

A swathe of forest cleared to make way for a natural gas pipeline.
A swathe of forest cleared to make way for a natural gas pipeline.

Even those in favor of the plan, such as Dynegy, Inc, Massachusetts Electric Co. and National Grid, recognized in their comments that the plan raised “potentially insurmountable federal/state legal and jurisdictional questions” because FERC has exclusive jurisdiction over the allocation of natural gas capacity.

In fact, FERC’s mandate is to ensure a fair and competitive national wholesale gas market that prevents a pipeline from discriminating among purchasers. A plan that would interfere in the market by securing preferentially priced, ratepayer-financed allotments of natural gas contravenes FERC’s mandate.

The New England Power Generators Association (NEPGA) pointed out that, if natural gas were subsidized by ratepayers while other power sources such as oil, nuclear, and renewables, were not subsidized, this would give an unfair competitive advantage to natural gas.   And even among natural gas generators in Massachusetts, some would benefit from their access to the subsidized gas, while others would not, depending on their location.

Moreover, federal law prohibits the utilities and pipeline company from reserving gas capacity for the exclusive benefit of the utilities’ ratepayers. “Any prospective purchaser can bid for the gas capacity even through the DPU may consider Massachusetts ratepayers to be the intended beneficiaries,” according to the NEPGA.

Conceivably, the scheme could benefit the ratepayers of other nearby states who will enjoy the benefits of additional natural gas pipeline capacity without having to shoulder the costs.

Upending the Massachusetts Restructuring Act of 1997\

Before 1997, the electric utilities owned and operated both electricity distribution (the lines and wires) and the power generation facilities. The Restructuring Act split these functions, eliminating so-called “vertically integrated” utilities in order that consumers could chose their own generation services.

In the words of the Act, “the interests of consumers would best be served by competition in the generation sector and the functional separation of generation services from the transmission and distribution services.”

But the DER is saying, in effect, “never mind that – now the utilities themselves should buy natural gas for electric generation from a pipeline project.” DER and DPU believe that the utilities should enter into long-term contracts, with the contracted gas making its way to the generators   in some as-yet-unclear way.

When the New England States Committee on Electricity (NESCOE) was spearheading the idea of long-term utility contracts funded by electric ratepayers for all of New England, that organization devised a complex plan for distributing the gas to generators through a “capacity manager,” (a plan deemed “socializing energy” by the generators). Now that states are addressing the long-term contract issue on an individual basis, it appears that Massachusetts would simply expect the gas to be bought by the generators – and billed to the public.

Proponents claim that, in return for funding the pipeline, ratepayers will eventually benefit from lower energy costs – but this claim has not been backed up.

“A volatile commodity”

During the PUC Investigation, the Attorney General and others also pointed out the significant financial risk posed by long-term capacity contracts financed by ratepayers. Although the term of the contracts are fixed at 15 or 20 years, the contracted price of gas generally fluctuates month-to- month.

Protestors against the proposed Kinder Morgan Northeast Direct natural gas pipeline marched the entire route of the pipeline across Massachusetts, from Richmond to Dracut. Above, the activists have reached Groton.
Protestors against the proposed Kinder Morgan Northeast Direct natural gas pipeline marched the entire route of the pipeline across Massachusetts, from Richmond to Dracut. Above, the activists have reached Groton. Photo: Lynne Cherry

“The financial risks that would be borne by the Massachusetts ratepayers would not only be significant, but would be magnified by the fact that the DER Proposal – by authorizing full cost recovery for the electric distribution companies [the utilities] through rate charges – would expose the utilities to no risk whatsoever,” stated GDF Suez, a liquid natural gas company.

In fact, the risks assumed by the electric ratepayers would be significant, because the volatility of natural gas pricing is well known.

“Price action in natural gas never ceases to amaze me,” said commodities trader Andrew Hecht recently in a financial market publication. “Just when all the stars line up and you expect prices to fall, they do exactly the opposite. That is why it is such a volatile commodity.”\

Attorney General’s Comprehensive Study of Need for Gas and Other Energy Sources

Following her investigation, the Attorney General announced that she would launch a thorough inquiry into the DER’s plan to have taxpayers subsidize the proposed pipeline projects, including the Northeast Energy Direct and Access Northeast projects.

The study, conducted by Analysis Group, a Boston-based economic and financial consulting firm, will include an evaluation of all potentially available energy resource options to meet reliability needs, including natural gas (both natural gas pipelines and LNG), oil, hydro imports, energy efficiency, demand response, and renewables.

Due to be released in October, the study will address costs and benefits, including price impacts, of each option. A key focus of the study will be whether more natural gas is needed in the region, and if so, how much more capacity is needed.

Ann Berkwick, former chair of the Massachusetts DPU.
Ann Berkwick, former chair of the Massachusetts DPU.

In an Op-Ed piece published in August by the Boston Globe, Ann Berwick, head of the Department of Public Utilities in the Patrick administration, applauded the Attorney General’s study.

Pointing out that the DPU and others might be wrong in assuming that increasing the supply of natural gas will cause prices to fall, Ms. Berwick said, “Electricity prices –tied largely to the cost of natural gas – did rise sharply last winter, [but] that was due to the anticipation of high natural gas prices and shortages that never materialized.” Perceptions, rather than natural gas supply, caused utilities and generators to raise prices.

She added: “Another indication that the logic of ‘more gas means lower prices’ might not prove true comes from the experience of Pennsylvania during the winter of 2014. Even though that state is in the heart of the Marcellus shale region, natural gas prices spiked” during that winter. Ms. Berwick pointed out that New England might fare no better even with a natural gas pipeline.

The former DPU head also said, “utilities make more money by building infrastructure than by encouraging conservation and energy efficiency.”   The current regulatory regime grants higher rates to utilities that incur higher costs. “So, of course, they argue for infrastructure.”

DPU approves long-term pipeline contracts for Berkshire Gas, Columbia Gas, and National Grid

On August 31, the Department of Public Utilities approved 20-year contracts for natural gas capacity for three utilities, Berkshire Gas, Columbia Gas, and National Grid. Together, the contracts commit to using .3 billion cubic feet per day from the Kinder-Morgan NED pipeline.

Attorney General Healey had argued that the contracts should not move forward until after the DPU considered the broader issue of the region’s gas capacity needs.

She said, “Our office is reviewing the Department’s orders. The AG’s Office is conducting a regional study that will examine the need for additional gas capacity in New England through the year 2030 and what the right mix of sources should be.”

As the ratepayer advocate, the Attorney General must decide whether to appeal DPU’s approval of the long-term contracts by September 19.

Canadian LNG Projects Move Forward

Meanwhile, in August, the U.S. Department of Energy granted permits to two Canadian Liquid Natural Gas projects to export liquefied natural gas to countries with which the U.S. has free-trade agreements.

An August article in the Ottawa Globe and Mail points out that the projects, initiated by Pieridae Energy Ltd. And Bear Head LNG Corp., “are counting on the United States to build pipeline capacity into New England.”

The CEO of Peridae has a long-term supply agreement with E.On, a German utility that has agreed to purchase gas for the European market.

According to the Director of the Public Citizen’s Energy Program, long-term purchase agreements like these “are necessary to demonstrate to Wall Street and other financial backers that the export facility will have steady cash flow and guaranteed sales needed to provide returns on such capital-intensive projects.”

LNG exports will raise domestic prices

LNG exports increase demand for domestic gas from foreign buyers who will pay higher prices, thus resulting in higher domestic prices.

A 2014 study by the Energy Information Administration (EIA) concluded that, on average, gas bills for residential, commercial, and industrial consumers will increase significantly, depending on the volume of gas exported.

According to Tyson Slocum, if even a simple majority of the LNG terminals that have been approved by DOE are actually built and export the volumes of gas for which they are authorized, “such exports will likely overwhelm domestic supply and demand capacity” – causing steep price hikes.

U.S. Senators Markey and Warren are not ignoring the potential for harm.

“[The EIA report] is a wake-up call to American consumers and businesses who rely on natural gas that higher prices are on the horizon if we don’t keep our natural gas here in America, “ said Senator Markey. “The affordable domestic supplies we’ve recently developed could soon become a thing of the past if companies are allowed to export large volumes of American natural gas supplies to foreign countries.”

Senator Warren, who has been an opponent of a natural gas pipeline, has been involved in negotiating the bipartisan Energy Policy Modernization Act of 2015. She has opposed provisions intended to expedite natural gas exports by setting certain deadlines for agency review, but has tempered these provisions by successfully including a requirement that the Secretary of Energy conduct a study to evaluate the state, regional, and national economic impact of exporting liquefied natural gas.

“Massachusetts, which relies on natural gas, faces some of the highest energy bills in the nation. As Congress considers making it easier for companies to send American natural gas overseas, we need to be absolutely certain that we aren’t raising costs for families and businesses in New England and across the country,” Senator Warren said.

State rep. from eastern Massachusetts seeks pipeline easement through the protected forest

While the international actors set the stage for exports, a home-state pipeline fan, Rep. Garrett Bradley (D-Hingham), is helping Kinder-Morgan subsidiary, Tennessee Gas Pipeline Co., resolve an easement problem in the protected Otis State Forest in Sandisfield, in southern Berkshire County. The easement is needed for the Massachusetts Loop of the Connecticut Expansion pipeline project.

A natural gas pipeline being installed in Pennsylvania forestland.
A natural gas pipeline being installed in Pennsylvania forestland.

On July 13, he introduced a bill that would divest the Otis State Forest of its conservation land status under Article 97 of the State Constitution.   He did so after state Sen. Benjamin Downing (D-Pittsfield) and Rep. William Pignatelli (D-Lenox) refused to file the legislation on behalf of Tennessee Gas Pipeline Co.

If Rep. Bradley’s bill does not become law, the pipeline developers would likely file an action in court asserting eminent domain under the Natural Gas Act of 1938.

Squaring off 

Tremendous financial and institutional pressure is propelling the NED and/or Northeast Access pipelines forward: Canadian LNG facilities backed by Wall Street investors; the pipelines themselves, which will recognize a guaranteed rate of return from FERC of around 12-14 percent for decades; the pipeline investors, such as UIL Holdings (the parent company of Berkshire Gas); the utilities, which will benefit from the gas and from the ratepayer subsidy; the Marcellus Shale gas developers, lawmakers such as Rep. Bradley; and the Governors of the New England states, the most enthusiastic of which are Maine and Connecticut.

In the face of this pressure are voices urging reasoned analysis of need and attention to the environment: The Attorney General; the previous DPU Head, Ann Berwick (“more gas will not necessarily lead to lower electricity prices”); state legislators; U.S. Senators Warren and Markey; environmental groups; and the many citizens and landowners of Massachusetts who have been packing public hearing rooms for the last 18 months to express their opposition.