Securing Pipeline Infrastructure for Gas-Fired Generation in New England

Increased reliance on natural gas as a fuel for electric generation has prompted regulatory reforms by the Federal Energy Regulatory Commission (FERC) to improve coordination between the two industries. Many in the power industry believe critical constraints in gas pipeline infrastructure serving New England pose a significant threat to electric reliability and prices during periods of peak load in this area. To address this perceived threat, electric distribution companies (EDCs) in the region have teamed up with Algonquin Gas Transmission on its Access Northeast pipeline project, which would carry up to 1 billion cubic feet (Bcf) per day of Marcellus gas to the Northeast. The project depends on an innovative but highly controversial effort to secure regulatory approvals and financing by relying on the EDCs’ balance sheets and subsidization by electric ratepayers.

Approximately 16,000 MW of gas-fired generation are currently connected to the New England market. Yet few generators have entered into long-term firm pipeline transportation contracts to ensure reliable supplies of gas. This means many of them may be unable to obtain needed gas supplies on peak days or may have to pay an exorbitant premium to get it, threatening electric reliability in the region and stable prices for ratepayers due to limited electric transmission import capability.

Regional grid operator ISO New England has sought to ensure the reliability of its electric capacity resources on peak days by adopting strict capacity performance requirements and penalties for non-performance. This has spurred increased dual-fuel capability by new generators but not long-term firm pipeline transportation agreements. Without such contracts, pipeline projects cannot be financed and built.

Stepping Up to the Plate

Into this void have stepped Algonquin and EDCs owned by National Grid and Eversource Energy. Despite being pure electric distribution companies, these EDCs have taken the novel step of signing long-term pipeline precedent agreements for capacity on Access Northeast and requesting that their state regulators approve those contracts as benefitting the EDCs’ ratepayers. Algonquin, in turn, has petitioned FERC to allow EDCs who subscribe for pipeline capacity on its system to resell that capacity, on a preferential basis, to electric generators through state-regulated electric reliability programs—assuming states ultimately adopt these programs. Any contract costs not recovered through such resales would be passed through to the EDC’s electric ratepayers.

Not surprisingly, these regulatory efforts face broad opposition on a variety of grounds at both FERC and the state level. The Electric Power Supply Association, New England Power Generators Association, Natural Gas Supply Association, the Massachusetts Attorney General, and a number of large electric utilities, generators, gas marketers, and gas producers oppose the proposed measures, arguing, among other things, that:

 

■ Preferential releases would be unduly discriminatory and would harm competitive markets

■ Access Northeast would get built regardless

■ New England generators do not want special treatment and can secure reliable fuel supplies without it

■ The EDC contracts are legally infirm under state law

■ There is more than adequate gas delivery infrastructure in the region

■ There is a conflict of interest because Eversource and National Grid propose to own 60% of Access Northeast

■ The FERC petition is premature because the states have not yet acted

 

Assuming the EDC contracts and electric reliability programs are approved by at least some of the New England states, the Algonquin petition would appear to present FERC with a choice between two of its highest priorities: ensuring electric reliability and adequate pipeline infrastructure on the one hand, and safeguarding competitive markets, policing undue discrimination, and promoting transparency on the other. Faced with this conundrum, FERC will likely chart a middle course.

Splitting the Difference?

One such path forward would be to grant Algonquin’s petition subject to conditions. FERC might require that Algonquin revise its proposal, narrowly tailoring it to do no more than necessary to promote electric reliability and ensuring that all of the terms under which preferential releases to generators would be conducted are fully fleshed out in the pipeline’s tariff. FERC also might require that before any EDC releases its capacity to a generator for longer than 31 days, the EDC post the capacity on Algonquin’s electronic bulletin board for bidding by other generators.

This would preserve transparency and at least some measure of competition in the capacity release market, while allowing the EDC-supported capacity to be re-sold first to generators, as it is on behalf of them that the EDCs are contracting. While such a result may seem a fair compromise to some, a solution that satisfies all will almost certainly prove elusive. FERC held a technical conference in early May on Algonquin’s petition and may take its time reaching a decision in light of these issues, the pending state proceedings, and the fact that Algonquin is targeting fourth quarter 2018 for service commencement. ■

Glenn S. Benson (glennbenson@dwt.com) is a partner in Davis Wright Tremaine LLP’s Energy Practice in the firm’s Washington, D.C. office. Walker Stanovsky (walkerstanovsky@dwt.com) is an associate in the firm’s Energy Practice, working out of the firm’s Seattle office.