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Gas Capacity Issue Front and Center in New England

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While the weather continues to warm up in New England, for energy policymakers the events of the past two winters are still very much in the news.  The region saw price spikes in the wholesale electricity markets, driven by cold weather and a continued increase in the reliance on gas-fired electric generation.  To some energy officials, one of the root causes of this dynamic is a lack of sufficient gas pipeline capacity into the region.   For example, in a recent filing with the Federal Energy Regulatory Commission, ISO New England, an independent systems operator (ISO), expressed its concern that winter price spikes can be exacerbated when some gas-fired generators are unable to run due to gas constraints.  The ISO is taking a number steps to alleviate the impact of gas capacity constraints on electricity reliability and price spikes, including a continuation of its successful Winter Reliability Program, which provides incentives for generators to install or maintain dual-fuel capability and have oil and other fuels in inventory before the start of each winter, and proposed changes to the forward capacity market that would provide financial incentives for generators to perform during times of the most severe reserve shortages.  

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Some elected and appointed officials appear reluctant to give the market the opportunity to respond to both measures such as those being proposed by ISO New England and to the underlying price signals being sent when gas and power prices are high in the winter.  These officials perceive that there is a need for incremental natural gas pipeline capacity that would help bring lower-cost gas from the Marcellus region into New England, and they have proposed specific means to obtain such new capacity.  In Massachusetts, these efforts have taken the form of a request from the Department of Energy Resources (DOER) to the Department of Public Utilities (DPU) to investigate whether electric distribution companies could be directed to enter into long-term contracts for incremental pipeline capacity and recover those costs from electric customers.  The DOER characterized this request as a desire to determine whether there is an “innovative mechanism” for electric utilities “or other parties to secure new gas delivery capacity into the region to benefit electric ratepayers.”  On April 27, the DPU granted DOER’s request by opening a docket to examine this proposed method for adding pipeline capacity into the Commonwealth.  (See DPU Docket 15-37.)

In the docket, the DPU is seeking comments on several questions raised by DOER and a number of other questions the DPU itself has about the proposal.  The concept of having electric utilities pay for incremental gas pipeline capacity raises a number of thorny issues, including the question of whether the DPU has the authority to approve such a contract as being in the “public interest,” a necessary finding in order for an electric distribution company to recover from its ratepayers the costs of a contract for pipeline capacity.  Other issues raised by the DPU include how the amounts and location of pipeline capacity would be chosen, how potential affiliate abuse could be prevented where the electric distribution companies might be considering proposals from their own affiliates to construct new pipelines, and how the incremental capacity would be managed and made available to the market, and by what entity. 

In the meantime, in Connecticut the State Legislature is considering a bill that would authorize the Commissioner of the Department of Energy and Environmental Protection, in consultation with other elected and appointed officials, to “solicit proposals for long-term contracts” from providers of, among other things, “natural gas pipeline capacity constructed on or after January 1, 2016 . . .”  (Senate Bill 1078.)  As in the Massachusetts DOER’s proposal, SB 1078 would allow an electric distribution company to enter into contracts for incremental gas pipeline capacity and recover the costs of such contracts from electric customers.

There are serious concerns about such out-of-market methods of acquiring new gas pipeline capacity into New England.  There are a range of actions (including, for example, those being proposed by ISO New England, discussed above) that can relieve the conditions that have brought about spikes in electricity prices during the past two winters, and that it would be best to allow the market to decide which of those potential solutions are most cost-effective.  Direct Energy will be monitoring these and other developments related to the gas capacity situation in New England and will continue to keep you apprised of material developments.

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Posted: May 27, 2015