More pipeline could lower New England gas prices, but should Maine subsidize it?

Posted June 05, 2013, at 10:46 a.m.

AUGUSTA, Maine — New England faces the highest natural gas prices in the nation and, as a result, some of the highest electricity costs, especially on peak days in the summer and winter when demand for electricity is high.

A bill pending in the Legislature that recently attracted bipartisan support from members of the Energy Committee would allow Maine to buy capacity in new pipelines as a way to expand a constrained natural gas infrastructure in the region and erase the difference between the much higher gas prices paid in New England and the rest of the country.

But is it wise for Maine, which consumes just 9 percent of New England’s electricity, to have its ratepayers subsidize the construction of pipeline that could help to alleviate natural gas infrastructure problems faced by an entire region? And will it lower electricity prices?

It makes economic sense if the intent is to deliberately lower electricity prices by relieving pipeline congestion in a market where new pipeline capacity has been slow to come online, said Matthew Oliver, an economist who researched natural gas pricing and pipeline congestion for his doctoral dissertation at the University of Wyoming.

But critics of the proposal have questioned whether Maine should essentially enter into the natural gas market as a trader and commit itself to one type of fuel long-term, something critics of Maine’s accelerated wind power plan — including Gov. Paul LePage — have opposed. They’ve also questioned whether there’s sufficient oversight built into the legislation to ensure the state’s ratepayers aren’t getting fleeced.

Late last fall, New England’s daily, or spot, prices for natural gas were 87 percent higher on average than they were at Henry Hub in Louisiana, the nation’s primary trading spot whose prices set the industry standard, according to the Energy Information Administration.

Those prices don’t affect the local natural gas utilities that have purchased capacity in existing pipelines and guaranteed themselves a steady gas supply for home-heating customers. It chiefly affects natural gas-fired power plants, which need to buy gas in real time to respond to demand for electricity. Since they generally don’t hold capacity in pipelines that could guarantee them a steady flow of gas, they can struggle to secure gas during high-demand periods. The result is very high prices.

“Because that pipeline capacity is constrained, it’s probably chronically congested,” said Oliver. “When that chronic congestion happens, what you see is these basis differentials,” or pronounced differences between gas prices in New England and elsewhere.

But more pipeline doesn’t automatically mean lower prices if demand for gas continues to grow, Oliver said.

In 2012, the Northeast saw the highest amount of pipeline construction in the country as gas poured out of the Marcellus and Utica shales in Pennsylvania and New York, according to the Energy Information Administration. But none of the construction was in New England.

That’s largely the result of a pipeline market that has few interested in buying new pipeline capacity that could ease the infrastructure shortage. Power plants aren’t paid to hold pipeline capacity, and gas traders who already own pipeline capacity have little incentive to invest in more capacity that could lower the high natural gas spot prices from which they profit.

Under the pending legislation, Maine could enter the market as a potential capacity buyer for new pipelines that bring gas into New England, where the region’s electrical generators can send power into the regional grid. The state could use that leverage as a way to deliberately lower prices for natural gas that’s used for electricity, said Oliver, who hasn’t been involved in crafting the proposal.

“The state could essentially regulate itself in terms of the value it puts on that capacity in the secondary market and consciously bring down that basis differential [the spread between gas prices in New England and elsewhere] rather than be at the mercy of natural gas traders,” he said.

The bill would limit Maine to buying 200 million cubic feet per day of capacity and spending $75 million per year of ratepayer money, raised through an assessment on ratepayer bills or on utilities. That wouldn’t allow Maine to fund a new pipeline on its own.

“Two hundred million isn’t going to get you all the way there, but that might be enough to stimulate others who have interest,” said Thomas Welch, the chairman of the Maine Public Utilities Commission who has worked on crafting the legislation.

But critics aren’t confident that the process built into the legislation that governs how Maine purchases capacity from a pipeline developer ensures independent oversight over the deal.

The Maine Public Utilities Commission would be responsible for approving a deal, though it would be required to hire a consultant to negotiate the contract and work with the state’s public advocate and the governor’s energy office. The governor would have ultimate authority over whether Maine enters into such a contract.

“It’s this series of faux Chinese walls,” said Greg Cunningham, senior attorney with the Conservation Law Foundation of Maine. “We want a robust process where we get to the facts, rather than the fact finder who’s already decided what the best deal is.”

Cunningham added that new pipeline construction isn’t necessary if existing pipeline infrastructure can be used more efficiently.

Patrick Woodcock, who directs LePage’s energy office, said the oversight structure is designed to allow Maine to act fast while keeping the proceedings in public view.

“You want the process to move quickly and not be bogged down by bureaucracy, but also you don’t want the authority in one entity,” he said. “Striking that balance, there’s a tradeoff that’s inherent in that situation.”

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