$peculation on Natural Gas Pipeline Projects Is Wide$pread, Part 2

by S. Tom Bond on August 6, 2017

Pipeline Payday: How Builders Win Big, Whether More Gas Is Needed or Not, Part 2

From an Article by Phil McKenna, Inside Climate News, August 3, 2017

How the Cozy Relationship Pays Off

Historically, utilities had no corporate affiliation with the pipeline companies that provided their natural gas. That has changed in recent years as utilities seek to take advantage of higher returns from interstate pipeline projects and the limited scrutiny from federal officials who oversee those permit applications.

As regulated monopolies, utilities are allowed to be the sole provider of gas or electricity in a given region in exchange for the public service they provide. The utilities are allowed to make a profit, but they agree to certain limits on what they can charge customers who have nowhere else to go for their energy needs.

One way states limit local utilities’ profits is through the rate of return they are allowed to receive on new infrastructure projects—typically an 8 percent return on equity.

Interstate natural gas transmission pipelines, however, are regulated by the federal government, which typically allows around a 14 percent return on equity.

To capture that higher rate of return, the parent company of a local utility may acquire a gas pipeline company, or form a joint venture with a pipeline company, and then pair their utility and pipeline company together to build a new pipeline. Shareholders of the parent company make a tidy profit while ratepayers are stuck paying a premium for expensive new infrastructure.

“Instead of an investment earning 8 percent, they are able to get a very large return through the same invested capital,” said Greg Lander, president of Skipping Stone, an energy markets consulting firm.

PennEast Pipeline: A Question of Need

“We are in perfectly fine shape right now with the capacity that we have,” said Stefanie Brand, director for the Division of Rate Counsel in New Jersey, which officially represents the interests of consumers of regulated utilities.

Existing pipelines supplying local gas distribution utilities in eastern Pennsylvania and New Jersey currently have 50 percent more capacity than needed to meet their periods of greatest demand—even during the “polar vortex” extreme winter weather of 2014, according to a study conducted by Lander for The New Jersey Conservation Foundation.

If approved, pipeline builder Spectra and the utility holding companies that would own the pipeline would receive a 14 percent return on equity for the project.

New Jersey’s Rate Counsel “is concerned that this opportunity may be a key motivating factor behind the project,” counsel attorneys wrote in comments filed to FERC last September. “In this financial environment, the opportunity to receive a Commission-regulated return of 14 percent is tantamount to winning the lottery.”

The American Gas Association, a trade group representing local natural gas utility companies, said gas companies only invest in pipeline projects if they need the added pipeline capacity.

“They are not going to sign on to capacity when they can’t demonstrate that they actually need it,” said Susan Bergles, assistant general counsel for the American Gas Association. “They are getting involved in a project because they need it.”

The 14 percent return on equity that FERC allows is a relic from another time. FERC’s current policies on the certification and pricing of new interstate gas pipelines were set in September 1999. At the time, the prime interest rate—the rate banks charge their most creditworthy customers—was 8.25 percent, compared to 4.25 percent today.

State public utility commissions from at least five states—North Carolina, New York, Missouri, Connecticut and Kentucky—have challenged the high rates of return allowed by FERC since its current pricing policy was enacted in 1999, yet the policy remains.

FERC spokeswoman Tamara Young-Allen declined to comment for this article because the issues of rate of return and determination of need have been raised in cases pending before the commission.

The 1999 pricing policy played a role in the rise of the affiliate pipelines of today. Another key element came in 2005, when the Public Utility Holding Company Act of 1935 was repealed. The act kept the parent, or “holding,” companies of regulated utilities from engaging in non-regulated business. The longstanding law was replaced by less-stringent restrictions on regulated utilities, paving the way for the growing number of affiliate pipeline projects seen today.

ACP — Atlantic Coast Pipeline: Antitrust Concerns

In Virginia and North Carolina, a group of three utility holding companies formed Atlantic Coast Pipeline, LLC, a joint venture, to construct and operate the Atlantic Coast Pipeline.

The $5 billion Atlantic Coast Pipeline would run 600 miles from West Virginia to North Carolina and has been hotly contested by environmental advocates and landowners who oppose the project.

According to Michael Hirrel, a former antitrust attorney with the U.S. Department of Justice, the pipeline is an illegal monopoly. Hirrel, who owns a second home at a resort in the Blue Ridge Mountains where the pipeline would cross, filed a complaint with the Federal Trade Commission in 2016 alleging the pipeline violates U.S. antitrust laws.

Dominion Energy and Duke Energy, the lead investors in the project, declined to comment.

The utility companies have legal, regulated monopolies selling retail gas and electricity to their ratepayers, but they run into trouble when they branch out into other related businesses, Hirrel said. “An existing monopoly cannot extend its monopoly upstream or downstream into what are now competitive markets,” Hirrel, said. “That goes back to the beginning of antitrust law.”

NEXUS Pipeline: Blocking More Cost-Effective Sources?

The Sierra Club filed a similar antitrust complaint with FERC, the Department of Justice and the Federal Trade Commission in November against the DTE Electric Company in Michigan. DTE and its affiliate, NEXUS Gas Transmission, LLC, seek to build the $2 billion NEXUS pipeline from Ohio to Michigan.

The complaint alleges the project would raise electricity rates above competitive levels and exclude more cost-effective energy sources, including renewables.

It’s unclear what will happen in either antitrust case, but opponents of affiliate pipelines have had recent success elsewhere.

In 2016, environmental advocacy group Conservation Law Foundation won a lawsuit against the Massachusetts Department of Energy Resources that effectively halted Access Northeast, an affiliate pipeline project that the advocacy group said was not needed.

After New Jersey’s Rate Counsel first voiced opposition to the PennEast pipeline last year, Public Service Enterprise Group (PSEG), one of the holding companies involved in the project, pulled out in June. The company said opposition to the project played no role in its decision.

“PSEG sold its share to concentrate on core business, not in reaction to actions taken by others,” PSEG spokesman Paul Rosengren said.

The Rate Counsel is now urging FERC to conduct an independent analysis of whether there is a need for PennEast rather than relying on contracts between closely related companies as evidence of demand.

A model for such independent analysis is close at hand, NRDC’s Mall said.

“Look at how FERC has set up approvals for electricity transmission—it’s very different,” she said. “When they look at electricity transmission, they have to do a regional analysis of what is needed, and they have regional organizations that look at this issue.”

Is the Pipeline Boom a Bubble in the Making?

If questionable projects continue to be approved, the current pipeline boom could soon bust in the same way subprime mortgages imploded the housing market in the late 2000s, said Lander, the energy markets consultant.

“When transactions like that were motivated simply by money rather than providing a necessary service, it was indication of the coming bust,” Lander said of the housing crash. “It is possible that the pipelines that are driven by affiliate subscriptions are an indication that the truly economic pipelines that really meet market need and market demand are getting fewer and fewer and people are being motivated more and more by just financial engineering.”

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