Energy analysts and industry insiders are increasingly leaning toward the belief that federal regulators will have to intervene soon to resolve tension over how the next wave of natural gas pipelines is financed in New England and the Northeast.
Driving the conversation in the region is a Houston-based pipeline operator, Spectra Energy Corp., that continues to eye a rumored $500 million expansion of its established network in the six New England states. Spectra acknowledges the region is the next big piece of its strategy after securing a controversial permit to build a gas line into Manhattan. But at the same time, the company says it will not build extensions without first securing long-term contracts.
"We're still a work in progress," Spectra spokeswoman Wendy Olson said of plans to add major spurs to its Algonquin Gas Transmission system. "We have nothing filed yet while we continue negotiations with customers."
Spectra operates about 19,000 miles of natural gas pipelines and is a key supplier to gas-fired power in New England through Algonquin. Its position in the market has been strengthened by steady shale gas development in the Marcellus Shale as well as a gas surge in recent years to 43 percent of the total generation load in New England.
That increasing reliance on gas is expected to keep Spectra climbing given tough air quality requirements in the region, new finds of shale gas and the cheap price of the fuel. But all parties agree that none of that can happen without more pipeline capacity, which by some measures could cut the cost of electricity in half in New England if it gets new infrastructure.
The rub for Spectra is the harder it pushes for long-term contracts and guaranteed returns, the more it leaves itself vulnerable to electric utilities looking north of the border to Canadian hydropower to meet future demand. Expansion of power transmission to access Quebec's vast hydro is just as viable an option as building more pipes, insiders say.
On the other end are the utilities and merchant generators that have been operating in a competitive power market for years. They say Spectra is trying to play by its own rules and has to adapt to a different regional dynamic -- or risk losing to hydro.
"There's no need to rush to the panic button here, which is what Spectra is trying to do," said John Shelk, president of the Electric Power Supply Association, which represents merchant power plants. "You run the risk of everyone in the gas value power chain getting hurt if you drive New England to hydro."
On the sidelines of it all is the Federal Energy Regulatory Commission, which has long set a higher rate of return for interstate pipelines as a means to ensure reliability. The emerging Spectra vs. New England power sector dogfight has caught the commission's full attention, with plans next month to hold regional conferences on testy natural gas-electric power coordination problems (EnergyWire, July 16).
Andrew Pusateri, senior utilities analyst at investment company Edward Jones, said both sides have legitimate claims when arguing about who should pay for the new pipes. But he suspects customers will end up footing the bill, not the pipeline companies.
"I would agree ... that FERC would have to step in and be the one that resolves the tension," he said via email. "I think ultimately, when you are talking about the payment for these pipes, it's going to be the customers. Utilities make money by spending money, adding assets into rate base, and then asking for rate increases."
Pusateri also empathizes with the electricity sector, because merchant generators "are in a difficult situation with low natural gas prices and lower power prices," he said. When and if gas prices start to climb, power prices are likely to pick up along with the economy, which "should help a little bit," he said, even if the dynamic is a long time coming.
"FERC realizes there is a need for new transportation systems in that area, and therefore companies participating in it will continue to be rewarded," he said.
Yet Spectra also appears inclined to keep pushing its position. Richard Kruse, the company's vice president of regulatory affairs, recently said that when customers "step up and say they want to sign up for contracts, that's when we'll start working on the infrastructure that they need." To Pusateri, this indicates the bottom line for Kruse is protecting the company's stock price.
"Part of the advantage of owning stocks like [Spectra] is that they do have long-term contracts on their pipelines," he added. "That's why pipeline companies trade at higher multiples, and that's why investors view them as safer. I think that pipelines, from the point of view of the investor, would look at lot less attractive without long-term contracts in place."
Neal Walters, a partner at consulting firm A.T. Kearney Inc., said regardless of how the pricing controversy shakes out, "a smaller number of increasingly larger players" like Spectra are going to drive pipeline investments.
"Given the current price disparity between natural gas and other energy sources, there will continue to be a strong 'customer pull' demand to build out the natural gas supply infrastructure -- in New England and elsewhere," he said.
The Electric Power Supply Association's Shelk says his side is willing to talk, and he hopes the FERC conferences will help resolve the conflict, but he rejected the idea that merchant generators would be able to sign 10-, 15- or 20-year deals.
"They want us to guarantee them revenue that we don't in turn get guaranteed in the marketplace," he said. "Who can blame them? Pick your business -- airlines, newspapers, coffee beans -- any business would love to have a guaranteed revenue stream."
The Interstate Natural Gas Association of America has been surprisingly open to this view, setting up an interesting relationship with Spectra. INGAA CEO Don Santa recently said he understands why customers would hesitate to contract for pipeline service "if they don't have some assurance or confidence that they're going to be able to cover that cost in the price they get for what they're selling."
So, it looks as if FERC will have to step in following its August tour to Boston; St. Louis; Portland, Ore.; and Washington, D.C. But do the parties involved expect much to happen at those conferences?
"It's hard to tell," Shelk said. "I have seen technical conferences that have been great. Other times, everyone states their position and not a whole lot happens."
He added: "The one thing that would be helpful is to have the pipelines say what they are willing to do differently."
Pusateri likewise demurred when asked for predictions, and Spectra refused comment.
"I wish I had a better answer ... on what the resolution would be," Pusateri said.
What is clear is Spectra has bruised some egos on its way to carving out a more influential role. Mike Benard, a former gas leaseholder who fought a two-year legal battle against Spectra on eminent domain issues in Pennsylvania, said the company "has gone into a bunker mentality under current management" and refuses to budge on financing or answer many questions about it.
"They've appointed bush-league communications people who are not comfortable in the public arena of ideas," said Benard, who founded the group Spectra Energy Watch. "The company's behavior under Canadian CEO Gregory Ebel is so adolescent, it is laughable."
Benard notes that in 1989, U.S. EPA fined Spectra $15 million for the discharge of polychlorinated biphenyls (PCBs) at 89 sites on a Texas-New Jersey pipeline route, which represents the seventh-highest civil penalty in EPA history. That means environmentalists have begun drumming up stories about Spectra, which had 17 safety violations in 2011, according to Natural Gas Watch.
Benard also pointed out that Spectra acknowledged toxic PCBs remain in its pipeline system in a Securities and Exchange Commission filing, so he wants to know whether that problem will be resolved before building more pipes.
"When Spectra Energy expands its pipeline system -- into New England, for example -- do toxic PCBs move from existing pipelines into the new pipelines?" he asked.
One thing is clear: The stakes are high. Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution, said he doesn't know much about pipelines, but he does believe New England converting en masse to natural gas is a crucial development.
"Were New England's energy need able to be met by natural gas rather than by high-cost offshore wind farms, the country's energy security would not only be enhanced, but we would finally put the knife into the ribs of Middle Eastern oil import dependency," he said.
Sullivan is based in New York.