Philadelphia Gas Works’ LNG Expansion Efforts: A Guide to Understanding and Evaluating Project Benefits and Risks

Philadelphia Gas Works’ LNG Expansion Efforts: A Guide to Understanding and Evaluating Project Benefits and Risks

Executive Summary
June 29, 2016

The goal of this report is to provide policymakers and the general public with:

  • Information needed to understand Philadelphia Gas Works’ (PGW) liquefied natural gas (LNG) expansion proposals 
  • An overview of some (not all) potential benefits and concerns associated with these plans
  • A presentation of some issues to consider during and after the public evaluation of the LNG proposals

PGW’s current LNG assets—including the Richmond liquefaction and storage plant and Passyunk storage facility—are critical to maintaining reliability of natural gas supply and delivery, and enable the company to lower gas costs for consumers. Storing natural gas as a liquid allows PGW to meet winter peak gas demand needs (i.e. reliability) given existing large-scale pipeline capacity. It also allows PGW to buy gas and store it as LNG when prices are low for re-gasification and use when prices are high (i.e. cost savings). Natural gas demand has decreased in PGW’s firm customer base over time, leaving the LNG storage assets underutilized as incrementally less gas needs to be stored for peak demand needs. PGW has been successfully selling excess LNG to the private sector. From 2013 to 2015 PGW’s LNG sales created $6.5 million in profits that can be used to defer rate cases or accelerate pipeline replacement. With additional investments in the expansion of its liquefaction assets, PGW believes it can enhance profitability to further benefit its firm consumers

Expansion of PGW’s LNG assets is not a new idea. Numerous reports have identified the value of these asset and the potential to expand and leverage them for consumer benefit. In response to these studies, PGW has taken several steps to analyze, survey and test market interest in enhanced LNG sales. PGW’s April 2016 request for proposal (RFP) for “LNG Sales and Asset Optimization” will determine if there is enough formal business interest to warrant capital investment for construction of expanded LNG liquefaction facilities, to support firm LNG sales and to add redundancy to PGW’s existing equipment. For context, in the past, PGW’s Richmond Plant hosted equipment that produced LNG at volumes higher than what is envisioned in the RFP’s initial liquefaction expansion phase.

Depending on the outcome of the RFP, PGW may need to tackle specific project feasibility issues related to ability to secure permits, maintain the grandfathered status of the facility(s), and navigate certain legal and administrative complexities.

There is a compelling business case to support expansion of PGW’s LNG facilities. Unlike an investor-owned utility that has high equity capital costs and dividend expectations, PGW is run similar to a not for profit organization with a customer reinvestment structure. The LNG sales expansion plan represents a rare growth opportunity PGW can implement to increase revenues and profitability. New debt to support the expansion is expected to be credit neutral or positive, and long-term contracts for LNG sales have the potential to create stability in these new revenue streams. The value of gas storage near demand centers is intrinsic and PGW’s plants have operated safely for decades, with the exception of two incidents

On the other hand, there are also compelling reasons why the Philadelphia community may not support the growth of LNG facilities and activities. The industrial LNG manufacturing, storage, and sales plans envisioned present the potential for low probability, high risk plant and transportation accidents that create health and safety concerns to the local community and beyond. A 2006 resolution passed by Philadelphia’s City Council opposed the considerable marine-based LNG traffic that would have been created through PGW’s past large-scale LNG import terminal proposal. It is unclear if the same concerns and opposition will exist based on PGW’s potential exploration of much smaller-scale LNG exports. There may also be environmental concerns about facility-based pollution or the potential to destabilize toxic pollution at the U.S. Environmental Protection Agency’s (EPA) Superfund site that neighbors the Richmond facility. Based on previous public dialogue, there are likely to be broad-based environmental concerns about the climate change, air, land, and water impacts related to increasing natural gas production and use in Pennsylvania.

Key questions about the methods and ability to manage economic and other risks may help bound the conversation. For example, does PGW maintain adequate insurance to remediate and compensate for damages in the instance of a catastrophic event? How will PGW insulate its captive customers from the risks associated with using its assets to serve competitive markets? Also, what methods will be used to avoid ratepayer contributions to planning costs associated with determining project feasibility, and how will PGW avoid construction cost overruns?

This report does not offer an opinion on whether or not to move forward with PGW’s LNG expansion plans. Ultimately, this is a conclusion that only the public and their policy makers can formulate. However, the report presents key issues to be considered, during and after a decision has been reached. If there is public interest in moving the project forward, PGW and policymakers will need to navigate project feasibility, health, safety, and environmental concerns, risk management and other issues. If there is not public support for moving the project forward, the conversation should not simply end. Rather, PGW’s reduced firm sales trend coupled with its at-risk cast iron and unprotected steel pipe infrastructure require an immediate exploration of previously identified and new strategies to develop an actionable plan to boost revenues, and/or public acceptance of increased rates to maintain safe service.

This executive summary provides a brief overview of the issues explored in the Kleinman Center for Energy Policy’s report, "Philadelphia Gas Works’ LNG Expansion Efforts: A Guide to Understanding and Evaluating Project Benefits and Risks." Download a PDF of the complete report here. 

To submit comments in response to this report, please send a PDF of comments on your organization's letterhead to Comments will be posted on the same page as the report.