Financing Gas Pipelines through Electric Rates?

America needs new energy infrastructure, and increasingly ratepayers are being looked upon to bridge the financing gap.

This week, the Supreme Court is hearing arguments about Maryland’s efforts to use ratepayer subsidies to support construction of new gas-fired generation. Ohio regulators are considering long-term power supply contracts to keep existing coal and nuclear generation afloat, raising anti-competition appeals to FERC. These actions are happening in states that have chosen to deregulate (i.e. make competitive) electricity generation markets and now are attempting to re-regulate generation on an ad-hoc basis.

Enter a new twist on the phenomenon, having electric ratepayers support construction of natural gas transmission pipelines. Typically, FERC requires interstate natural gas transmission capacity to be funded by private entities.  However, the Access Northeast pipeline developers (including Eversource Energy, Spectra, Energy and National Grid) have approached regulators in Massachusetts and New Hampshire asking for socialization of gas pipeline costs (via 20-year contracts) among electric ratepayers. The pipeline developers need long-term contracts to make the billion(s) dollar pipeline financing work, enter the role of the ratepayer.

In the Northeast, these strategies have been brewing for a few years.  In June 2013, the Maine legislature passed a bill allowing its PUC to use ratepayer funds to buy up to $75 million annually in natural gas pipeline capacity.  Following Maine’s leadership, several northeast states collaborated through the New England States Committee on Electricity (NESCOE) to develop strategies to bring gas to the region, strategies that included allowing electric rate payers to support gas pipeline finance. See Kinder Morgan’s Northeast Energy Direct project.

The legalities of these ratepayer strategies aside, one could argue that electric ratepayer support is warranted.  Considerations such as high spot gas and wholesale power prices in the winter, gas demand that is outstripping pipeline capacity, and limited access to gas supply for power generators resulting in higher prices and raising reliability concerns are compelling.  Additional pipeline capacity could bring down the high costs of gas and power in the region, potentially delivering net savings to consumers, even when pipeline subsidies are considered.  The Access Northeast line apparently would connect to approximately 60 percent of New England’s gas-fired generation.

On the other hand, ratepayer benefits are speculative. Opponents argue that shifting private sector risk onto ratepayers for huge capital investments is inappropriate and only serves to maximize profitability for firms.  They challenge the notion that addition capacity is required, suggest that other resources (efficiency, renewables, LNG) could be used to address energy resource needs, and argue gas traveling through the pipeline could be used by other states or be exported, with no benefits to the subsidizing ratepayers. Electricity generators that don’t use gas (coal, nuclear, oil) argue that pipeline subsidies amount to anti-competitive handouts to gas generators.

Sifting through these competing pro and con subsidy arguments has proven confusing to regulators. So far, it seems skepticism is prevailing, which makes sense given the stakes. New Hampshire regulators raised concerns about ratepayer support and lack of transparency with the traditional pipeline open season process. New Hampshire legislators have proposed a bill to prevent ratepayer subsidies for pipeline construction. A study conducted for the Maine PUC found that none of the proposed gas pipeline contracts examined would provide ratepayer benefits greater than their costs.

It seems to me that there is a choice to be made in the Northeast: either allow the private sector fully funds interstate pipelines that are economically viable with no ratepayer intervention, or have government officials lead a coordinated, transparent, multistate effort to secure project finance through public and private capital for only those projects deemed necessary and beneficial to ratepayers. The current situation where multiple pipeline are competing for ratepayer funds in multiple jurisdictions through a state-by-state approach is suboptimal for developers and ratepayers.

Christina Simeone

Kleinman Center Senior Fellow

Christina Simeone is a senior fellow at the Kleinman Center for Energy Policy and a doctoral student in advanced energy systems at the Colorado School of Mines and the National Renewable Energy Laboratory, a joint program.