More Details on why MassDOER (Baker’s) Natural Gas Plan Makes No Sense

Background

In my previous post I quickly outlined why Governor Baker’s natural gas plan makes no sense. This post is a more rigorous letter I’ve sent to my local representatives that breaks down the flaws in MassDOER’s letter to the DPU a little more detail.

For more background I suggest reading my over-arching post on the general topic: Northeast Energy Direct Pipeline: Everyone is Right. . . so What is Wrong?

Updates

  • On April 16th, 2015 on Boston Public Radio (21:30 into the audio play) when questioned about the pipelines Governor Charlie Baker responded:

    I don’t know where this tariff thing came from, to the best of my knowledge it has never been discussed inside the administration by anybody.

    Note this is semantics; as I outline below the Baker administration crafted a subsidy. It is unfortunate that the misleading continues.

  • I also wrote a letter to FERC enforcement (same content applied in a different context) as this may undermine FERC’s process to grant a certificate of public convenience and necessity (the process used to grant the right for a private company to use eminent domain).

The Letter

April 12th, 2015

Representative X,

When you get a chance please read MassDOER’s filing in DPU docket 15-371. I have included a copy with highlighted sections. As a citizen and an electric rate-payer2, I find specific aspects of this concerning and need your feedback and help.

As explained clearly in the docket, New England electric generators have experienced fuel shortages because they fail to reserve enough fuel for the winter (which resulted in price spikes). MassDOER believes part of the solution is to increase fuel supply by bringing more gas pipeline capacity into the region. In order to justify eminent domain for any pipeline, FERC requires that the pipeline has customers3. As MassDOER explains, despite experiencing fuel shortages the generators won’t sign up for gas on the pipelines3:

However, generators with gas-fired power plants who sell into an unregulated power market are generally unwilling or unable to take similar steps to secure firm gas capacity1

MassDOER’s creative solution is to have the DPU create a new type of customer for gas. Specifically to let electric utilities (who the DPU has control over) buy pipeline gas (remember electric utilities manage the wires while generators run the power plants). The idea is to underwrite pipeline capacity with basic service funds and then float it back to the generators when they run out of fuel.

The part that MassDOER implied but did not state directly is that this innovative mechanism attempts to generate the customers necessary for FERC to justify eminent domain (satisfy the basic requirements for a FERC certificate of public convenience and necessity)3. Unfortunately the legal basis for this creative solution appears to be purposely misreading the law; page 4 of MassDOER’s letter reads:

The plain reading of 94A does not limit an electric utility from filing only electricity contracts. Section 94A applies to any "gas or electric company" that is seeking to purchase "gas or electricity." G.L. c. 164, § 94A1

As shown in their footnotes, the law reads:

No gas or electric company shall hereafter enter into a contract for the purchase of gas or electricity covering a period in excess of one year. . .1

The intent of the law was clearly written that gas companies handle gas and electric companies handle electricity. If MassDOER feels the law is out-dated, insufficient or unclear they should approach the legislature to change it. The justification for eminent domain should never be created on misreading the law. As a citizen I feel that no one’s land (whether it be our state’s protected land nor our citizen’s land) should be taken by a private company with a justification based on legal trickery. Period.

I think you will find broad pubic support for this notion. Is there any way that the legislature can clarify the existing law to MassDOER and the DPU?

What thoroughly disturbs me is that although this justification appears weak and will likely not stand up on appeal it won’t matter. If implemented by the DPU, by the time this is appealed land will have been taken and built on. Thus I feel it is prudent to be pro-active in the legislature and ensure that the people get fair treatment and that MassDOER and the DPU follow the law or approach the legislature to change it — not find clever ways to subvert it.

Beyond that, as an electric rate-payer I find other aspects of MassDOER’s plan misleading and ineffective. I know, however, you may not be able to influence all aspects so feel free to stop here. I covered the most important point. However if you are curious and able to listen please let me explain:

Gas Pipelines Don’t Need Incentives

If you follow the news it is plainly clear that multiple gas pipeline companies are very aggressive in pursuing the three proposed pipeline projects (Kinder Morgan’s Northeast Energy Direct, Spectra Energy’s Algonquin Incremental Market and Access Northeast) that combined will nearly double our existing pipeline capacity4. They are so aggressive that there are repeated allegations of trespassing on private land in order to survey5.

Thus MassDOER’s assertion in this docket that we need to stimulate necessary gas pipeline expansion is misleading. There already is plenty of motivation from multiple projects. Nonetheless MassDOER is still attempting to use ratepayer basic service funds to underwrite and float the purchase of natural gas from the pipelines:

…allowing EDCs to contract for natural gas firm transportation capacity would require the net annual cost/savings to be reconciled through electric rates1…(emphasis added)

As Gordon van Welie (CEO of ISO New England) summarized: "it would essentially create a subsidy to gas generators"6.

But generators state they don’t even want gas subsidies:

The question of whether to ask ratepayers to finance a pipeline rather than gas companies is an important one to Dan Dolan, president of the New England Power Generators Association. "Where I start from," he said, "is that subsidies anywhere on the system distort the market outcome and lead to a dramatic cost and risk consequence to consumers."12

Then why, exactly, is MassDOER crafting a subsidy? As I asserted before I believe that it is less about stimulating gas pipeline investment and more about using rate-payer funds to create new local gas customers to justify FERC’s use of eminent domain.

As a rate-payer I believe that this is a mis-use of the electric basic service charge. If the pipeline is needed there should be enough traditional local gas contracts to justify eminent domain. We don’t need to use rate-payer funds to fabricate new customers.

Incremental Gas Pipelines Will not Lower Costs

Consider this scenario: a city has traffic jams during rush hour and the people are desperate for relief so the state decides, rather then bolstering local roads, to build an interstate turnpike through the city. Will this alleviate the local congestion? As anyone who lives near an Interstate knows, the local trip to the grocery store is no easier when Interstate rush hour traffic is involved.

This is the scenario Massachusetts faces with pipeline expansion. We have occasional fuel traffic jams that cause price spikes however these pipelines are not upgrading the local roads, they are changing Massachusetts from a last-stop on energy infrastructure into an off-ramp on a gas superhighway to Canada for export. The existing Maritimes and Northeast import pipeline from New Brunswick to Dracut is being reversed and the Bear Head import terminal in New Brunswick is being converted to an export terminal. I argue this is why the gas pipeline companies are being so aggressive on New England expansion even without MassDOER incentives — I argue New England will be their secondary market; export is their primary market.

The core problem is more gas supply will not mean more gas will be available to Massachusetts; the reason is Massachusetts market will be fighting world demand for the pipeline gas and foreign markets pay much more for gas then we do. Even Black & Veatch, the consultants that conducted the Gas Supply Study7 for the New England Governors (NESCOE) justifying incremental pipeline, outright states in their "Bear Head [LNG] Export Project" review that gas prices in New England will rise above last year’s peak rates once export begins:

these proposed export volumes are expected to have a limited price impact in New England during the analysis period of 2019 through 20498

and Kinder Morgan consistently and plainly states they can not stop the gas from being exported from their proposed Northeast Energy Direct pipeline:

Under FERC’s regulations and policies, Tennessee cannot discriminate among customers based on the ultimate destination or use of the gas, such as the Northeast vs. Canada or another foreign country (via export of LNG).9

MassDOER is extremely misleading about this in the docket. On page 2 they begin:

While it is not clear how much capacity may be needed to address these issues…1

Basic economics states that in order to predict price one must know both supply and demand. MassDOER clearly states they don’t know what demand will be; so it follows that they have no grounds to make implications about price. Nonetheless they attempt to imply prices will fall by citing the Massachusetts Low Gas Demand Analysis report. That report, however, was not meant to analyse gas aggregate demand; it only looked at local demand. Then to add impact they added a quote that compares prices at different locations:

A comparison of natural gas wholesale prices in the New England and PJM Interconnection ("PJM") markets shows that the same volume of gas used by New England generators during 2014 would have cost over $600,000,0003 less in PJM due to lower gas prices. Homeowners, businesses, manufacturers, Commonwealth offices and municipalities are bearing the cost of these gas constraint-driven high prices and without added capacity this will become a common occurrence in future years.

Note that paragraph never states prices will be lower. I have searched and I am not aware of any study that accounts for expected exports and finds our prices will be lower. Rather then carefully wording a docket to imply we’ll get lower prices MassDOER should be putting this effort into studying whether the pipelines will, in fact, lower long-term costs. If they don’t we’ve solved absolutely nothing. As a rate-payer I would like to believe that MassDOER and the DPU would be able to provide concrete evidence their proposed solutions will actually solve problems.

Overall this seems like the Central Artery project all over again; government agencies so stuck in group-think about how to solve traffic jams that the miss the basic premise that tearing down 1/3 of old Boston an bisecting what was left with a highway through it created more problems then it solved.

Incremental Gas Pipelines will Exacerbate Problems

The most glaring short-term problem I see is electric generation is increasingly concentrated on one fuel source (natural gas) via one transport method (pipeline) from one location (Marcellus). Massachusetts is already at 63% gas generation10 and it is slated to become an even larger percentage as implied in the MassDOER docket:

The New England electric grid is a changing landscape with gaps in generation predicted for the near future. More than 4,6005 MW of capacity is expected to retire over the next three years; ISO NE further estimates that up to 8,300 MW (total) of generating capacity are assumed at risk of retirement by 2020 in the region, putting the system’s reliability at risk.

The risk that MassDOER neglected in that docket is that when our gas infrastructure becomes an export superhighway we not only will more than half our electric generation be coming from one source, the world will now be competing with us for the gas.

What hedges the risk of a all-eggs-in-one-basket energy portfolio? I read hundreds of pages of energy reports and I can’t find it.11 FERC doesn’t handle that, ISO-NE punts it to the states and MassDOER programs are way too small to substantively tackle diversification. To make the renewable slice of the pie as big as the gas slice we would need to grow renewables to 50% of our portfolio as fast as the pipelines are coming in — in about five years. We would need a program that rivals Germany’s energiewende. I’m not saying it is not possible, but I am saying that it is irresponsible for MassDOER to even imply the diversity issue is handled as they attempt to do on page 1 of the letter:

The Commonwealth has made great strides in reducing electric load through energy efficiency as well as in diversifying the electric mix1

The part about diversification is not just misleading; it is patently false. We have become more reliant on gas and MassDOER’s plan will make us more dependant. I would hope that MassDOER would have a handle on this; as they state in the letter on page 1, it is their responsibility:

DOER is the Massachusetts executive agency responsible for establishing and implementing the Commonwealth’s energy policies and programs aimed at ensuring the adequacy, security, diversity, and cost-effectiveness of the Commonwealth’s energy supply within the context of creating a cleaner energy future.1 (emphasis added)

The only thing MassDOER attempts to address in this docket is adequacy and as I show they fail in the basic argument. MassDOER and the DPU should be channelling their creativity into innovative mechanisms to solve this diversity issue; not finding creative ways to create new gas customers and exacerbate it.

Do it Right

I am an engineer who was the lead of the technical operations of a quarter of the Internet’s traffic. One of the first things I taught new employees was that when there is a crisis it is imperative to ensure that every step is checked and it is certain it will make the situation better. It is human nature to grab the quickest and easiest options when under pressure. More often than not, that only makes the situation worse and bad choices make the situation tougher to unravel.

I believe MassDOER is under pressure for a solution to our electric rate spike and they are reaching for what they think is a quick and easy solution without fully thinking it through. I, a layman not in the energy industry, just dismantled the logic of their plan without even looking at the higher order issues like climate change, limited fossil fuel resources and our long-term vision. The fact is this plan makes no sense and there is no easy solution.

New England has always had high energy prices due to bottlenecks and they have been a perpetual challenge. The reason is simple; we’re a fossil fuel island: we have no native sources (we import everything). Pain stimulates innovation and it is our pain that has made us the national leader in energy efficiency and renewable growth. Why, exactly, are we trying to change that?

Do we subsidize the fossil fuel we already have too much of, we’re looking to step away from in the long term, we’re not certain will actually solve anything and will create problems? Do we subvert the law and undermine the public trust to allow private out-of-state companies to take our land? Is a desperate move to do something a good solution? I don’t think so. We should be doubling down on our pioneering efficiency and renewable path and MassDOER should be channelling their creativity into finding more ways of stimulating local energy on our little fossil fuel desert island. We should not throwing the system into reverse with a knee-jerk.


1: Request to Open an Investigation into New, Incremental Natural Gas Delivery Capacity for Thermal Load and Electric Generation (http://web1.env.state.ma.us/DPU/FileRoomAPI/api/Attachments/Get/?path=15-37%2finitial_filing.pdf)

2: I am a resident of Lowell and am not affiliated with any corporation or group involved in Massachusetts energy. I’m an engineer trained in complex systems and economics and in my spare time am passionate about energy efficiency. When I read ISO-NE’s reports and MassDOER’s plans to incentivize natural gas expansion I came to the conclusion that they make no economic sense, don’t actually solve any problems and have the potential to make the situation worse. My goal is to share this as I don’t believe it is being debated as rigorously as it should be.

3: FEDERAL ENERGY REGULATORY COMMISSION STATEMENT OF POLICY (http://www.ferc.gov/legal/maj-ord-reg/PL99-3-000.pdf):

In sum, if an applicant can show that the project is financially viable without subsidies, then it will have established the first indicator of public benefit

4: EIA Gas Pipeline Projects (http://www.eia.gov/naturalgas/pipelines/EIA-NaturalGasPipelineProjects.xls), EIA State to State Gasline Capacity (http://www.eia.gov/naturalgas/pipelines/EIA-StatetoStateCapacity.xls)

5: Lowell Sun: &Surveyors cross a line in Dracut& (http://www.lowellsun.com/news/ci_27894052), The Boston Globe: &Pipeline surveyors draw landowner complaints& (http://www.bostonglobe.com/business/2015/04/09/pipeline-surveyors-draw-landowner-complaints/fwk9yfh3h4NCQq2N7CDTkL/story.html)

6: Argus Media: "Fixing gas-electric concerns might fall to states" (http://www.argusmedia.com/News/Article?id=1013985)

7: Gas Supply Study (http://www.nescoe.com/Gas_Supply_Study.html)

8: Black & Veatch, New England Market Impact Assessment for
LNG Exports at the Bear Head Export Project (February 2015)
(http://energy.gov/sites/prod/files/2015/02/f20/Appendix%20C.pdf)

9: Tennessee Gas Pipeline Northeast Energy Direct (NED) Project FAQ (http://www.kindermorgan.com/pages/business/gas_pipelines/east/neenergydirect/faq.aspx)

10: EIA: Massachusetts State Profile and Energy Estimates (http://www.eia.gov/state/?sid=MA)

11: I wrote a detailed paper on the dwindling diversity issue; if you are interested please contact me and I’ll send a copy.

12: Cuorant: Winter And The Power Grid: A Near-Miss Or A Policy ‘Object Lesson’? (http://www.courant.com/business/hc-winter-electricity-prices-much-milder-than-last-year-20150412-story.html#page=1)

More Details on why MassDOER (Baker’s) Natural Gas Plan Makes No Sense

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