In this post I’ve written a letter to the FERC Enforcement Hotline describing how MassDOER’s letter to the DPU 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).
Note that it is pretty much the same content as the previous letter just applied in a different context.
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?
April 17th, 2015
FERC Enforcement Hotline
888 First St. NE – 5th Floor
Washington, DC 20426
I believe Massachusetts DOER may be attempting to manipulate the gas markets by unlawfully using the Massachusetts DPU’s influence over electric utilities’ basic service charge to coerce electric utilities into becoming new gas pipeline customers. I believe this may be an attempt to deceitfully satisfy the FERC’s first requirement for certificate of public convenience and necessity for the proposed new gas pipelines in Massachusetts. If implemented, I believe this would defraud the Commission’s certificate process and violate the Commission’s Anti-Manipulation rule:
To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any entity.1
To be clear, the law has not yet been broken, however I argue it is imperative in this particular case for the FERC to be pro-active to ensure the integrity of the Commission’s process and maintan the public trust. For example, if this scheme were implemented by the Massachusetts DPU and later found to be illegal on appeal, it is likely land would already have been condemned and built on.
Like many manipulation schemes, this appears convoluted, has elements of truth but overall is misleading. I will do my best to show basic evidence of deceit and suggest steps for the FERC to consider. Please note that I am only a layman (not a lawyer) so I will not be able to approach this with rigor. Also note I have no property interest in this (neither my land nor my city are affected by the proposals).
With that, I have included and annotated version of MassDOER’s filing2 in Massachusetts DPU docket in 15-37; let’s review it.
As explained clearly in this letter, New England electric generators have experienced fuel shortages because they fail to reserve enough fuel before the winter. This causes price spikes and MassDOER believes part of the solution is to increase fuel supply by encouraging incremental gas pipeline capacity for the region. Despite experiencing fuel shortages, however, the generators won’t sign up for long-term gas contracts on the three proposed new pipelines for the region (Kinder Morgan’s Northeast Energy Direct, Spectra Energy’s Algonquin Incremental Market and Access Northeast)3:
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 capacity2
MassDOER’s proposal is to have the DPU create a new type of customer for gas. Specifically, for electric utilities (who the DPU has control over) buy new pipeline gas (in Massachusetts electric utilities manage the wires while generators run the power plants). The idea is to underwrite the purchase of new pipeline capacity with DPU basic service funds and then float it back to the generators when they run out of fuel:
…an innovative mechanism for electric distribution companies ("EDCs") or other suitable parties to secure new, incremental gas delivery capacity into the region to the benefit of electric ratepayers; (2) review for cost-recovery of EDC contracts for natural gas capacity by the Department under G.L. c. 164, §94A ("§94A")…2
…allowing EDCs to contract for natural gas firm transportation capacity would require the net annual cost/savings to be reconciled through electric rates2
MassDOER explains that this proposal’s intent is to stimulate gas pipeline expansion:
The mismatch between the availability of long-term commitments needed to stimulate necessary gas pipeline expansion and the willingness and/or ability of gas-fired generators to supply those commitments is the essential problem that is in need of a solution.2
And as Gordon van Welie (CEO of ISO New England) summarizes: "it would essentially create a subsidy to gas generators"4.
If you follow Massachusetts news, however, it is plainly clear that multiple gas pipeline companies are very aggressive in pursuing the three proposed pipeline projects that combined will nearly double our existing pipeline capacity3. Moreover, the capacity of the proposed upgrades are eight times greater then moderate New England gas demand estimates5. They are so aggressive that there are repeated allegations of trespassing on private land in order to survey6. So there clearly appears to be ample, nascent, active and aggressive competition for gas pipeline expansion in Massachusetts.
Also in contrast to MassDOER’s depiction, the generators consistently 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."7
This inconsistency raises a number of questions:
- Why would MassDOER see a need to stimulate projects that are ample and hotly competitive?
- Why would MassDOER craft a subsidy the beneficiary does not want?
- If the core problem is with generator fuel contracts, why the convoluted, confusing plan; why not bolster
and enforce ISO-NE’s Winter Reliability Program (carrot) and Pay for Performance (stick) or just simply enforce generator supply contracts?
- Why does this proposal apply exclusively to generators securing new pipeline capacity and does not include securing unused capacity on existing pipelines, too?
- If the core problem is generators securing fuel contracts, why does this proposal not include other suitable fuels such as LNG or ULSD, etc?
There appears to be a very simple explanation. The FERC requires gas pipeline contracts to be in-place to grant a certificate and justify eminent domain for the proposed pipeline projects:
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.8
We’ve established generators are not buying capacity on the new pipelines. It turns out very few contracts have been garnered so far. For example, Kinder Morgan’s Northeast Energy Direct appears to only have two contracts, National Grid (Boston Gas) and Liberty Utilities (a wholly owned subsidiary of APUC and Kinder Morgan).9
I assert that MassDOER and the DPU may be attempting to fabricate new gas customers to fraudulently satisfy the FERC’s first requirement for certificate of public convenience and necessity.
What is especially troubling is it MassDOER’s legal justification appears to be a purposeful misreading of Massachusetts 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, § 94A2
As shown in the 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. . .2
The intent of the law was clearly written that gas companies handle gas and electric companies handle electricity. This raises more questions:
- If MassDOER deems this is so important, why would they prop it up on questionable legal footing?
- If MassDOER felt the law was out-dated, insufficient or unclear why would they not just approach the legislature to change it?
Again, I feel the answer is simple; as I mentioned in the introduction, this likely will not stand up to legal muster and the intent may be to fabricate new gas customers just long enough to fraudulently satisfy the FERC’s first requirement for a certificate8.
What is wrong with all this? If the pipelines are needed there should be enough traditional gas contracts to justify the FERC’s certificate requirements. We should not need to use rate-payer basic service funds to fabricate new customers under the guise of stimulating the pipelines. Beyond 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 that undermines FERC’s certificate process. Period.
What can the FERC do? I am not a lawyer but this looks like it might be a mess to untangle; for example, I traced the proposal back to a private meeting between undisclosed parties who then passed it to Governor Charlie Baker who then passed it to MassDOER (an agency under his charge) who has now has passed it to the Massachusetts DPU. I do, however, see a few actionable steps to protect the FERC’s process and I welcome any other ideas or actions:
- Could the FERC pro-actively provide a legal opinion as to whether the Commission will view this as a subsidy?
- Would it be reasonable for the FERC to provide a pro-active opinion on the legality of MassDOER’s request?
- Can the FERC give guidance on whether MassDOER influencing electric utilities to become gas customers would count toward showing the projects are financially viable?
- Would this be an issue that the FERC would work with the Massachusetts Attorney General’s office on?
Thank you for your consideration.
2: 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)
3: 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)
6: 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)