POWER September 2014 - 77

COMMENTARY
David T. Doot
Joseph H. Fagan Sebastian M. Lombardi
The Northeast's
Natural Gas
Challenge
David T. Doot, Joseph H. Fagan, and Sebastian M. Lombardi
T
he experiences of the electric and gas markets in the Northeast
this past winter highlighted better than any article,
speech, or prediction the interesting and urgent challenges
and opportunities arising from increased reliance on natural gas
to heat and power homes, offices, and factories.
The use of natural gas has risen so much that demand at times
this past winter outstripped the capacity to transport it into the
Northeast. The result: When natural gas prices elsewhere in the
U.S. were under $5/MMBtu, prices in the Northeast climbed to
over $100/MMBtu on one cold day in New York. In the Northeast,
wholesale electric prices follow gas prices. Thus, New England,
for example, saw bills for wholesale power increase more than
70% over the previous winter.
Advantage: Natural Gas
Abundant domestic supply, favorable costs, and environmental
advantages are driving consumers to natural gas. Moreover, new
environmental mandates have helped drive up costs for coal- and
oil-fired power plants, while Fukushima has challenged nuclear.
Consequently, competition with gas-fired generation has become
increasingly difficult. Indeed, recently there have been significant
announced retirements of non-gas generation plants in the
Northeast, such as the 625-MW Vermont Yankee nuclear power
plant and the 1,525-MW Brayton Point coal plant. More retirements
will certainly be forthcoming. While new technologies or
higher wholesale power prices might slow this trend, for the
foreseeable future, all signs point to continued growth in the
consumption of natural gas.
The Missing Link: Gas Deliverability
Unfortunately, the ample natural gas supplies are not located in
the Northeast, and last winter suggests that there is not enough
infrastructure to meet the growing demand for domestic, lowercost
natural gas. The key production area for natural gas for the
Northeast is the Marcellus shale in the Appalachian region, and
existing pipelines that can deliver that gas to the Northeast
have been running at or near full capacity nearly every day of
the year of late. The impact of these pipeline constraints is most
acute during the winter months, when gas demand is at its highest.
With gas demand peaking and the available capacity to get
it to market, gas prices skyrocketed (once by more than 20-fold)
and were highly volatile over the winter.
What Next?
With prices like those experienced this past winter, expansion of
gas infrastructure in and into the Northeast is inevitable. Pundits
debate whether natural gas is the future or a bridge to a future
with new technology supporting broad deployment of distributed
generation, massive expansion of renewables, and/or smaller-scale
76
nuclear power. In a rare show of solidarity, governors from all six
New England states agreed and issued a unanimously supported
policy objective to increase both transmission into New England
for the delivery of at least 1,000 MW of clean energy resources and
natural gas pipeline capacity by at least 1 Bcf above 2013 levels.
New York, which lies between these abundant domestic gas supplies
and New England, is encouraging the expansion of both electric
and natural gas transmission capacity in and into New York.
The debate decidedly has shifted to how best to meet these
growing infrastructure challenges. Free market advocates resist
government intervention and financing of new infrastructure
and argue that markets will provide the capital when and where
needed. Others fear that electric market design is inadequate to
support new investment in the fuel delivery system. Moreover,
pipeline capacity will not be expanded without long-term contracts
with creditworthy counterparties.
Some public policy advocates, including environmental advocates,
are working actively to minimize investment in new
gas pipeline, which some fear will make gas generation the future
rather than a bridge to reduced consumption and increased
renewables. Investors in alternative fuels such as nuclear and
liquefied natural gas oppose government intervention in the
markets, which they see as potentially unfairly suppressing market
prices and favoring principally gas and wind over their technologies.
And while virtually all consumers want the economic
benefits of more infrastructure, many are intent on ensuring it is
not in their back yard.
State regulators and elected officials find the current path to
new infrastructure too uncertain and are poised to drive forward
with their vision of expansion, financed by electric customers.
This picture ensures continued controversy and litigation. Market
rules for the purchase and sale of wholesale power will continue
to evolve, along with new laws and regulations. Much more will
be written and said about the topic. Consumers will continue to
be faced with the dizzying pace of change and the ever-growing
opportunities to impact their rising energy costs through wise
investments, smart contracts, and careful energy management.
In short, there promises to be much turbulence ahead. Few
would or should quarrel with the fact that these challenges are
much better problems than those created by excessive reliance
on high-cost foreign oil. So, for those in the Northeast, buckle
your seat belts and enjoy the ride. ■
-David T. Doot is chair of Day Pitney's Energy and Utility Law
group, serves as secretary and general counsel for the New
England Power Pool, and counsels energy and utility providers and
customers across the country on energy transaction and regulatory
issues. Joseph H. Fagan is a partner and member of Day Pitney's
Energy and Utility Law group, and Sebastian M. Lombardi is an
associate in the firm's Energy and Utility Law group.
www.powermag.com
POWER | September 2014
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POWER September 2014

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