Report Outlines Gas Pipeline Risks to Rate Payers

Pipeline construction between West Virginia and Pennsylvania

Pipeline construction between West Virginia and Pennsylvania

by James A. Bacon

The proposed Atlantic Coast Pipeline (ACP) and Mountain Valley Pipeline (MVP), designed to bring low-price natural gas in the Marcellus and Utica shale fields to Virginia and North Carolina, pose significant risks to electric utility rate payers and landowners along their routes, argues a new study, “Risks Associated with Natural Gas Pipeline Expansion in Appalachia.

“Pipelines out of the Marcellus and Utica region are being overbuilt,” states the report, written by the Institute for Energy Economics and Financial Analysis, whose stated mission is to accelerate the transition from fossil fuels to renewable energy sources. “Overbuilding puts ratepayers at risk of paying for excess capacity, landowners at risk of sacrificing property to unnecessary projects, and investors at risk of loss if shipping contracts are not renewed and pipelines are underused.”

A major justification for both pipelines is to provide Dominion Virginia Power and other electric utilities access to natural gas from West Virginia and Ohio, which for several years has been selling at a discount to Gulf of Mexico gas. But once a slew of proposed pipelines is built, the report contends, that price advantage likely will disappear, raising the possibility that the $9 billion cost of building the two pipelines will exceed the savings from lower gas prices.

“Shale drillers cannot continue to produce below cost indefinitely,” states the report. “In the longer term (10-15 years), it is likely that Marcellus and Utica gas prices will stabilize at a somewhat higher level. These longer-term prices will have a significant impact on the long-term economics of the Atlantic Coast Pipeline, which is designed as a 40-year project.”

Aaron Ruby, a spokesman for Dominion Transmission, managing partner of the ACP, disputed the conclusions of the report, saying, “There is no question about the urgent public need for the Atlantic Coast Pipeline. This project was developed in response to the real and demonstrated need of public utilities in Virginia and North Carolina. … Demand for natural gas in the region will increase nearly 165 percent from 2010 to 2013. Yet there is not enough infrastructure or supply … to meet this growing demand.”

Increased demand will come from electric utilities switching from coal to natural gas and from population growth, Ruby said. In Hampton Roads natural gas is in such short supply that service has been curtailed during extreme weather events for industrial customers, and attracting new customers burning natural gas is all but impossible.

Last month 33 area legislators signed a letter saying, “The need for this project is urgent; to put it bluntly, our region’s natural gas transportation system has reached a tipping point. The pipelines serving Hampton Roads are fully subscribed. Without new infrastructure, there is no way to meet our region’s rising demand for natural gas … crippling out prospects for economic growth.”

Mountain Valley Pipeline said that it had retained Wood Mackenzie Inc. to provide an independent analysis of long-term natural gas supply and demand in the Southeast. The resulting report, says MVP spokesperson Natalie Cox, “makes clear that the Southeast market alone has more than enough natural gas demand to support the MVP’s current capacity of 2.00 [decatherms] per day, and it’s important to remember that [the] Southeast is only one of MVP’s target markets.”

Graphic credit: Institute for Energy Economics and Financial Analysis

Graphic credit: Institute for Energy Economics and Financial Analysis

The Marcellus gas boom

The pipeline-building boom has been driven by soaring natural gas production in the Marcellus and Utica shale fields, in which production has outpaced the ability of pipeline companies serving the region to transport the gas to customers. A persistent price disparity has opened up between the “Henry Hub” price for Gulf gas and the “Dominion South” hub for shale gas, as seen in the graph above. Backers of both the ACP and MVP projects have argued that their pipelines will allow electric utilities to access the lower-priced Marcellus gas, saving $377 million a year for ACP’s Virginia and North Carolina customers alone.

The low gas prices are driving a race among natural gas companies to build new pipeline capacity to reach higher-priced markets, states the IEEFA report. “Pipeline companies [are] competing to see who can build out the best networks the quickest.”

Energy holding companies with utilities have an interest in building new lines because regulatory structures allow pipelines to earn a higher return on capital than other categories of investment, the report contends. “If the regulated utility’s parent company can build its own pipeline for use by its regulated subsidiary, it can capture this profit, giving a utility holding company an incentive to prioritize building its own pipeline rather than utilizing that of another company. This structure also shifts some of the risk of pipeline development from the developer and its shareholders to the regulated utility’s ratepayers.”

Even players in the gas industry acknowledges that pipelines are likely to be overbuilt, the IEEFA report says, quoting Kelcy Warren, CEO of Energy Transfer Partners. “The pipeline business will overbuild until the end of time. I mean, that’s what competitive people do,” he said in an earnings call last year.

When pipelines are built unnecessarily, the report argues, landowners along the route are unnecessarily put at risk of having their land taken through eminent domain and potentially damaged, and communities along the routes may be at greater risk from gas explosions.

Gas pipelines lightly regulated

Natural gas transmission pipelines are regulated by the Federal Energy Regulatory Commission (FERC), which does not exercise the same level of oversight as state regulatory commissions, the report says. To ascertain public need for a proposed project, FERC relies upon whether a pipeline developer has been able to recruit enough companies to contract for capacity on the line. “If a pipeline is fully or near fully subscribed, FERC considers this strong evidence that the pipeline is necessary.”

Furthermore, the report notes, FERC sets “recourse” rates — the rate that a shipper is allowed to demand and receive — that allows a Return on Equity (ROE) of 14%, considerably higher than the ROE, typically around 10%, granted by state regulatory commissions. In theory, pipelines provide a more attractive investment return for holding companies like Dominion Resources than for state-regulated projects.

The “recourse” rates apply to only a small fraction of the gas that would flow through the ACP, however. Ninety-six percent of the capacity of that pipeline, says Dominion’s Ruby, would be locked up in negotiated 20-year contracts. The ROE embedded in those negotiated rates is not public information. The IEEFA report cited a National Gas Supply Association study that found that a majority of the 32 natural gas pipeline companies studied generated ROE closer to 12%.

The main role state regulatory commission has in regulating interstate natural gas pipelines is approving the pass-through of pipeline costs to customers. In Virginia, the State Corporation Commission must conclude that the cost has been prudently incurred. While the SCC could in theory reduce the pass-through incurred by Dominion Virginia Power for the ACP’s rates, that decision would not occur until after a pipeline has already been constructed, the IEEFA report says, which gives the commission no power to curtail overbuilding.

“Rates charged for shipping gas on pipelines are ultimately passed through to the consumer of the gas, largely customers of electric and natural gas utilities,” states the report. “That leaves ratepayers at risk of paying for unnecessary new capacity.”

customers

Graphic credit: Institute for Energy Economics and Analysis

Public need questioned

ACP is a joint venture of Dominion Resources (which has a 45% interest), Duke Energy (4o%), Piedmont Natural Gas Company (10%), and AGL Resources (5%). The pipeline’s owners and customers are almost synonymous. The pipeline partners account for 74% of the 1,439 dekatherms per day of contracted capacity. In other words, three-quarters of the multibillion-dollar pipeline cost will be charged to rate payers of the utilities that, through their parent companies, own the pipeline.

While the pipeline companies generate a potentially higher return on capital, the rate payers get stuck with much of the risk, the IEEFA report contends. A big risk is that the $5 billion cost of building the pipeline will exceed the savings from cheaper natural gas.

ACP’s claims of savings for rate payers are based upon an ICF International study that asserted that Marcellus/Utica gas would continue to be $1 to $1.75 per million BTU cheaper than Gulf gas through 2034, saving Virginia and North Carolina rate payers $377 million per year, says IEEFA. But that finding contradicts current market expectations.

As more pipelines are built out of the Marcellus and Utica region, the excess pipeline capacity will further narrow the price differential between the hubs. That is, as natural gas pipeline capacity increases to meet or exceed the glut of natural gas supply, natural gas prices in the Marcellus should rise.

Dominion’s Aaron responds that ACP’s contracts lock in gas prices for 20 years. If the gap between Marcellus and Gulf Coast gas prices does narrow, there won’t be any impact for two decades. And even then, Dominion, Duke and the others will benefit from more diversified sources of supply that would insulate themselves from events that create price spikes, such as Hurricane Katrina’s disruption to the Gulf gas industry.

Recommendations

IEEFA urges a “comprehensive planning process” for natural gas pipelines that could reduce overbuilding and dampen returns on pipeline development. The high returns on equity embedded in recourse rates “is especially egregious given that the growing trend of transactions between regulated utilities and affiliated pipeline developers tends to shift risk from utility shareholders to ratepayers.”

Also, Virginia’s State Corporation Commission should “closely examine the prudence of contracts signed by regulated utilities to ship gas on a pipeline owned by affiliated companies.”

Finally, FERC should suspend evaluation of the ACP and MVP pipelines until an “appropriate regional planning process” can be developed.

Conclude the authors: “Without a coordinated approach to natural gas pipeline planning, as exists for many other types of infrastructure, the Federal Energy Regulatory Commission cannot make an honest determination of the need for these pipelines. Ratepayers and communities will shoulder much of the costs and risks … investments of nearly $9 billion that are poised for approval without adequate scrutiny.”

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18 responses to “Report Outlines Gas Pipeline Risks to Rate Payers

  1. Surprised that no one else has comments… and did wait …

    An argument that COULD be made is to let companies compete on these pipelines and let investors of these companies decide how much market is available and their own competitive prospects – and the market itself will sort out the winners and losers.

    Except for two issues.

    The first is imminent domain. If these companies had to acquire right of way – via willing buyer/willing seller – then that ALSO would become part of the “market” process and those companies with superior operations and practices would win – and it’s not at all impossible as I have pointed out before

    The Rocky Mountain Express Pipeline – 1,679 miles
    across eight states, and cost nearly $6.8 billion…
    … Acquisition of all rights of
    way was accomplished within the project timeline allowed
    for construction to take place with no land-related delays.
    The project was accomplished within budget and with
    nearly 100% voluntary acquisition. For REX West, voluntary
    acquisition was 99.7% successful. ”

    So I think it is wrong to start off with the absolute power of eminent domain rather than it being used for the 1% that could not be successfully negotiated.

    If Rocky Mount Express can do it for 1600 miles across 16 states why not Dominion for 550 miles over 3-4 states ?

    Those who blather on here about “intrusive government” involving itself in commerce and creating winners and losers have apparently completely lost their tongue on this project…. where are those “let the market work” folks on these pipeline issues?

    and the second part …

    how do you make a pipeline successful when there are competitors and they have signed up most of the domestic buyers? Well – you push to export the gas of course and that’s exactly what is going to happen if all those pipelines are approved. We’ll see companies try to recoup their investment buy marketing gas to overseas customers for 5-10 times what it would fetch from domestic buyers.

  2. We should note that these pipelines are 40 year investments …. and that overseas LNG shipments makes a poor case for using imminent domain. Who knows how long that price differential will last. Some gas facilities in Europe have become ‘stranded assets’, unuseable before they have been paid for because of Europe’s renewable investment priorities.

    Building these pipelines seems to be all about shifting the risk to the ratepayers and the guarantee of a double digit rate of return for the investors. It is not about ‘need’ which is created by Virginia’s choice to block solar and offshore wind development.
    Virginia has just been named one of the 10 states whose policies block solar development although the state’s solar potential is very large.

    Report on pipelines concludes …
    • Ratepayers and communities will shoulder much of the costs and risks of the Atlantic Coast and Mountain Valley pipelines, investments of nearly $9 billion that are poised for approval without adequate scrutiny… Most of the risk for the project is borne by those utility customers in Virginia and North Carolina.
    • IEEFA said landowners were at risk of sacrificing property to projects that are not needed
    • … the fact that a pipeline developer is signing a contract with an affiliate is strong evidence that there is financial advantage to the parent company from building the pipeline, but not necessarily that there is an independently established basis for the pipeline need.

    http://ieefa.org/report-ferc-encourages-pipeline-overbuilding/

  3. I am skeptical that an organization devoted to pushing non-fossil fuel energy is truly interested in saving utility ratepayers money. Indeed, most such organizations want to see higher and higher electric and natural gas bills to force reductions in energy consumption.

    Before some go crazy, this does not mean the study is necessarily wrong. But I would sure like to cross examine the authors in a VSCC hearing. I suspect Institute for Energy Economics and Financial Analysis is just as biased as Dominion itself.

    I still agree with Larry in that pipeline costs should not be included in the rate base to the extent the pipeline is used to export gas. Nor should eminent domain be permitted in such a case.

  4. Several things. First, isn’t this 2016? The Dominion quote on the need for this infrastructure is: “Demand for natural gas in the region will increase nearly 165 percent from 2010 to 2013. Yet there is not enough infrastructure or supply”

    The ACP will provide redundant gas supply to the Dominion facilities in Virginia. They claim that it will allow more options for getting gas and make costs lower. However, the higher cost of this pipeline and the pressure of higher rates for gas abroad make it appear logical that costs will only increase.

    I don’t understand how rate payers can be forced to pay for redundant infrastructure or how landowners can be forced through cheap eminent domain to give up our land and forced to live daily with the risks imposed by these huge high pressure pipelines. Those who claim they are safe compare them with smaller lines. These larger, newer pipelines have failure rates more like lines from the 40’s. I don’t think eminent domain should be allowed for this project and I think investors alone should pay for it, not rate payers.

  5. and again – when we argue for the “market” why don’t we also argue for the “market” to buy the right of way rather than govt-sanctioned condemnation?

    if there is a real “market” then by all means let it do it’s thing and if the Rocky Mount Express Pipeline project can use willing seller/willing buyer for it’s corridor why not these guys?

    we blather on and on about the “green” groups and “subsidizing” renewables but what the heck is imminent domain if not a defacto rate-payer AND private landowner “subsidy”?

    we seem to have double standards when it comes to these issues.

  6. First … there is no need to force higher and higher prices to create a reduction in energy use … the reduction is visible today with flat growth rates, even though GNP is increasing. Solar with storage is cheaper than utility costs in Hawaii, and solar will be at a price par with utility rates this year in most states.
    Second … The rate setting system is based on the natural monopoly status we rightly gave our utilities years and years ago. The facts about that old rate structures include pipeline rate setting by FERC.
    “The Federal Energy Regulatory Commission facilitates overbuilding,” the Institute for Energy Economics and Financial Analysis said in a study released April 27. “The high rates of return on equity that FERC grants to pipeline companies (allowable rates of up to 14%), along with the lack of a comprehensive planning process for natural gas infrastructure, attracts more capital into pipeline development than is necessary.”
    The report’s authors also found “FERC’s approach to assessing the need for such projects is insufficient.”

    The report says that because the evaluative process at FERC is flawed, FERC should delay acting on the pipelines until sound policy is developed. Sounds reasonable to me … especially since we, the rate payers, bear all the risks, both financial and environmental, and none of the gain.

  7. Blather. The pipelines have sufficient customers already lined up under contract or no bank or broker will underwrite one mile of them. The people who run these companies are not stupid. To the extent there is risk I do not see it hitting the ratepayers, but rather the people who loan these companies the capital (either as loans, bonds or common stock.) I will accept that at some point the system could be overbuilt but I doubt the next line approved will be the one that gets you there.

    And for goodness sake it is EMINENT domain. Not imminent.

    We really don’t want to succeed in this country anymore, do we? Everybody wants jobs, less income inequality, growing state and local and federal revenues – where do you think it comes from? Energy is money! It don’t grow on trees but it is buried in the ground! Get it from point A to point B and you can do something productive with it and create wealth. You can hate coal as much as you want but the industrial revolution depended on it. Now we have better choices.

    • “creating wealth” by using govt to take land from others that does not belong to you is not “hating” or being opposed to productivity -. It’s about treating people fairly and equitably and not using govt to force people to give up their wealth for others.

      If the Rocky Mount Express folks as well as many other pipeline companies can “create wealth” with fair business practices that do not prey on others – then why not here in this case?

  8. My thoughts exactly.

    “2o years from now the stock market might be up. Or down. I think down. Don’t invest in the stock market.” Such “reports” are pure unadulterated speculation built from nothing but empty words from those without a clue. People without any color of experience, responsibility, tract record, or stake, throwing mud at a fence, hoping to get the attention of someone equally vapid and and clueless and driven by baseless ideology, one blinkered zealot writing for another who might give them a grant of somebody else money, or footnote their “report” in some other form of drivel that clogs and flogs today’s “info highway”.

  9. Steve Haner I have to respectfully disagree. The pipeline’s customers are the builders. If they use it to serve their load, they will displace gas currently serving it. It is not needed but it is lucrative for them. They can get FERC to approve the pipeline and tell the SCC that ratepayers will pay for it, while guaranteeing them a 14% return. Even if they serve their gas fired plants using it, and they do not have to because those plants already have service through Transco according to filings at the SCC, all of the gas is not accounted for. The cost of tapping into the line is so high and the minimum required regular use is so high that only a very rare entity will be able to afford to do so.

    In Buckingham, where the pipeline disrupts my 100+ year old family business, there has been gas for decades but it has not brought jobs or even a local distribution system. We have no reason to believe that will change now. Longwood and Hampden Sydney together couldn’t make it work to connect to the line. Neither could Kyanite Mining Corp.

    It seems like we’ve worried about energy independence for my entire life. It makes no sense to quickly deplete the supply of gas by sending it abroad. Further, if you visit the communities where the fracking is occurring, the damage is severe and the reward not apparent for most of those living nearby. For generations our extraction industries have taken from the people living near them, but given very little back. The areas where the fuel is found have been made sacrifice zones that most people never visit or consider.

    We have hardly attempted to use solar, wind and efficiency in Virginia. Fossil fuels have had tax and rule advantages forever to make them our predominant source. It’s time to change our direction and seriously attempt to use things that will not risk our environment like fossil fuels and nuclear do. We need to find a way for our economy and our country to succeed without sacrificing certain communities and certain people like we have for so long.

  10. Response to Mr. Haner …” To the extent there is risk I do not see it hitting the ratepayers, but rather the people who loan these companies the capital”

    Analysis disagrees … it depends on which pipeline you are talking about.
    “IEEFA finds that the utility-driven Atlantic Coast Pipeline places most of the risk on ratepayers, whereas the Mountain Valley Pipeline poses greater risks for investors.”
    “The projects are structured differently. … Construction of the Atlantic Coast Pipeline is driven by natural gas utilities. Suppliers, not utilities, are driving construction of the Mountain Valley pipeline. The utility-driven Atlantic Coast Pipeline places most of the risk on ratepayers, whereas the Mountain Valley Pipeline poses greater risks for investors.”

    For the ACL the “ratepayers—specifically the customers of Dominion Virginia Power, Piedmont, Virginia Natural Gas, Public Service Company of North Carolina, Duke Energy Progress and Duke Energy Carolinas—are on the hook for 96% of the project’s costs through the FERC regulated rates (cost plus double digit profit) they are charged to ship gas on the pipeline. “

    The ratepayers are also at risk for potential underutilization of the pipeline. “It is all but certain that the instability and financial problems brought about by current low natural gas prices will drive some of the shale gas drilling companies into bankruptcies. According to JP Morgan there have been 48 bankruptcies in the oil and gas exploration and production sector since 2014, and further bankruptcies are expected in 2016.”

    “The Mountain Valley Pipeline is very different from the Atlantic Coast Pipeline in that is a supplier-driven pipeline, rather than a customer-driven pipeline. That is, the entities that have entered into long-term contracts for the majority of the capacity on the Mountain Valley Pipeline are producers of natural gas. … all affiliates of the companies that are partners in the joint venture.” Here the investors do bear the risk, and those people victim to land takings through eminent domain.

    Finally call me what you will but here are partial bios of the report’s authors:
    Cathy Kunkel ….. is an independent West Virginia-based consultant focusing on energy efficiency and utility regulation. She is a former senior research associate at Lawrence Berkeley National Laboratory. Kunkel has an undergraduate degree in physics from Princeton University and graduate degree in physics from Cambridge University.

    Tom Sanzillo … is the author of several studies on coal plants, rate impacts, credit analyses, and public and private financial structures for the coal industry. Sanzillo has 17 years of experience with the City and the State of New York in various senior financial and policy management positions. He is a former first deputy comptroller for the State of New York.

  11. re: ” We really don’t want to succeed in this country anymore, do we? Everybody wants jobs, less income inequality, growing state and local and federal revenues – where do you think it comes from? Energy is money! It don’t grow on trees but it is buried in the ground! Get it from point A to point B and you can do something productive with it and create wealth. ”

    All due respect – that does not justify doing it in a way that essentially transfers wealth to one group at the expense of others – ironic because normally we talk about this with entitlements but this is plain old corporate cronyism which is using govt to enrich investors at the expense of other property owners and ratepayers.

    It’s not that people “hate” coal or don’t want American to succeed.

    They want to participate – to get a share of it – and instead this is plain old run-of-the-mill crony capitalism that not only takes property from people , but also makes ratepayers pay for industry shenanigans and the worst thing of all -they’d then sell a scarce energy source overseas – until it’s depleted and everyone has to pay more for it.

    This is not what the Country should be about and no wonder there are larger and larger groups of disaffected wanting change.

  12. Thanks LarrytheG You said it well. I never imagined that a for profit company could decide that it knows better what to do with land that my family has farmed for over 100 years than we do, and could essentially take it from us. They will insert into our land and the middle of our business, a large high pressure pipeline bisecting the property, putting most of our buildings in the zone where if there is an explosion of the pipeline it and we, if we are there, will simply be incinerated.

    If they don’t send this gas abroad, it will just free up other gas that will be sold abroad. Investors reap huge rewards. Our benefit? Nothing. Only a one time easement payment that won’t even generate enough money to pay the annual property taxes we’ll still have to pay even though we can no longer use our property except as the pipeline owner allows. Ratepayers will have higher rates. We have a net loss and have to live with the daily possibility of explosion.

    You can say it doesn’t happen but it does. There was a 30 inch pipe that exploded in Pennsylvania yesterday. There was one in Appomattox county a few years ago. Our country refuses to pay for safety oversight of these things and even if the state gets authority to check for safety, it will only be able to notify the feds if it finds problems. It will have no enforcement authority.

    This is not how I have always believed democracy and a free market work. This is the kind of thing I’d have expected to happen in another economic system.

  13. re: ” not enough to even pay for taxes”

    really?

    I know folks who have agreed to have cell towers put on their property – and the lease brings in several thousand dollars a year. enough to pay for the taxes on the tower footprint as well as it’s fall zone – and in some cases enough to pay for taxes on the rest of the property – something each property owner has to decide if the tower is “worth” the money it provides.

    Of course – each one of these cell towers is done via willing seller/willing buyer terms not eminent domain – even though the cell tower companies can legitimately claim they are providing a “public need” – as they actually have to, in addition to paying the property owner – go through a public approval process where the public is allowed to say whether they want the tower in their area or not – just from a visual impact.

    in fact the latest one approved – on a Church property – which provides the church with substantial lease dollars also had to look like this to meet approval to surrounding owners impacted visually:

  14. That is correct. Not enough to “invest” and get annual earnings to pay the taxes on that land. No annual income.

    You are also correct that cell towers bring money in annually AND the company pays the property tax increase. We have one of those. Totally different deal. Totally different treatment by the company. Totally different personal safety risk situation.

    Yes, it is past time to allow some companies to “take” property for their use without compensating owners adequately. Comparing the situations for these pipelines and cell towers shows the tremendous difference. Those arguing for making the pipeline companies negotiate in good faith with landowners, creating a situation where landowners would want and benefit from their infrastructure are right. The fact that others have done it proves it is possible. However, the pipeline companies rely on ancient practices and bully power, saying it can’t be done otherwise.

  15. sorry about the huge picture – the size of the original picture is no where near that big – and it’s unpredictable as to what the size ends up being.

    re: ancient practices and bully power

    agree – and the irony here is that all along we have to listen to yahoos blather about how the govt is incompetent and the private sector is not – and here we have the private sector going amok and running over other people’s property rights – with the express help of govt.

  16. I have been away and not connected to the discussions for a while. I wish I could have participated earlier in this one to help clear up some misconceptions.

    First, as correctly noted the ACP is owned by three of the largest utility holding companies in the U.S. Dominion owns 48%, Duke 47% (these ownership shares were adjusted after Duke acquired Piedmont Natural Gas) and Southern Company, through their new subsidiary AGL, owns 5%. The MVP is driven by producers trying to find a market for their stranded supply.

    Based on prior Supreme Court rulings, the owners and the customers (all but one) should be considered the same entity. This is not an open market bid for supply in the case of the ACP. It is a parent company directing their subsidiaries to buy pipeline transport services from them even if it is more expensive than other alternatives.

    Rate information filed as part of the ACP application shows that the FERC allowed rate of return for this project will be 15%. The North Carolina utility Commission has intervened in the FERC proceeding arguing that this rate is far higher than would be allowed for an intrastate pipeline and the rate payers will be unnecessarily harmed. No agency is speaking on behalf of Virginia ratepayers.

    Mr. Ruby, the Dominion spokesman, is either uninformed or disingenuous when he says “that ACP’s contracts lock in gas prices for 20 years. If the gap between Marcellus and Gulf Coast gas prices does narrow, there won’t be any impact for two decades.” Dominion has publicly stated on numerous occasions that it will not own the gas. The only price that could be somewhat fixed is the transportation fee to the pipeline owners. Although that also varies depending on operating and maintenance charges and depreciation as the pipeline ages. No producer is willing to fix the long-term price of gas when many are currently producing below cost because they must generate cash flow to pay their debts.

    The current below market price for gas in the Dominion South hub is because there are not currently enough takeway pipelines in this area to move the gas into the national transmission network. This is expected to be remedied by 2017, well before the ACP is projected to be in operation.

    This pipeline makes business sense to the utility holding companies because it provides a higher rate of return compared to any other type of investment, power plants, transmission lines, etc.; they have captive control over their customers; and automatic pass-through of the higher pipeline transport fees for the ACP via the fuel adjustment charge on utility customers bills. Dominion also owns thousands of miles of gathering pipelines (from the wells), natural gas liquids processing plants, one of the largest gas storage complexes, and 160,000 acres of leases in the Utica Basin for which they pay rent only when gas is produced.

    This is a business proposition that is helping to prop up their share price (as does continued low interest rates). However, it is not necessary to supply their generating plants. The two plants intended to be served by the ACP are already served by a new pipeline completed last year that provides two sources of supply. Nor will it be cheaper than existing alternatives.

    The shortfall in the Hampton area has been shown to have been caused by inefficient methods of dispatch rather than inadequate pipeline capacity. However, modifications to the Columbia Gas pipeline in WV and VA will provide 1.3 billion cubic feet per day of natural gas (1.5 bcf/d for the ACP) requiring just 3 mile of new pipeline construction. The Columbia Gas line already connects to the Virginia Natural Gas line (owned by AGL) that serves this area. Extra capacity will be available to the Hampton area faster, with lower cost and far less impact than the 77 miles of 20 inch pipeline built on new right-of-way into North Carolina that is proposed for the ACP.

    The traditional market for natural gas (space and water heating) is not growing. Only burning natural gas in power plants and exporting LNG is increasing the demand for natural gas. Dominion and Duke control much of the generating capacity in Virginia and North Carolina and their needs can be supplied by moving gas from the Marcellus from north to south using the Transco pipeline, as it is being done to serve the Brunswick and Greensville plants. So the MVP doesn’t really have a business case. One of these pipelines might actually provide a benefit if they were to take the Utica and western Marcellus production into the Midwest and avoid the sensitive and potentially dangerous sinkhole laden karst of the Alleghenies and Shenandoah Valley.

  17. Thanks for the exhaustive explanation … much of which agrees with the info in the report I quoted and was described to us at the pipeline meeting in Weyers Cave a week ago.

    The pipeline is redundant for Virginia’s needs – which to me says that unless it used already designated rights of way it should be rejected, like the Constitution pipeline proposal in NY that Gov Cuomo rejected. That rejection was based on clean water grounds.

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