Delayed, ACP Price Tag Reaches $7 Billion

Delays mainly caused by continuing regulatory battles have added another half a billion dollars to the price tag for the Atlantic Coast Pipeline project now crossing Virginia.  Dominion Resources CEO Thomas Farrell used a new top figure of $7 billion in a discussion of the project with investors and analysts on November 1.

Back in February it was the Duke Energy CEO who first floated a figure of $6.5 billion for a project that started out with a $5 billion or less advertised price.  Those costs do not include financing, which will add to the amount customers pay for the gas in coming years.  Dominion is the lead partner in the pipeline, along with Duke Energy and Southern Company, but owns slightly less than 50 percent of the project.

The transcript is rough in places, the fault of the transcriber I’m sure, so I may add some suggested translations here and there.

“The FERC stop work order in (and?) delays obtaining permits necessary for construction have impacted the cost and schedule for the project. As a result, project cost actions have increased the range of $6 billion to $6.5 billion to a range of $6.5 billion to $7 billion excluding financing costs,” Farrell told those assembled on a conference call to discuss the company’s third quarter results. The most recent dispute involves the proposed compressor station in Buckingham County, with its permit decision delayed at the last Air Pollution Control Board meeting.

“The Atlantic Coast Pipeline is pursuing a phase in service approach with its customers whereby we maintain a late 2019 in-service date for key segments of the project to meet peak winter demand in critically constrained regions. ACP will be pursuing a mid-2020 in-service date for the remaining segments.  Farrell said later their profits are not threatened if they don’t start pumping gas in 2019 because the are guaranteed to recover funds used during construction.

“Through this process, we’ve already been through one process with customers on the rates, and we’ll continue to work with them. The returns are going to be very adequate and comments (commensurate?) with the normal returns we get in projects like this in our midstream business,” Farrell said.

Dominion Energy Virginia, through another arm of the company, is one of those customers, meaning of course its millions of Virginia ratepayers will ultimately pay off the portion of the pipeline serving Dominion generation plants.

Opponents tend to focus on the top line number ignoring the fact that there will be other customers sharing the cost along the line.  Opponents are quite right when they point out that new pipelines cost more than old pipelines built at lower cost.  Those issues will be debated in future State Corporation Commission cases, where the higher transportation charges will be compared to cheaper alternatives. 

In speaking to the analysts, Farrell was positive about the prospects of another huge capital expense coming at ratepayers like a train – license extensions to add another 20 years of life for its four nuclear reactors.  In some recent State Corporation Commission testimony, the company has been equivocal on its plans.  Who’s getting the real story, the SCC or the stock analysts?

“Now, on October 16, we filed with the regulatory commission for subsequent license renewable (renewal?) for the [indiscernible] power station reactors. This is an important first step in which we expect will be a multiyear $4 billion investment program that will extend the lives of both the [indiscernible] (Surry?) and North Arizona (North Anna) nuclear stations by an additional 20 years. We expect to submit the North license suspension (extension?) application in 2020. As a result of this initiative, our customers will continue to benefit from clean, reliable and low-cost generation from these best-in-class facilities,” Farrell is quoted in the transcript.

And on a related note…..

Former State Senator John Watkins was actively promoted this past winter as a candidate to fill an opening on the State Corporation Commission.  He was apparently derailed by concerns about his votes on key utility regulation issues and his ties to various legislators who have shown little interest in protecting ratepayers when the utility was rewriting the law to its benefit.  Yesterday’s Wall Street Journal took note of how things work in Virginia.

Apparently that Clean Virginia group published something pointing to relatively high electricity bills in Virginia, and Senator Watkins rose to the company’s defense in a guest column in The Roanoke Times, a paper far from his Chesterfield County home.  Read it and form your own opinion of his fitness for the Commission job, which is still open after all.

One line of his did inspire me.  “Facts are facts, and the SCC does a really good job of compiling them. Legislators and the public count on the SCC to provide that information to make sound decisions,” he wrote.   My mission at Bacon’s Rebellion to report on the Commission process and the facts that drive its decisions will continue.

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12 responses to “Delayed, ACP Price Tag Reaches $7 Billion

  1. The original price tag was $5 billion, wasn’t it? I wonder if the project would have penciled out at its inception if Dominion, Duke and the others knew it would cost $7 billion. I also wonder what the SCC will do when Dominion asks to put the ACP into the rate base.

    The pipeline foes may not have stopped the project, but they sure have succeeded in running up the cost of the project.

    • These stupendous costs overrun are now the norm in this country, not that the exception. The primary cause these cost overruns and related incompetence are a combinati0n of four factors often working together:

      1. A corrupt Environmental establishment that drive up costs intentionally to kill all projects they object to by reason of ideology,

      2. Rampant crony capitalism by corrupt private and NGO government contractors,

      3/ A corrupt higher education establishment by reason of its failure to teach, or its brainwashing of students with ideology in lieu of teaching, or the corruption of its research and government or NGO contract work, and,

      4. The corruption of public service employee labor unions, both in government and related public service industries such as DC Metro.

      Hence, it was recently determined that the cost to build mass transit in this country, on average, costs anywhere between twice as much to 20 times as much as any other country in the world, save Great Britain.

      For an overview illustration of how this works in particular circumstances, please connect the dots of text in four different Nov. Bacon’s Rebellion articles, namely,

      1/ Yes, Blatant Fear Mongering” Is a Fair Description,
      2/ The Closing of the American Mind: Mary Baldwin Edition,
      4/ The Workforce Skills in Greatest Shortage Are Not Math and Science, and
      5/ Delayed, ACP Price Tag Reaches $7 Billion

      Here are the dots to connect.

      1/ “but the greatest skill deficits are education & training, social skills, verbal abilities, and management … What does this tell us? It’s all well and good to strengthen Virginia’s K-12 and higher-ed math and science curriculum. But we can’t neglect reading, writing, communications, and collaboration. Who knows, a humanities education might come back in style one day.

      2/ The UVA Department of English seem to agree with Mr. Abatte. When writing ” About Us” here’s how the Department describes itself:

      “About Us

      The English Department teaches texts that reflect and permit study of a wide range of voices. In order to do what we do well, we must be a place in which all students—the student who feels endangered because of threats based on gender, sexuality, race, religion, immigration status, body type; the student who has felt unwelcome because of unpopular political views; the student who is feeling isolated; the student who believes in the enabling properties of literature and language, the student who fears power that has been associated with literature and language, the student who is unsure what literature and language mean in a time like ours—feel welcome. All such students, indeed all UVa students, are welcome in our department and in our classrooms.”

      3/ “The FERC stop work order in (and?) delays obtaining permits necessary for construction have impacted the cost and schedule for the project. As a result, project cost actions have increased the range of $6 billion to $6.5 billion to a range of $6.5 billion to $7 billion excluding financing costs,” Farrell told those assembled on a conference call to discuss the company’s third quarter results. The most recent dispute involves the proposed compressor station in Buckingham County, with its permit decision delayed at the last Air Pollution Control Board meeting.

      4/ “Dominion’s truncated treatment of the issue said that the area adjacent to the compressor station was sparsely populated and had only three dwellings nearby. A survey led by Dr. Fjord, a UVA professor who is an expert in the field, identified nearly 100 households within a 1.1-mile radius of the compressor station. Seventy-five of these households have been surveyed to-date and contain 199 residents. Racial and ethnic minorities make up 83% of those residents, a far higher percentage than the Commonwealth as a whole …”

      5/ Today in America we are going through another epidemic of Blatant Fear Mongering. All around us now, “Blatant Fear Mongering” is quite the norm, rather than the exception. Often, too, a singular event kicks off whole series of witch hangings and their ilk that can easily last for decades, and waste many billions of public dollars, illicit monies that often end up in the pockets of the Fear Mongers.

      The best illustrative example I’ve found of this is the Love Canal Hoax, how it set off the Superfund debacle that ended up wasting tens of billions of public monies. That study of the Love Canal and other contemporary hoaxes is “Availability Cascades and Risk Regulation” by Cass R. Sunstein and Timur Kuran published 2007 by University of Chicago Law School.

  2. re: ” I also wonder what the SCC will do when Dominion asks to put the ACP into the rate base.”

    Does it matter what the SCC does if the GA continues it’s current behaviors to mandate what Dominion wants, e.g. the profits from the rate freeze, the grid transformation act, and not rebating the taxes that were cut?

    ” “Facts are facts, and the SCC does a really good job of compiling them. ”

    right…!!!

  3. A few clarifications:

    The SCC will not be asked to put the ACP in the ratebase. The pipeline isn’t owned by Dominion Energy Virginia (the utility). A different subsidiary of the parent company, Dominion Energy, is the owner of the pipeline. The utility will just collect money from the ratepayers and pass it on to the parent company, through the ACP.

    The SCC will be asked to rule on an annual Fuel Factor proceeding after the pipeline is built that will include two factors: 1) the price of gas used by Dominion’s power plants, and 2) the cost of transporting that gas using the ACP.

    Despite assertions in the pipeline application that the gas in the West Virginia production zone used by the ACP will be considerably cheaper than gas from other sources, Dominion’s price projections in their IRP for this gas is similar to the prices projected for the gas from Pennsylvania and elsewhere that is currently supplying Dominion’s existing power plants.

    Instead of the $1.60 price advantage that Dominion claimed would last for 20 years for gas from West Virginia, the price is now about the same as other Appalachian gas – even before the ACP is built.

    That means the savings from the project would have to come from a lower cost of transporting gas using the ACP. The cost of transportation on the ACP is more than 3 times higher than using Transco to supply gas to the Brunswick and Greensville plants. This is based on the published tariff which has not yet been adjusted for the 40% price increase in the cost of the ACP. The Transco connection was built in 2015. The cost of using other existing pipelines that currently serve Dominion’s plants is even cheaper than using Transco.

    All of Dominion’s major gas-fired power plants have long-term transportation agreements with existing pipelines. No new combined cycle units will be built according to Dominion. Most of the new plants proposed for North Carolina have been cancelled too.

    If the SCC is allowed to rule on the basis of the “facts”, the ACP provides no benefits to the customers of Dominion Energy Virginia and a pass-through of the costs of the ACP contract should be denied. This avoids at least a $4 billion increase in energy costs to ratepayers for a pipeline that provides them no benefit.

    If the ACP was built, the price of gas ultimately delivered by the ACP to the Hampton Roads area would be at least 60% more expensive than the delivered price of gas from other alternatives. The ACP does nothing to solve the issue that exists in southeast Virginia.

    The article states “Opponents tend to focus on the top line number ignoring the fact that there will be other customers sharing the cost along the line.”

    If Dominion acquires Public Service Company of North Carolina, as a result of a merger with SCANA, every single customer on the ACP will be a wholly owned subsidiary of one of the owners of the pipeline. No “arms length” transactions have occurred with the ACP. The entire risk and cost of the pipeline is intended to be off-loaded to the ratepayers of the utility subsidiaries of the holding company owners of the pipeline.

    The pipeline, just like the extensions of the nuclear units, are exorbitantly expensive projects that are unnecessary to assure a reliable supply of energy in Virginia. Ratepayers are expected to pay billions more for energy for the benefit of shareholders. Reducing the authority of the SCC (such as with offshore wind) only increases the likelihood that projects will fail to receive a proper review.

    Blaming cost increases on people questioning the necessity of these projects misses the point. If the applicants and the regulators did their job properly, these issues would be sorted out in a timely fashion based on the facts. Instead, this unnecessary project keeps getting more expensive because regulators are unwilling or unable (removing informed Air Board members prior to a crucial vote) to perform their statutory function. Our elected officials and their appointed regulators are supposed to balance the issues in these matters, not burden unknowing citizens with decades of higher energy costs for a private gain. Shareholders have a chance to benefit from the cost overruns Ratepayers lose at any price.

  4. I didn’t claim that the regulatory woes caused the delays, Farrell did. It is behind schedule. There have been regulatory delays, but nobody should be surprised. I’m sure the final price will be higher still.

    It will be misleading to claim that the entire $7 billion + capital cost will flow to Dominion customers, which some of the opposition rhetoric does. Duke and Southern will be using some gas, and the contracts today may be very different than the contracts in 10 or 20 years. Maybe as some fear it will get exported, and those overseas customers will also help pay off the cap ex. But I get that it’s a big and expensive project and both the future demand and price on that commodity involve speculation, with minimal risk on the shareholders (which is wrong, unless they also get a low ROI because of near zero risk.)

    • Steve,

      You are right, Dominion’s utility customers are intended to be responsible for only $4 billion of the $18 billion that will be due (based on published rates) for the 20-year contracts signed by the utility subsidiaries of the pipeline owners.

      Rates can go down over time as the pipeline depreciates (but is offset by higher operating and maintenance expenses). The utility is not a market-based buyer, however. It gets nothing from this transaction. It is in the interest of its parent company, as an owner of the pipeline, to keep the rates up. There are studies that show that pipelines often recover 150% of their authorized returns because rates are not regularly reviewed (the customers don’t ask).

      Although exports could shift some of the pipeline costs to foreign buyers, exports would drive gas prices up faster than they would rise otherwise. This would raise utility rates. Australia, the world’s second largest LNG exporter, saw their domestic gas prices increase by more than 300% in 10 years and utility bills skyrocketed.

      If exports drive up domestic gas prices, gas-fired power plants will be used less. In Virginia, ratepayers will be on the hook to pay for those power plants for 35 years or more years regardless of their use.

      Although the risks of the ACP are off-loaded on to the ratepayers, the owners receive a 15% return on the project. This is 50% higher than the returns for other types of energy projects such as power plants and transmission lines. For pipelines, the owners get a lower risk and higher returns. That’s why so many companies want to build one, even if they are unnecessary.

      This project demonstrates poor energy planning, and total disregard for the families and businesses in Virginia.

  5. There is a problem with the price of gas though – it they sell it in a competitive market – they won’t necessarily get the price they want and that in turn will affect the longer term financial condition of the company. However if they have a guaranteed captive market that must buy it and at their price – then they’re good to go.

    One would think if an analysis was done that any new competitor to the existing companies like Transco would have an uphill climb since Transco can buy the same Appalachian gas for the same price and move it through their existing pipelines – the capital cost having been amortized.

    All things equal and they never are – existing pipeline operators should have a built-in competitive advantage to any would-be start-ups.

    I suspect that the owners of the ACP are counting on the ability to sell gas to Dominion – and at a price premium… and if the SCC balks – the GA will smooth the way.

    • Larry,

      You and many others believe that the ACP will sell gas. It will not. Gas is purchased in a separate transaction with gas producers or marketing companies.

      The ACP sells a transportation service. The pipeline owners had their utility subsidiaries in VA and NC sign 20 year contracts for this transportation service. Payment is due in full regardless of the amount of the reserved capacity that is used. The utilities want to pass the cost and risk of these contracts on to their customers. Based on published rates this amounts to $18 billion over the next 20 years ($6 billion in VA,$12 billion in NC). This rate is likely to go up by 40% or more as construction costs climb. Remember, the price of gas is in addition to this cost.

      Since there is very little new demand (no new power plants) and existing pipelines can meet any new demand far more cheaply than can the ACP, this is a very bad deal for ratepayers.

      These contracts plus FERC’s approval without evaluation negate the role of market competition.

      The state regulators can deny the pass-through of the costs because they provide no value to the customers. But by that time it is too late. After construction, either the ratepayers or the shareholders get hurt because the regulators failed to do their job at the beginning. This results from severe pressure from the industry to approve unnecessary projects purely for profit, not public benefit. These projects are supposed to provide both.

  6. Just a few questions … We know the ACP will raise VA rates but what about the issues that are beginning to make it look like a bad bet for Dominion investors too?
    • Why do the costs not include financing? Does the ACP have investors available? Many investors are pulling out of long-term fossil fuel projects. More than 225 global investors, including nearly 70 North American investors, with USD $26.3 trillion in assets under management have signed onto an organization to act on Climate Change, reducing investments in fossil fuel projects.
    • South East Virginia could be well served by offshore wind. Is Dominion preferencing pipeline and nuclear extensions over new clean energy? What would a full lease build off VA Beach cost? The MA cost for Vineyard Wind is comparable, although MA has supported offshore development with onshore industry assistance.
    • What about the overblown numbers of available gas in WVA and the financial state of those drillers? Will this resource be able to fill all the new pipelines being built for their 40 year life? Is the price enough to drill? Platts Analytics forecasts production will grow by about 2.6 Bcf/d over that period. However, even at this rate of growth, Platts Analytics forecasts the pipeline capacity coming online will be underutilized.
    • What about too much pipeline capacity being built? Farquharson said he agrees. Based on the current level of regional activity and the amount of capital that would have to be deployed to increase production to the point where it fills up all the capacity coming online, Just a few questions … We know the ACP will raise VA rates but what about the issues that are beginning to make it look like a bad bet for Dominion investors too?
    • Why do the costs not include financing? Does the ACP have investors available? Many investors are pulling out of long-term fossil fuel projects. More than 225 global investors, including nearly 70 North American investors, with USD $26.3 trillion in assets under management have signed onto an organization to act on Climate Change.
    • South East Virginia could be well served by offshore wind. Is Dominion preferencing pipeline and nuclear extensions over new clean energy? What would a full lease build off VA Beach cost? The MA cost for Vineyard Wind is comparable, although MA has supported offshore development with onshore industry assistance.
    • What about the overblown numbers of available gas in WVA and the financial state of those drillers? Will this resource be able to fill all the new pipelines being built for their 40 year life? Platts Analytics forecasts production will grow by about 2.6 Bcf/d over that period. However, even at this rate of growth, Platts Analytics forecasts the pipeline capacity coming online will be underutilized.
    • What about too much pipeline capacity being built? Farquharson said he agrees. Based on the current level of regional activity and the amount of capital that would have to be deployed to increase production to the point where it fills up all the capacity coming online, “we don’t think there’s going to be enough near-term supply to fill all the capacity,” he said.

  7. Jane,
    Costs (for any energy project that is discussed) don’t include financing expenses because that would make the projects look much more expensive. Of course, the ratepayers ultimately have to pay for the financing costs too, but that isn’t obvious when the media covers the story because the energy companies and the policymakers don’t tell the whole story.

    The supply of gas in West Virginia and its lower cost was a result of investments made after the mortgage securities crisis and the rapid decline in shale gas wells. Drillers had to keep drilling to pay their debts and a surplus resulted that was unrelated to the normal forces of supply and demand.

    This misled many people into believing we had an enormous reserve of cheap gas. Twenty-five new pipelines are being added to the Appalachian Basin this year and next. Respected gas industry analysts believe that we won’t have enough production to fill all of those new pipelines for at least 5 years or more. Production in Appalachian Basin is expected to peak in the mid- to late-2020s.

    Within 5 years, wells producing gas below $2.50 mcf will be used up. Within 10 years wells producing gas below $4 mcf are expected to be exhausted. Within the next 10 years more than a third of our domestic production is expected to be shipped overseas. We will still have gas but it will be much more expensive.

    It is foolish to artificially create a boom-bust cycle in the gas industry at the expense of our citizens and their businesses. This ties up capital that could be better invested in superior alternatives, aggravates climate issues, and risks huge amounts of stranded assets. Our short-term profit mentality is leading us in the wrong direction and our policy-makers are buying it hook, line and sinker.

  8. Please remove the double paragraphs. The last 4 are repeats. Sorry about that

  9. Thanks for the informative answer Tom. But that leaves me with … In pipeline accounting what difference can increased basic cost actually have on the rest of the job’s accounting? A $2billion increase in basic cost means almost $300,000,000 in extra income for the builders guaranteed by FERC, so do they care?

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