What’s next for cross-Mass pipelines?

On August 17 the Massachusetts Supreme Judicial Court killed the “pipeline tax.” It’s a watershed decision for energy and the environment and it brings up some interesting thoughts. Here are a few.

Free market ideology can bite both ways. During the free-market decade of the 1990s, the Mass. legislature opened up the electricity business to competition. Before 1997, electric utilities were vertically integrated. They owned everything from the power plants to the wires that bring electricity into your home, and they set the price of that electricity (under the watch of the Department of Public Utilities).* Now, utilities only own the regional distribution system in Boston or Cape Cod or the Berkshires. Other companies own the power plants; those companies compete with each other; and the competition is supposed to lower electricity prices. Utilities can’t own power plants because they could sell power to themselves and jack the price back up. And investors, not customers, have to shoulder the risk of building new infrastructure, which will keep expensive, unnecessary new plants (or pipelines) from being built. Competition = free markets = lower prices = good. Monopoly = unfree markets = higher prices = bad.

But profit trumps ideology, and the power distribution business isn’t very profitable. Utilities can make twice the return by investing in, say, new gas pipelines –if they can avoid the risk that they won’t sell all the gas. A couple of years ago they came to newly elected Governor Baker with a proposal for new gas pipelines. We need more gas, they said. The brutal winter of 2014-15 strained our pipeline capacity. Gas prices spiked and the power plants charged us so much for electricity, it’s killing the state’s economy. Baker bought it, and his DPU ruled last year that electric customers could be charged for building new pipelines.**

Wrong, said the SJC on August 17. The 1997 restructuring act said electric utilities have to stay out of the power generation business, and fuel is a big part of power generation – as much as 75% of the cost, the decision notes. “We agree with the plaintiffs that such activity would undermine the main object to be accomplished by the restructuring act, i.e., to move from a regulated electricity supply market to an open and competitive market for power,” said the SJC. Worse, the pipeline tax “would undermine the main objectives of the act and reexpose ratepayers to the types of financial risks from which the Legislature sought to protect them…. The department’s interpretation of the statute as permitting electric distribution companies to shift the entire risk of the investment to the ratepayers is unreasonable, as it is precisely this type of shift that the Legislature sought to preclude through the restructuring act.”

This episode is awash in ironies. Charlie Baker, who’s a free market guy, tried to end-run one of the state’s  biggest free market laws. His DPU, which is supposed to regulate utilities, bent the law to give them new powers. (See the DPU legal team’s pretzel logic in the SJC’s fascinating and history-filled decision.) And the Independent System Operator, which runs New England’s power grid, solved the gas supply problem last winter by, among other things, making the power plants stockpile liquified natural gas in case of cold snaps. New pipelines weren’t needed.

More fundamentally, the episode shows the limits of free market ideology. At their most radical, free marketeers say the government should get out of the economy and let private enterprise create the best of all possible worlds. But this free market administration’s DPU was trying to construct a market – set up rules that would make an area of economic activity safe for investors.

There’s hope for the Baker administration. Ideology clearly means less to them than a workable economy. Unless Spectra Energy wants to build pipelines on its own dime and risk (more on that below), Baker’s people now need to find other ways to satisfy the state’s energy appetite. That could mean energy conservation, demand management, local wind, local solar – or Canadian hydro, Maine wind (which many Mainers deeply oppose), maybe even nuclear power. Now is the moment to work on the Department of Energy Resources.

How can we block more pipelines? The SJC’s decision was a victory for a very broad climate movement. The Better Future Project thanked “the Conservation Law Foundation, who sued to stop the tax, our partners across the state (especially the Mass Power Forward coalition), and every one of you who took action and spoke out….we have unambiguously won a victory that the people’s money should be not used for private projects that further commit us to climate catastrophe.”

But…

The fuel fossils aren’t giving up. Check out this proposed new trans-Canada pipeline, a hugely expensive route from Alberta to the Atlantic. The fracked gas fields in Pennsylvania and New York are our regional tar sands, and the gas industry must find a way to the coast.

The SJC only barred a pipeline tax on August 17. They didn’t bar companies from building new pipelines on their own dime. How can we keep them from doing that?

Grassroots mobilization, engagement with Baker’s people, maybe more lawsuits – and keeping the Spectras from getting long-term contracts to use the gas.

When Kinder Morgan wanted to push its pipeline across the Berkshires, activists went to Dartmouth College and urged administrators not to take 20-year contracts for new natural gas. That is a key strategy for our movement now. Without the security of long-term contracts, billion-dollar pipelines are too risky for investors.

 

*In the words of the SJC’s decision:

Prior to the passage of the restructuring act, electric companies were vertically integrated monopolies, controlling the generation, transmission, and distribution of electricity. See Northeast Energy Partners, LLC v. Mahar Regional Sch. Dist., 462 Mass. 687, 695 (2012). Recognizing that “the interests of consumers [could] best be served by an expedient and orderly transition from regulation to competition in the generation sector consisting of the unbundling of prices and services and the functional separation of generation services from transmission and distribution services,” St. 1997, c. 164, § 1 (m), the Legislature enacted the act to separate these three utility services and open the supply of generation services to competition. Northeast Energy Partners, LLC, supra at 696-697. This functional separation of services, which limited a “‘company’s ability to provide itself an undue advantage in buying or selling services in competitive markets,’ was regarded as a necessary first step in moving toward ‘a fully competitive generation market based on customer choice.'”

**The SJC’s decision spells out the contorted financing:

In 2015, the Department of Energy Resources (DOER) filed a petition asking the department to investigate the means by which new natural gas delivery capacity might be added to the New England market in order to mitigate price volatility experienced by ratepayers in the Commonwealth, especially in the winter months. See D.P.U. 15-37 (Oct. 2, 2015). The DOER specifically asked whether the department, pursuant to its authority under G. L. c. 164, § 94A, could approve long-term contracts by Massachusetts electric distribution companies for the purchase and resale of interstate natural gas pipeline capacity. The DOER stated that the ultimate goal of such purchases would be to lower “gas constraint-driven high prices” for electricity in New England by lowering the prices, particularly in the wintertime, of wholesale electricity across the region.

In support of its request, the DOER asserted that gas pipeline constraints have caused unreasonably high winter electric prices in New England. Unlike local natural gas distribution companies, which regularly contract for gas capacity, electric generators that use natural gas to produce electricity are generally unwilling or unable to enter into long-term contracts to secure firm gas capacity. For these generators, there is added risk for such contracting because there is no means by which they can be reasonably assured of receiving enough revenue to cover the cost of securing the gas capacity over the course of each year. Pipeline companies, on the other hand, are not willing to build new pipeline capacity without having long-term contracts in place. Thus, pipeline companies do not have sufficient assurances such that they are willing to build additional pipeline capacity for natural gas-fired electric generators, despite the increasing natural gas demand for heating and as a source of supply for electric power. The DOER characterized this situation as a “mismatch” of needs and incentives that requires a “solution.”

Under the DOER’s proposal, (1) the department would authorize, pursuant to G. L. c. 164, § 94A, electric distribution companies to enter into contracts to purchase gas pipeline transportation capacity to be funded by the Commonwealth’s ratepayers through rates set and approved by the department; (2) the pipeline owners (which in this case will include affiliates of electric distribution companies) will use those transportation contracts to help finance the construction of new gas pipeline capacity in the region; (3) after the pipelines are expanded, the electric distribution companies will release (resell) their contracted-for capacity to electric and (4) the release of that capacity will increase gas supply and thus lower the wholesale price of gas and electricity….The DOER stated that ratepayer-funded gas capacity contracts entered into by electric distribution companies would solve the “mismatch” problem by providing sufficient financial assurance to pipeline companies to build new pipelines and infrastructure in order to provide gas to natural gas-fired electric generators.

 

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