First, let me say that as a member of the Groton Pipeline Working Committee and one of two Groton representatives to the Northeast Municipal Gas Pipeline Coalition, I am opposed to the Kinder Morgan pipeline project and have spent many hours researching the issues and writing material on the basis for my opposition.
Yet I am also opposed to the intentional (or unintentional) misrepresentation of reality in an attempt to defeat the proposal, as such spurious arguments diminish the impact of the legitimate concerns. After reading yet another tirade on the electricity tariff issue (this time by Forbes online contributor Erik Sherman), I feel compelled to try to shed some light on the issue to get this bogus argument off the table.
All infrastructure projects built by private companies require someone to sign long-term contracts to use the infrastructure. Without such contracts no private company is going to make the huge investments required. In the case of the existing gas pipelines in New England, these long-term capacity contracts (called firm capacity) are held by our local gas distribution companies (LDCs). These contracts are analogous to dues paid to a country club — they reserve the right of the contract holder to have first call on the use of the facilities, in this case a portion of the pipeline capacity. Such contracts cost money, and the LDCs recover those costs by passing them on to the gas customer. If you use natural gas, you may have seen a capacity charge as part of your bill. That is your LDC passing on to you its costs for reserving pipeline capacity to support your gas use. Electric transmission lines are usually handled in much the same way.
Kinder Morgan has already announced that it has firm capacity contracts (or at least expressions of intent) for 0.5 bcfd in new gas pipeline capacity. The counterparties for these agreements are some of our LDCs. They have agreed to pay Kinder Morgan annual fees to reserve capacity on a new pipeline. If the pipeline is built, the cost of these contracts will ultimately show up in your bill.
But where New England really needs more gas is for power generation. Up until now, gas-fired electricity generators have operated on the basis of interruptible gas supplies, meaning they can bid on whatever capacity is left over after the gas distribution companies (as firm contract holders) get the gas they want.
When gas-fired power was only a small portion of New England’s generation mix, this worked OK. Now that gas-fired generating capacity is about half of our generation mix and the volume of gas used by the local distribution companies has grown, the system is breaking down. During the coldest periods, particularly last winter, there is simply not enough gas pipeline capacity to go around, and some of the gas-fired generation plants simply cannot operate.
The answer to this problem would seem to be for power generators themselves to sign long-term firm gas capacity contracts to insure they have adequate supplies (just as the LDCs do), and to pass the cost of those contracts on as part of their electricity prices.
Unfortunately, under the current structure of the New England electricity market (and I won’t go into the details), there is no effective mechanism for the power generators to pass on such costs, so the financial risks associated with signing long-term gas capacity contracts are unacceptable.
Enter the New England States Committee on Electricity (NESCOE). Seeing this dilemma — no new gas supplies for generators without long-term gas contracts and no long-term gas contracts for power generation without some mechanism for passing the associated costs on to consumers — NESCOE came up with a proposed scheme whereby the New England Independent Service Operator (ISO NE) (or an agent thereof) would sign long-term gas capacity contracts with Kinder Morgan for some portion of the capacity of any new pipeline, and allocate the gas capacity to gas-fired electricity generators as needed. ISO NE would recoup the cost of the contracts by adding an additional cost (tariff) to the wholesale electricity rates for all consumers. Estimates of the additional cost vary, but it would probably be in the range of 0.5 to 2 cents per kilowatt hour.
The bottom line is that the proposed tariff is really only a minor variation on the scheme in place for every other regulated common carrier built by private companies. Private companies, in this case Kinder Morgan, would invest the billions needed to build the infrastructure. In exchange they would receive payments from companies using the infrastructure (in this case the LDCs and ISO NE). In turn, the companies using the infrastructure (LDCs and ISO NE) would pass these costs on to their customers. In the case of LDCs, the contract costs would show up directly on your gas bill. In the case of the contracts with ISO NE the costs would be recouped by somewhat higher wholesale electricity costs.
Opponents to this scheme ask the question of “Why should I pay for a gas pipeline when I don’t use gas?” The obvious response to this is that ISO NE would be responsible for and sign for contracts only for the portion of the pipeline devoted to supplying the power generators, and we all use electricity.
Also often heard is “Why should rate payers pay to build a pipeline for Kinder Morgan?” The answer? They are not really being asked to pay for the pipeline any differently than they paid for the existing pipelines.
Another often-heard question is “Why does Kinder Morgan need a tariff for a profit-making pipeline?” The answer? It is ISO NE who needs the tariff to recover the costs of the contracts it would sign with KM for access to pipeline capacity to support power generators. Without the contracts there will be no pipeline capacity set aside (as is needed) for power generation.
Is the NESCOE proposed tariff the best way to get the project off the ground? Maybe not. However, there are many legitimate arguments against the Kinder Morgan Northeast Energy Direct project as it is proposed, but the tariff issue isn’t really one of them.