ESTIMATED SAVINGS FOR CONSUMERS IN THE GREATER PHILADELPHIA REGION FROM THE ADELPHIA GATEWAY PIPELINE PROJECT

Transcription

1 ESTIMATED SAVINGS FOR CONSUMERS IN THE GREATER PHILADELPHIA REGION FROM THE ADELPHIA GATEWAY PIPELINE PROJECT PREPARED FOR NJR PIPELINE COMPANY, LLC DECEMBER

2 Concentric Energy Advisors is a management consulting and financial advisory firm focused on the North American energy industry. Our firm was founded in 2002 by a small group of executive-level consultants committed to establishing a mid-sized energy consulting firm with capabilities and a reputation unsurpassed by any firm in North America. Since its inception, Concentric has grown more than eight-fold and has significantly expanded its service offerings, while remaining focused on achieving the highest standards of consulting excellence in the energy field. Litigation Financial Advisory Regulation Markets & Resource Planning The expertise of our staff spans all aspects of the natural gas, power, and oil markets. We offer a broad range of advisory and support services that enable our clients to address diverse needs comprehensively without the difficulty of retaining and coordinating multiple resources. Through our subsidiaries, CE Capital Advisors, Concentric Advisors ULC, and Concentric Energy Publications, we provide capital market advisory support, consulting services in Canada, and publish The Foster Report, respectively. Concentric s workforce is comprised of energy industry experts who have held positions with utility companies, state and federal regulatory agencies, energy marketers, and global energy companies. Many members of Concentric s team have been working together for more than 25 years. Concentric s experts have performed numerous strategic natural gas market assessments throughout North America for pipelines, producers, natural gas storage providers, LNG developers, and lenders. These assessments have evaluated historical and future markets for energy assets, and have considered aspects including risk assessments, comparative cost assessments, valuations, quantifications of savings associated with new infrastructure, and regulatory environment and policy assessments. CONCENTRIC ENERGY ADVISORS, INC. i

3 DISCLAIMER Concentric Energy Advisors, Inc. provides information and projections consistent with standard practices. The analyses contained herein require certain assumptions; however, it is the opinion of Concentric that these assumptions and the corresponding results reflected herein are reasonable. All analyses are based on the best information available at the time they were conducted. Concentric makes no warranty or guarantee regarding the accuracy of any forecasts, estimates, or analyses, or that such work products will be accepted by any legal or regulatory body. CONCENTRIC ENERGY ADVISORS, INC. ii

4 TABLE OF CONTENTS SECTION 1: INTRODUCTION 2 A. Overview 2 B. Executive Summary 2 SECTION 2: MARKET OVERVIEW 5 A. Natural gas Demand 5 B. Natural Gas Supply 12 C. Natural Gas Infrastructure 14 D. Natural Gas Pricing 16 SECTION 3: ENERGY MARKET BENEFITS 19 A. Natural Gas Price Benefits 19 B. Electric Price Benefits 22 C. Industrial Transportation Customer Savings 23 SECTION 4: ECONOMIC BENEFITS 25 A. Analysis Framework 25 B. Results 26 SECTION 5: CONCLUSION 28 CONCENTRIC ENERGY ADVISORS, INC. 1

5 SECTION 1: INTRODUCTION A. OVERVIEW Concentric Energy Advisors, Inc. ( Concentric ) has been retained by NJR Pipeline Company to independently evaluate and estimate the potential savings to energy market participants in and around Philadelphia, Pennsylvania (the Greater Philadelphia Region ) 1 associated with the Adelphia Gateway Pipeline ( Adelphia Gateway ) project. As proposed, Adelphia Gateway is a 49-mile conversion of an existing 18-inch petroleum pipeline to a natural gas transmission pipeline. 2 The existing pipeline to be converted traverses from Bucks County, Pennsylvania to Delaware County, Pennsylvania near the site of the former Marcus Hook oil refinery. Once the conversion is completed, Adelphia Gateway would be capable of transporting approximately 250 MMcf/d of natural gas, and is expected to have two receipt points with other natural gas transmission pipelines and five delivery points with utility and industrial customers and other natural gas transmission pipelines. The report herein provides an overview of Concentric s analysis and an estimate of the energy market savings benefits for consumers in the greater Philadelphia region plus the estimated associated economic benefits due to the addition of Adelphia Gateway s incremental pipeline capacity. B. EXECUTIVE SUMMARY The primary conclusions from Concentric s analysis are as follows: Natural gas-fired generation capacity in both the Greater Philadelphia Region and in PJM as a whole has experienced significant growth over the last several years, and the growth in the reliance on natural gas-fired generation is expected to continue. As a result of the significant role of natural gas-fired generation in producing electricity in the Greater Philadelphia Region, and due to the nature of the competitive wholesale electric markets wherein generators bids are significantly affected by their fuel cost, the price of natural gas significantly affects the price of electricity. Therefore, changes in natural gas prices will result in changes in wholesale electric prices. Because the original pipeline network was not designed to transport the significant quantities of gas now being produced in the Appalachian region, this has created the need for additional gas delivery infrastructure (e.g., new pipelines, pipeline reversals, pipeline 1 Defined herein as the energy markets in and around Philadelphia, Pennsylvania reflecting the utility service areas that encompass portions of southeastern Pennsylvania, central and southern New Jersey, northern Delaware and eastern Maryland. 2 In total, Adelphia Gateway is an 84-mile pipeline in southeastern Pennsylvania, of which the northern 35 miles is currently in service for natural gas transmission, while the remaining 49 miles was formerly in service for petroleum transportation. The Adelphia Gateway project will convert the southern portion of the existing pipeline to natural gas transmission. The northern portion of the existing pipeline was converted to deliver natural gas in CONCENTRIC ENERGY ADVISORS, INC. 2

6 expansions, pipeline conversions) such as Adelphia Gateway to transport the prolific natural gas production in the Appalachian region for the benefit of downstream markets. It is generally accepted that natural gas markets that are constrained during some or all of the year, and thus reflect higher and more volatile natural gas pricing during such periods, can benefit from additional pipeline capacity to mitigate the higher and more volatile pricing. It is expected that the addition of the pipeline capacity associated with the Adelphia Gateway project will result in lower natural gas market prices than otherwise would be experienced in the Greater Philadelphia Region absent the Adelphia Gateway project. To estimate the benefit of the Adelphia Gateway project, Concentric simulated the natural gas market and resulting prices under two scenarios: (i) without the Adelphia Gateway project; and (ii) with the Adelphia Gateway project. In both scenarios, but for the exclusion or inclusion of the Adelphia Gateway project, all other model assumptions and inputs were held constant to isolate the impact of Adelphia Gateway on natural gas prices. Concentric s analysis demonstrates that Adelphia Gateway is expected to reduce natural gas prices in the Greater Philadelphia Region as reflected by the Transco Zone 6 Non-New York North ( TZ6NNY-N ) index prices. Specifically, during the first 15 years of operation, the estimated impact on natural gas prices varies by month, with the average winter price impacts estimated to be approximately double the average price impacts in the summer, with the winter impacts ranging as high as approximately $0.17/MMBtu. Overall, the estimated impact of Adelphia Gateway on the TZ6NNY-N prices is estimated to be an average of over $0.02/MMBtu per month over the entire first 15 years of the pipeline s operation. Because natural gas-fired generators often set the price of electricity in eastern PJM, lower natural gas prices are expected to result in lower electric energy prices. Accordingly, Concentric utilized its estimate of lower natural gas prices to estimate the savings that would be achieved in the electric market in the Greater Philadelphia Region if Adelphia Gateway commences operation. It is estimated that electric consumers in the Greater Philadelphia Region could save approximately $402 million in total over the first 15 years of Adelphia Gateway s operation, or an average of approximately $27 million per year. 3 In addition, it is also estimated that large industrial natural gas customers in the Greater Philadelphia Region that acquire their own natural gas and which generally do so directly in this region, would benefit from lower natural gas prices associated with Adelphia Gateway. It is estimated that these large industrial customers would save over $16 million over the first 15 years of the pipeline s operation, or an average of approximately $1.1 million per year over that time frame. 3 All savings referenced herein are expressed in nominal dollars, unless otherwise specified. CONCENTRIC ENERGY ADVISORS, INC. 3

7 Adelphia Gateway is also expected to provide broader economic benefits to the Greater Philadelphia Region. These broader economic benefits are the result of consumers and businesses re-spending the energy market savings associated with Adelphia Gateway within the local economy. The energy market savings of $418 million over 15 years are projected to have a total direct effect of approximately $334 million in local economic output in the Greater Philadelphia Region, which in turn is estimated to result in total economic output in the region of approximately $609 million over that time frame. Thus, every dollar associated with Adelphia Gateway that is spent locally is estimated to generate an additional $0.82 in supply chain and income-related economic activity in the Greater Philadelphia Region. 4 It is estimated that benefits to consumers in the Greater Philadelphia Region through both the energy market savings and the resulting regional economic benefits could reach approximately $677 million over the first 15 years that Adelphia Gateway is in service, which equates to an average of approximately $45 million per year over that time frame. These benefits reflect the combination of (i) the energy market savings estimated to be achieved by electric consumers in the region through a lowering of market area natural gas prices; (ii) the savings estimated to be achieved by industrial customers purchasing natural gas supplies in the market area; and (iii) the economic multiplier impacts associated with re-injecting energy market savings dollars into the local economy. Lastly, the potential benefits estimated herein are based on monthly average price impacts assuming normal average weather. In periods of elevated demand when market area natural gas prices increase significantly, the opportunity for achieving benefits from lowering natural gas prices (and associated electric prices) through additional pipeline capacity could be substantially higher. 4 In addition to the economic benefits associated with the energy market savings due to Adelphia Gateway, there are also expected to be more moderate economic benefits associated with the construction and capital expenditures associated with the conversion of the existing petroleum pipeline, as well as the ongoing operation of the pipeline. However, for purposes of this analysis, conservatively only the economic benefits associated with the energy market savings have been evaluated. CONCENTRIC ENERGY ADVISORS, INC. 4

8 SECTION 2: MARKET OVERVIEW This section summarizes the natural gas markets in the Greater Philadelphia Region, providing context for the estimated energy market savings analysis discussed in the following sections. 5 First, a discussion of the natural gas demand by both LDCs and electric generators is provided, followed by a discussion of the natural gas supply and infrastructure in the region. A. NATURAL GAS DEMAND As illustrated in Figure 1, over the last five-year period for which data is currently available (i.e., 2012 through 2016), the demand for natural gas in the two largest states in the Greater Philadelphia Region (i.e., Pennsylvania and New Jersey) has steadily increased from approximately 1,565 Bcf/year to 1,825 Bcf/year. This equates to an increase in the average daily demand from 4,290 MMcf/d to 5,000 MMcf/d over this period. 6 Figure 1: Annual Natural Gas Consumption in Pennsylvania and New Jersey 7 5 As discussed previously, the Greater Philadelphia Region encompasses portions of Pennsylvania, New Jersey, Delaware and Maryland; however, since Pennsylvania and New Jersey are the largest of these markets, the focus in this section will be on these two states. 6 Note that the demand figures presented herein reflects data for the entire states of Pennsylvania and New Jersey as consumption by end use data specific to portions of these states is not published by the U.S. Energy Information Administration ( EIA ). 7 EIA, Annual Natural Gas Consumption by End Use for Pennsylvania and New Jersey, release date October 31, CONCENTRIC ENERGY ADVISORS, INC. 5

9 Local natural gas distribution companies ( LDCs ), serving residential and commercial customers as well as significant portions of the industrial and power generation load, deliver the majority of the natural gas consumed in the Greater Philadelphia Region. Certain industrial customers and electric generators have direct connections to interstate pipelines, and thus are not served by the LDCs. One of the responsibilities of an LDC is to develop a portfolio of natural gas supplies that can be delivered to its service territory to serve customer demand. Typical LDC gas supply portfolios consist of a combination of: gas supplies purchased in a production area or at a downstream liquid trading point; long-haul and/or short-haul pipeline capacity; underground storage; peaking supplies (e.g., LNG, liquid propane, propane air); and citygate delivered supplies. LDCs utilize several different approaches to acquiring assets for a gas supply portfolio. For example, LDCs execute both shorter term contracts (i.e., contracts for existing infrastructure with a typical duration of one season to a few years) and longer term contracts (i.e., contracts for new infrastructure with a typical duration of years), although there are exceptions to both. Alternatively, utilities can build or acquire assets both natural gas supplies and infrastructure for their gas supply portfolios. In addition to the type of asset and method of acquisition, there are several other factors that are considered when choosing assets to include in a gas supply portfolio. Important considerations include: ability to meet forecasted demand, cost level and stability, flexibility, diversity, reliability, and operational considerations. The sector with the largest consumption of natural gas in Pennsylvania and New Jersey is the power generation sector, which utilized approximately 830 Bcf of natural gas in The power generation sector in Pennsylvania and New Jersey also experienced the largest growth in natural gas consumption in the last five years, with annual demand increasing by 210 Bcf over this period, and increasing from approximately 40% of the total natural gas consumption in these two states in 2012 to 45% in The residential and industrial sectors in Pennsylvania and New Jersey also experienced moderate growth as well over the last five years, while natural gas consumption in the commercial sector remained relatively constant. The demand for natural gas in Pennsylvania and New Jersey is seasonal, rising significantly during winter months as residential and commercial customers use natural gas to heat their homes and businesses. In addition, demand by electric generators in the hot summer months for air conditioning load is increasing mid-summer demand, meaning the lowest natural gas use occurs in the shoulder months. Figure 2 illustrates the seasonality of the natural gas demand in Pennsylvania and New Jersey, whereby the average day consumption during January 2016 was approximately two times greater than the average day consumption during September This seasonality of demand, particularly during periods of high demand, can cause constraints on the natural gas delivery system in the Greater Philadelphia Region, leading to higher prices, diminished availability and reduced flexibility of natural gas to serve demand. CONCENTRIC ENERGY ADVISORS, INC. 6

10 Figure 2: Monthly Natural Gas Consumption in Pennsylvania and New Jersey, by Sector 8 LDCs in the Greater Philadelphia Region The Greater Philadelphia Region is served by a number of LDCs: PECO Energy ( PECO ); Philadelphia Gas Works ( PGW ); New Jersey Natural Gas ( NJNG ); South Jersey Gas ( SJG ); and Delmarva Power ( Delmarva ). 9 The service territories of these LDCs are shown in Figure 3. 8 EIA, Monthly Natural Gas Consumption by End Use for New Jersey and Pennsylvania, release date November 30, Note, Public Service Electric and Gas distributes natural gas to portions of central New Jersey, but also to northeastern New Jersey immediately outside of New York City, which is subject to the Transco Zone 6 New York price index. As a result, Public Service Electric and Gas conservatively has not been included in the analysis herein; to the extent that the portions of central New Jersey served by Public Service Electric and Gas were included, the results herein would be understated. CONCENTRIC ENERGY ADVISORS, INC. 7

11 Figure 3: Service Territories of LDCs in the Greater Philadelphia Region To highlight the relative sizes of the loads served by the LDCs in the Greater Philadelphia Region, Figure 4 presents the number of customers and the retail sales volumes in 2016 for each of the LDCs. As shown, in total, the LDCs in this region serve over two million natural gas customers and distributed approximately 380 Bcf of natural gas to those customers in PGW, PECO and NJNG all serve relatively the same number of customers; however, NJNG has a significantly greater retail sales volume relative to the other two LDCs. Figure 4: Greater Philadelphia Region LDC Summary Operating Statistics 10 No. of Retail Sales Service Natural Gas Volumes Territory Customers (Mcf) PGW PA 501,575 68,297,636 PECO PA 514,152 84,076,494 NJNG NJ 525, ,485,841 SJG NJ 375,321 55,688,993 Delmarva DE/MD 130,912 58,252,149 Total Region 2,047, ,801, SNL Financial. CONCENTRIC ENERGY ADVISORS, INC. 8

12 Electric Utilities in the Greater Philadelphia Region As illustrated in Figure 5, there are six investor-owned electric utilities serving customers in the Greater Philadelphia Region: PECO; PPL Electric Utilities ( PPL ); Metropolitan Edison ( MetEd ); Jersey Central Power and Light ( JCP&L ); Atlantic City Electric ( ACE ) and Delmarva Power ( Delmarva ). 11 Figure 5: Service Territories of Electric Utilities in the Greater Philadelphia Region In 2016, these six electric utilities sold over 126 TWh of electricity to almost 5.5 million customers. As shown in Figure 6, electric sales for the utilities in eastern Pennsylvania (dotted on the graph) represent approximately three quarters of the electric sales, while the remaining approximately one quarter of electric sales are from the utilities in New Jersey (solid on the graph) and Delaware (striped on the graph) Note, Public Service Electric and Gas distributes electricity to portions of central New Jersey, but also to northeastern New Jersey immediately outside of New York City, which is subject to the Transco Zone 6 New York price index. As a result, Public Service Electric and Gas conservatively has not been included in the analysis herein; to the extent that the portions of central New Jersey served by Public Service Electric and Gas were included, the results herein would be understated. 12 FERC Form 1 data, as compiled by SNL Financial. CONCENTRIC ENERGY ADVISORS, INC. 9

13 Figure 6: Electric Sales by Utility in the Greater Philadelphia Region ACE 7% Delmarva 6% PECO 30% JCP&L 17% MetEd 11% PPL 29% The electricity market in the Greater Philadelphia Region is part of the PJM Interconnection, a regional transmission organization that coordinates the movement of wholesale electricity in the mid-atlantic region. As shown in Figure 7, combined cycle ( CC ) power plants and combustion turbines ( CT ), which are predominantly fueled by natural gas, represent the largest share of installed generation capacity in the Greater Philadelphia Region (i.e., 46%). Natural gas-fired generation capacity in both the Greater Philadelphia Region and in PJM as a whole has experienced significant growth over the last several years, while coal-fired generation has shown a large decline as a result of relatively low natural gas prices and increasing environmental restrictions on coal-fired generation. Specifically, in the Greater Philadelphia Region, natural gas-fired generation represented approximately 42% of the installed capacity in 2012, and has increased to over 46% in 2017, while coal-fired capacity has declined from 27% to 21% over that same period. For PJM as a whole, the dynamic has been similar. 13 In addition, as shown in Figure 7, natural gas-fired generation produced approximately 27% of the energy in PJM during the first nine months of 2017, which is an increase from approximately 18% five years ago From 2012 to 2017, the proportion of installed generation capacity that was natural gas-fired increased from approximately 30% to 36%, while the proportion of coal-fired generation fell from approximately 45% to 37%. (Monitoring Analytics, LLC, 2012 State of the Market Report for PJM, Table 11-8; and 2017 Quarterly State of the Market Report for PJM: January through September, Table 12-11). 14 Monitoring Analytics, LLC, 2012 State of the Market Report for PJM, p. 51; and 2017 Quarterly State of the Market Report for PJM: January through September, Table 12-11). CONCENTRIC ENERGY ADVISORS, INC. 10

14 Figure 7: Generation Capacity in Greater Philadelphia Region The growth in the reliance on natural gas-fired generation is expected to continue. As stated by Market Monitoring Analytics, LLC in their most recent State of the Market Report for PJM: A significant shift in the distribution of unit types within the PJM footprint continues to develop as natural gas fired units enter the queue and coal fired steam units retire. As of September 30, 2017, there were 15,954.2 MW of gas fired capacity under construction in PJM. As of September 30, 2017, there were only MW of coal fired steam capacity under construction in PJM. With respect to retirements, 4,125.0 MW of coal fired steam capacity and MW of natural gas capacity are slated for deactivation between September 30, 2017, and December 31, The replacement of coal fired steam units by natural gas units could significantly affect future congestion, the role of firm and interruptible gas supply, and natural gas supply infrastructure. 15 While the statements by the PJM Market Monitor apply to the entire PJM region, these same conclusions hold for the Greater Philadelphia Region. Over 78% of the capacity currently in the queue for this region is natural gas-fired (totaling 12,284 MW), while less than 1% is fueled by coal. 16 As a result of the historical and expected future reliance on natural gas-fired generation to meet electricity needs, demand for natural gas by electric generators is expected to continue to grow. 15 Monitoring Analytics, LLC, 2017 Quarterly State of the Market Report for PJM: January through September, p Id., Table CONCENTRIC ENERGY ADVISORS, INC. 11

15 Electric generators in the Greater Philadelphia Region (and throughout PJM) are dispatched by PJM in a least-cost manner, subject to certain market conditions and operational constraints. The last generating unit dispatched to serve demand within a particular area is known as the marginal unit, which sets the electric price paid by all customers in that area. As a result of the significant role of natural gas-fired generation in producing electricity in the Greater Philadelphia Region, and due to the nature of the competitive wholesale electric markets wherein generators bids are significantly affected by their fuel cost, the price of natural gas significantly affects the price of electricity. The price of electricity paid by consumers in the Greater Philadelphia Region, as well as in other competitive electric markets in the U.S., is often set by natural gas-fired electric generating facilities. This means that natural gas-fired generation represents the marginal unit in a significant share of the hours of the year. 17 Consequently, since the cost of fuel for a natural gas-fired generating facility represents the majority of the overall electric production cost, lower natural gas prices will reduce wholesale electric prices. B. NATURAL GAS SUPPLY Historically, the majority of U.S. natural gas production occurred in the Gulf Coast area, including Gulf of Mexico offshore, Texas, and Louisiana, as shown in Figure 8. Because natural gas markets in the northeastern U.S., including the Greater Philadelphia Region, had demand that far exceeded any indigenous natural gas production capability, natural gas was delivered to these markets via large, long-haul pipelines from distant supply basins. Figure 8: North American Marketed Natural Gas Production For the first nine months of 2017, natural gas-fired generating resources were the marginal unit approximately 53% of the hours in the real-time energy market (Id., p. 93). 18 Natural Gas Marketed Production by State, U.S. Energy Information Administration, released November 30, CONCENTRIC ENERGY ADVISORS, INC. 12

16 In the past decade, advances in drilling technologies have made the extraction of natural gas more economic, adding substantial natural gas production from new locations and drastically changing the pattern of natural gas flows across the continent. As shown in Figure 9, the Appalachian supply region, which encompasses the Marcellus and Utica shale basins, now produces the largest amount of shale natural gas in North America, producing over 26 Bcf/d. 19 As of the third quarter of 2017, natural gas production in Pennsylvania ranked second in the nation to only Texas. 20 Figure 9: Monthly Natural Gas Production by Key Supply Basin (Bcf/d) 21 Two of the three most productive counties in Pennsylvania (i.e., Susquehanna and Bradford counties) are in the northeastern portion of the state, not far from Adelphia Gateway. Specifically, through the third quarter of 2017, these two counties alone produced 1,504 Bcf, or the equivalent of over 4 Bcf/d. 22 The surrounding counties also produced (i.e., Lycoming, Wyoming, Tioga and Sullivan counties) have also produced another 777 Bcf thus far this year, or the equivalent of over 2 Bcf/d of incremental production. 23 Previously, much of the northeastern region of the U.S. in which the Marcellus and Utica reside was nearly completely dependent upon long-haul pipelines to deliver natural gas to serve their markets. However, the now the prolific Mid-Atlantic region has completely changed the market dynamics major producing areas of the past are being replaced with new producing areas, and major market areas that were thousands of miles away from production now have access to production in very close proximity. 19 Drilling Productivity Report, U.S. Energy Information Administration, released November 13, Natural Gas Marketed Production by State, U.S. Energy Information Administration, released November 30, Natural Gas Weekly Update, U.S. Energy Information Administration, March 17, Pennsylvania Independent Fiscal Office, Natural Gas Production Report July to September, Third Quarter 2017, p Id. CONCENTRIC ENERGY ADVISORS, INC. 13

17 C. NATURAL GAS INFRASTRUCTURE As discussed, LDCs generally purchase natural gas in production area supply basins or at downstream liquid trading points and transport the gas via pipelines for delivery to end-use customers served from the local distribution system. Accordingly, LDCs typically have a number of natural gas supply contracts as well as various firm transportation contracts for capacity on pipelines, and they pass on the costs of these contracts to the customers for which they purchase natural gas supplies. Certain, typically very large gas customers (e.g., industrials and electric generators) do not purchase their natural gas from the LDC, but rather from a third-party marketer at a mutually agreeable price, usually tied to local market area natural gas prices. Regardless of the price paid, natural gas generally must travel from production area supply basins to the market area through the interstate pipeline system. As illustrated in Figure 10, the Greater Philadelphia Region natural gas market is served primarily by three major pipeline systems: Transcontinental Gas Pipeline ( Transco ); Texas Eastern Transmission ( TETCO ); and Columbia Gas Transmission ( Columbia ). The proposed Adelphia Gateway project is also illustrated by a dotted line on the map. 24 Figure 10: Major Natural Gas Pipelines in the Greater Philadelphia Region Transco and TETCO both originate in the Gulf of Mexico, and were originally built to transport Gulf of Mexico gas supplies thousands of miles to consuming markets in the Northeast that did not have sufficient natural gas production to meet demand. However, with the development of the significant natural gas production in the northeastern U.S., both of these pipelines have undergone infrastructure changes to facilitate the transportation of gas from the Marcellus/Utica shale basins to 24 Note that the pipeline locations are approximate for illustrative purposes. CONCENTRIC ENERGY ADVISORS, INC. 14

18 markets both in the northeastern U.S., as well as back to the Gulf Coast and to other regions through various pipeline interconnections. The Columbia system is a reticulated pipeline system that traverses large portions of the Marcellus and Utica Shale formations, and thus can directly access gas from these formations. Columbia also historically accessed gas from the Gulf of Mexico through interconnections with other pipelines as well. Because the original pipeline network was not designed to transport the significant quantities of gas now being produced in the Marcellus and Utica Shale region, this has created the need for additional gas delivery infrastructure (e.g., new pipelines, pipeline reversals, pipeline expansions, pipeline conversions) to transport the prolific natural gas production in the Appalachian region for the benefit of downstream markets. In addition, the pipeline transportation capacity currently serving the Greater Philadelphia Region is fully subscribed, necessitating additional capacity such as from the proposed Adelphia Gateway conversion project to serve demand in the area. For example, TETCO serves the Greater Philadelphia Region through its Philadelphia Lateral, and has noted that increasing demand has created the need for additional capacity in the region. The existing Philadelphia Lateral consists of two 20 diameter pipelines from the TETCO mainline in Chester County, Pennsylvania to a point near on the Pennsylvania side of the Delaware River (i.e., the Chester Junction Station) where then two 16 diameter pipelines extend in opposite directions parallel to the Delaware River, with one terminating in Philadelphia, and the other near the Pennsylvania/Delaware border. The Philadelphia Lateral was expanded in 2011 and currently has the capability to deliver approximately 550,000 dth/d to power generators, refineries, steam generators and LDCs along the lateral. In addition, TETCO held an open season in 2015 for its Greater Philadelphia Expansion Project, which was to provide incremental capacity of 475,000 dth/d on the Philadelphia Lateral, noting that: Demand for natural gas from these end users has increased significantly in recent years, creating the need for additional long-term incremental capacity on the Philadelphia Lateral. In addition, growing energy demand has developed on the New Jersey side of the Delaware River in response to state and local support to promote the Greater Philadelphia Region as an energy hub and to improve infrastructure connecting the vast natural gas supplies being produced across Pennsylvania and the Appalachian basin. Tremendous efforts have been made by local stakeholders to attract new industry into the region, and expansion of the region s natural gas infrastructure will be critical to meet the increased demand for natural gas and electric generation as new industry locates in the region. 25 A spokesman for TETCO at the time of the 2015 open season stated that Philadelphia needed more pipeline transportation capacity than could be currently provided by the Philadelphia Lateral as, [t]he demand has gone beyond what we can deliver through those pipes. 26 The pipeline noted that 25 Texas Eastern Transmission, LP, Greater Philadelphia Expansion Project, Open Season Notice: March 25, 2015 May 8, Phillips, Susan, Pipeline expansion could bring more shale gas to Philly, StateImpact Pennsylvania, May 8, CONCENTRIC ENERGY ADVISORS, INC. 15

19 the demand is being driven by industrial customers such as electric generators and refineries. 27 Recently, TETCO indicated that the Philadelphia Expansion Project remained in development. 28 Transco s pipeline system also serves the Greater Philadelphia Region through its mainline north of Philadelphia and its Trenton Woodbury Lateral that encircles the Philadelphia area, and these facilities are also fully subscribed as evidenced by recent expansions. For example, in February 2015, Transco proposed the Garden State Expansion Project to expand capacity from its Station 210 Zone 6 Pool in Mercer County, New Jersey to a new delivery point with NJNG on Transco s Trenton Woodbury Lateral in Burlington County, New Jersey. The project has two phases, the first providing 20,000 dth/d of incremental capacity, and the second phase providing 160,000 dth/d of incremental capacity. The first phase of the project entered service in September 2017, and the second phase is scheduled to be in-service in the first quarter of D. NATURAL GAS PRICING There are generally two primary categories of natural gas pricing points: production area pricing points and market area pricing points. Production area pricing points represent the price of the natural gas commodity in a region in which there is significant natural gas production, (i.e., the wellhead, or the aggregation of production from different areas). Relevant production area pricing points for the Greater Philadelphia Region traditionally included Gulf Coast points such as Henry Hub, a major trading point in Louisiana that serves as a nation-wide benchmark price for natural gas, but more recently prices in the Marcellus Shale production area. Market area pricing points represent the price of the natural gas commodity in the area in which it will be consumed, and reflects not only the cost of the commodity itself, but also the cost of transportation and other value drivers based on circumstances in that particular market. Relevant market area pricing points for the Greater Philadelphia Region include the Transco Zone 6 Non-New York ( TZ6NNY ) and TZ6NNY-N index prices, with the TZ6NNY-N prices being a subset of the TZ6NNY prices. 30 As shown in Figure 11, the TZ6NNY prices have reached extreme levels and experienced volatility in the recent past. While Figure 11 truncates the prices for purposes of presentation, daily TZ6NNY-N spot prices have reached well over $100/Mcf in the past (January 2014), while also exceeding $20/MMBtu on a number of days as well. 27 Id. 28 Enbridge, 2017 Annual Wequassett Customer Meeting, May 24, Williams Partners Begins Service on Virginia Southside II Expansion, Provides Updates on Ongoing Projects, Pipeline and Gas Journal, December 5, There are other published production area and market area prices relevant to the greater Philadelphia region, but for the purposes of this report, the focus will be on the TZ6NNY and TZ6NNY-N prices. CONCENTRIC ENERGY ADVISORS, INC. 16

20 Figure 11: TZ6NNY Natural Gas Prices (Truncated at $20) Past 5 Years 31 Higher market area natural gas prices such as have occurred at TZ6NNY cause a substantial increase in energy costs for natural gas consumers purchasing their supplies in the market area. In addition, due to the nature of the electric markets, wherein generators bids are significantly affected by their fuel cost, the price of natural gas significantly affects the price of electricity. For example, Figure 12 illustrates the impact to electric prices in the Greater Philadelphia Region associated with high natural gas prices. 31 SNL Financial. Note, since the TZ6NNY-N index price did not start to be published until 2014, the TZ6NNY price is reflected here. CONCENTRIC ENERGY ADVISORS, INC. 17

21 Figure 12: Electric and Natural Gas Prices in Greater Philadelphia Region Past 5 Years There are a number of reasons for spikes in spot natural gas prices, including: (i) colder than normal weather that increases peak demands; (ii) reductions in the availability of natural gas supply and pipeline transportation attributable to these weather conditions; (iii) lower than expected storage inventories; and (iv) increased reliance on natural gas for power generation in competitive wholesale electric markets. 32 Because natural gas demand from LDCs and electric generators is expected to grow, additional pipeline infrastructure is expected to mitigate natural gas price levels and the volatility of such prices, and thus in turn, electric price levels and electric price volatility for consumers. 32 Natural gas-fired electric generators do not have an electricity market mechanism to recover fixed demand charges associated with reserving capacity on interstate pipelines and thus rely on interruptible pipeline transportation, a circumstance that can cause increased competition for natural gas, and thus cause an increase in the price of natural gas and electricity prices. CONCENTRIC ENERGY ADVISORS, INC. 18

22 SECTION 3: ENERGY MARKET BENEFITS Additional natural gas pipeline infrastructure that increases the delivery of supplies can influence wholesale natural gas prices. It is expected that the addition of the capacity associated with Adelphia Gateway will result in lower natural gas market prices than otherwise would be experienced in the Greater Philadelphia Region absent the project. As noted, because natural gas-fired generators often set the price of electricity in eastern PJM, lower natural gas prices are expected to result in lower wholesale electric prices. Accordingly, Concentric estimated the natural gas and electric market price benefits for consumers in the Greater Philadelphia Region due to the incremental pipeline capacity to be provided by Adelphia Gateway during its first 15 years of operation (i.e., ). The approach utilized by Concentric to estimate savings and the associated results are described below. A. NATURAL GAS PRICE BENEFITS ANALYSIS FRAMEWORK It is generally accepted that natural gas markets that are constrained during some or all of the year, and thus reflect higher and more volatile natural gas pricing during such periods, can benefit from additional pipeline capacity to mitigate the higher and more volatile pricing. Given this, the objective of Concentric s analysis was to estimate the potential of Adelphia Gateway to reduce the price of gas delivered to consumers in the Greater Philadelphia Region. To conduct its analysis, Concentric utilized GPCM, which is an industry-standard natural gas market simulation software. 33 GPCM is a network optimization model that simulates flows of gas in the North American natural gas market to develop long-run price forecasts. The model provides a high degree of granularity and close approximation of the capabilities and constraints of real world operating assets, as well as the microeconomic principles that underlie competitive markets, all of which make it an ideal tool for analyzing the impact of changes to pipelines and other infrastructure assets. The GPCM model reflects all the primary components of the North American natural gas network, including supply, pipeline transportation and storage, and demand. First, natural gas production in the model enters the pipeline system from suppliers based on supply curves that relate the amount of gas offered to market clearing prices; the higher the price, the more gas will be produced, subject to resource and reservoir limitations. Supply curves are differentiated by supplier type and by geographic location. Second, natural gas in the model flows from producers to consumers across a network of over 250 pipelines. Each pipeline s capability and cost to move gas are based on actual, asset-specific configurations and capabilities. Each pipeline is modeled separately within GPCM with specific configurations, delivery capabilities, costs, and other operational variables. Each pipeline is divided into zones that represent aggregations of meters, grouped based on delivery constraints and/or market pricing areas. Flows across each segment of pipeline are constrained by the actual ability of 33 GPCM is a software product owned and maintained by RBAC Inc.; Concentric licenses GPCM from RBAC. CONCENTRIC ENERGY ADVISORS, INC. 19

23 the pipeline to move gas in the region. Additionally, gas can flow in the model between pipelines through interconnections that are also configured individually and constrained based on the actual operating parameters of the interconnections. Natural gas storage is also reflected within the GPCM model, whereby gas flows into and out of storage are based on real-world configurations (i.e., location, pipeline connections, size, operating capacity, and injection and withdrawal rates) and are differentiated by storage facility. Third, natural gas demand is reflected in the model based on customers that receive gas from pipelines, including, for example, LDCs (providing gas for residential, commercial, and most industrial customers), directly-connected industrial consumers, and gas-fired power plants. Customers demands for gas are based on long-run projections of consumption, which is differentiated by customer, as well as elasticity for that demand based upon demand curves. Just as in the actual natural gas market, natural gas prices are established in GPCM based on the interaction of projected supply and demand for natural gas and the infrastructure capabilities of the natural gas network. Specifically, consumer demands for gas, production levels, and the availability of pipeline and storage capacity, all contribute to the formation of natural gas prices. Prices are differentiated by location, similar to the standard pricing indices reported in the natural gas industry trade press. To estimate the benefit of Adelphia Gateway, Concentric simulated the natural gas market using GPCM under two scenarios: (i) without Adelphia Gateway; and (ii) with Adelphia Gateway. In both scenarios, but for the exclusion or inclusion of Adelphia Gateway, all other model assumptions and inputs were held constant in order to isolate the impact that the addition of Adelphia Gateway would have on wholesale natural gas prices. For example, in both scenarios, weather and other factors that influence demand were assumed to be normal. In addition, Concentric reflected in both scenarios natural gas infrastructure that is currently under construction or significantly along in development, including two other projects in the broader region to be served by Adelphia Gateway (i.e., PennEast Pipeline and the Atlantic Sunrise Project). In the scenario in which Adelphia Gateway is assumed to be operational, the project reflects the ability to transport up to 250 MMcf/d of natural gas from two receipt points (i.e., interconnections with TETCO and Columbia) to five potential delivery points (i.e., interconnections with TETCO, Transco, Columbia, PECO and Delmarva). A comparison of the two scenarios, and the resulting suppression of market area natural gas prices associated with Adelphia Gateway, provides the basis for the estimated benefits to the energy consumers in the Greater Philadelphia Region calculated herein. CONCENTRIC ENERGY ADVISORS, INC. 20

24 RESULTS Figure 13 demonstrates that Adelphia Gateway is expected to reduce natural gas prices in the Greater Philadelphia Region (as defined by the TZ6NNY-N natural gas price) by an average of over $0.02/MMBtu each day during the first 15 years of operation. Figure 13: Natural Gas Price Savings Associated with Adelphia Gateway 34 The majority of the energy market savings due to lower natural gas prices are expected to be experienced through lower electric prices, as well as for large industrial customers that directly purchase their own natural gas (known as industrial transport customers) instead of an LDC purchasing the gas on their behalf. Lower natural gas prices can also translate into savings for LDC customers as well; however, such savings are not expected to be significant considering the manner in which LDCs purchase natural gas for their customers. Specifically, as discussed previously, LDCs typically purchase the gas used by residential and commercial customers, as well as for certain industrial customers, meaning lower natural gas prices in a market area such as the Greater Philadelphia Region can also provide benefits to LDC customers. However, most LDCs purchase the majority of their natural gas supplies directly in production areas or downstream liquid trading points and transport the gas to their distribution system. As a result, LDC natural gas costs are generally based on natural gas prices in a supply area or at a liquid pricing point plus the cost of transporting that gas via pipeline from those locations to their distribution systems, and not on a market area price such as the TZ6NNY-N price. Some LDCs also purchase a portion of their natural gas at local market area prices. Thus, to the extent that Adelphia Gateway lowers market area natural gas prices, and LDCs in the Greater Philadelphia Region purchase gas at the lower market area natural gas prices, these benefits would also be passed on to LDC customers. However, the quantity of natural gas that LDCs in the Greater Philadelphia Region purchase at local market area prices varies, is confidential, and generally is not significant; 34 Prices reflect an assumed annual inflation rate of 2% over the forecast period. CONCENTRIC ENERGY ADVISORS, INC. 21

25 therefore, any benefits of Adelphia Gateway to LDC customers in the Greater Philadelphia Region were excluded from the estimation of the benefits of Adelphia Gateway herein. B. ELECTRIC PRICE BENEFITS ANALYSIS FRAMEWORK As previously discussed, wholesale electric generating resources in the Greater Philadelphia Region are a part of PJM, and natural gas-fired generation plays a critical role, with the costs of such generating resources often setting the price of power that consumers pay. Natural gas-fired generators operating in competitive wholesale electric markets typically purchase gas at local spot market prices. As a result, as shown previously in Figure 12, electric prices in in the Greater Philadelphia Region are closely tied to natural gas prices in the region. Therefore, if Adelphia Gateway commences operation and dampens market area natural gas prices, it is expected that the project will also translate into lower electric energy prices. Accordingly, Concentric utilized its estimate of lower natural gas prices in the Greater Philadelphia Region to estimate the savings that would be achieved in the electric market in this region. Specifically, Concentric focused its electric price benefit analysis on the PJM electric utility zones located in the Greater Philadelphia Region (i.e., the PECO, PPL, MetEd, JCP&L, ACE and Delmarva zones). Concentric evaluated the historical relationship between natural gas prices and electric prices separately for each zone. Based on this analysis, Concentric developed factors that were used to estimate the reduction in electric prices resulting from the reduction in natural gas prices assuming Adelphia Gateway is in service. These electric price reductions were multiplied by PJM s most recent forecast of electric consumption by month and by electric zone to determine the electric price benefits to consumers in the Greater Philadelphia Region associated with Adelphia Gateway. RESULTS Annual average electric prices in the Greater Philadelphia Region are expected to be reduced as a result of Adelphia Gateway by $0.16 to $0.18/MWh (depending on the zone) as a result of the natural gas price over the first 15 years of the pipeline s operation. As shown in Figure 14, when the average electric price benefit is multiplied by the forecasted electric consumption, the annual benefit to the Greater Philadelphia Region electric consumers associated with Adelphia Gateway ranges from approximately $14 million to $41 million per year over the first 15 years of operation of the pipeline. CONCENTRIC ENERGY ADVISORS, INC. 22

26 Figure 14: Annual Electric Market Benefit to the Greater Philadelphia Region Associated With Adelphia Gateway Based on the analysis, it is estimated that electric consumers in the Greater Philadelphia Region would save approximately $401 million in total over the first 15 years of Adelphia Gateway s operation, or an average of approximately $27 million per year over the forecast period. As shown in Figure 14, the largest electric market savings are expected in southeast Pennsylvania in the electric service territories of PECO, PPL and MetEd (approximately 65% of the total savings), with lesser amounts in central and southern New Jersey (approximately 20%), northern Delaware (10%) and eastern Maryland (5%). C. INDUSTRIAL TRANSPORTATION CUSTOMER SAVINGS Unlike most residential and smaller commercial natural gas customers, many large industrial customers, which can have very substantial daily natural gas requirements, procure their own natural gas supplies as opposed to having their LDC purchase such supplies on their behalf. Such industrial customers are referred to as transportation customers of the LDC since the LDC only has to transport through their distribution system, not purchase, the gas for these industrial customers. 35 Industrial transportation customers generally purchase their supplies from third-party marketers and these supplies are typically priced based on market area price indices (as opposed to production area price indices reflective of Marcellus or Gulf Coast prices). 35 Customers for which the LDC both purchases natural gas supply and pipeline transportation service, as well as distributes that gas to the customer, are known as sales customers. CONCENTRIC ENERGY ADVISORS, INC. 23