REGULATORY POLICY AND RESIDENTIAL MAIN EXTENSIONS

Transcription

1 REGULATORY POLICY AND RESIDENTIAL MAIN EXTENSIONS Presented to: Northeast Gas Association s Sales & Marketing Conference March 15, 2013 Presented by: Melissa Bartos, Assistant Vice President mbartos@ceadvisors.com

2 Today s Discussion Northeast State Policies Regarding Gas Growth Conversion Decision Drivers The Economics of Conversion Policies Regarding: Customer Investments LDC Investments Fuel Outlook Externalities Conclusions 1

3 Northeast Regulatory Policy Regarding Natural Gas Growth Pro Growth Regulation Vermont Maine Pro Growth Policy Statements Connecticut New York New Jersey Focused Elsewhere Rhode Island Massachusetts New Hampshire 2

4 Policy: Pro Gas Growth Regulation State Context Policy Statements Vermont Maine 15% Residential Gas Heating 4.9% (4 th ) Unemployment Served from Canada 5% Residential Gas Heating 7.2% (28 th ) Unemployment Supply Constrained Reversal of Flows Ahead 2011 Comprehensive Energy Policy: eliminate reliance on oil by 2050 Approved existing customers subsidizing distribution expansion CNG for large off the main industrial customers (unregulated) 2011 Act to Expand the Availability of Natural Gas to Citizens of Maine authorizes state bond financing for gas distribution investments Governor discussed fast tracking new distribution infrastructure in 2013 State of the State Address CNG for large off the main industrial customers (unregulated) 3

5 Policy: Pro Gas Growth Policy Statements State Context Policy Statements Connecticut New York New Jersey 32% Residential Gas Heating 8.2% (37 th )Unemployment Capacity/Supply Constrained 56% Residential Gas Heating 8.2% (37 th )Unemployment Projects Relieving NYC Constraints; Constrained East of Iroquois 74% Residential Gas Heating 9.5% (48 th ) Unemployment Multiple Projects Relieving Constraints 2013 Comprehensive Energy Strategy: 300,000 new gas customers in 7 years Possibility for existing customers to subsidize distribution expansion Encourages pipeline expansion Legislature and PURA to implement 2012 Blueprint Energy Highway: study barriers to gas conversion Need to update 1989 expansion rules Environmental benefits of gas recognized, especially in NYC 2011 Energy Master Plan focused primarily on electricity Supports natural gas pipeline expansion throughout the state, especially in Southern New Jersey 4

6 Policy: Focused Elsewhere State Context Policy Statements Rhode Island Massachusetts New Hampshire 51% Residential Gas Heating 9.9% (51 st ) Unemployment Capacity/Supply Constrained 49% Residential Gas Heating 6.7% (21 st ) Unemployment Capacity/Supply Constrained 20% Residential Gas Heating 5.7% (15 th ) Unemployment Capacity/Supply Constrained Focused on energy efficiency and renewables Proposal National Grid: existing customers subsidize distribution expansion Focused on energy efficiency and renewables Considers clean energy investment beneficial to local economic development, whereas investment in natural gas is not Focused on energy efficiency and renewables Bureau of Labor Statistics, ʺLocal Area Unemployment Statistics.ʺ Accessed March 13,

7 Four Conversion Decision Drivers Customer Investment LDC Investment Fuel Outlook Externalities Boiler/ furnace conversion Other appliances Financing/ discount rate Convenience Service line Meter Main extension Gas supply Pipeline capacity Commodity prices Oil prices Environmental impacts Economic development 6

8 Perspective Matters! Customer Investment LDC Investment Fuel Outlook Externalities State Policy Makers The economy + The environment = Gas growth perspective Potential Customers How much will it cost? Can I afford it now? Will gas prices remain low? State Commissions How will existing customers be affected? LDCs What do policy makers and regulators want? Can LDCs make money? Will it require more risk? How can LDCs make the costs work for customers? 7

9 The Economics of Conversion Residential Main Extension Customer Investment LDC Investment Fuel Cost Outlook Externalities Heating System & Installation $7,500 Mains, Services, & Meters $11,500 Annual Fuel Cost Savings $1,800 Environmental & Economic Development Benefits ($?) Utility Investment $5,200 Customer Contribution ( CIAC ) $6,300 Project Economics Driven By: Projected Load Assumptions Anchor Customer(s) Customer Interest Fuel Use Project Cost Assumptions Financial Assumptions Payback Period Hurdle Rate Example based on data from Connecticut Comprehensive Energy Strategy Assumes average service and main length, no anchor customer, 20 year payback, utility hurdle rate, 100 Dth/year 8

10 The Benefits of Low Interest Financing Heating System + CIAC = Customer Total Cost $7,500 + $6,300 = $13,800 Annual Fuel Cost Savings $1,800 Simple Payback Period 7.7 Years Many customers discouraged by long payback period Without CIAC, payback over 4 years Low interest financing can diffuse the up front cost and still allow for net annual savings Interest rates above breakeven (~5%) may be a more difficult sell Customer Cost to Convert Annual Benefit to Customer (Fuel Savings minus Payment) Annual Fuel Savings 0% 2% 4% 6% 8% 10% $13,800 $1,800 $420 $264 $99 $(75) $(257) $(446) Example based on data from Connecticut Comprehensive Energy Strategy 10 year financing, 100 Dth/year 9

11 Policies that Address Customer Investments 1. On Bill Financing: South Jersey Gas: 5 year, 0% financing for up to $8,000 for fuel switching 2. Fuel Switching Rebates: ConEd: Oil to gas fuel switching rebate, funded by surcharge on all natural gas customers Customer Investment Boiler/ furnace conversion Other appliances Financing/ discount rate Convenience O&R: $500 fuel switching rebate Puget Sound: Fuel switching rebates for electric to natural gas conversions, from electric energy efficiency funds Puget Sound: Contractor strategic partnership offers $500 rebate 3. Tax Credits: Similar to solar incentives 4. Existing Equipment Removal: NSTAR: Discounted oil tank removal New Jersey: Program for removal of leaking underground oil storage tanks, but this program is unfunded 10

12 Policies that Reduce Customer Contributions 1. Policies that reduce the total project cost: Direct economic development subsidies (Maine, North Carolina bond financing) Tax Increment Funding Encourage state/municipal anchor customers 2. Policies that tilt project cost recovery from new to existing customers: Limited funding of CIAC from existing customers CGA credits (Vermont, Connecticut proposed) Pipeline refunds (North Carolina) Funding through surcharge (Rhode Island proposed) Disregard the existing customer impact test (Nebraska if the project promotes economic development can be funded from all ratepayers) Adjust the test to reflect externalities in some quantified manner Changes to the formula parameters: Lengthening the payback period Lowering the hurdle rate 11 LDC Investment Service line Meter Main extension

13 Policies that Minimize the Risk to Existing Customers 1. Incremental rate for new customers (NY, DE, MI, WI) Phased out over time (5 10 years) Can include interest True up to prevent over recovery May reflect customers that connect to the new main at a later time LDC Investment Service line Meter Main extension 2. Absorption of risk by the LDC in exchange for opportunity for an increased return for successful projects Analogous to at risk conditions for interstate pipeline expansion Depends on degree of confidence that the LDC can control construction costs and attract load 12

14 Policies that Address Fuel Outlook 1. Support pipeline expansion projects Firm service customers currently benefit from shale gas indirectly through downward pressure on Henry Hub prices. However, peak day pipeline capacity constraints exist. CT s Comprehensive Energy Strategy recognizes a Oil prices need for PURA approve LDC commitments to new pipeline capacity. DEEP also called upon to facilitate siting. The case for additional pipeline capacity should be made in IRP filings. 2. Current major proposed expansions include: Spectra Algonquin Incremental Market Expansion ( AIM ) Tennessee Northeast Expansion/Bullet Line/200 Line Expansion Constitution (Williams)/Wright Interconnect Project (Iroquois) Transco Rockaway Lateral Fuel Outlook Gas supply Pipeline capacity Commodity prices 3. To address the risk of price increases, commissions might be receptive to a fixed, multi year supply price (Central Hudson). 13

15 Policies that Recognize Benefits of Externalities 1. Greenhouse Gases CO 2 : Natural gas produces approximately 30% less CO 2 than oil per equivalent BTU of energy Methane: One ton of methane traps as much radiation as 20 tons of CO 2 but remains in the atmosphere for 8 to 40 times less time (hence, the concern over fugitive emissions) 2. Natural gas has a clear advantage relative to oil with respect to other pollutants: SO 2 : 1,000 to 1 NO x : 5 to 1 Particulates: 12 to 1 Externalities Environmental impacts Economic development 3. Economic Considerations These include environmental and economic (jobs, new development, industry competitiveness) benefits (CT Comprehensive Energy Strategy) 14

16 Conclusions There is a tremendous opportunity for gas growth in the Northeast, although new pipeline capacity may be required. Policy makers in several states are favorably disposed to natural gas growth, but implementation requires regulatory action. LDCs can help regulators by developing specific proposals that are consistent with policy objectives. It is critical that LDC proposals remain focused on market conditions and propose economic solutions for both new and existing customers. 15