Week Ending March 4, 2016

Algonquin’s Initiative to Exempt Electric Distribution Companies from Natural Gas Capacity Release Bidding Rules Triggers Strong Reactions in the Northeast Region

This Article Appears as Published in Foster Report No 3089
Algonquin’s Initiative to Exempt Electric Distribution Companies from Natural Gas Capacity Release Bidding Rules Triggers Strong Reactions in the Northeast Region

Indicated Shippers (actually, ConocoPhillips Co. and Direct Energy Business Marketing LLC) joined some parties who this week protested a new amendment proposed by Algonquin Gas Transmission LLC (RP16-618) to FERC on February 19 under section 4 of the Natural Gas Act (NGA), which would exempt electric distribution companies (EDCs) participating in “state-regulated electric reliability programs” from the capacity release bidding requirements when they directly or indirectly release capacity to electric generators.  Algonquin’s proposal specifically would permit EDCs to prearrange releases of firm gas transportation capacity to electric generators serving the regional power grid as part of a state-regulated program.  Algonquin portrayed its proposal as being consistent with what is contemplated as an eligible electric reliability program.  Algonquin proposed that the amendment become effective on April 1, 2016.

Algonquin’s proposal has been identified as directly related to both Algonquin’s Access Northeast Project (ANP) and to recent filings by Eversource Energy and National Grid before the Massachusetts Department of Public Utilities (DPU).  In its tariff filing, Algonquin states that the revisions though are not limited to the ANP or to any specific pending state electric reliability program.

Some parties, especially utilities in the New England Region, are rooting for Algonquin’s plan.  The Brooklyn Union Gas Co. d/b/a National Grid NY; KeySpan Gas East Corp.d/b/a National Grid; Boston Gas Co., Colonial Gas Co., collectively d/b/a National Grid; Niagara Mohawk Power Corp. d/b/a National Grid; and The Narragansett Electric Co. d/b/a National Grid, all subsidiaries of National Grid USA, Inc. ( the National Grid Gas Delivery Companies) support Algonquin’s filing because “it will enhance the reliability of both natural gas and electric distribution services…  The ability to obtain electricity from generators more reliably would, in turn, enhance the reliability of electric distribution services.”

As formerly in the case of state-approved “retail choice programs”, National Grid believes Algonquin has devised a program for EDCs that fits a model contemplated when the Commission itself signaled a willingness to consider proposals such as this one.  National Grid Gas Delivery Companies submit that Algonquin’s filing is in the public interest because it will result in making firm interstate gas pipeline transportation capacity available to electric generators “in a manner that is both transparent and not unduly discriminatory.”

In addition, National Grid asserted, Algonquin’s proposal will also enhance the reliability of natural gas distribution services by (1) creating a means for EDCs to contract and pay for the construction and operation of additional firm pipeline capacity that can be used to serve other gas customers when it is not needed by electric generators, and (2) reducing the likelihood that gas distribution services will be adversely affected by a loss of electricity, particularly during the critical winter months.

Similarly, the New England LDCs ,”long concerned about the lack of adequate natural gas pipeline infrastructure in New England to serve the needs of gas-fired generators…, many of whom rely on the secondary gas market and do not have dual fuel capability,” support the concept proposed by Algonquin.  The New England LDCs commented briefly, “Algonquin’s proposal is apparently designed to complement proposed state and local regulatory initiatives that may result in programs to increase pipeline capacity available for electric generation in the region.”

On the other hand, Consolidated Edison Co. of New York, Inc. and Orange and Rockland Utilities, Inc. jointly commented that the Algonquin proposal needs to be clarified further so that both the Commission and Algonquin’s firm customers have a better understanding of the proposal’s scope and applicability. Con Ed/O&R requested a five-month suspension and tech conference so that customers and Commission Staff: (1) are given the opportunity to fully understand the scope and intended implementation of this proposal; (2) can assess the impact on regional markets for natural gas commodity and pipeline capacity; and (3) can, collaboratively with Algonquin, give greater definition to the terms of Algonquin’s bidding requirements’ exemption proposal.

These two big New York are utilities observed that Algonquin has not defined “state-regulated electric reliability program(s)” and how releases would be performed under such programs.  The existing exemption allowed for state-regulated retail choice programs is much clearer than Algonquin’s version offered now, they suggested.  Algonquin has provided no examples of how the exemption might work and indicates only (1) that an exemption might apply to “statewide, and possibly regional” programs, and (2) that programs would “utilize preferably one, but possibly more, asset managers to administer the program capacity acquired by participating EDC for a fixed fee.”  No eligibility criteria are described.

Con Edison and O&R are concerned that “leaving the parameters of the proposed exemption undefined in Algonquin’s tariff will only create confusion as to eligibility and potentially open the door for discriminatory practices that undermine regional gas and electric markets.”  Before approving Algonquin’s proposal, the Commission should seek to better define:

  1. How Algonquin and state regulators would determine which generators may utilize the proposed bidding exemption for “state-regulated reliability programs”;
  2. Who will assess the reliability needs of the electric system, how frequently will they be assessed, and whether the assessment will be based strictly upon reliability needs or whether economic and other considerations, such as environmental goals, will also play a role;
  3. Whether the capacity that may be released under the state-regulated electric reliability exemption is limited to expansion capacity procured under long-term contracts or whether it will extend to other forms of capacity as well;
  4. Whether capacity released to generators will be eligible to be re-released and/or recalled, and, if so, the conditions for doing so; and
  5. What price and terms of service will apply to such releases.

Algonquin’s Justifications.  Algonquin argues that the Commission has the authority to find that the public interest supports the release of capacity, without bidding, as part of a state-regulated electric reliability program that by its very nature aims to enhance electric reliability.

According to Algonquin, approximately 16,000 MW of natural gas-fired generation is interconnected to the New England gas pipeline system.  Given that generation units are subject to economic dispatch, gas-fired generators may not be dispatched if lower-cost generation is available and sufficient to meet load requirements.  Some of these generators do not have the economic incentive to pay for year-round firm interstate pipeline capacity.  Instead, explains Algonquin, they rely on interruptible pipeline services or the secondary market for delivery of gas.

Algonquin further asserts that, because demand for pipeline capacity in the New England natural gas market is high, competitive generators must either try to acquire interruptible or released capacity—which they may not be able to do—or purchase natural gas at higher spot prices.  Algonquin and its supporters believe its plan will allow EDCs to obtain firm capacity pursuant to state-regulated electric reliability programs and then directly or indirectly release that capacity to electric generators on a non-biddable basis.

According to Algonquin, these changes will facilitate the daily, weekly, monthly, seasonal, or longer release of capacity and thereby enable the gas-fired generators to secure firm pipeline capacity.  Algonquin and some parties also assert these tariff modifications are consistent with the current FERC policy of exempting releases made pursuant to state-regulated natural gas retail access programs.

Algonquin states that the state-regulated electric reliability programs would be statewide, and possibly regional, and would utilize one or more asset managers to administer the program and capacity acquired by participating EDCs for a fixed fee.  The programs would favor releases to regional generators owning or operating natural gas-fired generation plants directly or indirectly through their agents.

To the extent capacity isn’t needed by the generators, the capacity would be released subject to the bidding requirements of the pipeline’s tariff.  And this capacity would be recallable under defined circumstances to ensure the capacity would be available when additional generator demand arises.

Protester – Massachusetts.  Maura Healey, state Attorney General of the Commonwealth of Massachusetts, protested Algonquin’s filing with FERC.  The Attorney General opposes Algonquin’s filing “because the new tariff provision is premature and unnecessary unless and until state regulators have the opportunity to review and confirm the facts assumed in Algonquin’s Transmittal Letter.”  More specifically, the Massachusetts Department of Public Utilities (DPU) has initiated three related proceedings to examine and investigate whether there are gas capacity constraints in Massachusetts that effect electric power reliability and whether it is in the public interest for EDCs to enter into precedent agreements for additional gas pipeline capacity to address any such reliability needs.  Algonquin’s transmittal letter notes that similar inquiries are underway or contemplated in New Hampshire, Connecticut and Maine.

Most important, Attorney General Healy noted to FERC that gas capacity precedent agreements executed by EDCs are without legal precedent in Massachusetts.  The Massachusetts Supreme Judicial Court is currently reviewing whether the DPU has authority under state law to approve such gas capacity contracts entered into by EDCs.  So, “there is substantial uncertainty” whether the kind of state-regulated electric reliability programs that are the claimed basis for Algonquin’s proposed tariff revisions are legal under Massachusetts law and whether the proposed gas capacity contracts are in the public interest.

In other words, summed the attorney general, Algonquin’s proposed revisions to waive the bidding requirements for capacity devoted to such programs “places the cart before the horse,” and ought to be suspended by the Commission or denied without prejudice for Algonquin to re-file when and if such state-regulated reliability programs are found by state regulators to be warranted and lawful and such determinations have been reviewed and affirmed on appeal.

Indicated Shippers.  Algonquin and its utility supporters pose this proposal as a gesture to boost reliability, but the Indicated Shippers described it as “little more than an effort to protect certain electric generators from paying for the true value of the interstate pipeline capacity.”  The two parties comprising the Indicated Shippers in this proceeding charged that Algonquin’s proposal runs counter to the Commission’s policy requiring capacity to be allocated to the person who values it most.  While the Commission saw the necessity to request public comment on the significant new rules governing capacity release in Order No. 712, Algonquin’s proposal “would establish a new blanket exemption from the Commission’s price and bidding requirements and, potentially, broadly expand the definition of an asset management arrangement (AMA), all without benefit of public comment in the context of a rulemaking.”[1]

According to ConocoPhillips/Direct Energy, Algonquin’s “attempts to analogize its proposal to the current bidding exemption for state natural gas retail choice programs” overlook key reasons for that exemption and are not persuasive.  Algonquin has not demonstrated that public policy supports non-biddable capacity release to electric generators as part of a state-regulated electric reliability program.  To the contrary, this proposal is “facially preferential and discriminatory,” would result in “inaccurate price signals for interstate capacity demand”, and would operate as an “improper subsidy” to gas-fired electric generation.

Indicated Shippers requested that the Commission reject the February 19 filing on the ground that it is contrary to established rules and policy regarding capacity release under Order 712 and is unjust and unreasonable.  Alternatively, Indicated Shippers requested a suspension order and a technical conference.

Algonquin is requesting a major new exception to Order 712 without benefit of rulemaking and public comment, ConocoPhillips/Direct Energy objected.  With respect to the price for released capacity, the Commission’s overarching concern then was that the party who most values the capacity should receive the capacity.  It accomplished its goal through the elimination of the price ceiling on short-term capacity releases (one year or less) and imposing a requirement for bidding on released capacity except pre-arranged releases for very short-term releases (31 days or less) and long-term releases at the maximum tariff rate.[2]

The Shippers stressed that the subject application now is “not a waiver application” that would only be applicable to a specific transaction.  This is a blanket tariff provision that would be applicable to any EDC and electric generator on its system that is subject to a state program.  The provisions, if approved, likely “will quickly be adopted by other interstate pipelines.”

Algonquin is asking FERC to adopt a major new exception from the price and bidding requirements “for one privileged segment of the New England capacity market.”  As such, this request has far-reaching policy and economic implications and, if granted, “will insulate a significant portion of the New England capacity market from competition and accurate price signals that are the natural benefit of market forces.”  The Commission should deny Algonquin’s proposal and reject the filing on the grounds that it is contrary to Order 712.

Despite reference to greater reliability, “in fact the majority of its filing discusses how its proposal will help suppress the cost of delivered fuel for electric generation and by extension retail electric prices.”

Algonquin does not justify its proposal to favor and subsidize one segment of natural gas consumers above others.  Algonquin’s proposal is likely to” frustrate rather than support reliability” in the market.

Besides defying the value premium preserved in Order 712, the Shippers argued extensively, Algonquin’s proposal is also contrary to the law and Commission policy in three additional areas: it is preferential and unduly discriminatory; it provides false price signals as to new construction, and it favors one form of electric generation over others.

Nor is Algonquin’s proposal comparable to the Retail Choice Exception, the Shippers argued.  State-run programs allow retail customers to choose from whom they will purchase gas in order to increase competition in the retail market.  Local distribution companies (LDCs), who historically have had to hold interstate pipeline capacity sufficient to serve all of the customer in its service area, may release such capacity to those other retail suppliers without such releases being subject to the Commission’s bidding requirements.  If the LDCs were unable to do so, such capacity would be stranded because of decreased demand from retail customers.

The proposal here is very different, the Shippers emphasized.  Current rules under Order 712 do not reference electric markets at all.  In this case, there is no retail consumer choice that would increase competition in the retail market or any other market and there is no stranded capacity due to decreased retail customer demand.  Algonquin’s attempt to analogize the two is unpersuasive, the Shippers reasoned, and instead is preferential and unduly discriminatory on its face.

The exemption allows preferential treatment to some shippers even though other shippers may be willing to pay more than the price of the preferentially released, non-biddable capacity.  This withholding of released capacity from the general market may drive the cost of capacity even higher for the part of the marketplace excluded from bidding on the released capacity.

“The fact that electric generators may not receive sufficient compensation to recover the costs of firm gas transportation is due to the market structure of the ISOs/RTOs, and not due to a flaw in Order No. 712 and pipeline tariffs.”

In practical application, reasoned the Shippers, Algonquin’s proposal and the associated state programs effectively aggregate the demand of electric generators and put it in the hands of EDCs.  EDCs, unlike electric generators, would be willing to carry the risk of long-term capacity contracts because they have increased optionality as compared to other capacity holders: “EDCs can dispose of the capacity to electric generators at depressed prices in the first instance, or, failing that, they could release to asset managers or to the general market.”

Therefore, asserted the Shippers, Algonquin’s proposal “operates to artificially increase demand from EDCs, which, all else equal, will distort the price market participants are willing to pay when considering whether to bid on new expansion capacity in an open season.”

In the view of ConocoPhillips/Direct Energy, there are other methods to accomplish the goal espoused by Algonquin and others without giving preferential treatment to one group of shippers and distorting the market.  For example, the Commission has approved multiple-shipper agreements as a means for shippers to group together and share firm capacity and costs, and some pipelines, including Algonquin, have incorporated these agreements in their tariffs.

In the end, the Shippers charged, Algonquin’s proposal would operate as a subsidy for gas-fired generation.  “Algonquin provides no policy justification whatsoever as to why the Commission should subsidize one form of electric generation over another.”

Finally, Indicated Shippers complained that Algonquin’s proposal may also significantly change the requirements for an asset management arrangement (AMA) without benefit of rulemaking and public comment.  The key requirement for an agreement to be considered an AMA is that the replacement shipper be under an obligation to sell gas to or purchase gas from the releasing shipper, if requested by the releasing shipper, for some minimum portion of the term of the release based on the length of the term.  The requirement is designed to limit exemptions from the tying and bidding requirements to bona fide asset management agreements as compared to other types of capacity release.

Algonquin’s descriptions and proposal appear to contemplate two capacity releases, one from the EDC to an asset/capacity manager and a second from the asset/capacity manager to the electric generator. However, the capacity release from the EDC to the intervening asset/capacity manager does not appear to have a purchase or delivery requirement as required by section 284.8(h) (3) of the regulations.   If so, this appears to significantly broaden the definition of an AMA.

At a minimum, concluded the Shippers, Algonquin would have both transactions exempt from bidding. Given the importance of the definition of an AMA under the capacity release rules, this should not be permitted on an ad hoc basis but should be the subject of rulemaking and public comment.

Exelon/NextEra EnergyExelon Corp. and NextEra Energy Resources, LLC filed a joint protest.  For them, the February 19 filing is “far from a simple exemption or waiver of the Commission’s capacity release rules.”   The proposed exemption cannot be understood in isolation and must be evaluated in context.  While Algonquin “alludes to enhancing reliability,” the proposed exemption is a key element in “a multi-state scheme to suppress wholesale power prices in ISO New England.”

To Exelon/NextEra, the pending Eversource filing at the DPU, for instance, “trumpets price suppression while making no showing that the ERSP[3] is needed for reliability.”  Accordingly, “it is through this lens that the Commission should consider the February 19 filing.”

Under plans such as the ERSP, the protesters explain, an EDC would enter into long term contracts for new pipeline capacity that the EDC cannot use.   It is reasonable to assume that the price paid for the released capacity would be at a considerable discount to the maximum rate.  The Eversource ERSP also would bar generators from re-releasing the capacity they acquire, a restriction that would further depress the price for these preferential releases because the generator would run the risk of being stuck with this pipeline capacity if it is not called to run by ISO New England.

The ERSP also implements a complicated, multi-tier award process that always affords gas-fired generation a preference for capacity, thus “creating a small universe of potential acquirers of the capacity.”  Given that cost under-recoveries would be covered by non-bypassable charges on EDC distribution customers, the EDCs are indifferent to the price received for the capacity.  “Cognizant of this reality, the generators in turn will have little incentive to offer competitive prices for the capacity, because they are sheltered from competing in the market to obtain the capacity.”

The size of the subsidies involved likely would be substantial.  These subsidies will depress wholesale market prices in ISO New England because they will be reflected in the preferred generators’ locational marginal pricing for energy sales and their Forward Capacity Market de-list bids.

Furthermore, Exelon/NextEra alleged the February 19 filing results in undue discrimination between gas-fired generators on Algonquin who are given the benefit of non-biddable subsidized capacity and gas-fired generators who are connected to other pipelines and therefore are ineligible for the ratepayer subsidized preference.  Given that these same generators compete in the New England market, “this preference will reverberate throughout the ISO New England market,” potentially creating “haves and have-nots.”

The proposal further results in undue discrimination between gas-fired generators on Algonquin and other generators who have made firm fuel arrangements without subsidies, whether it be natural gas or other fuels.  There is even an undue preference on the Algonquin system with respect to pipeline capacity given that there are generators that already have firm pipeline capacity on Algonquin.

Algonquin’s proposed tariff language further places restrictions on the ability of a generator that obtains releases of capacity from an EDC to serve the wholesale electric market outside of the EDC.

The capacity release restriction is “rather vague,” as it could be perceived to limit a generator that acquires preferential capacity to only selling in the New England market or perhaps it is even more limited to “the market serving the electric distribution company”—i.e., a sub-market within ISO New England, such as the service territory of the releasing EDC.  This restriction could “balkanize” wholesale sales by generators who receive subsidized preferential releases.

Finally, Exelon/NextEra claimed the proposal is essentially unnecessary because FERC and ISO New England already have taken steps to address regional reliability concerns.  ISO New England has established a regional “pay for performance” initiative that has been adopted by the Commission to provide incentives for all generators to be there when called upon by ISO New England.  ISO New England has also implemented the Winter Reliability Plan to ensure adequate firm fuel inventories in the winter, which has proven to be effective.

“If parties are concerned that the pay for performance mechanism will not incent adequate generator reliability in New England, the pay for performance mechanism itself should be adjusted, in place of the new and additional out of market construct envisioned in the February 19 filing.”

The potential for harm to competitive markets is exacerbated by the breadth of Algonquin’s proposal, the protesters continued.  Algonquin’s proposal covers both expansion capacity and existing capacity. Algonquin’s extension of the exemption for bidding for gas-fired generators to existing capacity is “puzzling.”  If the “problem” is more pipeline capacity needs to be built, how would an exemption for the existing capacity that Algonquin contends is fully subscribed solve the problem?

Moreover, given that EDCs presumably do not hold existing pipeline capacity on Algonquin, extending the exemption to existing capacity would be meaningless unless Algonquin intends the proposed exemption to encompass capacity contracted by affiliated gas LDCs to be treated as EDC capacity.  “If so, that issue should be addressed by the Commission in its order.”

Other questions emerge.  What restrictions may be placed on an electric generator’s use of capacity acquired under the tariff language proposed by Algonquin?   “The policy implications of Algonquin’s filing are extensive; the unanswered questions it raises are material.”

Quite simply, concluded Exelon/NextEra, Algonquin’s request goes far beyond an exemption.  Effectively, given the breadth of its request, Algonquin is asking the Commission to revise its capacity release regulations without engaging in notice and comment rulemaking.

Other ProtestersCalpine Energy Services, LP, Dynegy Marketing and Trade, LLC and PSEG Energy Resources & Trade LLC (Joint Protesters) aired similar views to those of the joint protester Exelon/NextEra.  Joint Protesters noted that the rules Algonquin put on the table would apply to EDCs that would be participating in “as yet nonexistent state-regulated electric reliability programs.”  The proposed exemption would “distort the secondary market for pipeline capacity to the detriment of EDC ratepayers and New England gas market participants, and improperly aims to suppress electricity prices in New England.”

Joint Protesters took no issue with the need for the Algonquin ANP or similar efforts to expand natural gas pipeline infrastructure in New England.  However, Joint Protesters objected to “hastily promulgating an unnecessary, potentially harmful exemption to the Commission’s capacity release rules.”

Algonquin’s filing “reprises arguments first made during the gas-electric coordination discussions” that “in the eyes of some pipelines” and EDCs, generators do not hold the “right kind” of pipeline capacity.  Such arguments, however, afford no basis for concluding that New England’s power system reliability is imminently at risk; it is not.  Generators have, and make use of, myriad fuel supply options “that, ironically, the ANP would expand even without resorting to preferential capacity releases of the kind proposed by Algonquin.”

Contrary to Algonquin’s claims, these three entities argued, the proposed exemption is not needed to promote enhanced generator reliability in New England because existing electric reliability is adequately maintained via existing pipeline, LNG and dual-fuel capabilities, and ISO-New England’s strict capacity performance requirements.

Moreover Algonquin’s proposal would distort the secondary market for pipeline capacity to the detriment of EDC ratepayers and other secondary market participants.  There is no reason why the EDCs’ allocation of that pipeline capacity in the secondary market could not be done in a competitive, non-discriminatory manner under the Commission’s existing capacity release regime, rather than through preferential releases to generators.

Most disturbingly, “the proposed exemption appears intended to achieve improper price suppression in New England’s power markets akin to efforts previously undertaken in Maryland and New Jersey and rejected by the courts.”

Repsol Energy North America Corp. indicated in a filing that it does not oppose the concept of an appropriate mechanism designed to facilitate the release of capacity to electric generators for electric reliability purposes pursuant to a state-regulated program.  However, such a mechanism “should be carefully vetted” by the Commission, its Staff, and interested parties to ensure that it does not unduly undermine or interfere with the goals and policies of the Commission’s capacity release program.

Repsol is looking for safeguards to protect the capacity market and its participants.  For this reason, Repsol requested a technical conference especially to examine how the releases Algonquin proposes for exemption from the capacity release bidding requirements will work in practice.  For example, Algonquin’s proposed tariff that “Algonquin has no responsibility or liability for determining whether a Customer is in compliance with its state-regulated electric reliability program.”  Lack of appropriate verification or oversight may open the door to abuse of the proposed bidding exemption, cautioned Repsol.  The technical conference “should consider what procedures are necessary to ensure that the exemption, if approved, will be used only for the purpose of furthering electric reliability by participants in a state program and in accordance with the requirements of that program.”

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[1]  Order Nos. 712, 712-A, 712-B carried the moniker Promotion of a More Efficient Capacity Release Market (2008, 2009).

[2]  Under Order 712, the Shippers noted, the only other exceptions to the bidding requirement are release transactions (1) that constitute asset management arrangements, or (2) are entered into in furtherance of a state-sponsored natural gas retail access program.

[3]  Eversource Electric Reliability Service Plan.

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Copyright © 2016 by Concentric Energy Publications, Inc.  All rights reserved.

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