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Study slams FERC scrutiny of 'self-dealing,' demand for gas pipelines

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Study slams FERC scrutiny of 'self-dealing,' demand for gas pipelines

Regulators are falling short of their duty to assess whether new interstate natural gas pipelines are supported by long-term demand, creating the potential for corporations to shift financial risks to utility ratepayers, a study by three non-profit groups released Tuesday contends.

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The report, dubbed "Art of the Self-Deal" by Oil Change International, Public Citizen and Sierra Club was released in advance of the Federal Energy Regulatory Commission's first monthly meeting in seven months. FERC is slated to decide on a slew of pending gas projects in the coming months.

The study points to the 14% return on equity FERC has tended to allow for greenfield pipelines, saying the "excessive rate" distorts market signals, luring utility holding companies to invest in pipeline projects. That rate, first set in 1997 when interest rates were double today's average, exceeds what is typical for other major utility investments, it argues.

It calls particular attention to projects that lean heavily on utility affiliates of project owners as customers, warning that FERC needs to scrutinize "self-dealing."



Utility holding companies "are launching their own projects to cash in on the high returns associated with pipeline development," the report contends. It raises doubts about whether the projects will be underutilized, increasing financial risks for ratepayers.

"FERC fails ratepayers when it takes at face value pipeline company estimates of future gas demand while the momentum behind clean energy's disruption of fossil fuel markets is accelerating," said Lorne Stockman, senior research analyst at Oil Change International and co-author of the report.

The main regulatory agency is performing an "entirely superficial analysis," he contends, pointing to a dynamic energy landscape that makes demand for gas over the next 20 years highly uncertain.

The report was met with a quick rebuke from gas industry officials who said it is little surprise groups opposed to fossil fuels or gas pipelines would conclude that they are unneeded.

Cathy Landry, spokeswoman for the Interstate Natural Gas Association of America, said report sponsors "have been clear in their belief that high natural gas prices are good, and that new pipelines that result in lower monthly energy bills for consumers are bad."

"To suggest that pipelines are being proposed and built without demonstrable market support is preposterous," she said, adding that gas demand is growing in the electric utility sector, industrial sector and gas utility sector. "Investments of this size and nature would not be made without demonstrable justification, and federal and state regulators would not approve such investments without that justification," she added.

FERC declined to comment, noting some of the issues involve arise in contested proceedings that are pending before the commission.

The report questions the pitch from pipeline companies that they will bring access to lower priced gas and will lower energy costs for consumers. For instance, it argues that higher transportation costs of new projects could be a key factor in end user costs once regional gas basin differences balance with national averages, as more pipelines come online.

It claims that "comparing transportation costs published with FERC shows that the cost of transporting gas to Dominion's new power plants in southern Virginia would be 3.5 times higher than using the [Atlantic Coast Pipeline] compared to the existing Transco pipeline."

Aaron Ruby, a spokesman for Dominion Energy, said the report ignores the fact that the region's existing pipelines are "fully tapped and virtually inaccessible" in many areas Atlantic Coast will serve. "Pipelines in eastern Virginia are stretched so thin public utilities are shutting off service to major industrial facilities during the winter just to keep homes and hospitals warm," he said, adding new economic development is stymied east of Richmond. He also cited a 2015 ICF International study indicating the pipeline would lower consumer energy costs by $370 million a year.

Landry added that "natural gas and electricity prices are cheaper in markets with adequate natural gas pipeline capacity than in those with capacity constraints."

--Maya Weber, maya.weber@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com