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Gas Supply:Too little, Too late?

Fortnightly Magazine - September 2004

contract into rate base, you're not going to sign a contract," says Allan Marks, a partner with the global project finance department of Milbank, Tweed, Hadley & McCloy LLP in Los Angeles. "But if you are in a jurisdiction where you have more latitude, then you will take the risk."

Indeed, some utility rate-making authorities are warming up to the idea of long-term gas contracts, whether with pipelines or LNG terminals.

"We've seen a change of heart by many commissions," says Kirk Morgan, vice president of marketing and regulatory affairs for Kern River Pipeline Co., MidAmerican Energy's pipeline arm. "Contracts can be out of the money for a period of time, and state PUCs second-guess their utilities with regard to contract positions. But we are seeing a change from short-term to longer-term thinking, to prevent what happened to us with supply imbalances and price spikes."

Considering Pre-approval

Examples, Morgan says, include the California PUC, which has adopted policies wherein utilities can get pre-approval of long-term capacity agreements so they won't be second-guessed in future rate cases. Another example is the Arizona Corporation Commission (ACC), which last year issued a policy statement saying that it would consider pre-approving gas contracts for Arizona utilities. The commission did just that in late June, when it granted pre-approval of costs related to a block of the $1 billion Silver Canyon pipeline that Southwest Gas plans to acquire from Kinder Morgan Energy Partners, if the pipeline is built.

"Pre-approval of these expenses is a new policy for the commission," says Mike Gleason, ACC commissioner. "This policy is necessary to encourage critically needed additional pipeline capacity to meet our growing natural gas needs."

Other commissions are considering the issue in policy discussions, and further action is expected later this year. "We need some technical guidance on this, and we are hoping to work on it with the DOE [Department of Energy] and NRRI [the U.S. Department of Energy and the National Regulatory Research Institute]," says W. Robert Keating, a commissioner with the Massachusetts Department of Telecommunications & Energy, and former chairman of the gas committee for the National Association of Regulatory Utility Commissioners (NARUC). "There are pros and cons with regard to long-term contracting that we need to study. I'm hopeful that we'll have a recommendation for the NARUC November annual meeting."

NARUC's guidance will be helpful. However, pipeline companies and LNG terminals might not be able to bank on such agreements the way they once could have. "The question for sellers becomes, how creditworthy is the utility?" Marks says. "Just because the utility has permission to put a contract into rate base doesn't mean the utility is creditworthy."


LNG Science: A Moving Target

In the frantic aftermath of the Sept. 11 attacks, the U.S. Coast Guard stopped all shipments of liquefied natural gas (LNG) into Boston Harbor. To reach the Everett LNG terminal, tankers had to cruise past downtown Boston, and officials weren't sure what would happen if terrorists were to attack a tanker, as they did the U.S.S. Cole in October 2000.

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