RELENTLESS. That's the word consultant Benjamin Schlesinger uses to describe the growing share of North American markets claimed by natural gas produced in the U.S. Rocky Mountain region, the San Juan basin and western Canada.
"Western gas has climbed steadily, from 21 percent of North American gas production in 1975, to 33 percent in 1995," says Schlesinger, president of Benjamin Schlesinger & Associates Inc., Bethesda, Md. "It looks like that figure will reach 35 percent in the next few years. And that doesn't include new supplies from Sable Island [off the coast of Newfoundland]."
A look at the map shows some of the major proposed pipeline projects, with many designed to move Canadian gas to the Chicago hub and points east. Other projects vie to bring gas from the Sable Island into New England.
In seeking U.S. certification, Independence Pipeline sponsors claimed: "Natural gas will serve as the ideal fuel for industrial expansion and power generation in an area that must balance these energy needs with new environmental regulations."
With electricity, however, the news is less ebullient. An ice storm last winter knocked Hydro Quebec on its heels. And in Ontario, well, electricity appears mired in uncertainty (em caught between a restructuring white paper and a nuclear shutdown.
Natural Gas: 10 New Pipes
A year ago, the U.S. Energy Information Administration said it was tracking about 88 pipeline projects at various stages of development in the U.S., Canada and Mexico.
"The most extensive development is focused on expanding the deliverability of Canadian gas to the U.S. Midwest and Northeast, and to Canadian markets¼ Sixteen projects have been proposed that would add more than 8,063 MMcf per day to U.S. import capacity from Canada over the next 4 years, an increase of 78 percent from 1996 levels¼ almost double the total Canadian import capacity added from 1991 through 1996." (See, "Natural Gas Pipeline and System Expansions," by James Tobin, Natural Gas Monthly, April 1997.)
A good chunk of that new capacity would be located on U.S. soil, requiring certification from the U.S. Federal Energy Regulatory Commission. Some of new pipelines, such Viking Voyageur and Vector, will receive approvals in the U.S. Others, such as Alliance and the Maritimes and Northeast line, must apply to both the FERC and the National Energy Board of Canada. (See table, "10 Pipeline Projects.")
Three key issues have emerged before the FERC: (1) Can the market absorb the new pipelines? (2) Can the new pipelines keep their shipper lists confidential? (3) Will the FERC allow equity returns high enough to sustain construction?
In the Alliance case, Natural Gas Pipeline Company of America (a competitor) questioned whether the project sponsors had shown a market need:
"The [FERC order] authorizes a brand-new pipeline that will terminate in the Chicago market. This market is currently served by Natural, ANR Pipeline Co., Trunkline Gas Co., Midwestern Gas Transmission and Northern Natural Gas Co. In addition, the commission has recently approved an application by Northern Border Pipeline to extend its system to Chicago¼ Voyageur Pipeline has announced plans to construct an additional pipeline that will terminate in the same area¼ [W]hat will happen when all this capacity is constructed?"
One way to prove need is to conduct an open season, inviting shippers to bid on and sign "precedent agreements" for new capacity. What if the pipeline applies under the FERC's "optional certificate" procedure so it can keep its shipper list confidential?
NGPL challenged that strategy in the Alliance case: "[We] are handicapped by the refusal to require Alliance to identify its shippers. The commission [must] determine whether the proposed pipeline is actually needed, or is merely an outlet for excessive production."
NOVA (now talking merger with TransCanada Pipelines) added, "Alliance denies its own shippers an opportunity to realize the full benefit of competition by shielding their identities from competitors." On Feb. 24, the FERC Office of Pipeline Regulation required Viking Voyageur to release its precedent agreements.
Keith Bailey, CEO for the Williams Companies, testified at FERC's January technical conference in Docket pl908-2-000, criticizing commission policy setting equity returns. So did David N. Fleicher, gas analyst at Goldman Sachs, who noted, "The new projects on the drawing board contemplate higher returns than are available under the FERC's new policy."
David A. Arledge, president and CEO, of the Coastal Corp. adds, "All the projects leading out of Chicago are proposed expecting things to get better. If return on equity stays the same, these projects won't get built."
On Oct. 27, a five-person panel set up by the Canadian NEB to review proposals for development of Sable Island offshore gas fields voted to allow the Maritimes and Northeast project to proceed, denying requests by the North Atlantic partners and the Trans Québec & Maritimes project to delay proceedings to allow their competing applications to be reviewed. On Feb. 6, Kevin Madden, director of the FERC OPR, wrote to Charles M. Darling, president of North Atlantic Pipeline Partners: "Your application contains serious deficiencies¼ I am placing the application in an inactive status."
Power: Remaking Ontario Hydro
Meanwhile, the "unsatisfactory" business record of state electricity giant Ontario Hydro, particularly with regard to its nuclear division, has been cited as one "compelling" need for change in Ontario's electric industry. More than 90 percent of the province's electricity is generated by the giant, and when all units are in operation, more than two-thirds of that is generated by nuclear power.
There have been signs for a while that the Ontario Hydro's nuclear plants were cause for concern. An internal study conducted last year for Ontario Hydro found management problems, inadequate maintenance and barely acceptable safety practices. Former President Allen Kupcis took responsibility for the problems and resigned in August.
In November 1997, the Ontario provincial government released a White Paper outlining a move to competitive wholesale and retail markets in 2000. The paper, Direction for Change (em Charting a Course for Competitive Electricity and Jobs in Ontario, echoes much of an earlier recommendation by a government advisory committee to restructure Ontario Hydro. The plan would form a holding company, the Ontario Electric Service Corp., for transmission, distribution, retail and operating contracts, along with the Ontario Electricity Generation Corp. plus an independent market operator.
While pointing a finger to "ongoing problems" with nuclear plant management and worker training, the report also finds no problems with power reliability or nuclear safety: "The Atomic Energy Control Board and other independent experts have confirmed that the nuclear system is being operated safely."
William Farlinger, Ontario Hydro's chairman and then-interim president and CEO, stressed the same point in an earlier speech to the Canadian Club: "[O]ur nuclear units¼ are safe, or we would not run them. What I am saying is that when operating performance worsens, safety will eventually be affected if actions are not taken."
Three weeks after the White Paper was made public, Ontario Hydro released its first in a series of monthly report cards to benchmark the nuclear division, plus individual stations, against industry standards for production, safety and environmental compliance. John Earl, a spokesman for the company, emphasizes the reports are a "long-term trending device¼ based on two-year rolling averages." He warns not to look for "instant gratification or negatives." Ontario Hydro has set "stringent targets for itself, the optimums of where we'd really like to be."
Five of Ontario Hydro's 19 nuclear generating units were "laid up" recently, and more were scheduled for lay up in late March or early April. "We've stopped applying band aids," said Farlinger. "Our plan is to concentrate our resources on improving the performance of our 12 newest nuclear reactors.
Ultimately, the fate of those laid-up units will be decided by the company's board of directors; a business plan will be presented to them in 1999. The Ontario government already has decided, however, to keep Ontario Hydro's generating assets intact, in order to keep it a strong player once competition becomes a reality. Rumors of the possibility of private-public partnerships or the outright sale of some nuclear plants to other interested parties had circulated since The Macdonald Report in 1996 had recommended dividing up and privatizing some of the company's generating assets.
This mothballing, Hydro asserts, should not have a negative impact on fuel supply. "We have enough capacity via our fossil plants to make up the difference," according to spokesman Al Manchee.
Nonetheless, the company is looking at other fuel sources, if only to "see what is out there that's better than what we have," says Ontario-Hydro's director of communications, Terry Young.
The company imports "a small amount" of fuel from the U.S., Manchee says, and some American companies have responded to this RFP.
Price is, of course, an important consideration. Wholesale electricity prices are under a rate freeze that began in 1994 and runs through the end of 2000. As Farlinger told the Canadian Club, the company would like to keep two of its Bruce A station units operating, but only so long as the units can be safely run, and only if continued operation of the units is a "cost-effective decision for all our customers." Ontario Hydro is also busy improving the efficiency of its operations, according to Farlinger, and encouraging demand-side reductions, "where this is cost-effective," and is "looking at small-scale renewable energy options," as well.
Building on the RFP, another government recommendation was implemented in January when Ontario Energy, Science and Technology Minister Jim Wilson announced creation of an interim market for replacement power. "This market," Wilson said, "will provide an opportunity for suppliers to compete with Hydro generators¼ in preparation for full competition."
In January and February, Wilson also announced the establishment of the Market Design Committee and the Minister's Electricity Transition Committee. The former will advise the government as it considers legislation to create an independent market operator. It is comprised of industry and end-user representatives who, Wilson remarked, "will help us to iron out the complex technical details to allow competition to begin." Wilson will chair the Transition Committee, whose members are senior industry representatives. "Bringing together officials from a cross-section of key organizations will give me a sounding board on issues," Wilson said. "It will be important for me to have a regular forum for updating stakeholders¼ for hearing their views."
One question is whether the move to competition and the lay-up of several nuclear generating stations will lead to an increase in natural gas as a generating fuel in the region.
Terry Young, Ontario Hydro's communications director thinks that question is a bit premature. Yet Ontario Energy Minister Jim Wilson, in a speech earlier this year, seemed to have gas-fired plants in mind when he noted, "Newer, smaller and more efficient power plants (em many of them using renewable energy sources (em will also help us meet our energy related environmental targets."
Whether or not Ontarians are moving toward natural gas, others are eyeing possibilities in the region. In February, for example, the energy marketing arm of Michigan-based CMS Energy Corp. acquired a 50-percent interest in the Ontario-based natural gas marketing firm PremStar Energy Canada Ltd. That move, said CMS Marketing Service and Trading COO William W. Schivley, "firmly establishes" the U.S.-based company "in the top tier of Canada's energy service providers" and will help "grow our customer base in North America."
Meanwhile, the restructuring continues. On March 2, Ron Osborne, appointed president and CEO of Bell Canada in 1997, took over as president and CEO of Ontario Hydro.
Chairman William A. Farlinger, who served as interim president and CEO from August 1997 through February 1998, said of the appointment: "Ontario Hydro is entering a critical point in its history."
Bruce W. Radford, who researched gas pipelines, is editor of Public Utilities Fortnightly. Lori M. Rodgers, associate editor, reported on restructuring at Ontario Hydro.
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