Maine commission rejects LNG contract proposals

Friday, May 19, 2017

Maine utility regulators have decided not to order utilities to enter into contracts for liquefied natural gas storage capacity, after finding that none of the proposed contracts satisfied statutory requirements.

In 2013, the Maine legislature enacted the Maine Energy Cost Reduction Act in response to concerns about natural gas and electricity price increases driven by constraints on natural gas supply into and within the New England region.  That law authorized the Maine Public Utilities Commission to execute (or to direct utilities to execute) one or more "energy cost reduction contracts" for natural gas pipeline capacity, if certain prerequisites were met.

In 2016, the legislature enacted a further law amending the Maine Energy Cost Reduction Act, to include liquefied natural gas storage capacity -- "physical energy storage"-- along with interstate natural gas pipeline as within the Commission’s authority for long-term capacity contracts.  In a subsequent proceeding, the Commission solicited bids, ultimately considering 11 physical energy storage contract (PESC) proposals from 6 bidders.

But according to the Commission's order, analysis by its consultant Navigant "indicated that no PESC proposal would provide more than a minimal reduction to natural gas or electricity prices in the regional wholesale markets. Thus, no PESC would reduce electricity prices for Maine consumers, and any benefits of the PESC come from managing the purchase and sale of gas stored in the physical energy storage facility at differing times of the year and flowing those differences back to ratepayers."  The Commission noted that "perhaps the most useful aspect of the Navigant analysis is the extent to which it demonstrates the risks of the PESCs, given the extent to which the cost-benefit results are shown to be highly sensitive to assumptions about the future, such as the presence or absence of ANE and the use of winter peak-day vs. average-day prices."

The Commission further found that "there is no barrier that would prevent private entities from developing LNG storage facilities in the region; thus, under existing market rules, private transactions can be expected to achieve substantially the same market price impacts as those which might occur through the execution of a PESC."  The Commission also concluded that "the proposed PESCs do not meet the statutory prerequisites with respect to market rules and private transactions, cannot be considered economic or commercially reasonable, will not have a significant impact on natural gas or electric prices, and will not significantly enhance reliability in Maine or the region. Moreover, the proposed PESCs expose the State's utility ratepayers to substantial risk and could result in significant rate increases, particularly in the near term."

For these reasons, the Commission concluded that "none of the PESC proposals presented in this docket satisfy the statutory requirements specified in LNG Storage Act. Therefore, the Commission cannot order the execution of a PESC."

In the meantime, progress on an Energy Cost Reduction Contract for pipeline capacity appears stalled, despite years of proceedings and initial progress.  The Commission issued its Phase 1 Order on November 13, 2014 in which it made the necessary prerequisite findings for ordering a pipeline contract, and invited proposals.  It issued its Phase 2 Order on September 14, 2016, finding that two pipeline capacity proposals satisfied the statutory requirements for acceptance and would benefit ratepayers.  But on November 26, 2016, the Commission postponed further activities regarding the development and review of a precedent agreement for pipeline capacity, pending future developments in other New England states, noting that it would monitor such developments and would renew activity in the docket in the future if circumstances warrant. There has been no activity in the pipeline contract docket since the issuance of that November 26 order.

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