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Task force says long-term contracts best Financing needed for new natural gas infrastructure, such as an Alaska gas pipeline, hurt by emphasis on short-term contracts By Kristen Nelson Petroleum News Editor-in-Chief
A task force report from the National Association of Regulatory Utility Commissioners and the Interstate Oil and Gas Compact Commission says shorter-term gas purchase and transportation contracts may jeopardize financing of capacity expansion needed to meet a growing U.S. demand for natural gas.
Congress has approved a federal loan guarantee for a natural gas pipeline from Alaska’s North Slope but the task force said supporting new infrastructure projects such as the Alaska gas pipeline to expand the U.S. gas pipeline network is essential “to moderate the level, as well as the volatility of future natural gas prices.”
The task force said industry observers believe the United States must expand its gas delivery infrastructure to meet growing demand, and said “long-term contracting may be requisite for achieving this objective.”
Task force co-chairs are Commissioner Donald Mason of the Public Utilities Commission of Ohio and John Norman, chairman of the Alaska Oil and Gas Conservation Commission and former vice-chairman of IOGCC.
Norman said in a statement that over the past 25 years federal and state initiatives have created increased competition in the U.S. natural gas industry, accompanied by “a movement toward shorter-term commercial transactions for gas procurement and transportation services. Such heavy reliance on short-term transactions may jeopardize the ability of gas-delivery sponsors to finance expanded capacity sufficient to meet the country’s growing demand for reasonably priced natural gas.”
The task force found that the movement toward shorter-term contracts is the result of both market-driven and regulatory factors.
Officials from the organizations will be asking state regulators and the Federal Energy Regulatory Commission to look at regulatory practices that may need to be changed to encourage longer-term gas delivery services.
The task force took comments at a Washington, D.C., workshop on Aug. 18 and also accepted written comments. Information came from industry groups, gas suppliers, pipelines or retail gas utilities; two state regulators also submitted written comments.
The task force said in a report released in October that those commenting at the workshop acknowledged “that long-term contracts may be needed to finance new capital projects” and said state regulators should change their practices, which now discourage gas utilities from entering into long-term contracts. Commenters at the workshop said states “should evaluate long-term contracts from a multi-year perspective and avoid second guessing utilities because contracts could later be deemed unattractive during a limited lifetime.”
The task force said comments identified “regulatory barriers at the state level as a major reason for why gas utilities have been reluctant to sign long-term contracts for delivery services,” and recommended strategies such as pre-approval of long-term contracts and the application of a portfolio approach, with utilities contracting for some long-term gas. Regulatory barriers One barrier to long-term contracts addressed in the written comments is that state regulators do not have clear policies toward long-term contracts, the task force said. Regulators also “inappropriately” exploit 20/20 hindsight “in prudence reviews to disallow costs for unanticipated events,” leave utilities exposed to stranded costs from long-term contracts when customers switch to marketers, place undue emphasis on short-term transactions and slight “the benefits of risk management resulting from hedging and portfolio diversification.”
The task force said most of those commenting believe “regulators should encourage long-term contracts when new gas-delivery infrastructure investments are warranted.”
The predominance of short-term contracts for gas suppliers and gas delivery over the past 20 years has “imposed additional risk on gas-delivery operators by increasing the uncertainty of their future revenue stream,” the task force said. Recent studies have shown that delays in gas infrastructure development “can have a chilling effect on future natural gas market conditions,” the report said, attributing such delays to the absence of long-term commitments by gas utilities. Portfolio approach One solution to the need for long-term commitments “would be for gas utilities to apply a portfolio approach to gas procurement and transportation acquisition,” the report said. “…Within the confines of a portfolio approach, a prudent long-term strategy may encompass long-term contracts for pipeline and storage services.”
The task force said it concluded “that long-term contracting may be a prudent way to develop an appropriate balance between cost, risk and reliability,” with the optimal mix of long-term contracting within a portfolio varying by utility, with long-term contracting attractive “when pipeline capacity becomes so restricted in a region that a utility must prudently guarantee adequate future capacity by making a long-term commitment to new capacity.”
The task force is recommending that state regulators take a more active role in encouraging long-term contracting and “should minimize second guessing and taking a short-term perspective when evaluating long-term contracts.” The task force urged recognition of “the urgent need for additional gas-delivery infrastructure to moderate the level, as well as the volatility, of future natural gas prices,” and said state regulators should look at “long-term contracting as an appropriate mechanism to manage long-term price and volume risk within the confines of a gas utility’s portfolio strategy.”
The Alaska natural gas pipeline project is specifically mentioned, with state regulators urged to “recognize the special features of certain infrastructure projects, specifically the Alaskan gas pipeline and multiple LNG projects, that will require substantial revenue guarantees.”
The task force also recommended that state regulators require utilities to develop long-term strategies for pipeline capacity and said “FERC should revisit its policies for pricing different pipeline services, in addition to its other practices that may be stifling financing of, and contracting for, long-term gas-delivery services.”
The report’s policy recommendations are available on the National Association of Regulatory Utility Commissioners Web page at:
www.naruc.org/associations/1773/files/NARUC-IOGCC-REPORT.pdf
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