Pipeline costs spike price of gas and electricity

WESTFIELD – Officials of the city’s Gas & Electric Department reported a revenue deficit for January and anticipate that the February numbers will also be in the red when the books are closed. And December wasn’t much better.
The financial reports presented to the Municipal Light Board (MLB) members last night show a net income deficit of $992,600 compared to January of 2012. Those numbers are surprising because the winter of 2012 was one of the warmest on record and energy demand for heating was extremely low, while this winter is more typical of New England
The year-to-year comparison of income versus expenses show where the red is leaking into the department’s ledgers. Gas division revenue in 2012 was $2,383,508, while the gas expenses were $1,848,923, resulting in a net income of $534,603. Those same numbers for 2013 are: $2,618,508 for income, $2,734,986 for expenses resulting in a net revenue loss of $116,478 for the month. The most startling number is the $886,063 difference in the expense line from 2012 to 2013.
The electric division has a similar line item, although not as extreme as the gas division. The difference in the Electric Division cost of purchasing power, from 2012 to 2013, is $381,901, while the total department, which saw an increase of $1,267,964 in the 2013 expanse line compared to last January.
The culprit is the regional transportation cost of natural gas due the fact that New England is at the end of the distribution system delivering that commodity.
General Manager Dan Howard said that the city is purchasing the gas commodity at an advantageous price.
“Gas is abundant, the supply is there, it’s getting it to the end of the pipeline that is the problem,” Howard said. “Every utility in New England, gas and electric, is experiencing the same problem. If you go 500 miles to the west or south, they are not seeing these historically high transportation costs.”
“The commodity price is very low.  It’s excellent. We’ve done a great job of managing that cost,” Howard said. “What we can’t control is the daily cost of the pipeline transportation. The pipelines were built years ago and that infrastructure is not able to keep up with demand.”
“We think we can absorb the price increases, but we’ll have to see how things play out in the markets the rest of the year,” Howard said. “There are a lot of variables.”
Board Chairman Tom Flaherty, a Hess Corporation energy manager, said that the gas prices are also pushing up the electric rates.
“Oil and coal electric generation facilities have been closed permanently, or are not being operated,” Flaherty said. “The main (electric) generation has become natural gas, (which is) economically and environmentally more efficient.”
Flaherty said that cuts in the volume of gas from the Canadian Maritime, liquefied natural gas (LNG) shipments into Boston, the North Shore and Canaport, combined with little or no improvements interstate gas pipelines are resulting in transportation costs has much as 10 times higher that in the past. The cost of transporting gas to the region also spikes when nuclear generation plants are taken off line, such as during the February blizzard when the Pilgrim plan was taken off line, and gas-fired generation plants replace that missing electrical capacity.
“We are seeing near record high daily cash pricing for natural gas and the basis, the interstate transportation costs to get gas to New England, have skyrocketed,” Flaherty said. “This February has seen the average daily cash cost for the Algonquin Pipeline natural gas at $20.92.”
Howard said that the transportation cost is typically between $2 and $3 per MMBTU, but that in January that cost spike to more than $30 on some days and the February average, for the two pipelines, was $15 a day.
“New England must now receive most of its gas supply through two pipelines entering the region from the south and west, which are often at maximum capacity,” Howard said. “Demand has caused transportation costs to skyrocket well beyond historic levels.”
“High gas transportation costs also affect the wholesale power market,” Howard said, “due to New England’s growing reliance on natural gas for electric generation. As gas costs continue to increase, New England’s wholesale (electric) power costs go along for the ride.”
The department is buffering both gas and electric rates by tapping into the stabilization reserve accounts so local customers, 19,000 electric customers and 9,800 gas customers, do not see a dramatic rate increase.
Several board members expressed concern about substantially drawing down the gas stabilization reserve account, which initiated a debate about the purpose of that account.
Flaherty said that while management does not contemplate a rate increase this year, using the stabilization funds to bridge the gap between cost and revenue, it may not be able to sustain that buffer as the stabilization account is expended.
“So there is no need for a knee jerk reaction now to raise the gas rates,” Flaherty said. “So there is no (rate) increase this year, but if the market is the same next year, we would have to raise the rate.”
The MLB members have been debating the pipeline issue since December when the transportation costs began to spike. The board signed a letter to Gov. Deval Patrick last night seeking the state’s action to initiate a regional and national plan to fund an increase in pipeline capacity, an issue that is driving up the cost of both gas and electricity for residents in the state and entire region.
“However, the increase in reliance by electric power plants and the lack of construction of new and or upgraded gas transportation facilities into the New England area gas caused gas priced to spike due to delivery restrictions and increased delivery costs,” the board’s letter said. “In order to resolve this issue and provide for access to less expensive gas available outside of New England a regional and national solution needs to be implemented to help alleviate the physical constraints on our gas supply into New England.
“This can be accomplished by having all stakeholders contribute, on an equitable basis, to increase pipeline capacity,” the board stated.

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