Are the potential natural gas reliability issues facing New England a result of regulatory hurdles or investment issues? During today's OnPoint, Marc Spitzer, a former commissioner at the Federal Energy Regulatory Commission and now a partner at Steptoe & Johnson, discusses the challenges of financing natural gas pipelines. Spitzer also discusses efforts in Congress to restructure master limited partnerships.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Marc Spitzer, former FERC commissioner and now a partner at Steptoe & Johnson. Marc, thanks for coming back on the show.
Marc Spitzer: Love to be here, Monica. Thank you.
Monica Trauzzi: Marc, a House Energy and Commerce Committee panel held a hearing this week to address potential reliability issues in the Northeast due to a shortage of natural gas pipeline infrastructure. Is this a regulatory issue or an investment issue?
Marc Spitzer: Actually, it's both, and my former colleagues, Phil Moeller and Commissioner Cheryl LaFleur both testified, and, you know, FERC is one of those bipartisan agencies that's kind of unique and rare anymore in Washington, where Republicans and Democrats can agree. And the problem that both commissioners agreed upon and identified in their testimony on the Hill yesterday was that the economics of the pipeline industry are not aligned in accordance with the economics of the power generation industry. The pipelines have an open season and seek firm commitments from shippers to pay them to build the pipe. The power generators don't have the capital, and would have trouble accessing the capital markets in any event, to subscribe to 20 year contracts for firm pipe capacity. So they buy natural gas on the spot market. The problem is, in New England, which is at the end of the pipe, it gets very cold. The gas distribution companies are drawing from the same pipe as the power generators, and in times of cold, there is not enough gas in the pipeline. It's like three straws going into the milkshake at once. You're going to run out of milkshake too fast, and the milkshake's not going to go to the generators who've not subscribed to firm capacity. So the business model in the electric side is not aligned with the business model on the gas pipeline side; hence, both a regulatory and investment problem.
Monica Trauzzi: So what authority does FERC have on this, and what could they be doing right now to help out?
Marc Spitzer: Well, I agree with Commissioner LaFleur, who testified in response to a question, do you need additional regulatory authority, the answer is no. FERC has the authority to regulate the wholesale electric markets, and in this case, it's the Independent System Operator of New England, the New England ISO, and one possible remedy could be to create a mechanism to compensate the power generators for getting the capacity on the pipeline. So one mechanism proposed by the CEO of the New England ISO, Gordon van Welie, is to provide additional bonus for reliability. That's a after the fact mechanism. I'm not sure how bankable that is in terms of a generator being able to agree with a pipeline company to participate in an open season for 20 years firm capacity. Another way of doing it is to social - I hate to use the S word, but socialize the cost of the firm capacity across the system, and what you're really saying to the rate payers of New England is, we know there's a shortage of gas. We know that the generators and the gas distribution companies are fighting over the same gas. And in order to provide for the reliability of the grid, we need to incent this, and it's basically the cost of the reliability of the grid - is that incremental difference between the interruptible capacity that the generators are taking now, and the firm capacity that they really need to take to get steel on the ground.
Monica Trauzzi: But that last option is probably the least politically viable?
Marc Spitzer: There are some challenges, because you'd have to, I agree with you. You'd have to get the regulators on board and the state regulators having been in that position as a state commissioner in a prior life, you have to make the case as to the need for this, and right now, that case has not been made. I'm hoping for the sake of reliability of the electric grid in New England that case is made to the, in a very compelling manner, so that the regulators would support it. And if the regulators support it, I think then that political viability increases greatly.
Monica Trauzzi: So this is what's happening in New England. Do you think this case is a preview of what may be coming in other regions of the United States, as more natural gas is needed for base load power? A lot of states are implementing RPSs.
Marc Spitzer: Right. Absolutely true. There are a couple of factors. One, the price of gas has tumbled, of course, and the gas plants are running an economic dispatch ahead of coal, particularly some of the older plants with worse heat rates that are using Central Appalachian coal that's more expensive, or Illinois Basin coal. In addition, EPA regulations are tightening. Even if we don't get legislation from Congress on carbon, regulations relating to new goal as well as existing coal are likely to increase. So coal plants in the Midwest may shut. This is a big issue in MISO. FERC is very aware of this. FERC just last week held a hearing in the Midwest, very coal-dependent region of the country. You wouldn't think pipeline capacity would be an issue. Right now, the gas pipeline infrastructure is adequate, but if you have a number of coal retirements, you may have localized reliability issues. Wholesale switching from coal to gas invokes the same issue as New England. It's just not now, it's three years or five years from now. But grid operators have to plan well in advance, and the FERC is very well aware of this. And so this would be New England part deux.
Monica Trauzzi: So a fairly recent development, talk to me about what's happening with the master limited partnerships in Congress right now.
Marc Spitzer: Well, master limited partnerships are known as MLPs, and they're - I'll try and not show my tax lawyer background too much on this. It is a great investment vehicle for those who wish to put steel in the ground, because you do not pay two levels of tax. It's very friendly to investors. Instead of paying a corporate tax and an individual tax, MLPs pay one level of tax at the partner level, and all the profits flow through to the investors, which is why virtually every new oil pipeline in this country takes the form not of a C corporation, but an MLP. Congress favored MPLs with favored treatment in 1987 in a tax legislation, and there's a question as to whether that tax preference is subject to the acts in the budget discussions going on on Capitol Hill. When I took office at FERC, natural gas prices were in the $12.00 range in my home state of Arizona. They've come down to $3.00, and a lot is due to the ingenuity and creativity of the gas producers in this country. A lot of it has to do with the markets that have been structured, and the FERC regulated markets that are the envy of the world. And then third, gas needs to get from where it's produced to where it's consumed, and it takes the form of interstate pipelines, and we have laid in this country 10,000 miles of interstate pipelines when I served at FERC. It's a great tribute to the regulators, my predecessors, and those commissioners currently in office, to get that steel in the ground. The investment vehicle has been the master limited partnership, and a repeal of that section of the code would I think harm the rollout of gas in this country. Not only should that preference stay, in my view, but I think the MLP treatment ought to be accorded renewable energy. You know, as a former regulator who's required to provide a reliable supply of energy at reasonable prices to the ratepayers of the United States, I like all fuels. All fuels are good. And I think renewable resources could benefit, solar and wind, from the rollout of the transmission grid and other investments in the form of MLPs. It's a good thing for this country, and it's a good thing for the rate payers, and I think it not only should stay in the tax code, it should be advanced.
Monica Trauzzi: All right. Well, this will be an interesting issue to watch as those discussions continue. Thank you for coming on the show.
Marc Spitzer: My pleasure. Thank you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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