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PIPELINES FROM PAGE 1
their gas out of Appalachia and off to new markets. This coincides with a shift, driven by the need for cleaner energy, in power generation that hasn’t happened in decades — and arguably since the utility industry formed in Thomas Edison’s time. Coal has been the dominant fuel nationally since then. Now utilities favor natural gas as a cleaner “bridge fuel” between coal and renewable energy. Natural gas plants burn fuel more efficiently and cleanly than those fired by coal. DTE’s Nexus pipeline, the biggest project of its most profitable business segment, Gas Storage & Pipelines, is on track to open in early 2017. It is splitting the cost and ownership 50-50 with Houston-based Spectra Energy Corp. Nexus will have a carrying capacity of 1.5 billion cubic feet of natural gas per day. This is a fair amount: DTE’s gas utility sends out about half that, 0.8 billion cubic feet, every day to customers. Rover’s planned opening date is in mid-2017. The pipeline will have a capacity of 3.25 billion cubic feet per day, more than twice that of Nexus. Analysts say Rover is the biggest proposed pipeline to emerge from the Appalachian gas boom. Nexus will be a main supply line for DTE’s future natural gas plants. DTE would like to have Consumers Energy Co. as a Nexus customer, too, though Jackson-based Consumers will not say whether it plans to become a customer of Nexus or Rover.
Infrastructure costs One might think such a flood of cheap natural gas, timed with the rise of gas-fired plants, would automatically translate to dramatic savings for Michigan utility customers. Gas utility costs already are coming down, thanks to cheap prices. Consumers Energy last month announced its lowest fees for gas customers in 18 years. Low natural gas prices will influence electricity bills as energy increasingly is sourced from this fuel. So should Michigan utility customers expect to be basking in cheap energy sometime in the next 15 years? Probably not. Industry insiders are loath to predict the long-term direction of utility bill costs, given the complex web of economic pressures, regulations and parties involved. But they say a sharp drop is unlikely.
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“The cost and expense of the pipelines themselves might negate the effect abundant supply has,” said Eric Brooks, a gas industry analyst for market researcher Platts. Besides the cost of building pipelines and shipping gas on them, there is the cost of building or buying new plants to burn the gas. There will be large-scale invest-
hasn’t analyzed the potential impact of low natural gas prices or new pipelines. But the mood in the industry is that they will translate into some savings for customers, albeit not as much as they might think. “We don’t get into the prediction business, but it is widely believed that gas will be abundant for the foreseeable future and that customers will benefit from that,” said Judy Palnau, spokesperson for the commission.
‘Clean and green’
ments in converting coal plants to gas, building new plants or buying existing ones. DTE expects to spend $8 billion on this by 2030, for example, most of it beginning after 2020. (Few specifics on plant retirements or replacements have been announced so far.) These costs arrive in customer bills in two places. One is the basic electricity rate utilities use to recoup the costs of building plants and related infrastructure. This is where new investments in plants appear. The other is a fee that pays for the buying and shipping of fuel to power plants. Through a convoluted process involving a mechanism known as the FERC tariff, the pipeline construction costs eventually make their way into these fuel fees. So while there won’t be a “rate hike” as defined in the regulations, there nevertheless will be a cost in customers’ total bills reflecting the pipeline costs. Whether that cost will be higher or lower than it would be otherwise is anyone’s guess. DTE predicts $100 million in electricity fuel costs will be shaved off customers’ bills from 2017 through 2032. It further estimates general natural gas price savings of $2 billion in that period statewide (taking into account other uses such as regular gas utility service), thanks to Nexus. “It’s the cheapest route to the cheapest gas,” said Don Stanczak, DTE vice president of regulatory affairs. The Michigan Public Service Commission, which regulates utility rates,
Along with cheapness, natural gas comes with other features that should help push down utility bills as the big switch to natural gas gathers steam. The dirtiness of burning coal comes from burning off rock filled with pollutants, which not only is less efficient than burning straight gas but also necessitates expensive cleaning equipment to scrub the air emitted from smokestacks. Gas plants require less labor. A gas plant needs about 25 people, where a coal plant needs hundreds, said Samuel Andrus, a natural gas industry analyst at IHS Inc., a market research company. The distance between Appalachia and Michigan is shorter than from where Michigan currently gets most of its piped gas: western Canada, Texas, Oklahoma, the Gulf of Mexico and Louisiana. That lowers shipping costs. Once the gas arrives in Michigan, the state’s abundant natural gas storage capacity helps to keep price spikes in check. All this should result in lower bills for customers. But in addition to the investments in plants and pipelines, upgrades to an aging grid are bringing up costs, and utilities are increasing investments in renewable energy. DTE plans to drop its reliance on coal from 55 percent of its energy-source mix to 25 percent by 2030. Consumers in the past 10 years has dropped its coal use from 41 percent to 24 percent. Both companies will rely on renewables to buttress their natural gas baseload fuel. These investments, too, will end up in customer bills. But these bills would be much higher if it weren’t for a lucky turn of history that has led to cheap gas arriving at a time of investment in cleaner energy, Andrus said. “We’re basically financing going clean and green with the cheap gas,” he said. Gary Anglebrandt: (313) 446-1612 Twitter: @Anglebrandt
Where will all this gas go? According to data provided to Crain’s from IHS Inc. and Platts, there are five major interstate natural gas pipelines that come into Michigan, with a combined capacity of about 8 billion cubic feet per day. The proposed Rover and Nexus pipelines would increase that capacity by 35 percent. How will Michigan absorb all this? Some, of course, will go to utilities. DTE Energy Co.’s electric and gas utilities already are signed up as Nexus customers. Consumers Energy is staying mum on whether it plans to sign up for either pipeline. If it does not, it still could end up buying gas from one of the other pipes’ “shippers,” or customers, many of which are natural gas producers. Beyond that, it’s too early to tell just how much natural gas will be used in Michigan, but not all of it will end up here. DTE expects Nexus to pick up utility customers in Ohio along the way to Michigan. For Rover’s part, the pipeline will hook up with existing infrastructure in Defiance County, Ohio, that will allow gas to be delivered to the Gulf Coast, dropping its capacity from 3.25 billion cubic feet per day to 1.3 billion cubic feet per day by the time it hits Michigan. Once in Michigan, each pipe would connect with an existing interstate pipeline called Vector (of which DTE owns 40 percent). Vector allows for transport to distribution hubs near Chicago and in Ontario that connect to other long-range pipelines. Because of these connections, it’s likely that most of the natural gas shipped on these pipelines will end up outside Michigan.
The nuts and bolts of pipeline funding The pipeline business is a good one to be in if a company can swing it. Plans for new interstate pipelines must be approved by the Federal Energy Regulatory Commission, which then regulates the pipeline’s ensuing activity. The trade-off is that pipeline owners get a guaranteed rate of return. FERC — not the pipeline owner — sets the fee, known as a tariff, that pipeline companies charge customers, called shippers. In doing so, FERC takes into account the “cost of service” that it took to get the pipeline built and sets a tariff that allows the company to recoup those costs, plus some extra as a return on investment. A typical return is in the range of 10 percent. Developers of the Rover pipeline are seeking a 9.75 percent rate of return, while Nexus developers are asking for 10.7 percent, according to a review of FERC applications performed by Eric Brooks, analyst at industry research outfit Platts. FERC will take action later if it thinks rates have gotten out of whack, but these rates might get pretty high before it gets nosy. A current FERC investigation was triggered when it suspected a pipeline company, Tuscarora Gas Transmission Co. of Houston, was getting rates of 23.6 percent and 24.9 percent. “Some say the pipeline business is the least risky,” said Samuel Andrus, industry analyst at IHS Inc., another research organization. These costs make their way into utility customers’ bills, by way of the cost to buy and ship fuel for power plants. In Michigan, this is known as the Power Supply Cost Recovery fee. If that fuel happens to be natural gas that came into the state by way of pipeline, then this cost includes the rate the utility paid for shipping — the FERC tariff. As a Nexus customer, DTE Electric will pay this rate, and ultimately so will its customers. DTE Electric will pay $7.6 million a year
under its current deal with Nexus, according to the Michigan Public Service Commission. DTE expects this will be cheaper than paying other pipe operators for shipping. It should be noted that utilities are not allowed, under state regulation, to profit from these fuel fees. The fees must cover the cost to get fuel and nothing more. The Power Supply Cost Recovery fee differs from the basic electricity rate set by the commission. This is the one the public hears about when utilities go before the commission to make their formal “rate case,” seeking permission to charge rates that allow them to recoup the costs of building and maintaining power plants. This cost materializes on customer bills under language such as “delivery charges” or “service charge.” The funding for Nexus, and any other pipeline, comes from customers that sign up for shipping capacity before it’s built, on contracts of 15 to 20 years. In the case of Nexus, those customers are natural gas producers plus DTE’s own utilities, DTE Gas Co. and DTE Electric Co. DTE Electric and DTE Gas together have signed up for 10 percent of the pipe’s capacity, the company said. Union Gas Ltd., a Chatham, Ontario-based utility, is another signed customer, and DTE hopes to sign up a string of utilities in northern Ohio whose terrain Nexus passes through. The outcome of all this is that while DTE Electric customers won’t be asked to directly fund the pipeline through the basic rates in their bills, they will be paying for some portion of it through power supply fees. Fortunately for them, these costs will be diluted by Nexus’ other customers, who also will be paying that FERC tariff with its baked-in construction costs. Effectively, the building of Nexus will be funded by companies outside Michigan. Gary Anglebrandt