D R I V E R S A N D I S S U E S
NATURAL GAS EXPANSION
NASUCA, June 8, 2015Rebecca BachelderPresident, Blueflame Consulting, LLC
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NATURAL GAS EXPANSION DISCUSSION
• Fuel switching to natural gas is increasing due to price and environmental benefits
• There are market pressures to expand access to natural gas for consumers where gas is not currently available due to price differentials between gas and alternate fuels
• Legislative and/or Regulatory Policy needs to define who will pay
• Ratemaking modifications need to be made to accommodate policy
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NATURAL GAS RESERVES HAVE BECOME PLENTIFUL
1.Marcellus (PA, WV)
2.Barnett (TX)
3.Fayetteville (AR)
4.San Juan Basin (CO, NM)
5.Haynesville (LA)
As of 2013: 354 Tcf proved reserves
Source: EIA
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NATURAL GAS HOLDS A DISTINCT PRICE ADVANTAGE OVER ALTERNATE FUELS
1999 October
2000 May
2000 December
2001 July
2002 February
2002 September
2003 April
2003 November
2004 June
2005 January
2005 August
2006 March
2006 October
2007 May
2007 December
2008 July
2009 February
2009 September
2010 April
2010 November
2011 June
2012 January
2012 August
2013 March
2013 October
2014 May
2014 December
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
Cost of Fuels to End Users in Real (1982-1984) Dollars
$ per MMBtu
Cost of Residen-tial Heating Oil
Cost of Residen-tial Natural Gas
Cost of Residen-tial Electricity
Source: EIA
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NATURAL GAS ACCESS TO RESIDENTIAL CONSUMERS
Total Homes
Primary Homes w/
Natural Gas
% Homes w/ Natural
GasHomes w/ Fuel Oil
% Homes w/ Fuel
Oil
Homes heating
w/ Electricity
%Homes heating
w/ Electricity
Homes Heating
w/ Propane
Homes w/ Propane
Total U.S.1 (millions) 113.6 69.2 60.9% 7.3 6.4% 58.0 51.1% 8.0 7.0%Total Northeast 20.8 13.8 66.3% 6.0 28.8% 6.3 30.3% 1.1 5.3%
CT, ME, NH, RI, VT 3.0 1.1 36.7% 1.7 56.7% 0.9 30.0% 0.2 6.7%PA 4.9 2.3 46.9% 1.0 20.4% 2.6 53.1% 0.6 12.2%
Total Midwest 25.9 19.4 74.9% 0.5 1.9% 10.8 41.7% 2.5 9.7%MO 2.3 1.3 56.5% N/A 1.4 60.9% 0.3 N/A
Total South 42.1 17.7 42.0% 0.6 1.4% 29.7 70.5% 3.3 7.8%FL 7.0 1.0 14.3% N/A 5.8 82.9% 0.2 2.9%
NC, SC 5.4 1.8 33.3% N/A 4.1 75.9% 0.7 13.0%AL, KY, MS, TN 7.0 2.8 40.0% N/A 5.0 71.4% 1.0 14.3%
DC, DE, MD, VA, WV 6.4 2.9 45.3% 0.5 7.8% 4.6 71.9% 0.6 9.4%AR, LA, OK, GA, TX 16.2 9.1 56.2% N/A 10.2 63.0% 0.6 3.7%
Total West 24.8 18.3 73.8% 0.2 0.8% 11.1 44.8% 1.1 4.4%AZ 2.3 1.2 52.2% N/A 1.4 60.9% N/A
AK, HI, OR, WA 4.7 1.9 40.4% 0.1 2.1% 2.9 61.7% 0.1 2.1%Total Less Than National Avg 59.2 25.4 42.9% 3.3 5.6% 38.9 65.7% 4.3 7.3% 1Total U.S. includes all primary occupied housing units in the 50 States and the District of Columbia. Vacant housing units, seasonal units, second homes, military housing, and group quarters are excluded. Some homes reported more than one fuel source for heating.
Only 61 Percent of homes in the U.S. have access to Natural Gas
Source: EIA
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BALANCING COSTS AND BENEFITS
• What are the costs and benefits of line extensions from perspectives of: • Utility• Existing Customers• New Customers• Local Economy• Environment
• Who will be funding the expansion:• Shareholders• Existing Customers• New Customers• State or Local Governments (Tax Payers)
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TRADITIONAL APPROACH TO NEW CUSTOMER ADDITIONS
• New Customers pay entire cost of connection
- Or -
• Use an economic analysis to determine new customer contribution to construction costs• Utilize IRR or NPV analysis• Assume number of years to allow for return• Timing and level of revenues• Costs• New customers that fail the hurdle rate test must pay a
Contribution in Aid of Construction, CIAC
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COSTS TO INCLUDE TO EVALUATE NEW CUSTOMERS
• Capital costs of the main and service• Labor & Materials• Construction Overheads• Carrying charges
• Incremental or Long Run Marginal Costs• Increased Property Taxes• Billing and Payment Costs• Incremental Operations & Maintenance Expense• Incremental Administrative and General Expense• Working Capital• Depreciation
• Taxes
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REVENUES HAVE BECOME MORE COMPLICATED
• Unbundled Base Rates• LDC Distribution Costs• Return on Rate Base
Rate Trackers Collect Costs Dollar for Dollar• Cast Iron & Bare Steel Pipe Replacement Programs• Post Retirement Benefits• Bad Debt Cost Recovery• On-System Production & Storage
Gas Costs• Pipeline Demand Charges• Delivered Gas
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WHAT REVENUES SHOULD BE INCLUDED IN THE NEW CUSTOMER EVALUATION ?
Gross Margin Revenues• Base Revenues• Tracker Revenues for costs that the utility
would normally include in Cost of Service• Pension and PBOPS• GSEP – System Replacement Costs• Bad Debt• On-System Production and Storage facilities• Other Distribution Service related costs that would
normally be included in Cost of Service
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BARRIERS TO CUSTOMER CONVERSION
Equipment Cost
Installation Cost
Line Extension
Policies
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MECHANISMS THAT COULD BE USED TO FACILITATE CUSTOMER ADDITIONS
• Economic Analysis• Include Tracker revenues that provide contributions
to costs paid by existing customers• Expand the period over which the upfront capital
costs are collected in revenues • Allow LDC to group new customer projects together• Allow LDC to estimate the number of conversions a
project will yield over a defined number of years
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NON-TRADITIONAL MECHANISMS
• On-Bill Financing of Capital Additions• Through Rate Mechanism• 3rd Party
• Utilize opportunistic funds to finance uneconomic expansion• Non-Firm Margins• Pipeline Refunds
• Existing customers contribute to new customer additions • New rate mechanism• Cost recovery rolled into base rates
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CAUTIONS
• Alternate Fuel price spreads may not hold vs. alternate fuel
• Larger LDC rate increases may make gas prices less competitive.• Increased capital replacement - GSEP• Increased labor costs due to more rapid replacement and
expansion activity for all LDCs and a diminishing labor pool.
• LDC’s ability to estimate Capital Costs accurately
• LDC’s ability to forecast timing of new additions• Additional regulatory oversight required
• More reporting• More review required by regulators
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QUESTIONS?
Thank you!
Rebecca Bachelder, PresidentBlueflame Consulting, [email protected]
Office: 781-662-8584
Rebecca Bachelder, PresidentBlueflame Consulting, [email protected]: 781-662-8584