Below is the introduction to "Oregon and Washington -- Re-Visiting the Need for Natural Gas Supply and Infrastructure Additions," a white paper by Ken Glick.
Use these links to print pdf versions of the complete white paper. Because of the size of the file (166 pages) it has been broken down into sections for easier download.
Click here for a printable pdf version of the Abstract, Glossary and Table of Contents.
Click here for a printable pdf version of Ch. 1 Introduction and Ch. 2 Demand.
Click here for a printable pdf version of Ch. 3 Supply Resources and Ch. 4 Pricing and Affordability.
Click here for a printable pdf version of the Conclusions, Appendices and Bibliography.
I. INTRODUCTION
A. Oregon and Washington Overview – An Integrated, Multi-Resource Energy Market
Oregon and Washington, together, are served by four natural gas utilities. Of these, three serve both states and one, Puget Sound Energy, serves only Washington. The respective electric grids in these two states are integrated into a larger regional electric grid (The Western Interconnect) that spans the Provinces of Alberta and British Columbia, Canada; northern Baja California, Mexico; and the 14 western U.S. States situated between these northern and southern extremes.
The natural gas distribution systems in Oregon and Washington are completely dependent upon natural gas imported into these states from domestic and Canadian sources (one-third and two-thirds of supply, respectively). Access is achieved through capacity commitments in upstream interstate natural gas pipelines. The natural gas distribution systems in these two states are interconnected either directly or indirectly at cross-border points or through common upstream natural gas pipeline transporters. In the big picture, the natural gas needs of these two states are a subset of a common, larger natural gas market, generally referred to as the Pacific Northwest market region.
Natural gas is a multi-purpose resource in that it serves not only as an energy source in burner trip end use markets, but also as a fuel resource for electric generators, who in turn supply energy in the form of electricity to a different end use market. On a Megawatt (MW) capacity basis, natural gas is the dominant fuel resource among all new electric generation added in Oregon and Washington since 2000. For this reason, end use growth in electricity also exerts an upward pull to complement the demand growth in natural gas end use markets. Thus, in Oregon and Washington the need for natural gas is driven by two end-use communities – natural gas users and electricity users.
In Oregon and Washington, low-cost hydroelectric power in the past has been a driver for industrial development (notably Washington’s aluminum smelters) and has underwritten low-cost household electric bills for more than 50 years. Coal-fired electric generation has also contributed, although to a lesser degree, to the region’s lower energy bills. In Oregon, coal and hydroelectric resources combined to provide approximately 77% of the state’s electric generation capacity in 2007. In Washington, these two resources provided approximately 83% of the state’s electric generation capacity over the same time period.
Using data from the U.S. Energy Information Agency, the Washington Department of Community, Trade and Economic Development calculated that for 2005, the state’s electricity prices ranked well below the national averages, due to the prevalence of low-cost hydro power. Washington’s residential electricity prices were the fourth lowest in the country. Prices in Oregon were similarly well below national averages, but were slightly more expensive than in Washington. Since that time, energy prices in both states have escalated both in an absolute sense and relative to the nation as a whole. Still, the region enjoys a significant discount in its electricity rates due to the large percentage of hydroelectric power in its supply mix.
B. Defining Oregon’s and Washington’s Need for Natural Gas
1. Legal Parameters Constraining A “Needs Analysis”
Questioning the need for natural gas most recently has become an issue in context of permit proceedings for new natural gas infrastructure, particularly with respect to natural gas imports. In this latter context, the Congress provided an authoritative and preclusive answer to this question of need in section 201 of the Energy Policy Act of 1992. By that section Congress added subsections (b) and (c) to Section 3 of the Natural Gas Act (“NGA”), the relevant statute governing regulation of imports and exports of natural gas, including liquefied natural gas (“LNG”). Together, these new additions to the NGA decree as a matter of law that all imports of LNG are in the public interest, as are all imports of natural gas from nations with which the United States has in effect a free trade agreement that includes trade in natural gas (thus far including only Mexico and Canada, which are signatories to the North American Free Trade Agreement.) Moreover, Section 3 of the NGA directs that when these type of import applications are filed, approval be issued without modification or delay.
1984 guidelines issued by the U.S. Department of Energy’s Economic Regulatory Administration (“ERA”) define “public interest” in context of natural gas imports and exports as comprised of three elements: competitively negotiated contracts, need for the imported volumes, and the security/reliability of the supply. With respect to need, the guidelines state that need for the imported gas is not confined merely to a market or markets to be directly served by the imported gas, but the need of nation’s natural gas market as a whole. The guidelines further state that the nation’s need for natural gas is a matter that implicates international trade, foreign relations, and national security.
In short, Congress has determined that the nation’s interstate wholesale natural gas market needs to participate freely in the larger global market for natural gas in order to function with economic efficiency; that is, in a manner most likely to result in an adequate, reliable supply of natural gas at the lowest reasonable rate. With this guidance, it is clear that the need for natural gas imports is a question that has been pre-empted by the federal government for its exclusive decision. The federal government’s statutory decision on whether any particular LNG import proposal is needed is a pre-determined “yes.”
With the federal government occupying the field with respect to the need for LNG or other forms of natural gas imports, state and local permitting authorities are pre-empted by federal law from raising as a regulatory hurdle in their permitting of activities ancillary to the importation of natural gas, a market analysis to determine whether the natural gas to be imported in a specific transaction is “needed” by the public interest. Nevertheless, state and local authorities have proven reluctant to accept federal pre-emption and, if past experience is a guide, will likely insist that proponents of LNG imports provide data to persuade these authorities that there is a (local) market that will benefit from the import, unless directed otherwise by the courts.
2. Regulatory Judgment Contrasted with Market Forces
The insistence that a specific LNG import facility be justified by proof that markets will be beneficially served by the imported natural gas is no more and no less than an exercise by regulators to interpose their own judgment in substitution for the demand-supply-price equilibrium determined by competitive natural gas markets functioning under federal oversight . While it is true that other, non-economic permitting issues (such as public health or safety) could ultimately decide whether a particular infrastructure capacity project is allowed, this should occur only when the social value of permitting issues (other than need) trump the market’s decision to propose and invest in the facility. In self-driven competitive market, the market analysis of regulators is not to override the capacity decisions determined by market forces. Federal energy policy in wholesale natural gas markets concludes that fair competition, rather than regulatory fiat, is a better determinant of whether a need exists for new natural gas supply or infrastructure (see the “Sense of Congress” stated at Section 202 of the Energy Policy Act of 1992.)
3. In Terms of a Traditional Market Analysis, What Constitutes A “Need” For Natural Gas?
Under the approach provided by a traditional market analysis, the “need” for natural gas can be shown by one or more of the following: a mismatch (shortfall) between supply and consumption; replenishment of well depletions or expiring contracts; substituting less expensive natural gas for other higher priced supply (economic need); fuel switching; and/or the desire to obtain global climate change benefits of using a less polluting energy source.
C. Variables Affecting the Region’s Future Natural Gas Use
Natural gas markets in Oregon and Washington are dynamic; yesterday’s concepts and goals need to be adjusted to reflect the realities of a new global marketplace for natural gas, constrained by overriding social objectives such as global climate change and energy security.
