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Consumer advocates in Michigan say a proposed $2 billion natural gas pipeline would be a bad deal for ratepayers and potentially violate a state code involving business between a utility’s regulated and unregulated affiliates.
The Nexus project, a 250-mile pipeline that would carry natural gas from eastern Ohio to southeast Michigan, is a partnership between Detroit-based DTE Energy affiliates and Houston-based Spectra Energy meant to accommodate growing natural gas demand as coal plants are retired.
Spectra would evenly split ownership in the project with DTE Pipeline Co., an unregulated subsidiary of DTE Energy.
The project is still subject to approval by the Federal Energy Regulatory Commission. DTE’s plan to pay its share of the costs by assessing ratepayers of its regulated utilities, DTE Electric and DTE Gas, is also subject to approval by the Michigan Public Service Commission. DTE’s gas and electric utilities would essentially be customers, each taking roughly 10 percent of the capacity of the pipeline.
Opponents say it’s unusual for a Michigan utility to develop such a project, and the arrangement may also violate an MPSC Code of Conduct that prohibits regulated utilities from directly or indirectly subsidizing projects for their unregulated affiliates. Ohio landowners have also recently objected to the project.
Ultimately, opponents say DTE hasn’t explored potentially less costly alternatives and is relying on faulty analysis for cost projections.
“When we look at a proposal like this, it makes us concerned about relying so much on such a long-term forecast,” said Jim MacInnes, president of the Utility Consumer Participation Board, which advocates on behalf of ratepayers in cases before the MPSC. “The benefits are not really going to start showing themselves for 10-plus years.”
A presentation to the UCPB was provided to Midwest Energy News projecting that the project will cost millions of dollars per year until 2025 before it starts to show a return on investment for DTE.
“To forecast that far into the future and base your financial investment on that … so many things can change,” MacInnes said, referring to historically volatile natural gas prices. “We need to be adaptable. Once you make an investment in a pipeline that could last 80 years, you’re pretty much locked in for taking gas from that line. That seems like a lot of risk.”
And given the energy transition that Michigan is in, DTE should also consider the benefits of adding more renewables to its generation portfolio as well as energy efficiency, he added.
‘A good thing for the state’
DTE says its utilities would be paying the costs for transporting gas “whether it’s at our doorstep or at another part of the country,” according to Dan Brudzynski, DTE Energy’s vice president of gas sales and supply. Similar to the way it buys coal and gas from other parts of the country, Brudzynski said the utility wants Nexus to be another option.
He also contends: “We have the good fortune of being on the doorstep of cost-effective and prolific natural gas deposits … in the Utica and Marcellus basins in southeast Ohio. With all of this great gas on our doorstep, right now there’s really no way to get it to Michigan’s doorstep.
“From a pure diversification of supply standpoint, I’d say this is a good thing for the state.”
But whether there are alternative, cheaper options is a key point of contention with opponents.
“It’s not even clear Michigan needs incremental, inward firm (natural gas) capacity at this time,” said James Wilson, a Maryland-based consultant who testified before the MPSC on behalf of the Michigan Environmental Council and the Sierra Club on the project. “It might in the future, but it’s not clear now. It doesn’t seem to make sense for DTE Electric, especially, to step up to pay for capacity for the long-term.”
Wilson questions whether the pipeline would even get built if it weren’t for DTE’s involvement.
While DTE may build more gas-fired plants in the future, “There is a lot of storage in Michigan and existing firm capacity. If they weren’t affiliated, you would expect them to carefully evaluate all those alternatives,” Wilson said.
Wilson says natural gas pipeline capacity “has been and will continue to be built” to move supplies out of the Marcellus and Utica area, but that “producers will mainly be the ones to pay for it.”
And even if DTE had combined-cycle units it expected to run on a 365-day basis, “It still would be questionable whether they need to commit to capacity all the way back to the Marcellus as opposed to capacity from a liquid trading hub,” Wilson said.
Wilson compares Nexus with a similar project, the Rover pipeline. However, while Nexus is being developed with an affiliated utility contracting for much of the capacity so far, Rover is almost entirely contracted by producers in the Marcellus area, Wilson said. By comparison, Houston-based Kinder Morgan recently scrapped plans for a multi-billion dollar gas pipeline from Pennsylvania to New England because it didn’t have enough capacity subscribed.
He added that local distribution companies also “often step up and pay for firm capacity” from liquid trading hubs.
“Those are the parties you’d expect to step up and pay for additional pipeline capacity,” Wilson said. “For some reason, the producers liked Rover but don’t like (Nexus), or at least not yet because they’ve stepped up and contracted for Rover.”
Additionally, an official with ANR Pipeline, a subsidiary of TransCanada that also operates pipelines in the region, testified before the MPSC: “DTE Electric failed to engage in an open and fair process for choosing among the many alternatives that could provide it access to Appalachian gas supplies and achieve the gas cost savings claimed in its testimony at a much lower transportation cost.”
Brudzynski maintains that the utility did its “due diligence to make sure Nexus was still a better deal for our customers, and it was.”
Further, an analysis done by ICF Resources for DTE showed that the project would save ratepayers roughly $3 billion over a 20-year period, Brudzynski said.
But in testimony before the MPSC in March, Wilson said that estimate “incorporated flawed assumptions,” assuming depressed prices through 2037 because of a shortage of pipeline capacity: “This will not occur, because producers operating in this region have and will continue to support construction of new pipeline capacity to deliver their supplies to various markets.
“Accordingly, the gas purchase cost savings resulting from Nexus are likely to be much smaller than DTE Electric has assumed. The Nexus capacity’s cost is likely to substantially exceed its value over the period of the commitment and result in a large net cost to DTE Electric’s customers through the (cost-recovery plan).”
DTE responded in MPSC filings last week that Wilson’s testimony was also erroneous and maintains the company is taking “reasonable and prudent steps to ensure that its future baseload generation capacity has access to reliable, low cost fuel supply.”
Code of Conduct violation?
The UCPB and other challengers to DTE’s proposal also say there appears to be a violation of the MPSC’s Code of Conduct that deals with business transactions between utilities’ regulated and unregulated subsidiaries.
A key section of the code states: “An electric utility’s or alternative electric supplier’s regulated services shall not subsidize in any manner, directly or indirectly, the unregulated business of its affiliates or other separate entities.”
By structuring the plan in a way so that DTE’s gas and electric ratepayers are assessed the costs to build the projects is at least an indirect subsidy for the project, opponents contend.
DTE maintains the project would not involve a subsidy from its regulated utilities to its unregulated utilities.
“We look at them on an independent basis,” he said, referring to DTE Gas and Electric and its pipeline company.
A spokesperson for the MPSC said an administrative law judge is expected to issue a decision in August. That will then be submitted to the board of commissioners, who will issue an order on the Code of Conduct question.
MacInnes, of the UCPB, also notes that the planned project comes at a time when the state legislature moves toward adopting an Integrated Resource Plan process that, presumably, would comprehensively vet projects like Nexus.
“Allowing DTE to proceed with this pipeline investment now, even before the IRP process begins, could short circuit the planning process and make it difficult to even consider other alternatives to natural gas fired electricity generation,” MacInnes said. “This could leave ratepayers on the hook to pay for stranded pipeline investments if another combination of alternatives was found to be more desirable.”