New pipelines report shows the ACP is part of a widespread, systemic market failure

Photo courtesy of Chris Tandy.

Anyone who examines the corporate deals that underlie the Atlantic Coast Pipeline comes away with a strong sense of looking at a broken regulatory system. The Federal Energy Regulatory Commission (FERC) is supposed to approve only those pipelines that can demonstrate they are actually needed. Pipeline companies demonstrate need by showing that customers have contracted for most or all of the pipeline’s capacity. In the case of the ACP, Dominion Energy and its partners manufactured the need by making their own affiliates the customers of the pipeline.

What’s weird is that FERC seems to be okay with this. It recently approved another pipeline with a similar setup—the Nexus pipeline that will carry fracked gas from Ohio through Michigan to Canada. FERC ignored blatant self-dealing between the pipeline company and its regulated utility affiliate, including clear evidence the regulated utility affiliate increased its share of the pipeline’s capacity only to create a “need” for its parent company’s project.

A new report from Oil Change International concludes the U.S. is currently building unneeded fracked-gas pipelines as a result of FERC’s regulatory failures, including its failure to police self-dealing. The result will be excess pipeline capacity, paid for by regulated utility customers.

The primary cause of the overbuilding, and the reason companies like Dominion engage in self-dealing to create the impression of “need,” is that FERC sets an absurdly high rate of return on pipelines—14%, compared to a typical utility rate of return of 10%. FERC set the high rate back in 1997 when interest rates were double what they are now, so it was more expensive to build large infrastructure. FERC hasn’t changed the rate since then even though it is causing obvious market distortions—and creating an incentive for utilities to jump into the pipeline business.

What is even weirder is that Virginia’s State Corporation Commission seems to be okay with self-dealing, too. The ACP is also using affiliate contracts that commit the customers of state-regulated electric utilities (including Dominion Energy Virginia) to pay for the use of the pipelines.

The SCC’s job is to protect electric utility customers from precisely this kind of exploitation. These customers don’t have the option to walk away from the likes of Dominion Energy Virginia; they are required by law to get their electricity from that utility and no other. If the SCC looks at self-dealing and shrugs, where are the customers supposed to go for protection?

That’s why Virginia has a law called the Affiliates Act that requires SCC approval before a regulated utility can commit its customers to any contract or arrangement with an affiliated company. Dominion had to commit electricity customers to the ACP in order to show FERC the pipeline was needed. Yet Dominion never even asked the SCC for approval.

Recognizing the risk to ratepayers, the Sierra Club petitioned the SCC to require Dominion to comply with the Affiliates Act by disclosing the affiliate relationship and seeking approval of the arrangement that affects captive customers. Without SCC approval, Dominion would seem to be on thin ice telling FERC it has the contracts in place that demonstrate the “need” for the ACP.

One would have thought the SCC would jump at the chance to weigh in. The FERC filings show it will cost ratepayers three to four times more to use the ACP than to stick with the competing pipeline that Dominion already has long-tem contracts with.

But on September 19, the SCC denied the Sierra Club’s petition. One of the reasons cited was that Dominion will have to get SCC approval before it actually charges ratepayers for any gas carried by the pipeline.

Meaning, the SCC says it will consider the merits of the problem only after Dominion has secured FERC approval, and after the ACP has already ripped a 600-mile gash across the countryside, dispossessing landowners, tearing up forests, and endangering streams and water supplies.

Well, that poses a bit of a problem, doesn’t it? If the SCC turns down Dominion’s rate recovery request at that point, its decision will cancel out the very argument of “need” that Dominion and its partners used to get the ACP approved by FERC. Meaning, the ACP should never have been built.

But the pipeline will be there in all its razed-earth, $5 billion glory. What then? Perhaps Dominion will instead use the pipeline to serve its LNG export terminal at Cove Point or go hawking its expensive gas to new industrial customers, as some politicians hope. But more likely, this being Virginia, we would expect our General Assembly to order the SCC to grant rate recovery anyway, citing energy security or whatever fig leaf Dominion comes up with.

And a systemic market failure will leave Virginians, along with residents of other states, paying more to burn fracked gas for decades, unwillingly and unfairly doing our part to exacerbate the climate crisis.

8 thoughts on “New pipelines report shows the ACP is part of a widespread, systemic market failure

  1. Terrific post …
    and to add to the craziness of the FERC’s oversight … when those self-dealing contracts for gas made to demonstrate ‘need’ are torn up by the affiliates that signed them … then the gas coming though that pipeline, over a route created using the powers of eminent domain, can officially be sold anywhere … exported if that is who will buy the gas.
    Not much community benefit if you had to give up you property rights to the monster!

  2. I submitted an ecomment to FERC referencing this article and asked them to contact me regarding some of the concerns it poses.

  3. Pingback: New pipelines report shows the ACP is part of a widespread, systemic market failure | Friends of Buckingham Virginia

  4. It seems that cheap and available natural gas, via these pipelines, would hasten the switch away from coal as a base-loading energy supply. Thus an increase in demand for natural gas, without an increase in total energy demand (the premise of Oil Change International report). Yes?

  5. Gill, Yes, the Department of Energy has said the move away from coal has been about cheap shale gas supplies, much more than about regulations or solar and wind subsidies.
    But, even according to Forbes, the shift is about more than that. “America’s utilities of the future don’t need more coal to balance the grid—they can shift away from the traditional rigid baseload foundation toward a more nimble system with clean energy as its backbone. “

    “The perceived need for ‘baseload’ resources is in many cases counterproductive” … The new debate highlights the value of nimble power sources, like microgrids and distributed energy resources. Grid modernization makes ‘baseload’ a dated concept, and today’s changing mix of resources is not degrading the grid, says North American Electric Reliability Corporation.

    Oil Change International’s new study warns that one of the “established tenants of the gas industry, that new gas replaces dirty coal, is unraveling. The OCI report quotes BNEF that in California a decline in demand for gas-fired power “is a major factor in a projected 21 percent reduction in gas burn for power nationally in 2017.” In fact, in regions, and/or at times, when natural gas supply is constrained, renewable generation plays a significant positive reliability role by reducing the amount of gas needed to meet demand,

  6. a great post Ivy! Can you change enough wording so that it could be accepted as an op-ed by the RTD? is there any action we can do? will public shaming of the SCC make a difference? I see someone submitted questions to FERC, referencing your article. If that can help, let us know and everyone will do it.

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