The pipeline many fear could unleash an eminent domain surge

Mike Spille, 48, stands in front of his house, showing where the pipeline will pass within feet of his house.

HOPEWELL TOWNSHIP — The $1.2 billion, 118-mile PennEast Pipeline project set to carve through Pennsylvania and New Jersey has been fraught with opposition since it was made public in late 2014.

Some opponents are against natural gas fracking altogether, others are concerned about potential methane leaks, and many fret over the uncommon occurrence of explosions.

Michael Spille, a software engineer and 48-year-old father of two, became concerned for a different reason. His family’s West Amwell, New Jersey home — like many in the town — stands directly in the path of the pipeline’s proposed route.

“There was a big route change and that’s when it got my attention,” Spille said. “I pulled up the map and there it was — bam! It was going right through our property.”

It wasn’t until months later that Spille says the Federal Energy Regulatory Commission (FERC) sent him a brochure about his property rights as they pertain to eminent domain — the power of the government or those they designate to seize private property for public use.

West Amwell residents formed various groups to learn more about pipeline processes and what the implications of the project would be.

Residents aren’t energy experts or professionals in the field, Spille said, so they began by talking with other groups who had faced similar issues. That’s when they were alerted to something irregular in the PennEast proposal.

The companies building the pipeline are the parent companies of other companies signing up to receive a majority of gas from the pipeline. This may sound normal, but it isn’t.

Residents now fear that, if approved, PennEast could set the precedence for the collusion of utility companies to use their own desire for cheap energy — not individual ratepayers — as justification to seize control of people’s property through eminent domain.

What’s normal

Despite the concerns some have about environmental impacts of safety issues, the economic case for building natural gas infrastructure is a strong one, industry experts say.

Fracking technology has increased greatly in the last decade, making natural gas much easier to extract. The gas is easily and cheaply converted into electricity. This translates into lower monthly energy bills for consumers.

For natural gas to be distributed to the utilities companies that convert the gas into electrical energy, pipeline construction companies build extensive and sometimes costly infrastructure to transport the gas.

The terms and conditions and the prices for movement of natural gas are federally regulated. This means that federal and state governments guarantee set profits to the pipeline companies for receiving and delivering the gas and to the utility companies for providing natural gas energy to homes. These fees are paid to the pipeline company and utility by the individual ratepayer when they pay their energy bills.

Despite the high cost of pipeline infrastructure, ratepayers still save on energy bills because utility companies offset the high construction costs for customers by cheaply turning the gas into electricity.

Regulations mandate that there must be sufficient proof that a pipeline project is necessary and beneficial to customers before being allowed to proceed. The trade-off for government regulation is guaranteed profit.  

Industry experts explain that to determine if there is a market for new pipeline infrastructure the pipeline’s sponsoring company must canvas areas to determine if customers are willing to sign contracts for additional gas.

“If there are enough customers they calculate whether the customers are willing to pay enough to cover the cost of construction plus profit,” New Jersey Conservation Foundation (NJCF) research director Barbara Blumenthal said.

When a project seems viable they begin the process of discerning who might be interested. “If there is enough interest, they then pre-file with FERC,” Blumenthal said.

“None of this moves forward, generally, unless the pipeline builder has sufficient firm contracts in hand at the outset,” she said.

Irregularities

The companies that came together to create PennEast are signing their subsidiary companies — companies they own — as the customers for their own gas. So the ‘customer’ proof that FERC requires, in this case, is not individual residents or businesses, but the utility companies owned by PennEast’s owners.

“FERC is charged with assessing whether there is need, and public benefit,” Blumenthal said. In recent years, FERC has simply taken the existence of signed contracts as evidence of need and has not looked any further.”

A report by an energy market service provider, Skipping Stone, shows that in the case of PennEast, the utility companies responsible for converting the gas into electricity or selling the gas to those that will, have high stakes in the pipeline’s construction.

The subsidiaries utilities New Jersey Natural Gas, PSE&G, South Jersey Gas, and Elizabethtown Gas have purchased 50 percent of the total capacity of the pipeline, while their parent companies own 70 percent of the project.

Many are concerned that the companies have proposed a pipeline and are claiming that it is needed on the basis that they are willing to be their own customers, Blumenthal said.

This is the basis for a complaint and motion filed by the Eastern Environmental Law Center with FERC on June 15, 2016 on behalf of NJCF and Stony Brook-Millstone Watershed Association.

The filing states that PennEast is exercising a new form of market abuse and that FERC should accurately assess market needs by conducting a hearing with additional evidence rather than several companies’ willingness to sign contracts with themselves.

The motion was accepted into FERC’s docket, but there has been no action on it since, though they have indicated they would address the substance of the issue.

“FERC is charged with assessing whether there is need, and public benefit,” Blumenthal said. In recent years, FERC has simply taken the existence of signed contracts as evidence of need and has not looked any further.”

When a utility company owns a stake in a pipeline, that company is essentially agreeing with themselves that they meet consumer needs, Blumenthal says. By leaving customers out of much of the consideration process, the market’s actual supply and demand could be misrepresented — maybe intentionally, maybe unintentionally.

“This case is a clear example where FERC can and should look beyond these contracts, and actually determine whether there is new demand for this gas,” Blumenthal said.

The Skipping Stone report agrees that FERC should not rely solely on PennEast contracts to demonstrate public need for the gas.

Critics worry that that a motivator for this type of arrangement could be greed.

President of Skipping Stone, Greg Lander, has said that when utility companies own a portion of the pipeline, they can adjust the rate customers pay so that parent companies’ shareholders will earn a profit regardless of customers’ actual needs.

That’s because customers beholden to PennEast for gas would be paying the same company two different guaranteed rates. One for the cost of building the pipeline — regardless of how utilized it might be — and one for the cost of the gas that customers do use.

“This doesn’t necessarily mean there’s a smelly deal, but FERC should ask because it’s not obvious,” Lander has said.

Future Implications

In the case of a pipeline that crosses state lines — as PennEast does — the proposal is verified by FERC.

Under the Natural Gas Act, “any pipeline expansion approved by FERC automatically confers the right of eminent domain to the builders of the pipeline,” Blumenthal said.

Residents worry that the utility companies are using their own energy desires and regulator loophole in a way that easily confers them the power of eminent domain.

If PennEast is granted approval it would be the first time that this many utilities companies — six in all — have initially signed on as their own customers. It would also be the highest percentage of pipeline ownership by parent companies — 74 percent, Lander says. 

As far as contract arrangements of this nature go “(PennEast) is among the first,” Lander said. “The first that succeeded was Sabal Trail in Florida with Florida Power as a shipper and owner.” 

NextEra owns 42.5 percent of Sabal Trail and signed up for 60 percent of the gas. Duke Energy later bought 7.5 percent of both the project and the gas.

“Other utilities have either tried or are still trying to follow suit,” Lander said.

“As to whether more will try, it may depend on how those that are still trying make out,” he said. “Others that are trying to get approved include Atlantic Coast Pipeline, Mountain Valley Pipeline, and Access Northeast,” he said.

“All of these in just the past several years,” he said. “Prior to that, few if any come to mind.”

As far as this being a way to more easily gain eminent domain goes, “this raises a clear policy question,” he said. “I am not a lawyer so I can’t comment on this more than to say it is a clear policy question for FERC.”

The PennEast Pipeline (left upper center) would add onto New Jersey’s already existing 1,500 miles of pipeline. (Source: New Jersey Conservation Foundation)

PennEast — fears not facts

PennEast project manager Tony Cox said that these fears are not grounded in fact.

“At the end of the canvassing process… we ended up generating greater interest in capacity than we initially anticipated,” Cox said. “Interest in the project was based off customer needs.”

“When you look at the documentation filed with FERC, PennEast provided way more (proof than necessary) about why utilities and others are signing up,” Cox said.

PennEast representatives did not dispute that payments made by residents on future bills would provide one set of profits to the parent company and another set of profits to their subsidiary — thereby providing shareholders two sets of profits for one ratepayer transaction.

But, Cox says “there’s quite a bit of capital risk.”

“The regulations in place ensure that the utilities are making a prudent decision on behalf of their consumers,” he said. “The state utility commissions otherwise would make it difficult for the utilities to recover the costs,” he said.

The ultimate decision on how those rates are recovered is on the New Jersey Board of Public Utilities (BPU). The state could be more stringent than the federal regulators in how the companies are allowed to recover costs.

“What is up to the BPU is whether the costs to the utilities (from the pipeline) under the contracts that the utilities signed are allowed to be passed through to ratepayers,” Lander said.

“The BPU can disallow costs.” he said. “If they do, then it is up to the utility’s shareholders to come up with the money to pay the pipeline for the cost(s) of the contracts.”

Lander says because the BPU has not stated if they will require prior approval of utilities’ long term contracts, there is an open question over whether they will allow cost recovery by the utilities.

“If they do [allow cost recovery], then consumers pay,” Lander said. “If they do not, then the utilities are out the money they pay to PennEast.”

Despite inconsistencies over the guarantee of profitable returns, PennEast claims the project is both necessary and beneficial.

“New Jersey is saving a lot of money, but not as much as they could,” Cox said. “Demand is only increasing with the closing of coal and nuclear fired plants.”

“PennEast is the first pipeline providing direct natural gas into New Jersey from a nearby supply source instead of traveling up to thousands of miles,” Cox said. He added that PennEast’s distance of travel is only 118 miles, ensuring customers will save on gas costs. 

“It’s a paradigm shift,” he said.

Opponents of PennEast are quick to point out that the pipeline company Williams already has a line that delivers gas from the same source – the Marcellus Shale – to both states.

PennEast representatives also say the eminent domain fears are unfounded. “That’s kind of a silly argument,” he said.

First of all, the public need has been well documented,” he said. “In addition, if a utility company wanted to build a pipeline to the production region in its own state, it could do it through the state public utility commission and would have eminent domain granted by the state.”

“It just so happens that (PennEast) is going through state lines,” he said. “Any future modification of the project – would have to go through the same rigorous process.”

Unwell in West Amwell

The current proposal for the PennEast Pipeline places the pipeline just 50 feet from Spille’s backyard — if approved the pipeline can be constructed along any path within 400 feet on either side of its projected route.

Spille’s home is just 170 ft. away from the center of that path — well within the construction zone. Other Amwell residents aren’t even that lucky he said.

“They’re doing this just a few dozen feet from people’s houses,” he said. “It’s just horrifying.”

“The whole process is really stacked against the people and the homeowner,” he said.

During South Jersey Industries’ — parent company of South Jersey Gas —  2016 first-quarter earnings call CEO Mike Renna confirmed to investors that he’s already eyeing an expansion of projects off of PennEast once the project is completed.

“I think that there are opportunities for expansion of PennEast potentially down the road, as well.” Renna said in the document. “So I’m very bullish on the opportunities that we have in front of us.”

“The real tragedy is that the language PennEast is using says that they can install more pipeline onto the original” Spille said. “That’s salting the wound.”

By Greg Wright

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Greg Wright

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1 Comment

lorraine crown

Thanks Greg for a great discussion of the financial structure issues with PennEast. A company which can recoup its costs in a way that double-dips its profits, AND gets to take taxpayer preserved and private land by eminent domain in order to do it, is the reason there is so much resistance to this project.

The Environmental Defense Fund has also recently written about its concerns with the financial structure of PennEast and a couple of other pipeline projects structured like it.

http://blogs.edf.org/energyexchange/2016/12/07/warning-unnecessary-pipelines-could-leave-consumers-holding-the-bag/?_ga=1.131912393.715988999.1484674199

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