SJC nixes ‘pipeline tax’

Says Baker administration order violated intent of earlier laws

THE SUPREME JUDICIAL COURT ruled on Wednesday that the Baker administration can not authorize the state’s electric utilities to tap their ratepayers for the money to finance a new natural gas pipeline into the region.

The decision carries enormous financial and environmental implications for the state of Massachusetts and the region. Existing natural gas pipelines coming into New England are often strained to capacity during peak-demand periods in the winter, when the price of natural gas typically spikes and electric rates rise, sometimes dramatically. A new pipeline was expected to bring more cheap gas into the region and reduce electric prices, but opponents said a new pipeline would only increase the region’s over-reliance on a fossil fuel that is contributing to global warming.

The ruling means efforts to build a new natural gas pipeline into the region are effectively dead, although pipeline backers have said they will find another way to get the job done.  The Legislature could tweak the law to address the court’s concerns, but every member of the Senate and a majority of House members signaled during the just-completed legislative session that they oppose such a change. During debate in the Legislature, the proposed financing arrangement became known as the “pipeline tax,” while proponents insisted it was a “pipeline tariff.”

The case was set in motion when the Conservation Law Foundation and Engie Gas & LNG challenged an October 2015 order issued by the Department of Public Utilities. The order eventually paved the way for the DPU to begin hearing testimony on how Eversource Energy and National Grid could assess their electric customers for the money to purchase long-term natural gas contracts. Those contracts presumably would have helped finance the construction of Access Northeast, a pipeline project being developed by Spectra Energy of Houston, Eversource, and National Grid.

David Ismay, the Conservation Law Foundation’s lead attorney on the case, called the SJC ruling incredibly important. “Today our highest court affirmed Massachusetts’ commitment to an open energy future by rejecting the Baker administration’s attempt to subsidize the dying fossil fuel industry,” he said in a statement.

Attorney General Maura Healey joined the plaintiffs in opposing the DPU order. In a statement, she said “we know from our 2015 electric reliability study that there are cleaner and more affordable options for meeting our energy needs. The court’s decision makes clear that if pipeline developers want to build new projects in this state, they will need to find a source of financing other than electric ratepayers’ wallets.”

Arthur Diestel, a spokesman for Spectra Energy, said the company was very disappointed in the decision. “This leaves Massachusetts and New England in a precarious position without sufficient gas capacity for electric generation during cold winters,” he said in a statement. “The lack of gas infrastructure cost electric consumers $2.5 billion dollars during the Polar Vortex winter of 2013 and 2014.  While the court’s decision is certainly a setback, we will reevaluate our path forward and remain committed to working with the New England states to provide the infrastructure so urgently needed for electric consumers.”

The unanimous court decision, written by Justice Robert Cordy, who retired last week, held that the DPU order allowing electric utilities to assess their customers for long-term natural gas contracts violated the intent of state laws barring utilities from getting into the power generation business and preventing ratepayers from being exposed to financial risks associated with that business.

According to the court opinion, power generators who use natural gas to generate electricity are reluctant to enter into long-term contracts for gas because they have no assurance they will be allowed to recover their costs. But pipeline operators need long-term contracts in place to arrange financing for pipeline construction. Cordy noted in his decision that DOER had characterized the situation as a “mismatch” of needs and incentives that required a solution.

The novel solution embraced by the Baker administration was to have electric utilities tap their ratepayers for the money to purchase long-term contracts for natural gas, paving the way for the construction of new pipeline capacity. The notion was that the money ratepayers would fork over for the natural gas contracts would be more than offset by lower prices for electricity brought about by cheaper and more plentiful gas.

The plaintiffs claimed the DPU could only regulate electric and gas utilities separately, and couldn’t assess electric ratepayers for the money to finance a natural gas pipeline. They also argued that the proposed contracts for natural gas violated a 1997 law that restructured the utility industry, forcing utilities to divest their power-generating assets and focus exclusively on the transmission and distribution of electricity.

The SJC decision sided with the plaintiffs in both areas. The court first held that DPU must regulate the gas and electric industries separately, as it always has in the past. “The department’s order here thus represents a significant departure from its own history of administering [the law] and its separate treatment of the gas and electric utilities,” the ruling said.

The court also held that the purchase of long-term natural gas contracts effectively pushed the electric utilities into the power generation business and exposed ratepayers to the risks associated with that business. “We determine that the department’s approval of ratepayer-backed, long-term contracts by electric distribution companies for gas capacity contradicts the fundamental policy embodied in the restructuring act, namely the Legislature’s decision to remove electric distribution companies from the business of electric generation,” the ruling said.

“The department’s order would re-expose ratepayers to the very types of risks that the Legislature sought to protect them from when it enacted the restructuring act. Both the Division of Energy Resources and the [DPU] noted that gas-fired generating businesses are unwilling to assume the risks associated with long-term gas pipeline capacity contracts because there is ‘no means by which they can’ assure recovery of those  contract costs. Shifting that risk on to the electric ratepayers of the Commonwealth, however, is entirely contrary to the risk-allocation design of the restructuring act.”

Meet the Author

Bruce Mohl

Editor, CommonWealth

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

 

  • Mhmjjj2012

    The novel solution embraced by the Baker administration was tried in New Hampshire decades ago with Construction Work In Progress (CWIP) charges on ratepayers bills and that state’s $100 a year state legislators backed ratepayers will legislation banning those charges. Too bad Massachusetts state legislators didn’t take the same action to protect ratepayers from pipeline costs.

  • South Coast Neighbors United

    FYI, in a news article released on August 3, 2016, the following statement was released by Arthur Diestel,
    Director of stakeholder outreach for Spectra Energy (the same representative that spoke in this article):

    “During the first four months of this year, Boston-area consumers paid 50 percent more than the U.S. average price for electricity. Why? Because we don’t have the natural gas supply to meet the growing demand for gas-fired electric generation. That’s real money being taken out of peoples’ pockets. The rest of the continental
    U.S. is enjoying the benefits of very low natural gas prices – and low electricity prices that are increasingly coupled to natural gas – New England is an outlier. Consumers in New England are literally losing billions of
    dollars due to high energy prices. Individuals and local businesses pay too much and the entire region is less competitive. New England pays more for electricity than anywhere in the continental U.S., and during the past few
    winters, Boston had the highest peak day natural gas prices in the world – all when they are so close to the enormous supply of domestic natural gas.”

    So how does this statement lend credence to their claim that our high electricity prices are due to a lack of natural gas supply? The first four months of this year were the MILDEST temperatures we’ve seen in a long time in this area…yet we still paid ridiculously high electric bills…so it had NOTHING to do with increased use of natural gas or electricity, DID IT?! No, the high prices are due to the utilities taking advantage of us…and they tried to do it AGAIN by making us foot the bill for these pipeline expansions that WE DON’T NEED. THAT IS THE TRUTH. And if the rest of the country is enjoying the benefits of very low natural gas prices, then why are there so many pipeline expansion projects in the works across THE ENTIRE US???? IT’S FOR EXPORT, PEOPLE!!!

  • Jan Galkowski

    In fact, the highest electricity prices in the country are paid by Hawaii. Indeed, the states having the highest electricity prices are the ones whose electrical energy per person usage is the lowest, and states which are the least energy efficient (highest energy per person, typically low population states) have the lowest electrical rates.

    Why?

    Because utilities burden each kilowatt-hour consumed with their overheads. If there are less kilowatt-hours, there is more burden per kilowatt-hour.

    Accordingly, the problem is principally the inefficiency of the electrical utilities, and the solution is to move to a model where clean (meaning zero Carbon) energy is generated close to where it is consumed, so that there is less need of exorbitant grids and management of energy over long distances. Either that, or that grid, which was conceived and built in the 20th century, with its needs for “baseload”, needs to be modernized and made smarter. That can be done, but there will be a price, and as the SJC just said, consumers should have a choice as how they get their energy. If utilities cannot compete on price without the DPU forcing consumers to pay, then they should move to get their energy in other ways.

    This sounds to me like an excellent reason to strip off the cap on solar energy — especially aggregated community solar backed by energy storage (as Minster, OH has done: see http://goo.gl/LXzEl8) — like New York State has done, and let the utilities compete against local generation. They’ve always claimed solar PV was expensive, so it should be easy for them to compete on price. Of course, if it isn’t really expensive, then they have a problem …

    • NortheasternEE

      The only reason that utilities cannot compete against local generators is because local generators get a free ride on the grid at the expense of the utility, and folks with North facing roofs or who cannot afford to invest in PV and batteries.

      Let’s say that you can install a local PV and battery system that can service your home 90% of the time, and a neighbor, who cannot do the same, relies on the utility to supply all of the power. As long as you remain connected to the grid, the overhead burden to the utility, which is substantial, is the same for you and your neighbor. The cost to the utility, to guarantee that both you and your neighbor can draw as much power as you want from the grid. is the same. But, your neighbor pays 100% for this service, while you only pay for 10% for the same service. The missing 90% for your service must either come from reduced utility profit or passed on, unsuspectedly, to folks who cannot generate any of their own power.

      There is a good reason for the cap on solar energy. Left uncontrolled, the physical burden on the grid for firming the variable and intermittent nature of solar power will lead to local brown-outs and blackouts. The financial burden on utilities will lead to reduced service or higher rates on the rest of us.
      Those who wish to generate their own clean power, either individually or collectively, should be forced to either disconnect, or pay their fair share of grid cost.