SJC nixes ‘pipeline tax’
Says Baker administration order violated intent of earlier laws
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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.
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 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.”