Welcome to our new members…and officers/council members!  We hope that you all had a great Summer and that your Fall is off to a good start as well.  Thank you for your active membership, and thanks especially to our outgoing officers and council members.

Summer may not have been Endless, but the beer was…

Roughly 30 NCAC members joined our recent “Welcome Back” Happy Hour at Continental Pool Lounge & Beer Garden in Arlington.  Energy, economics, and beer—what’s not to be happy about?!? And: an actual in-person gathering!!  Hopefully a harbinger of good things to come.  Keep your eyes open for our next social event...

Upcoming events

October (date tbd):  Zoom webinar

Joint Briefing: NSC and DHS/CISA Presentation on Biden Administration Cybersecurity Priorities and Initiatives

The Biden Administration's Cybersecurity Efforts to Safeguard U.S. Critical Infrastructure:  What are the White House’s overall goals and objectives, and what initiatives has CISA launched?

November 1-2:  Virtual conference

38th Annual USAEE/IAEE North American Virtual Conference: Navigating Energy Transitions: Economic, Social, Technical and Policy Challenges

The annual USAEE/IAEE North American Conference provides a forum for informed and collegial discussion of how energy economics is contributing to the current and future thinking of businesses, consumers, technology developers, and public policy institutions in North America and around the world as they drive towards the future world of energy.

Our 2021 virtual conference takes place everywhere, from your browser, to keep the energy economics dialogue and debate alive, across North America and the world. As in previous years, the conference will highlight forward-looking energy themes at the intersection of economics, technology, and public policy, including those affecting energy infrastructure, environmental regulation, markets, the role of governments, and international energy trade. Participation from industry, government, non-profit, and academic energy economists will enrich a set of robust, diverse, and insightful discussions.

Registration for USAEE/IAEE members: $125.  For complete conference information and to register, visit www.usaee.org/conferences

March 2021

by Thomas N. Russo  

What is Responsibly Sourced Gas

            Responsibly Sourced Gas (RSG) should not be confused with renewable natural gas which may be sourced from methane emissions from landfills, livestock and agricultural wastes, and domestic waste water facilities. What distinguishes RSG from natural gas normally produced in shale basins are the steps taken by producers to reduce methane emissions, flaring and impacts on land, water and people. Continuous monitoring and independent verification of the aforementioned steps to reduce impacts are critical to assure consumers that the production process is meeting quality standards. 

            RSG is not just another slogan or empty commitment without metrics to decarbonize natural gas. While the RSG industry is in a nascent stage of development, it is gaining traction. For example, the ONE Future Coalition (ONE Future) is a group of 33 natural gas companies representing 15 percent of the US natural gas supply chain. The coalition voluntarily committed to reducing methane emissions across the natural gas supply chain to 1 percent or less by 2025. ONE Future’s member companies beat their 1 percent goal in 2019 with a registered methane intensity number of 0.33 percent.

Environmental Monitoring and Independent Certification are Key

            Technologies exist today to monitor and measure progress in reducing methane, CO₂ emissions, flaring and other environmental impacts associated with oil and natural gas production. For example, Project Canary is a leading provider of continuous emissions monitoring for the oil and gas industry.

The company, now referred to as Project Canary, an IES company, has joined forces with Independent Energy Standards (IES) to document independent performance reports to RSG producers, sellers, buyers and ESG investors. The combined companies offer the TrustWell™ certification to document RSG performance: that certified gas is commonly described as TrustWell™ gas or RGS. Currently the TrustWell™ RGS service measures 300 engineering points of drilling rigs and is verified independently by IES via on-site inspections and document reviews. IES in turn undergoes periodic audits of its procedures.

Ideally, the TrustWell™ RSG should also include the entire natural gas supply chain, including gathering systems, treatment and gas processing plants, storage, LNG terminals, and transmission and distribution pipelines to ensure the quality of RSG and reduce the carbon intensity of the RSG even further.

            Approximately 10 to12 RSG transactions have been undertaken. Southwest Energy is selling TrustWell™ RSG to New Jersey Natural Gas and Virginia Natural Gas, a subsidiary of the Southern Company. The latter company plans to source 100 percent of its gas as RSG by 2025. On November 10, 2020, VGS, a Vermont gas utility announced that it will be purchasing the Equitable Origin EO100™ certified RSG from Seven Generations Energy, an energy producer dedicated to responsible development in Alberta, Canada.

Dark Clouds on the Horizon

            The challenges to US natural gas and LNG exporters are growing larger every day at the international, national, state and local levels. The European Union reached agreement with its member nations to slash CO₂ emissions by 55 percent over the next decade, relative to 1990 levels. The United Kingdom also stated it would cut its emissions by 68 percent by 2030, and would also stop funding fossil fuel projects abroad with its taxpayer money. Canada said it would substantially increase its levy on CO₂ to $170 per ton.

            US President-elect Joe Biden announced that the US will rejoin the Paris Agreement on day one of his presidency. Not to be outdone by China and the EU, President-elect Biden has articulated very clearly in the Biden-Sanders Climate Action Plan that his Administration will curb methane emissions and rely on renewable energy to decarbonize the US economy.

            While many oil and gas industry executives might question the President-elect’s ability to curb methane emissions or flaring on private land, he has considerable power on federal land to reduce and/or delay the number of drilling permits and require existing wells to reduce methane emissions and flaring from their gathering systems. Continuous monitoring and methane emission abatement could very well become standard conditions of any new drilling permits.

A very different and proactive Federal Energy Regulatory Commission (FERC) could begin revising the agency’s 1999 Natural Gas Pipeline Policy Statement and possibly require continuous monitoring of methane leaks when issuing certificates of public convenience and necessity for interstate natural gas pipelines, new LNG Export terminals and additional LNG trains. In addition, the Pipeline and Hazardous Materials Safety Administration (PHMSA) could also turn its attention to the existing 400 underground natural gas storage facilities in an attempt to avoid methane leaks such as the one that occurred at SoCal Gas’ Aliso Canyon Gas Storage facility in California in October 2015.

            US LNG exporters may be especially vulnerable, as carbon prices increase in the EU and are contemplated by the top LNG importing countries, China, Japan and South Korea. According to a recent Reuters survey of eight analysts, EU carbon allowances are up 18.2 and 31.3 percent, respectively from forecasts in July 2020. The average forecast for prices in 2023 was 46.15 euros/tonne. The EU’s carbon trading system has proven its effectiveness. With the recent announcements at the 5^th anniversary of the Paris Agreement, China, Japan and South Korea are very likely to choose carbon pricing as a tool to achieve their net zero carbon climate goals.

Responsibly Sourced Gas: Time to Change the Natural Gas Industry's Narrative, Pages: 22-27 First Published: 14 January 2021 | Download full paper at https://bit.ly/3aVnEJD

January 2021

By Branko Terzic

The issue of “stranded” assets has come up again in the electric and natural gas utility industries. The current driver is the transition, at different paces in different state jurisdictions, from fossil fuels to renewable energy. The electricity issues surround uneconomic nuclear power plants, as well as transmission and distribution systems that are possibly becoming obsolete due to inadequate size. Or they may not have a function compatible with increased electrification - including the electrification of transportation. Natural gas distribution utilities face increased municipal bans on new additions - or even replacement of gas by electricity service.

The issue of stranded investment has appeared at least twice before in the recent history of U.S. public utility regulation. The first time was in the 1970s and 1980s, when the Federal Communications Commission (FCC) and the state public utility commissions (PUC) were slow to recognize obsolescence in existing electro-mechanical telephone assets, due to the introduction of digital switching and related new technologies. 

The second time was in the 1990’s, when a number of states were restructuring their electric utilities to unbundle generation assets from transmission and distribution. In some states the value of the generation assets to be sold was below the book value.  The utilities claimed that the spin-off process would result in under-recovery of the original cost of the asset. Various treatments were selected among the state regulatory practices dealing with these “stranded” assets.

The issue of stranded assets is again a topic of discussion, and is raised in the context of new regulatory and technological developments in distributed energy resources, on site storage and independent grids. The worry was that these new developments could cause today’s utility investment in generation, transmission and distribution to become “stranded.”  The solution, of course, is early recognition that the economic life of the assets is shortened by these developments and that appropriate adjustments in depreciation rates and policy must be made.

For that to happen both utility management and regulators must act in concert.

Management must promptly recognize the new economic reality that technology - and possibly regulation - have decreased the economic lives of existing rate-based assets. Regulators must act on the evidence presented, using established depreciation practices which recognize functional obsolescence caused by the introduction of new technologies without a long history of retirements.

Recognizing the need for shorter economic lives and higher depreciation rates can be a tough call by regulators and management. The depreciation expense is the only expense totally under the control of the regulator. Unlike rate-of-return and its market check in financial markets, no market check exists for the level of depreciation expense approved by the regulator. The rub is that shorter economic lives lead to higher depreciation expense and higher revenue requirement. 

This means that all too frequently the regulator’s decision to increase depreciation rates may be more informed by the effect of the direct rate impact, than by the need to recognize new depreciation realities such as technological obsolescence.

It was state regulators in the 1930’s who insisted that public utility depreciation expenses be systematically and scientifically evaluated and approved by the regulators themselves.  An objective assessment of the economic lives of assets under regulation would, progressive regulators believed, ensure fair return of capital and reasonable charges to consumers who benefited from the assets. Thus, the periodic readjustment of service lives was contemplated and supported by regulators as an essential element of cost of service regulation. To assist in this evaluation, many state regulators benefit from expert PSC depreciation staff experts, some of of whom are certified as experts by the Society of Depreciation Professionals (SDP). Some are also members of the SDP. Under this regulatory system, and with expert staff advisors, it should be a rare series of events which would lead to the “stranding” of investments in the future.

The Honorable Branko Terzic is a founding member of the SDP and former Commissioner FERC and Wisconsin PSC. Contact him at bterzic@thinkbrg.com.