Pipeline* - Local Natural Gas Distribution Companies - Natural Gas in New Hampshire Part 3

In my last post, I finished off by introducing the two local natural gas distribution companies (LDCs) here in New Hampshire that deliver natural gas to residential, commercial, and industrial customers through their distribution networks. As a reminder, I again present the map below  which shows the service areas of these two LDCs.

Source: NHPUC

The first and largest of the NH LDCs, with about 89,000 residential, commercial, and industrial customers as of 2012, is EnergyNorth which does business under the Liberty Utilities umbrella. Liberty Utilities has the franchise for the distribution of natural gas up the Merrimack corridor to the Lakes region—where they tap into a branch of the Tennessee Gas pipeline—and the tiny Berlin “island”, where they draw off the Portland Natural Gas Transmission System Pipeline that crosses the northern part of the state. EnergyNorth was, for many years, a standalone natural gas distribution company, but has recently been through several ownership changes. In 2000, it was acquired by Keyspan. In 2006, National Grid, a UK utility company, acquired Keyspan. National Grid then sold EnergyNorth to Liberty Utilities in 2012. Liberty Utilities is itself part of a much larger, multifaceted energy company, Alqonquin Power and Utilities Corporation. Alqonquin owns hydroelectric, wind, and solar generating facilities, and well as water, natural gas, and electricity distribution businesses in the US and Canada. Alqonquin Power and Utilities is headquartered in Oakville, Ontario, and is listed on the Toronto Stock Exchange. Liberty Utilities also has a smaller business distributing electricity to about 43,000 customers in the west and south regions of NH.

The other natural gas LDC is Northern Utilities, which operates under the Unitil name. This is a smaller natural gas and electricity distribution company with operations in Maine, NH, and Massachusetts. In NH, their gas distribution business is limited to the sea-coast area where they draw of the Granite State Gas Transmission pipeline which runs up the coast to Portland, Maine.   In 2012, they had about 30,000 natural gas customers. Northern Utilities Company has also been through many ownership changes. It was purchased by Bay State Gas in 1979, which  merged with NiSource in 1999. NiSource then merged with the Columbia Energy Group in 2000 and, in 2008, Northern Utilities was purchased by Unitil. Like Liberty Utilities, Unitil is also in the electricity distribution business in NH. Unitil is a publically traded corporation listed on the NYSE and is headquartered in Hampton, NH.

There are two aspects to the business of the LDCs. The first is creating and operating the natural gas distribution pipeline and the other is providing the gas that the customer uses. This is the reason that NH natural gas users are charged separately for natural gas distribution services and for the natural gas commodity itself (see Jumping Jack Gas for a typical breakout of a NH natural gas bill).  Establishing and operating a gas distribution network is a complicated, expensive,  and highly specialized business so these utilities have the sole right to distribute natural gas in a specified area - a monopoly - on condition that it is done cost-effectively, safely, and that the service is reliable. As a consequence of the monopoly awarded to these companies, they are tightly regulated by the New Hampshire Public Utilities Commission. (For a primer on public utilities, see What’s It All About, Alfie?)

In NH, the natural gas business is partially deregulated. Only the large industrial and commercial customers can choose their natural gas supplier from competitive suppliers. Residential users have no choice and are obligated to purchase their natural gas from their local distribution company. The LDCs therefore distribute natural gas supplied by others in the case of commercial industrial customers or supplied directly by themselves directly for residential customers.

Operating a natural gas distribution company is a challenging business. As we were reminded again by the gas explosion in New York last month that killed eight people and leveled two buildings, handling, transporting, and safely delivering a combustible fuel takes special technology and unique precautions. When the pipelines leak and the leaks go undetected or unreported, the consequences can be disastrous. The LDCs have a safety-first approach and are very concerned about running a safe distribution system. They react rapidly to reports of natural gas leaks. We, as citizens, also bear some responsibility for natural gas safety and we should promptly report leaks when we smell that distinctive natural gas smell. All excavation projects, including simple home projects like planting trees and shrubs, should be first cleared by a call to the Dig Safe hotline at 811 so that they can come out and mark where your utility lines run. Nothing quite spoils a gardening or home construction project like puncturing a natural gas line: you really don’t want to be that guy who caused the whole neighborhood to evacuate on a Sunday morning! 

Source: Flickr - Eugene Peretz

One of the prevailing safety issues is that the original gas distribution piping was made of unprotected cast iron or bare steel buried underground. After years of underground exposure, these pipelines slowly corrode and, in areas where soil moisture is high or the conditions are highly corrosive, corrosion can be severe and leaks can occur. The picture below shows a piece of highly corroded pipe removed from a natural gas distribution network in NH. The LDCs have active programs in place to replace steel pipe with newer and safer high tech plastic piping, but this is an expensive endeavor with costs of the order of $1.5 million per mile. Over the years, the utilities have replaced a great deal of their networks with plastic distribution pipelines. The latest pipeline report indicates that only 155 miles (8.2%) of the 1875 miles of piping in NH is still made of iron. Compare this to NYC, where 60% of distribution mains are still made of cast iron or bare steel and where some of the lines are over 100 years old.

Corroded Natural Gas Pipeline from Nashua, NH Area

Source: NHPUC Filing

These LDCs are an important component of the business infrastructure for NH and, like all other businesses, they are looking to grow and to earn a return on their investment. However, they face some unique challenges. From my research and discussions with some of the LDCs and other folks who have been in the natural gas business for a long time, I got an improved understanding and appreciation for their business and challenges. Here are some of the interesting things I have learned:

• LDCs make their money from the distribution of natural gas and not from the sale of gas. The natural gas is passed through to their customers on a dollar-for-dollar basis. They are not allowed to mark up the price of natural gas that they purchase and resell. In the case of commercial and industrial customers, they simply transport gas provided by a competitive supplier.
• Because the LDCs are regulated utilities with a monopoly in their service area, any rate changes to their services need to be approved by the regulators at the NH Public Utilities Commission. 
• In the rate-setting process, several factors are taken into account, the key one being the investment the LDCs have made in distribution equipment and facilities (pipelines, compressor stations, trucks, etc.) as well as the working capital used to operate their business. These investments are collectively known as the rate base. Expenses such as payroll, administration, and taxes are also taken into account. Because LDCs are for-profit business, they are allowed to earn a return on their distribution services, however, the rate of return is capped by the regulators, and is typically in the range of 9 to 10% on the equity invested.
• Rate-setting is a complicated business and rate cases presented by utilities are expensive and lengthy endeavors requiring a great deal of review and analysis by both the LDC and the regulators.
• Growing the natural gas distribution business is expensive and challenging. The reasons are complex, but an important aspect is that within the networks, the LDCs have already been very successful in signing up natural gas customers. In their service areas, which is considered to be within 100 ft of natural gas main, the LDCs have already signed up about 80% of potential customers. This significantly limits potential growth in their customer base from within their existing distribution network. Growth needs to come from expanding the network.
• At the same time as the natural gas utilities are trying to grow their businesses, there is a negative impact on natural gas usage due to energy-efficiency measures  in homes and the “natural” turnover and replacement of aging heating units, such as dryers and stoves, to more efficient units.

As public utilities, the LDCs are required to submit annual reports to the NH Public Utilities Commission. These reports make for compelling reading. Here are some interesting details that I gleaned from an examination of the 2012 annual reports (2013 reports are not yet available):

• These are capital-intensive business with profitabilities of the order of 5%.
• Revenues per customer are ~$900 per year and net income per customer is only about $50/year, which is not a great deal.
• The bulk of their costs are associated with the purchase of natural gas (about 60% of their overall expenses).
• Other costs include typical operations and maintenance costs, depreciation, administration and debt service expenses.
• The LDCs keep a small supply of liquefied natural gas at storage facilities on hand to assist with supply shortages. Some will even use propane when natural gas is in short supply and some LDCs have even purchased storage capacity at underground storage locations located in other parts of the US to ensure gas supply during periods of high demand.  

A question often asked is why the natural gas utility cannot provide natural gas to your home. The main reason is that there may not be a natural gas main pipeline nearby. The service area for a natural gas company typically lies within 100 ft of a mainline: anything further becomes too expensive. Expansion of service area by the laying down of new distribution piping is expensive and consideration must be given to the costs of pipeline extensions, housing density, and the probability of signing up new customers. Moreover, regulators are very sensitive to the “socialization” of expansion plans so they do not want network expansion plans funded by rate increases for existing customers. New pipelines, which cost about $1 million per mile, have to be paid by new customers. As noted earlier, the income per natural gas customer per year is low so capital recovery and return on investment requires a very long period. It is for this reason that expansion in natural gas service areas is a slow, measured, and carefully evaluated process.

Laying new natural gas distribution pipelines. 

In my next post, I will take a closer look at retail natural gas pricing in New Hampshire, which turns out to be a fairly complicated matter.

In the meantime, remember to turn off the lights before you leave the room and call Dig Safe at 811 before starting to dig.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

Click on this link to receive email notifications for Energy in New Hampshire updates

[*Pipeline – A great 1960’s surf music instrumental by the Chantays. I have always have loved the way this tune kicks off with that distinctive riff. You just know there are good things to come. Here is Pipeline, covered by Stevie Ray Vaughn and surf guitar god, Dick Dale.] 

Jumping Jack Gas* – Natural Gas in NH – Part 1

In this post I start a series which looks at natural gas from a New Hampshire perspective, but, as we will learn, we do not stand alone in NH as a natural gas consumer. Natural gas is very much a regional issue, and natural gas supply and consumption can, like electricity, only really be understood from a regional perspective.

Let’s start right away by looking at the history of natural gas consumption in New Hampshire, shown in the chart below. The first thing we note is that that natural gas consumption was relatively low and growing only slowly until 2003 when there was an enormous leap in consumption.

Data Source: EIA

This big increase in NH natural gas consumption was created by the commissioning, at the end of 2002, of the two combined-cycle natural gas combustion turbines at the then new Newington Power Facility. These turbines have a combined capacity of 525 MW and run exclusively on natural gas. This generation operation is owned by Essential Power (formerly known as North American Energy Alliance) which owns a number of other natural gas burning plants. Essential Power itself is owned by Industry Funds Management (IFM) which is a global investment fund held by 30 pension funds. [The Newington Power Facility should not be confused with the similarly named and nearby Newington Station owned by Public Service of New Hampshire, PSNH. The PSNH plant is a much older plant, put into service in 1976, and is a flexible operation that can burn oil or natural gas. This operation is rated at 406 MW capacity, its equipment is old and inefficient by modern standards, and it is used for peaking needs, i.e., it is only fired up when demand for electricity is high and prices are high.] 

As can be noted from chart, other uses of natural gas, such as industrial applications or home and commercial heating, rose slightly from 1980 but have fallen off since the early 2000s. The decline in residential natural gas consumption since 2005, shown below, took me by surprise. I had assumed that with the decrease in natural gas prices, especially when compared to that of home heating oil over the same period, droves of people would have signed up for natural gas and that residential consumption would have increased. In fact, it turns out that the number of natural gas customers did increase from 2005 to 2012 but the increase was small. The number of customers rose by 5.8% from 94,466 to 99,940.  The fall-off in residential natural gas consumption during this period is more likely a reflection of the decade-long warming trend that I highlighted in Crude Oil Blues. I anticipate that the cold winter we are presently enduring here in New England will boost the residential natural gas consumption numbers.

Data Source: EIA

Natural gas is important to us here in New Hampshire for industrial usage and residential and commercial heating but the tail that is wagging the NH natural gas dog is electricity generation. When we talk about electricity generation and natural gas consumption, we really need to think regionally: in truth, this is what we need to do with all energy matters. New Hampshire (as much as the independent Yankee folks up here might like it to be so) is not an energy island. It has few natural energy resources, except for a little hydro, some wind and wood, as well as a slowly growing amount of solar, so we need to think regionally in terms of energy imports and exports as well as our own consumption.

Before we jump into the complexities of regional natural issues, which I will tackle in future posts, let’s take some time to better acquaint ourselves with natural gas.

Natural gas consists largely of methane which is the simplest of the hydrocarbon fuel molecules. Methane is built from one carbon and four hydrogen atoms. Natural gas also contains varying amounts of other hydrocarbons, such as those in the figure below.

Natural gas is produced by the biological decay of vegetation and waste under anaerobic conditions (i.e., in the absence of oxygen or air). It is recovered from natural gas wells, it is often associated with crude oil, and it is found in coal seams. In the US, we have, in the past decade, been able to release vast quantities from shale gas deposits by horizontal drilling and fracturing shale deposits deep underground.

When natural gas is pumped up from underground deposits it is pretty dirty and a good amount of cleanup is required before it can be transported in a pipeline. When natural gas is recovered from conventional or shale gas deposits, it is often accompanied by other hydrocarbon gases, such as ethane, propane, propylene and butanes. Natural gas which contains a lot of these other hydrocarbons is referred to as "wet" gas. These other gases are removed during processing, which also removes water, sulfur, mercury, and other byproducts from the natural gas. The hydrocarbon gases are also separated into natural gas liquid (NGL) fractions, such as ethane, propane, butane, etc., each of which has its own specific use. As noted in Under Pressure, this is the source of much of the propane we use.

The composition of natural gas delivered to consumers therefore varies, depending on its source and the processing it has been through. Typical compositions are shown below.

Source: Union Gas

The most attractive feature of natural gas is that it is clean burning with fewer harmful combustion products than oil or coal. The main emissions are carbon dioxide and water. Of all the carbon-based fuels, methane has the lowest amount of carbon released, per unit of energy released. This is the reason that carbon emissions in the US have dropped as we have shifted from coal-fired to natural gas-fired electricity generation. The table below shows the carbon dioxide emissions per million BTUs produced by the combustion of different fossil fuels. The emissions of natural gas are almost half of those of coal.

Source:EIA

Natural gas is odorless and colorless. Its distinctive smell is due to the odorant that distributors are required to add to the gas for safety reasons. The odorant is normally a smelly sulfide compound, a mercaptan, that smells like rotten eggs: if you smell it, it means that you have a gas leak—you should leave the area and call the gas utility right away. Natural gas explosions, although rare, can have devastating consequences, causing loss of life and enormous property damage.

Natural gas is normally transported across the country by pipeline. These steel pipelines are 20 to 42 inches in diameter and buried underground along 100 ft rights of way. The gas flows at a rate of about 30 mph. The pressures range from 200 to 1500 psi and regular compressor stations maintain the pressure along the pipeline routes The natural gas is directed to distribution points where it passes through a gate station. Here it becomes the responsibility of the local distribution company that then drops the pressure, adds the odorant, and directs the gas to homes and business through a smaller diameter and lower pressure natural gas grid. Service lines bringing the gas directly into homes or businesses, through a gas meter, tap into this distribution grid. These service lines can be smaller diameter plastic pipes in which the gas pressure can range from 0.25 to 200 psi, depending on the amount of gas needed by the customer.  

Similar to electricity, there are three main components to the natural gas business. The generation/production side is carried out by natural gas companies who explore for, drill, pump, and treat the gas before it is fed into a pipeline. The transmission part of the business is the large network of natural gas transmission pipes and underground storage caverns across the country. The distribution network is the responsibility of the local distribution company (LDC).

The LDCs have a franchise for a specific area and, because they are monopolies, are regulated by the Public Utilities Commissions. Like electricity in deregulated markets, supply of natural gas is separate from distribution, so if you are able to buy your gas from a competitive supplier, it will have to be transported through the distribution pipeline of the LDC. In New Hampshire, we only have partial natural gas deregulation. Large industrial and commercial customers can purchase natural gas from competitive suppliers but residential natural gas users don’t have a choice and have to purchase their gas from the LDC.

Natural gas has different units to those of the other energy industries, such as electricity or oil. The basic unit of natural gas is a cubic foot of gas which has an energy content of 1027 BTU. This is not a great deal of energy. By comparison, a cubic foot of home heating oil (~7.5 gallons) would have about 1 million BTU. Because the energy content of a cubic foot of gas is so low, we normally talk in terms of hundreds of cubic feet or millions of cubic feet. Also, because a cubic foot of gas has an energy content of approximately 1000 BTU, we often talk about millions of BTU (MMBTU) when discussing natural gas and assume that 1 million BTU (1 MMBTU) of energy  is approximately equal to 1000 cubic feet of natural gas. Returning to the first chart in the post, we note that NH natural gas consumption in 2012 was just over 70,000 MMBTU or approx. 70 million cubic feet.

 A useful set of conversions is provided by the American Gas Association (AGA).

Most home owners pay for natural gas in terms of the heat content measured as therms. One therm is equivalent to 100,000 BTU or approximately 100 cubic feet. The AGA also notes that  193 cubic feet or ~2 therms is enough to meet the daily heating, hot water, and cooking needs for an average US home using natural gas. A few points are noteworthy on the natural gas bill for a NH resident, shown below.

There are three main components to the bill: 1) A minimum service charge; 2) a distribution charge; and 3) a fuel charge. Natural gas is metered into a home in hundreds of cubic feet but is charged in therms. . The conversion from cubic feet to therms involves multiplying by a therm factor (Note 4 in the figure above), in this case 1.035. I noted previously that a cubic foot of natural gas contains 1027 BTU, but this is an average which leads to 1.027 therms per 100 cubic foot. However, the actual BTU content of natural gas is very dependent on the amounts of the other hydrocarbon gases in the natural gas. The higher hydrocarbon gases have a higher heat values, so if the natural gas contains higher amounts of these, the therm factor will be higher than 1.027.

The chart below shows the 13-year fluctuation of retail natural gas prices, courtesy of the NH Office of Energy and Planning. Over this period, there has been considerable price fluctuation, ranging from a low of $0.71 in Oct 2002 to a high of $1.75 per therm in Oct 2008. In fact, as I have highlighted on the chart, at the start of 2013 natural gas prices were relatively low at $0.82 but there has since been a substantial increase, with recent prices getting close to $1.45 per therm. Prices in March are even higher at $1.60 per therm. These Jumping Jack Gas* price increases have been driven by increases in commodity gas prices, which, in turn, have been driven by the increased demand we have experienced due to this very cold winter. We will look more closely at natural gas prices in future blogs.

In my next post, I will take a look at regional natural gas issues and particularly at how it makes its way into New England through the natural gas pipeline network.

Until next time, remember to turn off the lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

Click on this link to receive email notifications for Energy in New Hampshire updates

(*Jumping Jack Gas - A play on the famous Rolling Stones’ tune, Jumping Jack Flash, with the classic line that most of us have lip synced to at one time or another, “Jumping Jack Flash, it’s a gas, gas, gas.” I am a cover tune fan, so enjoy a great but short version of the tune by the frenetic Tina Turner, rocking it out as only she can)