Northeast Natural Gas Infrastructure Assessment

Planning Advisory Committee

March 3, 2005

Herbert Rakebrand III Herbert Rakebrand and Associates,

LLC

March 3, 2005 2

Purpose of the Assessment

To assess the impacts of natural gas infrastructure enhancements on bulk electric system reliability

Develop an understanding of the relationships between infrastructure, supply and contracting

Support the ongoing training of ISO Staff

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Findings

The existing market structure puts local gas distribution companies (LDCs) at a competitive advantage over electric power generators for the purchasing/financing of natural gas services, primarily due to the “pass-thru” of costs across customer rate base.

Recent natural gas infrastructure expansions in

the Northeast have either been narrowly focused to serve specific markets (NYC) or were designed to bring Sable Island gas supplies to market.

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Findings (cont.)

Given the recent declines in Sable Island production (deliveries), New England’s electric power sector has received little or no benefit from recent gas infrastructure development

The completion of the HubLine/M&N Phase III projects simply moved the same (or declining) Sable Island gas supply from one delivery point on the gas grid to another (from Tennessee to Algonquin)

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Findings (cont.)

The ISO should monitor Sable Island gas deliveries, and the impact their declines are having on existing pipeline transportation contracts held by electric power generators

Natural gas infrastructure projects being developed and constructed over the near term will be sized to meet only the incremental load growth of LDCs, while they await new supply development

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Findings (cont.)

The electric power sector should not expect any meaningful benefits from gas infrastructure development over the next several years

While the natural gas industry and electric power generators have had an ongoing dialogue regarding new products and services, currently, the electric generators do not have the economic incentives or the financial wherewithal to support or contract for any enhanced pipeline service offerings

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Findings (cont.)

LNG projects proposed along the existing pipeline route, initially developed for Sable Island gas deliveries, will bring the greatest benefits to the electric sector by backfeeding the natural gas grid and creating a good deal of residual capacity benefits

LNG projects proposed along the St. Lawrence

River will bring the least amount of benefits to the Northeast U.S. as a large share of that new gas supply will probably remain in eastern Canada

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Findings (cont.)

The value of pipeline infrastructure (economic and physical) is directly proportional to the availability of gas supply being injected into that infrastructure

ISO should monitor the regulatory developments at FERC regarding heat content of LNG to determine if this will have an adverse impact on the operation of gas-fired electric generators in the region

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Findings (cont.)

ISO should monitor the market drivers which lead to the development of both natural gas infrastructure development and new products and services

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A Review of the Existing Natural Gas

Infrastructure in the Northeast

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Recent Gas Infrastructure Builds and the Market Drivers Supporting Them

Eastchester (Iroquois) Market is ConEdison (LDC) and NYC generators Provides a much needed backfeed to ConEd distribution system

HubLine (Duke) Market comprised of Generators (61%), LDCs (29%) & Marketers (10%) Provides a new backfeed to a weak Algonquin lateral

M&N Phase III (Duke) No Market Provides a new feed into Algonquin (HubLine) for access to Sable Island

gas The I-8 Uprating (Duke)

No Market Enhances Algonquin’s ability to serve emerging markets beyond Fore

River The Distrigas Project (Duke)

Market is Distrigas supply Expands Distrigas’ access to expanding New England gas markets

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Current Market Environment for Gas Infrastructure Development

Declines in Sable Island gas production Proliferation of LNG terminal proposals The collapse of spark-spreads The decline of the “Mega-Marketers” Well organized NIMBY(ism)

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An Assessment of Current Gas Infrastructure Capabilities

Distrigas New 60 MDt/d of capacity added on the

Algonquin system on October 1, 2004 Iroquois

70 MDt/d of primary firm held by Marketers with access to southwest Connecticut

60 MDt/d of secondary firm sold annually FERC approval for a new 10,000 HP compressor

in Brookfield, CT

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An Assessment of Current Infrastructure Capabilities (cont.)

Algonquin and Tennessee These older pipelines have little in the way of

excess capabilities and would require to have gas introduced into their systems in the market area (LNG) in order to create any incremental capability

Portland and Maritimes & Northeast (M&N) While these newer pipelines have some

incremental capacity capabilities, both are considered supply-constrained at this point and into the near future

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Gas Infrastructure Proposals - Medium Term (2005-2008)

Algonquin BGLS Project (Providence LNG Expansion)

Adds 500 MDt/d of takeaway capacity from the proposed expansion of the existing Providence LNG plant

IslanderEast This project proposes to transport 260 MDt/d from central

Connecticut to Long Island by late 2005 Status of supply to fill this capacity is currently undetermined FERC approved but currently stalled by the State of Connecticut

Duke Energy Gas Transmission Open Season Service commencement dates between 2006 and 2009 Earlier service dates will be to serve near term LDC

requirements; later service dates will serve LNG supply proposals

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Gas Infrastructure Proposals - Medium Term (2005-2008) (cont.)

Tennessee Tewksbury-Andover Lateral (June 2005)

5 mile lateral with 25 MDt/d of capacity Serving Wyeth Pharmaceuticals and Bay State Gas (LDC)

Northeast ConneXion–New England (November 2007) Open Season extended into early 2005 Volumes said to be approx 100 MDt/d targets LDC markets Increased long-haul capacity from Gulf of Mexico

Distrigas (November 2007) 7.6 miles of new pipeline Up to 75 MDt/d of incremental access to Tennessee’s markets

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Gas Infrastructure Proposals -Long Term (2009 & Beyond)

LNG projects along the St. Lawrence River Rabaska – 0.5 Bcf/d Gros Cacuona – 0.5 Bcf/d Characteristics:

Majority of gas will remain in eastern Canada U.S. deliveries will be made primarily to Iroquois, with

the potential for some deliveries into Portland Local opposition has become an issue for Rabaska Gros Cocuona requires developing a substantial pipeline

lateral to reach the markets

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Gas Infrastructure Proposals –Long Term (2009 & Beyond) (cont.)

LNG projects in the Canadian Maritimes Bears Head (Anadarko) – 1.0 Bcf/d Canaport (Irving Oil) – 1.0 Bcf/d Characteristics:

Provides greatest benefit to the northeast infrastructure Majority of required infrastructure to access New England’s

gas markets is already in place (M&N pipeline) These projects are the furthest along in development

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Gas Infrastructure Proposals –Long Term (2009 & Beyond) (cont.)

LNG projects in the Northeast U.S. Providence (RI) LNG (BLGS) – 375 MDt/d Weavers Cove (RI) – 800 MDt/d NorthEast Gateway (Offshore) – 800 MDt/d Broadwater (LI Sound)– 1.0 Bcf/d Characteristics:

All have significant NIMBY issues With the exception of NorthEast Gateway, additional

infrastructure will be required on pipeline mainlines

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Products and Services

Past Impediments Offering new services without new capabilities Concentrating on the traditional gas marketplace

and not the emerging electric marketplace Charging customers for what they already get for

free Lack of market signals

Note: With the addition of significant supplies from the north (either LNG and/or increased Sable Island production), New England’s pipelines will be in a much better position to offer enhanced services

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The Interdependency of Supply and Infrastructure

The value of pipeline capacity is directly driven by the availability of an adequate supply of gas

The location of incremental supplies will determine where infrastructure is built and what resultant benefit it will provide to the electric generation industry

Forecast future supply additions are currently influencing today’s pipeline capacity purchasing

decisions

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Questions and Discussion