Maine Rejects Proposals for LNG Storage Capacity

Despite backing from Maine Governor Paul LePage, the state Public Utilities Commission has rejected all 11 proposals it had received for the construction of new liquefied natural gas (LNG) storage facilities, which plans had been submitted pursuant to a legislatively approved program aimed at protecting consumers from volatile energy prices by increasing natural gas storage capacity. The proposals had been tendered in the form of physical energy storage contracts (PESCs), but the commission determined that none of the plans presented by the bidders comported with the statutory requirements enacted by the legislature. 

The commission expounded that proponents had failed to show that the benefits from the proposed Maine-only PESCs would outweigh associated costs. Rather, the commission found, a Maine-centric storage solution would be too small to drive the price at LNG trading points in the Northeast. It added that the injection of gas from a PESC facility into the market at peak times would likely result in but a minimal regional price effect.

Chronicling the background of the subject statute, the commission conveyed that state lawmakers long had been sounding the alarm about steadily increasing natural gas and electricity prices in Maine (as well as throughout the entire New England region), a trend the legislature had attributed to constraints on natural gas supply into and within the New England area. As a result, the Maine General Assembly had passed in its 2013 session the Maine Energy Cost Reduction Act (MECRA) in an effort to address what it perceived as a "market failure" in the energy sector, as evidenced by a reluctance on the part of electric generators to invest in new natural gas pipeline capacity on their own. 

The commission explained that MECRA authorizes it, in consultation with the state Office of Public Advocate (OPA) and the Governor's Energy Office, to execute certain consumer-funded contracts for new natural gas pipeline capacity. The commission noted that it had previously accepted two such customer-subsidized Energy Cost Reduction Contracts in 2016, deeming them to satisfy MECRA's eligibility criteria.

However, harboring reservations that MECRA alone was not incentivizing investments in natural gas plant expansions, the Maine legislature last year augmented MECRA with the LNG Storage Act. More specifically, the commission said the new law amends MECRA to permit the commission to commit ratepayer dollars to new Maine-sited liquefied natural gas storage capacity along with interstate natural gas pipeline investments. 

The commission stated that the LNG Storage Act mirrors many of the same requirements for consumer-financed investments in LNG facilities as MECRA had for traditional pipeline capacity. That is, the commission said, it must find that any such investment, whether in pipeline or storage facilities, will benefit the state's energy consumers during times of limited regional supply. 

More particularly, the commission listed five standards a proposed PESC must meet to win approval from the commission: 

1. It must be commercially reasonable; 

2. It must be shown to be in the public interest; 

3. It must materially enhance LNG storage in the region; 

4. It must significantly affect peak pricing; and 

5. It must be reasonably likely to be cost-beneficial to ratepayers. 

After examining the LNG storage proposals submitted in response to the 2016 law, the commission said it agreed with opponents, including its staff, the OPA, and the Conservation Law Foundation, that the proposed PESCs did not satisfy those requirements and instead represented an extremely risky investment that could subject Maine ratepayers to large fixed costs, as well as associated variable costs, in return for uncertain benefits. The commission asserted that such benefits, if they materialize at all, may not be realized for a decade or more. 

From the commission's perspective, there is little to be gained from approving a PESC associated with new LNG storage capacity if there is not adequate pipeline capacity to go with it. In that vein, the commission cited testimony from the OPA that while there may be some positive value for ratepayers in a PESC if noregional pipeline expansion were to occur, the prediction of any such value requires the assumption of optimistic results in practice. The commission deemed those benefits to be too speculative for justifying acceptance of any of the tendered PESCs. 

The commission also referenced Maine's position within New England, reporting that Maine's gas load is less than 6% of the region's and that its electric load is only about 9%. Given those minimal percentages, the commission said that an LNG storage tank plan would have to come in at a far lower cost than any of the PESCs submitted in order to be found cost-justified. And the commission dismissed associated claims that it was to be expected that initial PESC filings would appear more expensive because investments in the "first increment of [LNG] capacity" would go down proportionally as new gas infrastructure is added over time. 

The commission ruled that a further argument against the proffered PESCs is that LNG storage facilities are subject to regulation by the Federal Energy Regulatory Commission (FERC) in that they involve interstate commerce. The commission maintained that the mixed state and federal regulatory paradigm raises a concern as to whether the state could retain authority to direct the use of PESC storage gas for Maine consumers only. 

The state commission elaborated that inasmuch as FERC must approve the siting and certification of interstate natural gas facilities, and then oversee the rates and terms of service for use of such systems, it follows that FERC regulations guide how gas capacity is to be obtained and structured. As an example, the Maine commission noted that for new infrastructure proposals, FERC typically requires developers to hold an "open season" to establish foundational contracts supporting a project. 

Thus, the state commission said, all potential storage capacity customers must have an equal opportunity to obtain firm capacity in the open season process. Moreover, it held, the release of firm LNG storage capacity by its owner to others is subject to FERC's open access rules, which generally require that capacity offered for release be posted for bidding and awarded to the party offering the highest rate, so as to assure that the capacity goes to the market participant placing the highest value on the capacity. 

In the state commission's view, FERC's open season and capacity release rules would likely prohibit Maine from prioritizing jurisdictional customers for use of a Maine-located PESC facility. However, while concluding that that factor alone militates against approval of the proposed PESCs, the commission averred that its overarching reasons for disapproving the planned LNG storage units were that none had been shown to be commercially feasible or likely to bring down energy costs for Maine citizens. Re Proposals for Physical Energy Contracts for Liquefied Natural Gas Storage Capacity, Docket No. 2016- 00253, May 17, 2017 (Me.P.U.C.).