Interstate Natural Gas Association of America Foundation

Keynote Address
Fred Fowler
Group President, Energy Transmission
Duke Energy

Good morning. Today I’d like to talk to you about the state of our industry—a situation that reminds me of a story I recently heard from a colleague of mine.

An economist returns to visit his old school. He’s interested in the current exam questions and asks his old professor to show him some of the questions. To his surprise, they are exactly the same ones to which he had answered 10 years ago! When he asks about this, the professor answers: “the questions are always the same—only the answers change!”

Like the professor, we face many of the same challenges today that we’ve faced in the past 30 or so years—future market growth, availability of gas supplies, pipeline safety and pipeline security.

First, I’d like to talk about the state of our industry. Not too long ago, convergence was a popular topic as many natural gas entities combined with power companies. Lately, most of those companies—and much of the energy sector—have been challenged by a different form of convergence.

Beginning with the California situation, companies have seen a convergence of many factors in a relatively short period of time. Since the summer of 2000, we’ve seen a declining economy, government intervention in energy markets, corporate scandals and investor mistrust, the call for more financial transparency, ratings agency criteria challenges, and legislation and regulatory actions and reactions. And, I didn’t even mention the impact of Sept. 11.

Consider this. The dozen or so major players in the pipeline/merchant sector have lost almost $240 billion dollars in market capitalization in the past 17 months. Pipelines have deferred or cancelled construction projects? and I know this is causing increased anxiety among our supplier group, many of whom are here this morning.

The marketplace is highly charged and our industry is extremely fragile at this point in time. We are at a very crucial crossroads in our history. That’s why I believe it is essential that all of us—as energy providers representing all segments of the industry—work together to build the infrastructure needed to meet the growing demand for natural gas in North America.

The INGAA Foundation’s 30 trillion cubic feet report released last January clearly laid out the challenge for us over the next decade. This report—which updated an earlier Foundation report on the same subject—projected natural gas demand in the U.S. will grow to nearly 30 Tcf by 2010.

It will take significant cooperation between the pipelines, LDCs and producers to work through our current challenges in order to meet this market need. We are positioned for growth, but with a credit crunch infringing in all sectors, it will be a challenge to meet this market—and come up with $68 billion of new investment in pipeline transmission and storage infrastructure that will be required in the United States and Canada between now and 2015. This estimate of industry capital requirements includes the cost of new transmission and storage facilities and routine replacement of existing facilities.

The Foundation’s analysis estimates that the pipeline industry must invest $48 billion in U.S. gas transmission capacity from 2001 through 2015, an average of $3.2 billion per year. About 80 percent of this investment will go toward new pipeline construction, with the remainder required to replace and refurbish existing pipeline and compression facilities.

This estimate includes the U.S. portion of an Alaskan Gas Pipeline (assumed to utilize the Alaskan Highway route), and additional capacity necessary to serve power generation demand.

In Canada, the industry also will need to invest nearly $17 billion in gas transmission facilities at an annual average of $1.1 billion. The investment is required to allow increased deliveries from Eastern Canada and existing production areas in Alberta and British Columbia, as well as Arctic gas supplies from Alaska and the MacKenzie Delta.

This report clearly sets the benchmark for the challenges we face in building infrastructure to get natural gas to markets.

Two immediate challenges we faced this year were pipeline safety and pipeline security. The Foundation provided two key studies that had a definite impact on the debate and final legislative/regulatory decision making in both areas.

On the issue of pipeline safety, the U.S. Senate acted in 2001 on legislation that included a mandatory five-year inspection for all pipelines. This arbitrary inspection time was included in the legislation on the Senate floor with no debate or analysis on the economic consequences.

The Foundation produced a report this spring that played a vital role in getting this inspection time extended to 10 years in the final Senate/House compromise on this important legislation.

The Foundation report highlighted the fact that natural gas pipelines should be treated differently than liquids pipelines, which already are required under DOT regulations to inspect their pipelines every 5 years.

The report noted that natural gas pipeline companies need to have the flexibility to work with customers to minimize or eliminate any service disruptions. Unlike liquids pipelines, natural gas pipelines transport natural gas directly to the end user. Storage options are fewer. Direct industrial, power generation and small local gas distribution systems are inordinately affected because of service outages due to usage inspections.

Inspection work should be performed during periods of low gas usage to reduce impact to customers. Reducing the amount of time to complete the baseline inspections forces these inspections to be performed during peak natural gas usage periods.

The estimated price increase to the consumer due to restricted mainline pipeline capacity could be as high as $18 billion with a 5-year mandatory inspection period. This is over and above the cost of the integrity program—$2.5 billion for pipelines and $4.5 billion for local distribution companies—and does not include any costs the individual customer may incur as a result of a disruption of service.

This report also was used by the Office of Pipeline Safety staff as an important resource in drafting their pipeline safety regulations? and I trust Stacey Gerard, who heads the Office of Pipeline Safety, will mention this as part of her participation in this morning’s panel.

Right now, the pipeline safety bill agreement is part of the overall energy legislation that is still hanging in limbo in the House/Senate Conference Committee. There is strong Congressional support for passage of the pipeline safety measure, but some on the conference committee do not want to peel issues off the larger energy bill—at least as long as there is some hope of passing the larger energy bill.

It is still possible that an agreement on an energy bill can be reached—and passed—during a lame duck session in November/December. If the conferees give up on the energy bill, then we have a reasonable chance of passing the pipeline safety provision on its own—as long as there is still time available on the schedule.

On pipeline security, INGAA and the Foundation jointly produced a study entitled “Natural Gas Pipeline Security Study for the Northeast U.S.—The Gas Markets’ Ability to Withstand Significant Pipeline Disruption.”

Given the events of September 11, 2001, various offices in the federal, state and local governments—including the Office of Homeland Security, the Department of Energy, the Federal Energy Regulatory Commission and state Public Utility Commissions—became more concerned about the security of energy infrastructure against acts of terrorism.

The intent of this study was to determine and measure the ability of regional natural gas markets to absorb and efficiently reallocate gas supplies during the event of significant pipeline disruption and to assist policy planning for such an event. Specifically, the study was designed to determine the natural gas market’s ability to withstand loss of regional pipeline transportation capacity without causing an outage to a large number of residential and commercial heating customers during peak and other usage periods.

This study addressed the economic and emergency regulatory response to a potential capacity outage into New England, New York, New Jersey, Eastern Pennsylvania, or the Washington-Baltimore corridor. This pilot study clearly shows the “natural gas delivery risk profile” of the given region.

Let me explain the risk profile concept. In the present market, individual entities are making decisions based on their limited knowledge of the segment of their regional energy market. Like the famous elephant story, there are many blind people trying to describe the market and make decisions on how it will perform under stressed conditions such as a terrorist event.

In some cases, people may make conservative decisions based on that limited knowledge, but they are more likely, in this age of constrained resources, to try to get by and not invest in what is needed.

The key to this type of tool is to more clearly show the stakeholders—and more importantly the public policy overseers—what the gas delivery risk profile of the region really looks like. In this case, the focus of the stress on the infrastructure is a terrorist or security event that may upset the balance of the market.

An important conclusion of this study is that the regional risk profile is always changing. Seasons, weather patterns, economic activity, consumer response and revisions to the gas infrastructure have significant impact on the size and shape of this risk profile.

Out of the list that I just mentioned, the most controllable of these variables is the gas infrastructure. This is where the Foundation can help with innovative solutions on how to minimize that risk. The solutions can range from simple pipeline capacity additions to exotic “just in time” repair and recovery systems. This information is very important feedback to the pipeline companies in the development of their individual plans to detect, deter, respond and recover from potential terrorist events.

The results are naturally intuitive to an experienced gas person and mirror the efforts by gas infrastructure developers. For those not familiar with the physical underpinnings of our increasingly complex natural gas market, the revelations can be startling. We hope that these kinds of tools will be the basis for logical decisions in an increasingly illogical environment.

In the important world of national security, it is important to have these cards on the table so the key players can see the game. We, as an industry, do not want to overreact to misplaced concerns, but more importantly we need to be sure we are performing our civic duty for this country.

For those who attended the special briefing on the preliminary results of this model after the session yesterday, I think you can see how this tool can help market participants and their public representatives understand the scope and breadth of security challenges for the Northeast.

I think you also can see how this tool could be used to illuminate infrastructure development problems such as pipeline project resistance or hesitant customer commitment.

In closing, I’d like to reiterate my call for an open dialogue—such as the current exchange between INGAA and AGA—to work out solutions on such critical issues as building new infrastructure, hourly swings and level of service. Only by working together during these difficult times can we effectively promote natural gas as the fuel of choice—and be prepared to meet the market needs of the future.

I want to thank you for your support of the INGAA Foundation. I appreciate all the suppliers hanging in there with us as we pass through tough times. We will get through these times together and be stronger as the recovery occurs and the need for natural gas remains strong.