News: CJ Exclusives

Taxpayer-Funded Gas Line Grows

Using state bonds, Northeastern pipeline to tunnel across Currituck Sound

Eastern North Carolina Natural Gas is winding down its pipeline construction project in 14 Northeastern counties with an ambitious crossing of Currituck Sound, a three-mile underground tunneling that parallels Wright Memorial Bridge.

But it is not clear how many customers exist on the Outer Banks who are eager to convert from their present energy suppliers to natural gas. The prospect of persuading hundreds of commercial consumers is enticing to the struggling gas utility startup, which made burrowing 30 to 40 feet below the sound’s floor worth the risk.

“What it may boil down to is, what kind of residential and commercial demand is there on the Outer Banks?” said Mark Stultz, director of public relations for the Natural Gas Supply Association, a trade group based in Washington, D.C. “Usually (infrastructure buildup) is not done unless there is some guarantee of return on investment.”

John Monaghan, general manager for ENCNG, said the company has aggressively pursued potential customers between Kitty Hawk and Nags Head, but he didn’t know how many commitments they had.

“I can’t tell you the number,” he said. “We have people calling on customers all the time now.”

Giselle Rankin, a lawyer for the N.C. Utilities Commission Public Staff, a state agency that represents consumers in all utility rate cases before the commission, said many consumers in Dare County were “ambivalent” about natural-gas service as it was being considered in the late 1990s. Despite that, she said the Outer Banks “is one of the most (economically) feasible pieces” of the 14-county project.

Another constraint that ENCNG has as it deploys its 750-mile pipeline system is North Carolina’s “use it or lose it” law, which requires a gas utility to provide service in all the counties where the Utilities Commission has granted to it franchise rights. ENCNG holds the rights to Dare County, where most of the Outer Banks lies, but the company has yet to reach any part of the county. The heavily developed tourist community on the state’s barrier islands holds the most promise for gas demand in Dare County.

ENCNG was formed four years ago through an equal partnership between the Albemarle Pamlico Economic Development Corporation and Carolina Power & Light, now Progress Energy. ENCNG received $188.3 million of $200 million in voter-approved bond funds to construct a natural-gas pipeline through 14 northeast counties, where the population was too sparse to justify the project otherwise. Piedmont Natural Gas Co. purchased Progress Energy’s gas interests, including ENCNG, two years ago, and has committed $22 million for pipeline construction.

The number of customers for natural gas in ENCNG’s territory has not progressed as much as company officials had hoped. Monaghan said ENCNG has more than 800 customers in the northeast so far.

“That’s tiny by any standard,” said Thomas Catlin, vice president for Maryland-based Exeter Associates, which provides economic and financial consulting services in the areas of public utility regulation.

According to some gas industry trade association officials, gas service infrastructure is usually not built unless new customers are able to pay for the new lines.

“That’s usually how a distribution network is established,” Stultz said. “There has to be a public service demand.”

“The gist of what has happened there is you’ve got investments where they’re not paying for themselves,” Catlin said.

Because of the lack of customers and projected operating losses that are expected for the foreseeable future, Piedmont Natural Gas wants to absorb ENCNG’s customers into its statewide ratepayer base. If permitted by the Utilities Commission, a merger would mean that state taxpayers would foot the bill for paying the bonds and all of Piedmont’s customers in the state would bear the burden of the northeast operational shortfall for years to come.

When the Utilities Commission originally approved ENCNG to receive the franchise and the bond funds in 2000 and 2001, members told the company it would be able to recuperate up to $15 million in operations and maintenance losses over eight years in future rate reviews. Typically, for established utilities, that is not permitted.

“It sounds like there’s not enough subsidized financing to pay for (operations) either,” Catlin said.

Plans for a merger of ENCNG into Piedmont support the contention that those operational expense planning fell dramatically short. At an APEC meeting in October company officials said, “Piedmont’s ability to fund [ENCNG’s] operations is limited.” Minutes from a March 30, 2004 APEC board meeting state that the “current forecast shows ongoing operating loss(es).”

Piedmont and ENCNG officials blame the poor economy, the effects of the Sept. 11, 2001 terrorist attacks, and unusually high fuel prices as reasons for the lack of customers.

“It’s a challenging environment out there,” said David Trusty, a Piedmont spokesman. “There are a lot of things external to our control.”

Rankin supported Trusty’s contention.

“A lot of that is beyond their control,” she said. “It is not really their fault.”

Rankin said market studies in 1999 and 2000 did not exaggerate the number of expected customers or gas consumption. But she could not predict whether the Public Staff would support or oppose a “roll-in” rate case for ENCNG into Piedmont.

Even though operating losses were becoming unmanageable, Monaghan said there was no consideration given to slowing pipeline construction.

“The bonds were provided to build the project,” he said.

“They can’t use the bond money for operational costs,” Rankin said.

About $146 million of the $188.3 million in bond funds has been paid to ENCNG so far.

Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected].