bv law firms brownbag luncheon

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April 3, 2013 BLACK & VEATCH MANAGEMENT CONSULTING Issues For An Expanding Energy Market Market and Regulatory Advisory Services to the Natural Gas and Power Industries

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Page 1: BV Law Firms Brownbag Luncheon

April 3, 2013

BLACK & VEATCH MANAGEMENT CONSULTING

Issues For An Expanding Energy Market Market and Regulatory Advisory Services to theNatural Gas and Power Industries

Page 2: BV Law Firms Brownbag Luncheon

AGENDA

• About Black & VeatchIssues For An Expanding Energy Market

2

Page 3: BV Law Firms Brownbag Luncheon

ABOUT B

LACK &

 VEATCH

BLACK & VEATCH CORPORATION – SOLVING THE WORLD’S COMPLEX INFRASTRUCTURE CHALLENGES 

3

• Founded in 1915• Global workforce of over 9,200 • More than 100 offices worldwide• Projects in more than 100 countries on 6 continents

• $2.7 billion in annual revenues in 2011• Employee‐owned corporation

BLACK & VEATCH CORPORATION IS A LEADING GLOBAL ENGINEERING, CONSULTING AND CONSTRUCTION COMPANY

Page 4: BV Law Firms Brownbag Luncheon

ABOUT B

LACK &

 VEATCH

WE INTEGRATE MARKET REALITIES WITH REGULATORY STRATEGIES 

4

STRA

TEGY, M

ARKETS & FINAN

CE •Market Analysis

• Integrated Resource Planning

•Power Fuel Planning & Procurement

•M&A Support• Lender’s Engineer

REGULATO

RY, SECURITY & COMPLIANCE • Cost of 

Service & Rates

• Expert Testimony

• Turnkey Regulatory Services

• Pipeline Integrity

• Cybersecurity CUSTOMER

 ENGAG

EMEN

T • Retail Market Systems

• Contact Customer Performance

• CIS

INTELLIGEN

T INFRAS

TRUCT

URE • Advanced 

Metering Infrastructure

• GIS• Energy Efficiency & Demand Response

• Integrated Operations Control

• Distribution Planning

CUSTOMIZED, INTEGRATED & STRATEGIC SOLUTIONS

Black & Veatch Management Consulting

Page 5: BV Law Firms Brownbag Luncheon

AGENDA

• About Black & VeatchIssues For An Expanding Energy Market

5

Page 6: BV Law Firms Brownbag Luncheon

ISSUES ENCOMPASS THE MAJOR CHALLENGES FACING THE NATURAL GAS AND POWER MARKETS TODAY

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Page 7: BV Law Firms Brownbag Luncheon

– BRIGHT OUTLOOK OR TORTURED OPTIMISM?

7

Optimistic92%

Neutral 5% Pessimistic 3%

OUTLOOK ON INDUSTRY GROWTH IN NORTH AMERICA BETWEEN NOW AND 2020Source: Black & Veatch Natural Gas SurveyQ. What is your general outlook on the future growth of the North American natural gas industry?

Low Gas Prices+Lagging Demand Growth+Potential Export Limits+Increasing Regulation

?

=

Page 8: BV Law Firms Brownbag Luncheon

– WHILE THE INDUSTRY IS OPTIMISTIC, CHALLENGES EXIST

8

4.57

4.22

4.21

4.21

4.13

4.08

4.01

3.94

3.80

3.74

Safety

Economic growth

Gas supply reliability

Rate and regulatory certainty

Capital access and cost

Aging infrastructure

Gas price stability

Electric‐gas interdependency

Environmental activism

Aging work force

On a scale of 1 to 5, rate the most important long‐term issues to the gas industry.

No Impact

SignificantImpact

Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Convergence, Capital, Capacity

Capital

Source: 2012 Black & Veatch Strategic Directions in the US Natural Gas Industry

Thesemarketissuesrequireregulatorystrategies

Page 9: BV Law Firms Brownbag Luncheon

CAPIT

AL

– WHO WILL BUILD THE INFRASTRUCTURE IF NO ONE WANTS TO PAY?

9

Convergence

Cap

acity

Page 10: BV Law Firms Brownbag Luncheon

10

3.44

3.43

3.23

3.22

3.10

3.10

Ability to recover operating costs and provide satisfactory earnings

Costs associated with maintaining satisfactory regulatory compliance

Level of investment made by your company in the natural gas industry

Predictability of natural gas prices

Level of natural gas prices to consumers

Stability of service pricing

– CAPITAL: HOW WILL UNCERTAINTY AFFECT EXPANSION AND MAINTENANCE INVESTMENTS

B&V Survey Question: To what extent do you believe regulatory uncertainty (at either the federal or state level) has an impact on the following issues?

No Impact

SignificantImpact

CAPIT

AL

Page 11: BV Law Firms Brownbag Luncheon

11

CAPIT

AL

– CAPITAL: COULD REGULATORY UNCERTAINTY DIFFER MIDSTREAM INVESTMENTS?

US Midstream Investment Impact Summary for the 2012‐2035 Period (Cumulative Impacts in Billions of 2011 Dollars, Employment is Average Annual 

Jobs Supported)MIDSTREAM INVESTMENTS MIDSTREAM O&M EXPENDITURES COMBINED IMPACT

US Investment $200.2 Total O&M Expenditures $28.9 Expenditures $229.1

Results Results Results

Avg. Annual Employment

104,579 Avg. Annual Employment

20,760 Avg. Annual Employment 125,339

Income $141.3 Income $29.7 Income $171.0

Value Added $217.6 Value Added $43.1 Value Added $260.7

Output $424.5 Output $87.0 Output $511.5

State and Local Taxes $16.8 State and Local Taxes $3.3 State and Local Taxes $20.1

Federal Taxes $30.9 Federal Taxes $6.0 Federal Taxes $36.9

Source: Jobs & Economic Benefits of Midstream Infrastructure Development, INGAA Foundation, Inc., February 2012 

Page 12: BV Law Firms Brownbag Luncheon

– ENCOURAGING INVESTMENT IN PIPELINES THROUGH STABLE CASH FLOWS…

• Promote Stable Pipeline Service Revenues• Stabilize Cash Flow  and redefine depreciable life as the ability to cover operating costs rather than life of producible reserves (High Island Offshore System Docket No.RP09‐487);

• Set rates on revenue targets not throughput targets (Stingray Pipeline TQAM in Docket No. RP11‐1957);

• Develop services that promote use of max rate firm service (Kinetica Energy Express  Rate Schedule LFT‐1 in Docket No.CP12‐490

• Protect operating margins from large one time expenses• “Event trackers”• Safety and Cyber‐security prefunding mechanisms

12

CAPIT

AL

Page 13: BV Law Firms Brownbag Luncheon

SeeManagingtheRegulatoryRiskofInfrastructureInvestment inOil&GasFinancialJournal,February15,2013.

• Promote “Market Risked” Treatment For Equity Investors• Re‐evaluate the CAPM used for gas pipelines

• Consider thicker equity layers (HighPoint in Docket No. CP12‐9)

• Exercise more flexibility in use of proxy group median for ROE

• Utilize “risk premiums”

• Incremental v Rolled in Pricing• Flexibility in recovery of large irregular costs (Columbia Gas Transmission CCRM in Docket No.RP12‐1021)

– … ASSISTED BY EVOLVING REGULATORY TREATMENT OF CAPITAL IN GAS PIPELINES

13

CAPIT

AL

Page 14: BV Law Firms Brownbag Luncheon

‐ CONVERGENCE DRIVES SUPPLY, DEMAND AND REGULATORY ISSUES

14

Cap

acity

Capital

CONVERGENCE

Page 15: BV Law Firms Brownbag Luncheon

GAS FIRED GENERATION DRIVES GAS AND POWER MARKET CONVERGENCE 

15Source: Black & Veatch EMP

15

CONVERGENCE

Page 16: BV Law Firms Brownbag Luncheon

‐ ANOTHER CONVERGENCE DRIVER: EMISSIONS COMPLIANCE DEADLINES

16

CONVERGENCE

Page 17: BV Law Firms Brownbag Luncheon

– TECHNOLOGY ECONOMICS DICTATE CONTINUED CONVERGENCE

Assumptions: Capital costs are national average values and will vary widely by region and site.Coal assumes an average delivered price of $1.50/MMBtu.

Source: Black & Veatch Energy Market Perspective Analysis17

CONVERGENCE

Page 18: BV Law Firms Brownbag Luncheon

Moreoptionssupportsgas/electricconvergence.

• Requirement 2 of Order 1000 creates opportunities for gas pipelines

• Implementation plans are not complete;

• RTOs should ask “What is the appropriate placement and relationship of new electric and gas facilities that will promote the most cost efficient delivery of energy to consumers and industry?”

– CONVERGENCE: INCREASED CHOICES FOR OPTIMIZING REGIONAL ENERGY GRIDS

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Major PipelinesElectric TransmissionNortheast U.S.

CONVERGENCE

Page 19: BV Law Firms Brownbag Luncheon

– EVALUATING THE EFFICIENT ENERGY BUILD

19

Cascade Mountains

CONVERGENCE

Page 20: BV Law Firms Brownbag Luncheon

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– WHO SHOULD PAY FOR NEW GAS INFRASTRUCTURE? 

CONVERGENCE

Page 21: BV Law Firms Brownbag Luncheon

– COMMUNICATION AND SCHEDULING COORDINATION IS VALUABLE, HOWEVER…

Source:ISONewEnglandNUCPUCSymposium

21

CONVERGENCE

Page 22: BV Law Firms Brownbag Luncheon

Beginwithanother'stoendwithyourown.‐BaltasarGracián

• Guidelines for new service design:• Use existing FERC designs as a point of departure;• Recognize the operational characteristics of the pipeline;• Understand the cost implications for the pipeline;• Don’t try to be all things to all shippers, group services according to their needs;

• Test the design when possible and let it evolve.

• An Evolving Flexible Rate Design• Gulfstream – Docket No.CP00‐6;• ANR Pipeline – Docket No.RP00‐332;• Kinetica Energy Express – Docket No.CP12‐49

– …SO IS GAS PIPELINE FLEXIBILITY.

22

CONVERGENCE

Page 23: BV Law Firms Brownbag Luncheon

CAPACIT

Y– CAPACITY REALIGNMENTS STRAINS 

OPERATIONS AND OPERATING MARGINS

23

Convergence

Cap

ital

Page 24: BV Law Firms Brownbag Luncheon

2012‐2022 Flows Increase2012‐2022 Flows Decrease2012‐2022 Flows StableNatural Gas Pipelines

24

– SHIFTING SUPPLY BASINS REDEFINE ALL MARKETS

Source: Black & Veatch Energy Market Perspective Analysis

CAPACIT

Y

Page 25: BV Law Firms Brownbag Luncheon

– DRAMATIC CAPACITY REALIGNMENTS CALL FOR RETHINKING MARKETS AND SERVICES

25

CAPACIT

Y

Page 26: BV Law Firms Brownbag Luncheon

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– SOURCES OF CAPITAL FOR UNCONVENTIONAL AREAS: COMMONWEALTH PIPELINE

CAPACIT

Y

Page 27: BV Law Firms Brownbag Luncheon

– WILL GULF COAST LNG EXPORTS REVIVE GULF COAST PIPELINE CAPACITY?

Source: B&V Analysis, FERC, DOE

Jordan Cove

Freeport LNGLake Charles

•Cameron LNG

• MultipleFERC/DOE/NEBapplicationsforexportfrompreviousimportterminalsaswellasnewsites

• Ifapprovedandsupportedbymarket;thiswouldcreateanewdemandsourcefornaturalgasandamoreglobalizednaturalgasmarket

Gulf of Mexico Excelerate Energy

Elba Island, GA (Southern LNG)

Gulf Coast LNG

Freeport Cheniere

Gulf LNG Liquefaction

Oregon LNG

CE FLNG

•Golden Pass LNG

Cove Point

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CAPACIT

Y

Page 28: BV Law Firms Brownbag Luncheon

– TRANSITIONAL REGULATORY OPTIONS

28

POTENTIAL SOLUTION PR

OMOTES RA

TE 

CERT

AINTY

MINIM

IZES  U

NIT 

COST IM

PACT

MINIM

IZES 

INCR

EMEN

TAL  COST 

IMPA

CT

PROMOTES SERV

ICE 

CERT

AINTY

AVOIDS   D

EATH

 SPIRAL

COMMENTSTransition Mechanisms

Surcharges

A temporary solution that can fill temporary revenue gaps but not suitable as a long term solution

Throughput Driven Revenue True‐Ups

Links revenue deficiency to throughput decline but may accelerate death spiral

Rate Increases

Provides certainty only for term of rate increase;  risk of significant cost reallocation; does not address underlying issue

Segment Specific Rate Treatment

Segmented rates recognize greater risk associated with underutilized segment 

Acceleration of Depreciation

Increased cash flow improves revenue stability; accelerates future need for alternative mechanisms such as management fee

Temporary Abandonment

Practical only when segments can be isolated or compression can be idled without impacting contractual obligations

CAPACIT

Y

Page 29: BV Law Firms Brownbag Luncheon

– PERMANENT REGULATORY OPTIONS

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POTENTIAL SOLUTION PROMOTES RA

TE 

CERT

AINTY

MINIM

IZES  U

NIT 

COST IM

PACT

MINIM

IZES 

INCR

EMEN

TAL  COST 

IMPA

CT

PROMOTES SERV

ICE 

CERT

AINTY

AVOIDS   D

EATH

 SPIRAL

COMMENTSPermanent Solutions

Market Based Rates

Pipelines unable to collect max rates due to market pressures will not increase revenues; does not address underlying issue

Capacity Securitization

Most effective when associated with isolated pipeline capacity; sufficient throughput must remain to provide adequate amortization of costs

Refunctionalization Does not address underlying issue or promote revenue stability

Asset Consolidation

Consolidation of capacity restores the balance between demand for capacity and supply of capacity

Partial Abandonment

Effective on individual pipelines to right size capacity to match future obligations but does not deal with the total market for capacity

Full Abandonment / Sale

Abandonment of inefficient assets promote right sizing of market capacity; sales have uncertain outcomes that could result in increases and rates and changes in service rights

CAPACIT

Y

Page 30: BV Law Firms Brownbag Luncheon

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