Three years after private backers secured state regulators’ approval to build a major new natural gas plant in Charles City County, the fate of the facility has become a key factor in a controversial proposal by Virginia Natural Gas to expand its pipeline infrastructure throughout Northern and Central Virginia.
“The big issue here is risk, and how are we going to allocate the risk and who’s going to be holding the bag if this plant doesn’t get built,” said Judge Mark Christie during a Wednesday hearing conducted via Skype.
The facility, known as C4GT, has been in the works since 2016, when private developers first applied to the State Corporation Commission for a certificate of public convenience and necessity. A combined-cycle natural gas plant, the facility is expected to produce some 1,060 megawatts of power — about two-thirds the size of Dominion Energy’s most recent natural gas plant, the Greensville Power Station, which is capable of powering some 400,000 homes.
Yet despite securing regulators’ thumbs-up in 2017, the project stalled. Last March, the backers asked for a two-year extension of their certificate, citing declining interest from investors in light of changes in the regional PJM power grid’s capacity market.
Since then, Virginia’s energy landscape has also changed significantly.
The passage this spring of the Virginia Clean Economy Act and a law that will join the state to the Regional Greenhouse Gas Initiative, a carbon cap-and-trade market, have committed Virginia to transitioning off fossil fuels and toward renewable energy sources. Mandatory renewable portfolio standards for electric utilities and ambitious targets for solar and wind development are all designed to phase out the use of coal and natural gas by 2045.
“This legislation casts serious doubt on the financial viability of the C4GT plant and the likelihood it will ever be built,” said Greg Buppert, an attorney with the Southern Environmental Law Center representing environmental and consumer protection groups Appalachian Voices and Virginia Interfaith Power and Light, at the beginning of Wednesday’s hearing.
But Virginia Natural Gas, in arguing that regulators should approve its pipeline expansion proposal, dismissed those concerns, seeking instead to focus the proceedings on what it described as a “simple need solution” to its obligation as a utility to serve any customer in its territory that requests service.
“This application is not the place to debate public policy and legislation,” said VNG attorney Lisa Crabtree. “We’re not here to speculate on what will happen in 2045 and beyond.”
The Header Improvement Project regulators have been charged with considering was first outlined by Virginia Natural Gas this December, when it filed an application with the State Corporation Commission for approval to construct.
The proposal would add about 24 new miles of pipeline to VNG’s system: the 6.2 mile Transco Interconnect Pipeline running between VNG infrastructure in Quantico and the Transco pipeline in Catlett in Fauquier County, the 3.3 mile Quantico Parallel Pipe in Fauquier running alongside an existing company pipeline, and the 14.6 mile Mechanicsville Parallel Pipe running alongside another existing VNG line in Hanover, New Kent and Charles City counties.
Two new compressor stations would also be built: the Transco Interconnect station in Prince William and the Gidley station in Chesapeake, while a third station at Ladysmith in Caroline County would be expanded.
And while three parts of the project are directly tied to C4GT’s operation, three others — the Transco Interconnect Pipeline, Transco Interconnect Compressor Station and Quantico Parallel Pipe — would be required for any expansion of Virginia Natural Gas’ capacity, testified the company’s director of gas supply, Kenneth Yagelski.
Currently, VNG’s system is supplied from the north by an interconnection with the Dominion Energy Transmission pipeline at Quantico that is responsible for providing capacity to about half of VNG’s customers.
But the Dominion pipeline has no more capacity, said Yagelski, and VNG has concerns about its continued reliability.
“It’s never resulted in an outage to our customers, but we’ve come very close in the past,” he told the State Corporation Commission, and an extended outage “we believe is a possibility.”
That means that for any expansion of VNG’s service, the utility must look for other sources of supply, said Yagelski.
“We’ve often looked at a new connection to Transco at this location for reliability purposes, but it would be very expensive for VNG to justify on its own the 6.2 miles of pipe and the compressor station,” he told regulators. “This is an opportunity for VNG to essentially take advantage of the larger HIP project to get that reliability increase when some of those costs are shared with the other HIP participants.”
C4GT: The ‘big enchilada’
While Virginia Natural Gas emphasized the reliability benefits of the Header Improvement Projects, the trigger for the proposal was requests for service from C4GT, Dominion gas subsidiary Virginia Power Services Energy and Columbia Gas of Virginia.
But regulators and other case participants made it clear that in their eyes, the driving factor behind the application was C4GT — what Judge Christie characterized as “the big enchilada of this whole project.”
The importance of C4GT to the overall expansion project matters, staff and opponents contended, because recent filings and public policy changes put the facility’s future on shaky ground.
Particularly of concern, these parties said, was an April 14 letter from C4GT to Virginia Natural Gas requesting a six-month delay in the date by which the company would be required to close on its financing until debt markets “resume their normal functioning” after disruptions due to the COVID-19 pandemic.
Yagelski complained that this delay has been “mischaracterized over and over again” as a project delay rather than a financial deadline delay — a distinction hidden in docket filings by redactions made on confidentiality grounds. Original filings made on April 14 and 21 only noted a “slight delay” being sought by C4GT, with further detail blacked out. Only on May 8 was more information about the proposed delay provided in revised filings.
Regardless, SCC utilities analyst Alison Samuel testified that it was this letter that caused SCC staff to change their position on May 11 from a more neutral stance focused on shielding utility customers from risk to the recommendation that either approval be suspended until C4GT’s “financial close is imminent” or the entire application should be denied.
“Staff is concerned with the level of uncertainty regarding the need for the proposed project. C4GT is the customer driving the need for this project,” she said. “The delay C4GT requests, ‘until markets resume their normal functioning,’ could be indefinite or one of many.”
Yagelski, however, said C4GT, as well as Columbia Gas and Dominion’s gas subsidiary, had assured Virginia Natural Gas that they continue to be committed to the project.
Columbia on May 12 filed comments in support of the project with the commission.
C4GT’s “financial close has always been dependent upon receiving the (certificate of public convenience and need),” said Yagelski. “It’s a large project. It requires a big financial commitment from their investors. They are not going to obligate themselves to the project without a certificate to provide fuel to the facility. And because of the … uncertainties related to COVID-19, they were simply asking for a change in the date of when they would have to have financial close.”
Christie nevertheless appeared skeptical.
“We approved this three years ago. And you basically just said the reason they haven’t secured financing is because of the market conditions,” he said. “So it’s not the fact that you haven’t had a CPCN from us, it seems like. You didn’t even ask for this until two and a half years after they got their CPCN, which we extended. And it’s not COVID; I don’t even know why they bothered to cite that.”
The question of whether or not C4GT gets built might not at first blush seem to impact captive ratepayers who would be locked into paying for a project regardless of its success. Because C4GT is a merchant generator that will be privately funded and operated, its investors alone will bear the risks of any failure.
Such risks tend to be higher than those faced by utilities, which are guaranteed to recoup their costs and a rate of return from ratepayers. Consequently, merchant operators are more sensitive to the rise and fall of the marketplace.
“There are merchant plants all over this country — I could make you a list — that have not made money, and in merchant plants, if they don’t make money, the owners are not in business for charity,” Christie said during a cross-examination of Yagelski. “They will close them down.”
C4GT, however, relies on a natural gas supply. And because its proposed location in Charles City County falls within Virginia Natural Gas’ territory, any costs VNG incurs in building infrastructure to support the facility will have to be repaid by its customers.
In the current case, the utility has said that only 5 percent of the costs would be borne by its captive customers, with the remaining 95 percent the responsibility of C4GT, Columbia Gas and Virginia Power Services Energy.
Of the roughly $346 million in capital costs estimated for the Header Improvement Project, staff have calculated ratepayers will be responsible for almost $16 million — although SCC Division of Utility Accounting and Finance Deputy Director Scott Armstrong cautioned that the estimates are “very preliminary” and the capital costs could be as high as half a billion.
Furthermore, he noted, citing the Mountain Valley and Atlantic Coast pipelines that have seen costs rise from $3.5 to $5.5 billion and $5 to $8 billion, “recent and well-documented experience with other regional pipelines demonstrates that initial cost estimates are often significantly understated.”
Even if the estimates are correct, staff expressed concerns that if C4GT were to close down early, captive ratepayers would be left “holding the bag” for the remaining costs.
In particular, Armstrong took issue with Virginia Natural Gas’ plan to recover its costs over a 70-year period, even though its precedent agreements committing the three major customers to gas service are only 20 years.
“If parties are contracted for 20 years but have 70-year payment plans, that leaves a 50-year period in which those parties are anticipated but not obligated to pay their share of capital recovery,” he said.
As a result, Armstrong has recommended that the costs be required to be paid back over 20 years — a plan that would increase all customers’ immediate costs but over the long term would bring down its lifetime costs from about $1.4 billion to $913 million.
Virginia Natural Gas has resisted the recommendation, which attorney Joseph Reid said could increase proposed rates for the three major customers by as much as 25 percent. (Any rate increases for distribution customers would need to be approved by the commission in a separate case before going into effect.)
The utility has previously argued that a requirement to pay off costs over 20 rather than 70 years could potentially make the Header Improvement Project “cost prohibitive” and has emphasized other protections in place to protect ratepayers.
Several of the protections alluded to Wednesday are written into the precedent agreements and not available to the public for review. In written and spoken testimony, however, Virginia Natural Gas has pledged “to hold its distribution customer(s) harmless … from any costs that do not benefit these customers.”
Ultimately, said Yagelski, the risks will fall “on VNG’s shareholders.”
Noting that “to the extent that no one needs this capacity at some point in the future, we will have no one to assign those costs to,” John Cogburn, a regulatory planning director with VNG parent company AGL Services, said that “the company is willing to take the risk that that is not the case, because we believe that natural gas plays a role in a low-carbon future for a very long time.”
A legislative boon or bust
Exactly how strong the outlook for natural gas is given Virginia’s new legislative commitments was a theme of both public comments in opposition to the project and the conversation throughout the Wednesday hearing.
A letter from 12 Democratic legislators to the State Corporation Commission argued that because of an oversupply of gas in the U.S. and decreased energy demand due to the pandemic, the project will “most likely face significant economic setbacks that will only burden municipalities and VNG ratepayers.”
“With the project and its buyers facing funding and other economic uncertainties including COVID-19 that may last well into the foreseeable future, this project is too big a financial risk (and) therefore it cannot go forward,” they wrote.
Christie voiced reservations about the effect Virginia’s participation in RGGI, which will begin Jan. 1, will have on C4GT.
“It’s a de facto carbon tax. And it’s meant to drive up the cost of fossil fuels like C4GT’s plant and increase the cost of both energy and capacity by effectively putting a price on carbon,” he said. “I mean, that’s how RGGI works. How will that not have an impact on the market conditions affecting C4GT’s ability to raise capital to get this plant built?”
Yagelski, however, contended that RGGI participation could actually benefit C4GT because it will force older and less efficient coal and natural gas-fired plants to close down, leaving the power grid with greater need for energy.
“They may wind up being one of the last gas facilities that would be impacted,” he said.
And while Virginia Natural Gas said it had not conducted any analysis on the impact of the 2020 changes in state energy policy on the financial viability of C4GT — “We wouldn’t have the data to make such analysis,” said Yagelski — its executives pointed to other legislation and utility findings as proof of natural gas’ continued importance in Virginia.
While the Clean Economy Act aims to usher in a renewables-dominated energy future, it “also includes exceptions for allowing fossil fuel generation like natural gas fired generation to ensure the reliability of the electric system,” said Yagelski. “The Virginia Energy Plan explicitly states that there’s a need for natural gas infrastructure to make certain that reliability continues.”
Dominion’s most recent long-range plan filed May 1, he also noted, makes it clear “that natural gas-fired generation will continue to play a critical, low-emission role in their system for decades to come.”
Legislators and the coalition that helped craft this session’s sweeping energy legislation, however, have criticized the utility’s plan as unnecessarily reliant on gas, with VCEA sponsors Sen. Jennifer McClellan (D-Richmond) and Del. Rip Sullivan (D-Fairfax) accusing Dominion of sidestepping its commitment to the renewables transition despite having assured lawmakers such an energy transformation was possible