Commissioner Moeller's Testimony before House COmmittee on Energy & COmmerce, Sub-comm. on Energy & Power

Summary of Testimony of FERC Commissioner Philip D. Moeller
Before the U.S. House of Representatives
Committee on Energy and Commerce,
Subcommittee on Energy and Power
Regarding Coordination Between the Gas and Electric Industries
March 19, 2013
Coordination of the natural gas and electric industries is among the most
pressing energy issues we face as a nation, and I have been concerned about our
increased reliance on natural gas to produce electricity. This recent and dramatic
shift to natural gas as the preferred fuel of electric generators is the result of
several factors including: (1) the fact that it is easier to site and construct natural
gas-fired generating plants; (2) there has been a shift away from building new
coal-fired plants due to more stringent air quality regulations; and (3) there has
been a substantial increase in supplies of less expensive natural gas supplies as a
result of new supply sources such as shale gas.
After a several high-profile events involving disruptions to the electric and
natural gas systems, the FERC has initiated a number of proceedings and has
convened numerous conferences to determine the causes of communication
problems as well as possible solutions to improve coordination between these two
distinct, yet increasingly integrated, industries. The challenges are serious, very
real, and somewhat urgent, especially in New England and the Midwest, and the
FERC is currently working hard to improve coordination between these industries.

Testimony of FERC Commissioner Philip D. Moeller
Before the U.S. House of Representatives
Committee on Energy and Commerce,
Subcommittee on Energy and Power
Regarding Coordination Between the Gas and Electric Industries
March 19, 2013
Chairman Whitfield, Ranking Member Rush, and members of the
Subcommittee, thank you for the invitation to testify on our efforts to address the
challenges of coordinating the functioning of the natural gas and electric markets.
My name is Philip D. Moeller, and I serve as one of five sitting commissioners at
the Federal Energy Regulatory Commission (FERC). Thank you for the
opportunity to testify this morning, and thank you for the attention you are giving
this issue.
Coordination of the natural gas and electric industries is among the most
pressing energy issues we face as a nation, and your highlighting the issue helps us
to stay focused on finding solutions to the challenges we face. I have been
concerned for several years about our increased reliance on natural gas to produce
electricity. I do not contend that this is a bad trend, but rather one that must be
managed deftly to protect citizens so as to avoid supply disruptions and to
maintain the reliability of the nation’s production and supply of natural gas and
especially electricity.

Although the most efficient use of natural gas is direct usage – especially
space heating and water hearing – as a nation, we are continuing a significant
trend towards generating greater amounts of electricity from natural gas. I ascribe
five major reasons for this trend: (1) it is easier to site and construct generating
plants that burn natural gas; (2) even though expansion of the electric transmission
grid is often more efficient and less expensive than building new generating
plants, it has become increasingly difficult to construct electric transmission lines
in this nation; (3) as the nation expands the deployment of intermittent renewable
sources of electricity – especially wind and solar – traditional baseload generation
will be needed to “firm” these renewable resources when they are not available.
Gas generation is often used as the firming resource since it can quickly respond to
sudden output fluctuations by renewable generation sources; (4) a suite of air
regulations imposed by the Environmental Protection Agency will result in a
significant amount of coal generation either being retired or retrofitted; and (5)
lower natural gas prices have resulted largely from new supplies extracted using
relatively new technological advances in horizontal drilling and the use of
hydraulic fracturing.
Regarding this latter point, I was honored and privileged to serve on the
Coordinating Subcommittee of the National Petroleum Council’s two-year study
released in September 2011 that focused on the potential production and supply of
North American oil and gas resources through 2030. I continue to recommend the
study, titled “Prudent Development” as it documents the stunningly enormous oil
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and gas resources that we have in North America. The size of this resource base
was generally unrealized even a few years ago, and the aforementioned
technological breakthroughs are now allowing for extracting these resources. This
has had profound impacts for our nation’s economy in addition to worldwide
geopolitical ramifications. As a society we may choose to limit these techniques
for resource extraction. However, technological advances will only allow us to
find and potentially extract additional resources. Absent major restrictions on
these new technologies, we appear to be facing a sustained period of abundant
supplies of natural gas in North America.
Notwithstanding the dramatic increase in domestic natural gas supply over
the last several years, areas in our nation have already experienced reliability
challenges arising from the convergence of the natural gas and electricity
industries. Well known is the 2004 event in New England that my colleague,
Commissioner LaFleur, experienced first hand. Among others, some examples
include rolling blackouts in the Denver area in 2006, and a near catastrophe in my
home of the Pacific Northwest in December 2009 when quick action limited
outages to several thousand natural gas customers.
The event that especially focused my attention on this issue was the
Southwest Outage of February 2011 that impacted customers in Texas, New
Mexico, and Arizona. Although unseasonably cold weather greatly contributed to
this event, supply challenges on the natural gas side caused outages on the electric
side, and outages on the electric side caused disruptions in the gas transportation
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sector. Millions of people (mostly in Texas) lost electricity, and thousands of
customers (mostly in New Mexico) lost natural gas service at a time of very cold
weather.
In response to these widespread outages, FERC and the North American
Electric Reliability Corporation (NERC) conducted a joint study of the causes of
the event. The ensuing report that was issued in August 2011 thoroughly
described the event and included 32 recommendations for industry and regulators
in an attempt to avoid a similar occurrence.
I highly recommend this report for you and your staff. It is not only well
written but also includes primers on the gas industry and electric industry. The
report highlights the differences between the two industries. Each industry has
fundamental physical differences (for example, the near-instant speed of electricity
moving across transmission lines compared with the relatively slow speed of
moving gas molecules) and the different industries have their own language and
style. Yet the industries are converging and the need for each sector to understand
the other is growing. Energy professionals typically have been involved with the
electric industry or the natural gas industry but rarely both industries in a career.
Growing increasingly concerned about the lack of attention to the
convergence issue (especially related to industry communications during the
winter heating season) in February 2012 I posed a series of 11 questions to the
public on the reliability ramifications of these trends. These detailed questions fell
into three broad areas: (1) in the short term, what needs to be done to assure that
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entities better communicate during potential supply emergencies; (2) in the
medium term, do policies need to change to better align the electric and natural
gas trading markets; and (3) are investment signals adequate so that additional
energy infrastructure—especially additional natural gas pipelines—can be
deployed to meet this growing demand?
I am grateful that FERC Chairman Wellinghoff made the series of
questions, along with several others added by Commissioner LaFleur an official
FERC proceeding in Docket No. AD12-12-000. In addition, our chairman has
dedicated significant staff resources to this effort which has contributed
momentum to address this issue.
FERC received over 70 responses to the list of questions, although most
filings did not address every question posed. After reviewing the responses, the
Commission moved forward with a series of five technical conferences in August
2012 held in Washington DC, Boston, Portland, Oregon and St. Louis. These
conferences focused on the regional differences of the challenges posed and the
potential solutions to these challenges.

After reviewing the extensive comments made during these region-specific
technical conferences, the Commission scheduled another series of technical
conferences on specific subject areas to discuss possible solutions and next steps.
The first of these was held on February 13, 2013 on the subject of improving
communications between the natural gas and electric system operators. The
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second is scheduled for April 25, 2013 on the subject of the major differences
between the gas trading day and the electric trading day and possible ways to
harmonize or better align these days. Our third is scheduled for May 16, 2013
when the Commission will hear from the operators of the organized electric
wholesale markets on their respective systems’ performances during the 20122013 Winter season.
As stated earlier, solutions to the problems arising from the convergence of
the gas and electric industries have varying time frames over the next several
years. With only a few exceptions, most of the nation has had two consecutive
unseasonably warm winters. My fear is that this warmer weather has masked
system vulnerabilities that will be exposed when more normal colder weather
patterns occur. My goal heading into next winter is to have additional confidence
that natural gas and electric system operators in each region have widely
disseminated and understood communication protocols in the event of extreme
weather that results in greater system demands. It’s not clear yet if formal
Commission action will be needed to effectuate these communications channels.
Next we need to address the differences in the gas and electric scheduling
and trading days and whether changes would result in greater efficiency and
increased reliability. Until now, the industries largely operated independently of
each other, and if problems arose during a particular day, there was typically
sufficient pipeline capacity available to address any concerns. However that level
of flexibility is not as common as more power generators rely on natural gas-fired
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generation as well as non-firm pipeline transportation contracts to supply their
needs.
And finally, longer term we will need to consider whether the correct
market rules, investment signals and environmental policies are in place to assure
that adequate natural gas infrastructure exists to meet this growing demand.
During this period, the agency will continue to conduct outreach, pursue solutions,
and consider next steps as we identify these longer term issues affecting the
natural gas and power industries.
Ultimately, the challenges we face with gas and electric coordination is a
good problem to deal with as it’s partially the result of abundant domestic gas
resources. But the challenges are serious, very real, and somewhat urgent,
especially in New England and the Midwest. Indeed, some in the industry believe
nothing short of a major blackout will provide sufficient motivation to the various
stakeholders to solve the problems facing us. We need the energy industry,
regulators, and legislators focused on the range of solutions necessary in the near
term, medium term and longer term.
Again, I thank you for the chance to testify on this subject and the attention
you are giving it. I look forward to working with you in the future and to
answering any questions.

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