Northeast Utilities' Northern Pass: The
Neverending Story [NU]
by Rob Rains [202-756-4431] and Tim
VandenBerg [202-756-7714] -- We caution investors that Northeast
Utilities' (NU-$42) Northern Pass transmission project, which
would transport 1,200 megawatts (MW) of hydro power supplied by Hydro-Québec from Canada into New England,
likely faces significant delays and cost increases. The New
England Independent System Operator (ISO-NE) forecasts that, due to the
retirement of more than 8,000 MW of generation, including Entergy's
(ETR-$63) Vermont Yankee, the region will need 6,000 MW of generation by 2020
to replace it. Coal consumption is rapidly decreasing in the region, with
only six plants remaining, and if replacement power is not supplied by hydro
then it will likely come from natural gas.
Regulatory hurdles and
substantial political headwinds will likely prevent the project from going into
service before 2018, at the earliest with delays until 2019-2020 very possible
as well. We simply disagree with Northeast Utilities' past statement that
it expects Northern Pass to be in service in 2017 and that it will receive
state siting approval in 2015.
We also expect the firm to
succumb to overwhelming political pressure from Gov. Maggie Hassan (D), Sen.
Kelly Ayotte (R), and state lawmakers calling for them to bury more of the
project underground in the northernmost portion of the state, beginning in
Pittsburg and traveling through Coos County. This will significantly
increase the already $1.4 billion price tag of the project and the time to
completion. We note that Northeast Utilities' revised proposal, which
called for burying just 7.5 miles of the 187-mile project underground, raised
costs by more than 16%. Although 147 miles of Northern Pass will be built
on existing rights of way, the most contested portion of the project is a
stretch beginning in Pittsburg near the Canadian border and making its way
through Coos County and further south. Residents are upset because an
above ground transmission line would necessitate 100-150-foot towers that would
obstruct residents' scenic views. Political opposition is strong and
bipartisan and we think the company will ultimately need to bury this stretch
of the line in order to appease residents and move the project forward.
Delays and continued
uncertainty should be viewed as a positive for natural gas fuel usage in
the region, which already supplies 53% of the electricity to New England, even
though transportation constraints during winter months remain an issue. Hydro generation accounts for about 8% of net
electricity generation in New England, but transmission remains a huge concern
and natural gas pipelines could fill this need in lieu of this resource. We
note that from 2013-2016, New England
will be bringing 1,193 MW of capacity online,
and 50% of it will be natural gas, with 35% from wind.
In addition to a lengthy
review time for a presidential permit, approval from the New Hampshire Site
Evaluation Committee (NHSEC) is also needed. Northeast Utilities expects
this process to take one year to complete, but we think it will take at
least two years from the time of submission.
Additional points for
investors to consider include the following:
· After
more than two years, last week the DOE closed its comment period on the scope
of an eventual draft Environmental Impact Statement (EIS) that is
unlikely to be published before late Q2 2014. While the DOE received just
~5,600 comments, it has demonstrated a heightened sensitivity to the politics
of this proposal, as evidenced by leaving the scoping comment period open for
more than two years.
· After
the draft EIS is published, DOE will commence a 60-90 day comment period, and
will likely hold at least one hearing (possibly more) within the state.
Earlier scoping hearings were very well attended, and the prevailing feedback
was negative, increasing the uncertainty over the project's future.
· A
final EIS is unlikely before Q1 2015 and triggers an up-to 90-day interagency
review process among federal agencies. At this point, Secretary Ernest
Moniz could make a decision sometime in 2H 2015, or else Q1 2016. Given
opposition to the project, this decision will likely be appealed in federal
court, further increasing the uncertainty about the project's federal permits.
· At
the state level, Northeast Utilities may submit its application for NHSEC review
with only the draft EIS. This will be equal in importance to the DOE
review, but it is less certain due to its structure.
· The
NHSEC is a 15-member body of officials that work for other state agencies and
convene for specific proposals. Its statutory underpinning calls for
decisions on projects within nine months, but this has routinely been surpassed
for far smaller projects within the state with much less political
headwind. We believe that it will most likely be at least two years before
the NHSEC approves Northern Pass from the date the application is submitted,
which we expect by Q3 2014. In light of landowner and stakeholder
opposition, an NHSEC decision is almost certain to be followed by requests for
rehearing and then by appeals to the New Hampshire Supreme Court, which could
easily take more than a year.
· Although
NHSEC approves the project itself, it has no authority to exercise
eminent domain. We view this as material because there is a persistent
legal question about whether or not Northeast Utilities must purchase any
additional rights of way to fully complete construction. We note that the
Society for the Protection of New Hampshire Forests is likely to challenge this
assertion in state court, fueling uncertainty about the completion of this
project.
· Unlike
interstate natural gas pipelines that NHSEC has reviewed in the past, which
carry federal eminent domain authority, this is not an option for Northern
Pass. The New Hampshire legislature closed that option in 2012
specifically for non-reliability projects like this.
· New
Hampshire politicians, including Gov. Maggie Hassan (D) and Sen. Ayotte (R),
oppose the project in its current state and have called for additional miles of
the line to be buried underground. We view the political pressure in the
state as likely to force the company to bury more of the project to
secure approval by the NHSEC. The recent announcement of the 150-mile
1,000 MW TDI Blackstone (BX-$27) transmission
line that will be buried under Lake Champlain has fueled the belief by many
within the Granite state that Northeast Utilities can and should bury
Northern Pass.
· Once
completed, the project will transport 1,200 MW, or more than 8% of New
England's current electricity supply, of predominantly hydroelectric power,
under a 40-year agreement with Hydro-Québec.
· Recent plant shutdowns totaling more than 8,000 MW and the
need for 6,000 MW of replacement power should drive additional natural gas
consumption within the region. We note that closures like Dominion's
(D-$66) Salem Harbor-coal (740 MW), Brayton Point (1,500 MW), and Entergy's
Vermont Yankee (640 MW) are all in the works.
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