Pipeline Has Promise, But Will It Happen?
(from Maine
Townsman,
January 2012)
by Douglas Rooks
Will Maine town and cities build a natural gas pipeline or will they help finance one?
That’s one way of looking at attempts to bring the nation’s hottest fossil fuel to the Kennebec Valley, potentially involving 12 towns and cities from Richmond to Madison. And it is only one of several such plans, taking advantage of abundant supplies and a significant price advantage against competing fuels, such as petroleum.
The proposal currently getting most of the attention comes from Kennebec Valley Gas Co. (KVGC), a partnership of three old hands in the energy business. It received the go-ahead to seek financing in August from the Maine Public Utilities Commission. According to the latest estimates, the pipeline would run more than 52 miles from Richmond to Madison and involve up to 120 miles of transmission and distribution lines, at a cost of $85 million.
The Town of Madison would also like to build the same pipeline, in part as a means to bring a reliable source of generation to its municipal electric company – one of only two municipally owned electric utilities in Maine. The other is in Kennebunk.
But Madison’s plan to seek a $72 million bond to finance the pipeline was narrowly rejected by voters on Nov. 8, 2011, with 724 “nays” and 697 “ayes.” The vote followed a contentious campaign that included half a dozen mailings from KVGC opposing the town’s plan, fliers that Madison officials say contained inaccurate information.
Since the Nov. 8 vote, KVGC’s plan has emerged as the leading contender, though it is still far from a sure thing, as Richard Silkman, one of its partners, readily acknowledges.
“We think this is a viable project that has significant public benefits,” Silkman said. “But the world can change rapidly, and the energy market has been particularly volatile.”
Silkman was director of the State Planning Office during the McKernan administration and now is managing partner of Competitive Energy Services in Portland. He is joined by Tony Buxton, a veteran lawyer-lobbyist for industrial power users, and Mark Isaacson, who has planned and operated hydroelectric facilities around the state.
TIF PARAMETERS
The designated municipal role in KVGC’s pipeline plan, if all goes well for the company, is to rebate much of the property-tax revenue during the pipeline’s first 15 years of operation back to the company, giving it a better shot at gaining construction financing.
Acting on a suggestion from Augusta Economic Development Director Mike Duguay, most of the 12 municipalities that would host the pipeline met over the summer under the auspices of the Kennebec Valley Council of Governments to devise a standardized Tax Increment Financing (TIF) deal.
KVGC had asked for a 100 percent rebate over 20 years. What the towns ended up offering was an 80 percent rebate for the first 10 years and 60 percent for the next five years. After that, the pipeline could be taxed at full value, although municipalities can set the TIF district terms for a longer period, continuing to shelter the value from state aid formulas. At least one municipality – Hallowell – intends to do that. It approved a 30-year TIF by a 4-3 vote of the city council.
Silkman is straightforward about why so much of the initial tax revenue needs to be funneled back to the project.
“With a pipeline, you have huge construction costs, but minimal operating costs,” he said. “Once the line is built, taxes will be one of the biggest expenses we have.” The TIFs, if approved by all 12 towns and cities, would amount to an annual $1.3 million municipal subsidy.
So far, results are mixed concerning the TIFs, which must be approved by each council or during a special town meeting. Three municipalities have approved the TIF, Farmingdale has rejected it and Madison has said it won’t be submitted to the voters.
NO GO IN RICHMOND
The TIF also faces tough sledding in Richmond, where a survey of residents conducted by selectmen produced what Town Manager Marian Anderson called “a resounding no.”
The plan calls for the Kennebec pipeline to tap into the existing Maritimes & Northeast pipeline at the Richmond compressor station. The main pipeline was completed in 1999 and carries gas from Sable Island, located off the coast of Nova Scotia, to the Boston market, with significant distribution in Maine along the way, including in the Bangor area.
It is clear that, at least in Richmond, KVGC does not compare well to the earlier and much larger pipeline project.
Maritimes & Northeast “has been a good corporate neighbor,” Anderson said. “They’re great at cooperating with our fire and rescue departments, and they always give plenty of notice of any changes.” The gas utility has never asked for a tax break, she noted.
There’s a reason for that, according to Silkman.
The Maritimes & Northeast pipeline was built, and is owned, by a consortium of large utilities and energy companies, he said. “They had the deep pockets to do this kind of project. We don’t. Plus, they were building for a much more lucrative market in Boston.”
If Silkman had his wish, the Kennebec line would already be in operation. It was proposed as a lateral line, probably connecting through Augusta, at the time the original pipeline was constructed. But at the time, natural gas and petroleum had nearly equal costs, and there wasn’t an obvious incentive to build a line into central Maine.
COMPARISON SHOPPING
Much has changed since then. Over the past decade, petroleum prices have soared, at times to well over $100 a barrel, while gas prices have plunged, partly in anticipation of expanded domestic production through hydraulic fracturing, or “fracking,” a deep-drilling technique that has unlocked new supplies.
At current prices, Silkman expects to be able to deliver gas at the equivalent of $2.30 a gallon of heating oil, and even less for large industrial customers. This comes at a time when retail heating oil prices are pushing $3.50 a gallon.
The difference in price has spawned proposals to bring gas to many new sites in Maine, including Millinocket, Freeport and Rockland. The Finance Authority of Maine recently guaranteed a $5 million loan that will connect the Baileyville pulp mill to the Maritimes & Northeast pipeline.
But the Kennebec line is the biggest proposal currently on tap, in part because it would have major industrial customers, including two paper mills in Madison and Skowhegan and the Huhtamaki packaging plant in Waterville. By some estimates, these anchor customers could use as much as half of all the gas carried by the proposed KVGC line.
That factor, according to Madison Economic Development Director Joy Hikel, could be her town’s ace in the hole.
“We already have assurances from two of our biggest customers, Madison Industries and Backyard Farms (a major vegetable greenhouse operation). They don’t,” she said, of KVGC.
Madison’s search for natural gas began with a quest for a reliable generating source for the municipal electric utility. “We have lower rates than CMP, but we don’t generate our own electricity and we’d like to,” Hikel said.
Madison looked at a variety of possibilities, including biomass and establishing a “heating district” downtown that could use a central boiler, as many European cities do. Natural gas emerged as the best choice and that means a pipeline is needed.
NOT SO FAR-FETCHED
Indeed, natural gas requires expensive infrastructure, but having a town or towns finance the venture may be more likely than it seems.
“Municipal gas utilities are common in other parts of the country,” as are electric utilities, Hikel said. The nearest one to Maine is in Holyoke, Mass. Hikel believes municipal ownership could make good sense here.
“Municipally owned utilities are more responsive to customers, they generally have lower rates and they offer significant advantages for town budgets,” she said.
One of the selling points of the $72 million bond issue was that, potentially, pipeline revenues could pay for the $3.2 million municipal share of Madison’s annual budget.
Hikel and Silkman present sharply contrasting cases for whether KVGC or Madison would be the better choice as builder.
Hikel said TIFs have traditionally been used for spending on municipal infrastructure and other projects, “but why can’t we use them for projects that improve the revenue stream? We’re certainly not getting property-tax relief from the state.”
She also references lower municipal borrowing costs, greater local control and the lack of a need to forgo tax revenue through TIFs.
Hikel isn’t sure what to make of a new petition in Madison aimed at calling another referendum on the pipeline bond. She says such an ambitious project needs strong, not marginal, support from the community.
“In that sense, it was probably better to lose by 27 votes than win by 27 votes,” she said.
BUSINESSES TAKE RISKS
Silkman asserts that projects with a high degree of financial risk are traditionally built by private investors, not the public sector.
“A business is putting its assets at risk by borrowing money. Is that something a municipality really wants to do?” he asked.
The jousting over that point created friction during the bond issue campaign in Madison. Hikel said KVGC’s contention that residents could lose their homes if the pipeline went bankrupt was hitting below the belt.
“They were talking about Harrisburg (Pa.), which declared bankruptcy over a trash incinerator” that failed, she said. “But nobody lost their home. That isn’t how bankruptcy works.”
KVGC stands by its fliers. “We intend to communicate with citizens and tell them what we think are relevant facts,” Tony Buxton told the Waterville Morning Sentinel newspaper shortly before the vote.
Though there’s disagreement over who should build the line, nearly everyone seems to think the Kennebec Valley needs natural gas.
Not having it “places us at a serious competitive disadvantage to other parts of the state,” said Bill Bridgeo, Augusta’s city manager. His city council unanimously voted for the proposed TIF. “It’s something Brunswick and Portland and Lewiston can offer and we need it, too.”
AUGUSTA SEES BENEFIT
Augusta is also one of the places where gas would be distributed, not just piped through. Currently, the plan calls for the line to go up State Street, where state buildings could be tied in, and up Western Avenue, with its dozens of businesses and adjacent neighborhoods. From there, the line would extend to the new MaineGeneral facility, a regional hospital now under construction.
Municipal buildings could benefit, too. Bridgeo said the city has not so far calculated potential savings.
The sailing for KVGC has not been entirely smooth. Farmingdale residents overwhelmingly rejected the TIF agreement, even though selectmen recommended it. Silkman said that some of the arguments used at the special town meeting were misleading.
One prominent contention was that the Maine Avenue corridor (Route 201) would have to be completely dug up just months after the state finished a reconstruction project that included lengthy traffic delays.
“It’s just a three- or four-foot trench we’re talking about,” Silkman said. “And if that’s a problem, we can drill the line instead of digging.”
On the other hand, after first saying that a June 2012 town meeting would be the first chance for a TIF vote, Skowhegan selectmen decided to schedule a special meeting for Feb. 14. Town Manager John Doucette said selectmen haven’t decided whether to support the TIF, however.
“A lot depends on whether SAPPI buys into it,” he said, referring to the Somerset paper mill that is Skowhegan’s biggest employer. The mill’s potential use dwarfs the financial impact on the town. The pipeline section through Skowhegan would likely be assessed at $4 million, potentially producing $110,000 in annual revenue.
Skowhegan, like most of the larger municipalities along the proposed line, is familiar with TIFs, and has used them for infrastructure at the industrial park and for downtown sewer lines. Most recently, selectmen committed $250,000 to jumpstart the “Run of River” project, an effort to bring Olympic-class whitewater kayaking and canoeing to a spectacular stretch of the Kennebec River below the downtown dam.
In Hallowell, City Manager Mike Starn said that when he first heard about the pipeline last summer, it struck him as a no-brainer. “We may be getting 20 percent at first,” he said, “but that’s a whole lot better than 100 percent of nothing.”
LOW MAINTENANCE
Pipelines don’t represent any ongoing expense for towns and cities, he said. “It’s not like a road that needs to be plowed or wires that need to be maintained. It just sits in the ground.”
Silkman has said that KVGC needs all 12 municipalities to approve the TIFs, and that now seems unlikely. After Farmingdale turned down the plan, Silkman said that the company would find a way to reroute the pipeline around its borders. Yet if neighboring Gardiner and Hallowell remain on the route, things may be difficult.
Now, Silkman says, “We’ll do what works best economically, whatever that is.”
He makes it clear there’s a window of opportunity that won’t last long – one reason why he pushed to have the Skowhegan vote moved up.
One issue that won’t affect the pipeline is rights of way. KVGC, and probably Madison, intends to use existing rights of way for the entire line.
“As I understand it, a town can decide whether the pipeline goes up the left side, the middle or the right side of the road,” Starn said. “It can’t vote not to let the company have access.” Much of the route will follow the Route 201 corridor as it winds along the Kennebec River.
If the KVGC plan doesn’t ultimately come together, Hikel in Madison believes there may still be a chance for a municipal plan, possibly involving a consortium of towns and cities.
At the Kennebec Valley Council of Governments, Executive Director Ken Young said his organization is helping move the project forward, but doesn’t advocate any particular builder.
“The arguments in favor of the pipeline are very strong, but our interest is that it be built, not whether a particular plan is chosen,” he said.
HUHTAMAKI EXAMPLE
For anyone who doubts the importance of energy costs, Young mentions the Huhtamaki plant, which is part of a large national corporation where individual plants compete for production.
“They ended up losing a contract to one of their other plants in Illinois,” he said. “The main reason is that the Illinois plant has gas and this one doesn’t.”
Augusta’s Bridgeo remains a big advocate of a diverse energy mix, even though he says the price differential between gas and oil will eventually shrink.
“When I was a new city manager back in 1998, a certain gas pipeline was being built that was going to pass through Windsor, just eight miles from Augusta.” Bridgeo advocated that the city build a lateral to the line, bonding the expense, largely as an economic development tool.
“Everybody lobbied against it – CMP, the oil dealers. I got a lot of flak.” The city council made it clear it wasn’t interested then.
Bridgeo said he’d make the same argument today. “This is just too important to our future, as a community and as a state. We need to make this investment.”
