The New England Restructuring Roundtable

Gas Pricing Dynamics Affecting Power Markets and Resource Adequacy

in New England

Richard L. Levitan, rll@levitan.comJune 15, 2012

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Primary Issues & Concerns (next 3-5 Years)Supply push in PJM / NYISO demand pull in New

England

Slack deliverability during non-heating season insufficient to support new entry

• New flow patterns raise questions about economic obsolescence • Anticipated retirement of many RFO / dual fuel steam units, coal

Basis benefits will be indirect and may not materialize in the peak heating season

Destination-flexible LNG cargoes jeopardize fuel adequacy around Boston

Financial / regulatory support for new gas infrastructure

Who pays?

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Commodity prices remain weak and stable

Source: Bloomberg LP

7/2/2008$13.31

6/1/2012$2.24

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

1/1/2005 1/1/2006 1/1/2007 1/1/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/30/2012

He

nry

Hu

b D

ail

y P

ric

e,

$/M

MB

tu

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Gas Price and New England Energy Price

$0

$20

$40

$60

$80

$100

$120

.2007

.2008

.2009

.2010

.2011

.2012

Month, Year

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rgy

Pri

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, $/M

Wh

$0

$2

$4

$6

$8

$10

$12

$14

Na

tura

l Ga

s P

ric

e, $

/MM

Btu

MassHub ATC Electric Energy Price

Algonquin City Gates Natural Gas Price

Source: Bloomberg LP, ISO-NE

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Blow out in historical parity relationship

Source: Bloomberg LP

$0

$5

$10

$15

$20

$25

1/1/05 1/1/06 1/1/07 1/1/08 12/31/08 12/31/09 12/31/10 12/31/11 12/30/12

Hen

ry H

ub

or

WT

I D

aily

Pri

ce,

$/M

MB

tu

0

1

2

3

4

5

6

7

8

9

10

WT

I to

HH

Ra

tio

(M

MB

tu G

as

/ M

MB

tu O

il)

Henry Hub

WTI

WTI/HH Ratio

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Marcellus Production Forecast

Source: Penn State University

0

2

4

6

8

10

12

14

16

18

20

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Bill

ion

Cu

bic

Fe

et

of

Ga

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iva

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er

Da

y

1400

1600

1800

2000

2200

2400

2600

Nu

mb

er

of

We

lls D

rille

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2011 Production Forecast 2010 Production Forecast 2011 Forecast of Drilling Activity

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Wet and dry shale gas production

Wet

Gas

Dry

Gas

Major Dry Gas Production Area

Major Wet Gas Production Area

Sources: EIA, Pennsylvania State University Marcellus Center, Dominion Resources, Pennsylvania Department of Conservation and Natural Resources

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Gas Basis to New England Reflects Congestion

Source: Bloomberg LP

$0

$5

$10

$15

$20

$25

$30

1/1/2005 1/1/2006 1/1/2007 1/1/2008 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/30/2012

Da

ily

Pri

ce

, $

/MM

Btu

Henry Hub

Algonquin City Gates

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Marcellus-related planned projects

Source: NGA

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Seasonal Basis to New York and New England

Source: Bloomberg LP

$0

$1

$2

$3

$4

$5

$6

$7

. 200

6 . .

. 200

7 . .

. 200

8 . .

. 200

9 . .

. 201

0 . .

. 201

1 . .

. 201

2 . .

Mo

nth

ly A

ve

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e B

as

is v

. He

nry

Hu

b, $

/MM

Btu

Transco Z6 NY Algonquin City Gates

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Estimated P/L slack deliverability, except during winter

0

0.5

1

1.5

2

2.5

9/1/

07

11/1

/07

1/1/

08

3/1/

08

5/1/

08

7/1/

08

9/1/

08

11/1

/08

1/1/

09

3/1/

09

5/1/

09

7/1/

09

9/1/

09

11/1

/09

1/1/

10

3/1/

10

5/1/

10

7/1/

10

9/1/

10

11/1

/10

1/1/

11

3/1/

11

5/1/

11

7/1/

11

9/1/

11

11/1

/11

1/1/

12

3/1/

12

Dai

ly D

eliv

erie

s in

NE

(M

illi

on

s o

f D

th/d

) Algonquin Tennessee

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Gas Price Dynamics on DA / RT Prices E&P outlook likely to sustain downward pressure on

prices

Generators bid value AGT Citygates, TN-Z6• Existing paradigm does not capture M-T-M benefits

FCA prices do not support new gas infrastructure ◦ Attrition effects by FCA #8

◦ Deliverability constraints likely to materialize

◦ Prices will reflect seasonal basis, ULSD

Who bears the transportation freight?

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Gas Price Dynamics on ReliabilityDecline in LNG Imports to Canaport and Distrigas

• Concerns over adequate fuel to serve Mystic 8/9

Gas flow displacement effects from western and Atlantic Cdn

Coal and RFO steam unit retirements • Posturing RFO steam units in the winter appear key to

reliability

• ULSD oil tankage constraints and refill logistics

No step-up to firm transportation

How does the stakeholder process evolve?