Weather or Not? Welfare Impacts of Natural Gas Pipeline Expansion in the Northeastern U.S.

Abstract

New production of natural gas in the Marcellus region of Pennsylvania has created tremendous opportunities to increase natural gas use in the U. S. Unfortunately, the benefits from this new production are limited by the scarcity of pipeline capacity out of the region. Several new pipelines have been proposed to address this issue. Here we focus on the potential economic effects of one of these projects, the proposal by the Williams Company to expand its Transcontinental Gas (“Transco”) pipeline through the Atlantic Sunrise project in the northeastern United States. The Atlantic Sunrise project would permit additional deliveries from the Marcellus region to markets on the main Transco system. It would also afford more flexibility to the Transco system, by creating the ability to accommodate flow reversals in response to market conditions. To understand the market impact of the Atlantic Sunrise expansion, we develop a model, based on the arbitrage cost approach in Kleit (2001), that is well suited for fine-grained spatial evaluation of the market effects of relieving gas transmission constraints, employing daily data from 2012 to the middle of 2014. To our knowledge, this is the first paper to address the question of the economic effects of a natural gas pipeline expansion. Over the 30-month period examined in our study we estimate that consumers served by Transco from Alabama to New Jersey would have enjoyed about $2.6 billion in total benefits because of the Atlantic Sunrise expansion. There are two specific aspects of our findings, however, we wish to emphasize. First, the benefits to consumers are not uniform over time and will vary greatly with system conditions. More than 60 percent of the benefits in our period of study would have accrued in January 2014 alone, because of the high level of gas demand associated with the “polar vortex” in that month. Second, the benefits to consumers are not uniform over geographic areas. Because of the location of the constraints on the Transco system, we estimate that Virginia-North Carolina-South Carolina customers would benefit nearly three times as much as Alabama-Georgia customers. Pennsylvania-New Jersey-Maryland customers exhibit the highest benefits overall, but would have also been harmed during certain periods when exports from this region to Virginia cause prices north of Virginia to increase. These price increases, however, are far smaller than the price decreases that would occur due to Atlantic Sunrise during severe winter periods.