Coal, Emissions

Industry Watch: PIFUA Returns?

Issue 8 and Volume 110.

By Brian Schimmoller, Contributing Editor

Quick, name the person quoted here: “In my recent message to Congress on energy security, I urged several measures to ensure our nation has a strong domestic oil and gas industry and substantial protection against oil supply interruptions. These measures, taken together, will result in increased energy security.”

George W. Bush, right? Wrong. These are the words of Ronald Reagan, spoken in May 1987 as he signed legislation repealing provisions of the Powerplant and Industrial Fuel Use Act of 1978 (PIFUA).

Those Power Engineering readers “longer in the tooth” will remember – some fondly, some angrily – PIFUA as the legislation that effectively prohibited construction of power plants using oil or natural gas. Congress passed PIFUA in response to concerns over national energy security, arising from the 1973 oil embargo and natural gas supply shortages in the mid-1970s.

“The problem in the winter of 1977 that led to the passage of PIFUA was a misunderstanding by policymakers of the impact that widespread price regulation was having on the supply of natural gas,” says Chuck Linderman, Edison Electric Institute’s Director of Energy Supply Policy. “During that winter there were shortages of natural gas in Ohio, while Texas, with no price regulation in the intra-state market, had sufficient supplies. The Natural Gas Policy Act of 1978 was the first step in a path of wellhead price deregulation.”

In his remarks from 1987, President Reagan also urged Congress to pass other legislation that would further deregulate the natural gas industry and create a “freer and efficient marketplace.” The Federal Energy Regulatory Commission supplemented Congressional action with several orders in the 1980s and 1990s to enhance competition and expand the natural gas market. The almost 30-year path to deregulation since 1978 has resulted in the evolution of a vibrant natural gas industry. Ready access to natural gas spawned the boom in gas turbine power plants in the late 1990s and early 2000s and cemented the widespread use of natural gas for home heating.

Greater demand, of course, leads to higher prices, and natural gas prices have reached historic highs in recent years. Although prices have retreated somewhat from record highs last year, concern is building that sustained demand for natural gas, coupled with declining U.S. production, will keep prices at elevated levels. In some circles, there is even talk of implementing some sort of fuel use constraint that would reserve natural gas use for home heating applications, thereby relieving pressure on supplies.

One could argue that the fundamentals calling for such legislation are actually more compelling today than in the mid-1970s: high oil prices, declining natural gas production, greater reliance on foreign energy suppliers. In the face of such market pressures, why permit natural gas as a power generation fuel when other options are available to free gas for residential use? Why not just let coal, nuclear and renewables pick up the slack?

“Legislators are not likely to make those mistakes again, as they learned from the fuel shortages of the past,” says Daphne Magnuson, Director of Communications with the American Gas Association. Some states in areas with transportation constraints have asked power producers with interruptible natural gas contracts to ensure they have fuel-switching capabilities should extreme weather push the system beyond its delivery capacity. If more pipelines can be built in these regions, however, this will no longer be an issue.

The fundamentals today are different, with a deregulated price environment for both oil and natural gas, says Linderman. “Given our dependence on natural gas for approximately 20% of electric requirements, and the railroad’s inability to transport all of the coal to generating stations that the companies want, any legislation curtailing power plant use of natural gas would most likely create a very difficult economic environment and severely test electric reliability.”

Financial dangers are associated with legislation restricting natural gas use as well. PIFUA opponents raised such issues almost immediately after the legislation passed. Specifically, opponents said that a forced conversion to coal-fired generation would expose the power industry to an immense, financial burden. The same concern exists today, in addition to concerns about the availability of design, engineering, manufacturing and construction capacity to bring a new wave of coal plants on-line. While coal can lay claim to a promising future, that future should be earned, not mandated.

The likelihood of legislation curtailing natural gas usage for power generation is admittedly rather small. Domestic production, coupled with expanded use of imported liquefied natural gas, should accommodate conceivable demand surges. And as prices rise, power generators can shift production away from their gas-fired units if necessary, relieving supply concerns.

A “small” likelihood, however, is not the same as “negligible” likelihood. Negligible can be ignored; small must be acknowledged and planned for. A brutal winter that triples the heating costs of an average home and claims the lives of several elderly citizens on fixed incomes has a strange way of inciting politicians to action. PIFUA Take 2 may be the result.

Congress did it once; they can do it again.