Firm Transportation Contracts for Gas Pipeline Volumes: How They Work and Will They Burden Ratepayers?

     Contracts Counsel describes a gas transportation agreement as follows:

“A gas transportation agreement is a contract between a buyer and an interstate gas pipeline that allows the buyer to use pipelines to transport natural gas. In exchange for receiving access to the pipeline, the buyer agrees to pay a certain, pre-determined price for the duration of the use of the pipeline. This price typically reflects the cost to pay employees that work on the pipeline, as well as any maintenance costs that regularly occur.”

     Firm service, or firm capacity, refers to the sale and purchase of an uninterruptible natural gas supply. Firm transportation means that it will be prioritized over interruptible supply when needed. It is more expensive to purchase firm capacity, but it ensures a reliable gas supply for those customers. Below is a section from FERC that describes firm vs. interruptible natural gas supply, how they are charged, and also describes the primary and secondary markets for pipelined gas.  

     Unused firm capacity may also be released for sale to other entities, and this is done according to FERC rules. FERC’s Order No. 636 provides for the reallocation of interstate pipeline capacity. The method of capacity release is described by FERC below. FERC also has further rules meant to avoid other problems, such as “flipping” the gas volumes for profit or “tying” the release to specific events and contingencies.

     A recent opinion piece by Shelley Hudson Robbins, senior decarbonization manager for the Southern Alliance for Clean Energy, argues that the current trend of Southeastern utilities entering into gas capacity contracts, or firm transportation contracts, will be paid for by ratepayers, unnecessarily burdening them. She writes about the latest example and the trend:

“…EQT is seeking firm transportation customers for a 500,000 dekatherm (Dth) per day compression expansion of the Mountain Valley Pipeline that connects Appalachian Basin fracked natural gas to the massive Williams Transco pipeline. This project is the latest in a deluge of pipeline expansion projects that are backed by long-term contracts with Southeastern electric utilities such as Duke Energy in the Carolinas, Dominion and Santee Cooper in South Carolina, Oglethorpe Power in Georgia, and Southern Company in Georgia, Alabama, and Mississippi. These companies have contracted for more than 3 million Dth on three pipeline expansions currently underway at the Federal Energy Regulatory Commission: Transco Southeast Supply Enhancement Project, MVP Southgate, and Kinder Morgan’s South System Expansion 4.”

     The author's affiliation with a clean energy group and her use of the term “fracked gas” give her away as a fossil fuel opposer, and thus, we must take that into account when evaluating her argument. She acknowledges that the firm transportation agreements are for existing and planned baseload gas additions, but she argues that those additions won’t make the power grid more reliable, citing the potential for wellhead freeze-offs and pipeline outages. These are generally not large concerns, so I would certainly question her argument as lacking any likelihood. 

     Below, she argues that ratepayers will be burdened by having to pay for gas that will not be used.

“The contracting utilities will pay for this pipeline capacity every month and every year for 20 years, regardless of how much gas they actually use for power burn. These costs are passed directly to ratepayers.”

     However, if they could sell any unused volumes to other parties, then that argument is more or less voided. I don't know of any instances where utilities are paying for gas that they don't use or sell. They may end up selling some unused gas at a loss, but other than that, I don't see an issue, and I find the argument faulty. 

“Before encouraging any more firm capacity contracts, utility commissioners should consider the costs of each potential contract and compare that to the cost of the new gas generation unit that supports the FT contract. Last year, SACE used National Renewable Energy Laboratory Annual Technology Baseline data to estimate that a 1,360-MW combined cycle plant could cost $1.96 billion just for construction. A plant of this size would burn about 250,000 Dth at peak. Peak burn requirements are what utilities are currently using to guide FT contracting, even though peak burn rarely happens. Utility commissioners and the public staff often have access to the confidential pipeline contracts. Because the cost of these contracts is passed straight through to ratepayers, the utilities shoulder none of the cost risk, creating a moral hazard where utilities have no financial incentive to negotiate with consumer bills in mind.”

     She calculates the present net value (NPV) of the contracts using a common 7-year discount rate for utilities. She calculates the cost of the gas at nearly $42 million per year. But, as noted, any unused volumes could be sold to other entities. Thus, the utilities are well aware of the total costs and the potential burden for ratepayers and are still seeing these as good and necessary investments that provide necessary grid reliability assurance. Her alternative solution is solar and storage, including long-duration storage. While this is technologically feasible, with the addition of battery storage, the most likely storage source, that alternative scenario becomes prohibitively expensive. The area will also require gas combustion turbine resources to back up growing solar penetration on Southeastern grids. The region is already seeing “duck curves” that must be smoothed out by gas peaking plants. Her given solution in the op-ed is ripe with unnecessary and incorrect judgments about gas and unreliable suppositions and hype about renewables and storage. She does not consider the added costs of grid integration of solar, grid growth and upgrade requirements, and overgeneration management.  

“Gas is expensive. Gas is not reliable. Solar is the cheapest energy there is, even after Congress increased its costs, and batteries can store excess solar and wind. Longer duration storage is available now and advancing rapidly. Grid-forming inverters provide voltage support and other ancillary services, and batteries ramp up and down to follow changes in electricity load faster than any combustion turbine ever could. The sun and wind are not commodities. They are free and homegrown. Given these facts, adding even one more dekatherm of gas commitment to the Southeast is senseless. Let’s do the math.”

     I believe the fully accounted math would show that her proposed solution would be far less reliable and far more expensive than adding and contracting more gas pipeline capacity. Duke Energy and others in the region are also utilizing the largest, most advanced, and most efficient combined cycle gas turbines on the planet for some of their projects. While there is certainly a need for and a place for renewable energy on Southeastern power grids, there is also a very strong need for baseload natural gas power, especially to replace baseload coal power, but also demand response gas power to back up that growing amount of renewable energy. It also seems that, perhaps, clean energy advocates have too much influence in the region’s power grid policy dynamics.  

 

 

   

 

References:

 

Southeast utilities are signing gas capacity contracts that will burden ratepayers for decades. Shelley Hudson Robbins. Utility Dive. Opinion. August 26, 2025. Southeast utilities are signing gas capacity contracts that will burden customers for decades | Utility Dive

Gas Transportation Agreement: Definition, Terms, Example. Contracts Counsel. What is a Gas Transportation Agreement? (Key Terms + Sample)

Fact Sheet | Capacity Release. Federal Energy Regulatory Commission (FERC). Fact Sheet | Capacity Release | Federal Energy Regulatory Commission