Duke Energy and Williams got the certificate go-head from FERClast week to proceed with their newly acquired Gulfstream NaturalGas System project, a proposed 744-mile pipeline that would supplygas to the ever-expanding power generation market in Florida.

The Commission certificate came only weeks after the twocompanies purchased the $1.6 billion Gulfstream project from TheCoastal Corp., which had to shed the asset as a condition of itsmerger with El Paso Corp. The Federal Trade Commission ordered thesale of Gulfstream because Coastal’s merger partner, El Paso,already held a dominant position in the gas pipeline market inFlorida through its joint ownership of Florida Gas Transmission(FGT), the only pipeline system currently serving the SunshineState.

When completed, the Gulfstream system will offer Florida gascustomers pipeline-on-pipeline competition for the first time ever.The pipeline has a targeted in-service date of June 1, 2002.

After having awarded Gulfstream a preliminary determination (PD)last April and conducted an environmental review of the project,”we find that the public convenience and necessity require thegranting of the requested authorization,” last week’s order noted[CP00-6]. “It is critical that natural gas can be moved to marketsthat need it,” said Chairman Curt Hebert Jr.

The only hitch last week came when the Commission deniedGulfstream’s rehearing requests on two critical issues, whichtogether will reduce the project’s rate base by more than $150million. FERC stood firmly behind its earlier decision to eliminatethe $150 million that Gulfstream sought to set aside as”contributions in aid of construction” (CIACs) for customerswanting to build laterals and other facilities, and to exclude $4.8million due to a miscalculation in the project’s proposed allowancefor funds used during construction (AFUDC)

With respect to the CIACs, “the Commission based its [prior]decision on Gulfstream’s inability to identify the actuallegitimate original cost of the asset, and on Gulfstream’sstatements that the CIACs were an optional negotiating tool tofacilitate negotiations with shippers,” the order said. Becausenothing has changed since then, “the assets cannot be included inrate base. To be included in rate base, a cost must be known andmeasurable.”

However, if Gulfstream makes CIACs that are “measurable andreasonable and prudent,” it may amend its certificate later torevise its rate base for its initial recourse rates or to establishincremental rates, FERC said.

Likewise, FERC affirmed its earlier ruling on AFUDC. It orderedGulfstream to use an AFUDC rate for the entire construction periodequal to the overall rate of return on rate base approved for theproject’s recourse rates (70% debt at an interest rate of 8%, and30% equity at a 14% rate of return). Gulfstream argued that thisfinancing approach was inconsistent with the treatment given toother large-scale pipelines, such as Alliance, Independence andMojave.

On the plus side, the Commission said it would permit Gulfstreamto require a 12-month letter or pre-payment on contracts forlong-term service. In its April order, FERC had imposed athree-month letter of credit requirement.

The 744-mile Gulfstream pipeline will run from Mobile Bay, AL,under the Gulf of Mexico and come ashore at Tampa, where it willsupply 1.13 Bcf/d of natural gas to power generators, localdistributors, municipalities and independent power producers in thecentral and eastern parts of the state. Gulfstream, of which morethan half will be under water (400 miles), will be the largestpipeline construction project to be undertaken in the Gulf so far.

Approximately two-thirds of the pipeline’s capacity already issubscribed, primarily to power generators, according to thesponsors. The generation market will be Gulfstream’s key focus. Thestate forecasts that about 10,000 MWs of new gas-fired generationcapacity will be built in Florida between now and 2010, which theproject’s sponsors estimate will boost gas demand by 1.6 Bcf/d inthe state.

Susan Parker

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