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Waivers Allow Duke to Divest Gas Transportation Contracts in Preparation for Cinergy Merger

In anticipation of its planned merger with Cinergy Corp., Duke Energy on Friday was granted limited waivers of FERC's policies and regulations to divest itself of a number of natural gas transportation contracts associated with certain West Coast and East Coast generation power plants that will not be part of the asset base of the merged company.

The Federal Energy Regulatory Commission granted, with certain exceptions, requested waivers to allow the tying of nonjurisdictional gas transmission contracts to released transportation capacity; the release of transportation capacity at a rate higher than the maximum recourse rate; the permanent release of a temporary release transaction; and suspend certain capacity-release tariff provisions related to CenterPoint Energy Gas Transmission and the Kern River Gas Transmission.

Duke Energy is seeking to divest itself of 16 contracts, including two CenterPoint contracts (one of which is a negotiated rate); two ANR Pipeline contracts; four Gas Transmission Northwest Corp. contracts; one Kern River released capacity contract, which is held by Duke Energy Trading and Market LLC (DETM); one Southern Star Central Gas Pipeline contract; one Natural Gas Pipeline Company of America (NGPL) contract; and five Canadian contracts (two TransCanada Pipelines Ltd.-BC System contracts, one TransCanada Pipelines-Canadian Mainline contract; and two NOVA Gas Transmission Ltd. contracts), according to the company. The five Canadian contracts are nonjurisdictional.

In addition to the gas transportation contracts, Duke Energy said it was "actively divesting" itself of the gas storage, supply and delivery operations tied to the merchant generation facilities that it plans to sell. The company is conducting a "data-room" process in which a number of interested parties have been allowed to examine and bid upon portions of its nationwide "book" of power assets, it noted.

Duke Energy said an unaffiliated prearranged replacement shipper was willing to accept a permanent release of all 16 transportation contracts, subject to bid and the right to match competitive bids. The Charlotte, NC-based energy company reported it recently executed a binding prearranged capacity release and assignment agreement with the unnamed shipper, which it said was both qualified and creditworthy.

The agreement would carry out the permanent release (and, in the case of the Canadian contracts, direct assignment) of all the transportation contracts at the applicable contract rate for the full remaining term of the package of contracts, to be effective April 1 of this year. The majority of the contracts require the shipper to pay the pipeline's maximum rate, while two contracts contain negotiated rates (one of which is currently above the maximum rate) and two contain a discounted rate below the maximum rate, Duke Energy said.

Because the Commission-jurisdictional contracts within the portfolio cannot be released without being subject to the agency's capacity-release bidding process, Duke has requested that CenterPoint (the host pipeline) treat the capacity portfolio as a prearranged deal, and post it for competing bids, with the bids being evaluated on the basis of which shipper will require the smallest payments by Duke Energy to the shipper in order to consummate the transfer of the portfolio of contracts -- a process commonly referred to as reverse-auction bidding.

Duke Energy and Cinergy contend the waivers are needed to carry out the permanent transfer of the capacity portfolio to Duke Energy's replacement shipper or any successful third-party bidder using a consolidated, reverse-auction bidding process.

"The Commission will...grant the necessary waivers to permit [Duke Energy] to accomplish its goal subject to [certain] limitations," the order said [RP06-179]. FERC rejected a protest that was lodged by NGPL, "except to the extent that the petitioner's proposal seeks to auction capacity held on Natural's system on CenterPoint's website."

NGPL opposed Duke Energy's proposal because the release of capacity would include capacity on NGPL's system, even though NGPL has not consented to a permanent release of the capacity. "The Commission agrees with Natural on this point and will not permit Natural's capacity to be released through postings on CenterPoint's website, contrary to Natural's tariff, absent Natural's agreement. The Commission agrees with Natural that it cannot be required to agree in advance to a permanent release of capacity."

The Commission waived its policies to allow the tying of the release of Duke-held capacity to "any extraneous conditions," enabling Duke Energy to include in its capacity-release portfolio the five nonjurisdictional transportation contracts on upstream Canadian pipelines. FERC also permitted Duke Energy to release, in a single package, the eleven jurisdictional contracts, including seven contracts at the maximum rate, two at a discounted rate, and two at negotiated rates, one of which is currently above the maximum rate.

"In these circumstances, the Commission is willing to grant a waiver of the Section 284.8(e) prohibition on bids in excess of the maximum rate to the extent necessary to permit [Duke] to permanently release the subject capacity at no cost...To the extent this results in the winning bidder paying up to the negotiated contract rate for released capacity subject to an above-maximum negotiated rate, the Commission is willing to permit such a result based upon [Duke's] representations that it is attempting to divest itself of its natural gas contracts due to a corporate merger."

FERC, however, refused to grant waivers that would have permitted Duke Energy to seek reverse-auction bids that would result in payments to the company, instead of Duke Energy paying the winning bidder an amount to take the capacity.

In keeping with Duke Energy's plan to release its capacity portfolio on CenterPoint's website, Duke also requested, and was granted, a limited waiver of CenterPoint's tariff provisions to allow the pipeline to release its multi-contract portfolio as a single package.

With the exception of NGPL, Duke Energy said all non-hosting pipelines have agreed to allow Duke to include their capacity in its portfolio and be subject to bidding on CenterPoint's website. Duke asked FERC to waive the tariff posting and bidding provisions of the non-hosting pipelines, as well as any other capacity-release tariff provisions, to allow it to conduct a consolidated bidding process. FERC approved the request.

Duke Energy's portfolio includes a Kern River contract, which is a temporary release of capacity held by affiliate DETM. FERC approved Duke's request for a waiver to permit the winning bidder to acquire, via a permanent release, Duke Energy's released capacity on Kern River; and, subject to Kern River's approval, for Duke's contractual obligations with respect to that capacity to be permanently extinguished. The Commission directed Duke Energy to submit a copy of the contract with Kern River within 10 days of the order.

The planned $9 billion merger of Duke Energy and Cincinnati, OH-based Cinergy is expected to close this summer. So far, the proposed merger has been approved by FERC and the Nuclear Regulatory Commission, and has satisfied the Federal Trade Commission and Department of Justice review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The states of Ohio, Kentucky and South Carolina also have signed off on the merger, while Indiana and North Carolina still are reviewing the deal.

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