Marketers Blast Gas Sale to Williston Affiliate
Unaffiliated gas marketers on Williston Basin Interstate Pipe
Line's (WBI) system have accused Frontier Gas Storage, a "paper"
company that acts as a "surrogate" for WBI, of committing a large
portion of its storage gas with "attractive" pricing and scheduling
options to the pipeline's marketing affiliate to give it a
competitive edge over them, raising new allegations of affiliate
abuse and undue preference.
Rainbow Gas and KN Services contend they were foreclosed from
bidding on the Frontier gas even before a contract providing WBI
affiliate Prairielands Energy Marketing with up to 5 Bcf of stored
gas through May 1999 was executed last month. Bear Paw Energy, a
gatherer/processor in Colorado, made similar allegations against
Frontier. The three followed up with protests at FERC when Frontier
submitted the contract to the Commission for its review
[CP85-221-105]. MDU Resources Group, parent of WBI, said it was
aware of the protests, but it declined to respond last week.
The shippers have asked the Commission to issue an order to stop
the planned sale of Frontier gas to Prairielands. This should be
followed by a hearing or a technical conference "to examine the key
element of this arrangement, which is whether WBI/Frontier sold the
Frontier storage gas...to its marketing affiliate Prairielands
under terms and conditions that were unknown to and unavailable to
third parties...," said Bear Paw. The three protesters contend the
Frontier storage gas gives Prairielands preference in several key
areas: scheduling of transportation and storage services, price and
But even more important than affiliate abuse, says a source
familiar with the case, is the sales aspect of the transaction.
Frontier is selling the gas under a rate schedule that has
incorporated WBI's tariff. "In short, a pipeline is selling gas,"
which has been taboo since the advent of Order 636, he noted.
"That's our real concern to be brutally honest - that what's going
on here is that WBI, Prairielands [and] Frontier are turning back
the hands of time."
The history of WBI and Frontier are key to understanding the
shippers' allegations. Frontier was formed in the early 1980s by
WBI's predecessor, Montana Dakota Utilities (MDU), to resolve its
take-or-pay liabilities. Frontier's purpose was to purchase all of
the gas that MDU was obligated to buy from producers, store it in
MDU's storage fields, and then sell it all back to MDU. The beauty
of the arrangement, the source noted, was that it provided MDU with
a certain amount of flexibility with respect to paying for all the
gas (up to 59 Bcf).
But MDU's plan ran into a little snag in the 1980s, namely the
deliverability surplus. As a result, "they couldn't get anyone to
buy their gas," he said. "In order to entice people to buy the
Frontier gas, WBI [MDU's predecessor] gave Frontier gas a
preference coming out of storage." Later as the market price of gas
rose, WBI also lowered the price of Frontier storage gas, giving it
a price preference in addition to the scheduling preference, the
source noted. "By this time, Frontier gas became a pretty good
deal," and remains so today.
During the third quarter of 1996, WBI/Frontier marked down the
cost of Frontier gas to $1.35/Dth, which is "well below" the
prevailing market price for gas at the two principal destinations
of Frontier gas - about 30% less than on Colorado Interstate Gas'
North system and 35% less than on Northern Border Pipeline at
Ventura, IA. This has given WBI, more specifically Prairielands,
the ability to undercut its competitors, which primarily are
unaffiliated marketers served by the WBI system, Rainbow Gas
But now with Frontier's mission accomplished - resolution of
WBI's take-or-pay problems - shippers are questioning the reason
for the company's continued existence. They insist that WBI is
using Frontier gas solely to give Prairielands a competitive
advantage over non-affiliated marketers, and they want FERC to look
into this. The shippers also want the Commission to explore the
relationship between the two companies. They argue that WBI and
Frontier are one and the same company.
MDU Denies Affiliation
"You can look at it in a number of different ways, and you can
cut it a number of different ways, but the bottom line is that WBI
controls [Frontier gas] and it's stored in WBI's storage fields,"
the source noted. But MDU Resources, WBI's parent, said Frontier is
a special-purpose corporation that isn't affiliated with WBI. John
Brookhart, an MDU spokesman, acknowledged that Frontier has no
headquarters, and he's not sure if it has a president. However, he
said it has its own storage fields in eastern Montana.
Another issue is the amount of storage gas remaining with
Frontier. Frontier "conceivably" has more than the 5 Bcf that it
plans to sell to Prairielands left in storage, the source noted,
"but it's not selling to anyone else." As of last December,
Frontier had 14.9 Bcf in storage, Brookhart said, adding that it
plans to liquidate the assets over the next 3-4 years.
Unaffiliated marketers are hot over the planned sale of the
Frontier gas to Prairielands mainly because of the alleged
preferences associated with the gas. While interruptible storage
customers would have to "pre-pay" the associated IT transportation
upon injection into storage, Frontier customers wouldn't have to do
so since the gas is already in storage. And if on a cold winter day
a shipper needed to get gas out of storage and the only way it
could do so was on firm transportation, it would be required to pay
the firm rate on top of the previously paid IT transportation rate.
In short, the shipper would "forfeit" the pre-paid IT rate to WBI,
Rainbow Gas told FERC. "Conversely, if you're Prairielands, you
don't have to assume that risk," the source noted. As a result,
Frontier gas had a 25-44 cents/MMBtu competitive advantage over IT
storage shippers last winter, Rainbow estimated.
Furthermore, while competitors must buy their gas in the
marketplace - usually at much higher prices - and pay for it then,
Frontier customers under its "as-metered" LVS-1 agreement aren't
billed for any gas until it's removed from storage, Rainbow Gas
said. Such customers are "shielded from market risk that could
leave pre-paid previously injected [interruptible and firm storage]
gas stranded at above-market prices or to be sold at a loss," it
added. Moreover, as-metered customers don't have to pay WBI the
costs to transport the gas to storage, inject the gas into a
storage field, and store the gas.
"...[T]he "as-metered contract between Frontier and Prairielands
provides a great advantage to Prairielands," KN Services agreed.
Moreover, the fact that the sale price of the gas to Prairielands
has not been made public only adds to the WBI marketing affiliate's
competitive edge, it said. Lastly, the Frontier gas would give
Prairielands priority over IT storage customers when withdrawing
gas. These "advantages were obtained discriminatorily," contends KN
Services, which urged FERC to block the Frontier-Prairielands'
contract and set the matter for hearing.