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Discounting, Decontracting Force Trunkline to Abandon Portion of Pipe

Discounting, Decontracting Force Trunkline to Abandon Portion of Pipe

Year after year of underutilization, deep discounting and the promise of continued decontracting forced Trunkline Gas Co. to plan the shut-down a 720-mile portion of its 26-inch diameter mainline last week. The pipe, which stretches from Longville, LA, to Bourbon, IL., has the capacity to transport up to 255 MDth/d of gas.

Trunkline filed with the Federal Energy Regulatory Commission (FERC) requesting to spin down the asset to another Duke Energy subsidiary that plans to make better use of the space by converting it to transport ethane and other hydrocarbon vapors to the Gulf Coast from the proposed Aux Sable Liquid Products processing plant, which is expected to be built at the terminus of Alliance Pipeline. Alliance, if approved by FERC, would carry 1.4 Bcf/d of high Btu natural gas from Western Canada to the Chicago area.

Trunkline said the line will be spun down at net book value of $10 million, and in exchange, its Duke affiliate will cover the $10 million in proposed conversion costs, contribute another $10 million to cover Trunkline's indemnification against any potential future environmental costs and will pay $2 million for repair costs. The spindown will reduce Trunkline's cost of service by about $3 million/year.

"Trunkline is not getting out of the natural gas transportation business," said Steve Roverud, chairman of Trunkline. "This is simply a more effective use of one of our assets. Overcapacity in the Midwest has caused Trunkline to transport gas at deeply discounted rates for several years. We will continue to have adequate capacity to serve our long-term, firm transportation customers."

Trunkline said it has had to sell a substantial portion of its firm transportation capacity (two-thirds of its total capacity currently) at a 33% discount from maximum rates. "This is not a recent phenomenon. Trunkline's system continually has operated at levels well below maximum capacity since 1988, and only has operated at close to or at full capacity during the coldest winter heating seasons, i.e., the 1995-1996 winter, or as a result of Trunkline deeply discounting firm services," the pipeline told FERC.

In 1994, Trunkline was forced to discount 75% of its maximum daily quantity. Since 1995, over 90% of its MDQ has been sold at discounted rates. And still its system has had 568 MDth/d of unsold capacity annually.

Cheap Canadian gas historically has been favored over higher-priced Gulf Coast production and that is expected to continue as at least 2 Bcf/d of new firm transportation is added between western Canada and the Midwest over the next two years.

Trunkline cited a recent study by the American Gas Association that shows pipelines entering the Midwest had only 37% of their firm capacity under contract through 2001. "[E]ven though that amount will change as capacity is remarketed, the potential for a huge amount of unsubscribed capacity will remain in the Midwest region." The average term of Trunkline's current contracts is four years. During an open season for available firm service of its system in spring of 1995, the pipeline received "no requests" for long-term transportation.

Vows to Maintain Service

The abandonment of the 26-inch diameter line will have "no adverse effect on the customers' service requirements and will not affect Trunkline's ability to meet all of its firm service obligations," the pipeline said, adding the line represents only about 1% of the 21,584 MDth/d of interstate pipeline capacity entering the Midwest region.

"[T]here will be more than enough capacity to meet the present and projected future needs of Trunkline's customers," the pipeline told FERC. "Service to municipalities.where Trunkline is the sole transporter will not be affected, since adequate capacity will be retained. The small customers that are served directly off of the 26-inch line will be re-connected to Trunkline's remaining mainlines during the conversion process." In addition, the pipeline company said it will be reimbursed for the costs of the conversion and re-connection process. Trunkline said "no services, receipt and delivery point facilities, or compressors required to provide those services are to be abandoned." Currently, firm commitments on the line amount total 1,242 MDth/d, which is well below the proposed capacity upon abandonment of 1,555 MDth/d. Rocco Canonica

Producers, Industrials Assail Columbia Negotiated Plan

Natural gas producers and industrial customers insist they aren't the least bit interested in the Columbia pipeline affiliates' proposals to offer them negotiated terms and conditions of service, saying that pipelines already have the potential now to provide them innovative services on a tariffed basis. Utilities, on the other hand, were mixed in their reaction.

The pro forma proposals of Columbia Gas Transmission and Columbia Gulf Transmission are "premature" and should be rejected outright by FERC, Indicated Shippers and the Process Gas Consumers Group (PGC) urged the Commission separately. If it chooses not to reject them, they asked FERC to put a hold on the Columbia case pending the outcome of its generic review of the issue of negotiated terms and conditions.

Absent a generic finding, "it would be unfair now for the Commission to allow a myriad of separate proceedings to go forward on these topics, " the PGC noted. In the event that FERC should reject both courses of action, it should "clearly indicate" the Columbia docket will serve as the precedent-setting case in this area, and put all other filings with similar proposals on the back-burner, said Indicated Shippers, which includes major producers and marketers.

The Columbia proposal - the first specific, comprehensive plan of its nature presented by a pipeline - is the latest industry effort aimed at focusing attention on the negotiated issue at the Commission. FERC already is said to be considering the topic on a generic basis as part of its review of second-generation Order 636 issues; it has set for hearing a Northern Natural Gas proposal that seeks to negotiate certain terms and conditions as part of a rate filing; and it has pending a proposal by the American Gas Association (AGA), and endorsed by the Interstate Natural Gas Association of America (INGAA), outlining a plan to customize services for pipeline customers.

The Columbia proposals are "far more detailed" than any other pipeline plan so far, including the "sketchy request" of Northern Natural Gas, said PGC. "Ironically, however, even with a more detailed proposal like Columbia's the fundamental issues of undue discrimination, damage to equality of service, and damage to the highly competitive gas supply and service markets...remain very real and cannot be resolved under the procedures offered by Columbia." Both PGC and Indicated Shippers insist the issue should be taken up in a hearing rather than at a technical conference, as Columbia has suggested.

The pipelines, contend Indicated Shippers, are the only ones that are interested in customizing their services. "...[N]o arguments have been presented by any end-use customers that even suggest the need for or desirability of negotiated terms and conditions of service," they told the Commission [RP98-249, RP98-250]. The Columbia pipelines, in justifying the need for negotiated terms and conditions, contend the current regulatory structure hampers pipeline "creativity." But, it cautioned, "pipeline 'creativity' can be used as a smoke screen for pipeline mischief."

Indicated Shippers said proposals to negotiate services were "little more than a thinly disguised effort to allow the pipelines to engage in market-based pricing of [their] services without the appropriate threshold showing that the pipeline lacks market power."

Although fundamentally opposed to negotiated services, PGC said a number of safeguards would have to be in place first for such a program to proceed, including 1) the recourse, or standard, service would have to be proven as a viable alternative" to negotiated service; 2) FERC would have to make it possible for all customers to benefit from any improvement that was negotiated for an individual customer; 3) the Commission must place the risk associated with offering negotiated services squarely on the pipeline; and 4) stringent standards for protecting customers against undue discrimination would be required.

New York State Electric &amp Gas (NYSEG) was one of a handful of utilities that cited their support for the Columbia affiliates' proposal, but even it had some concerns. Specifically, Columbia's proposal to impose hourly flow parameters and limitations at delivery points for recourse service would "diminish" the value of recourse service now enjoyed by customers. Also, the New York utility said Columbia's list of non-negotiable terms and conditions shouldn't be considered exclusive. And, while Columbia is "on the right track" in recognizing that a customized service would be discriminatory if not offered to a similarly situated, recourse customer, its proposal needs to be better defined, NYSEG said.

Baltimore Gas &amp Electric (BG&ampE) said it fully supported the Columbia proposals, saying pipeline service flexibility will be a "key to success in addressing retail unbundling and other changes in our market." Unlike PGC and Indicated Shippers, it believes a technical conference - rather than a hearing - is the proper venue in which to consider the proposals. "This filing is not part of a rate case. It is clearly limited to policy considerations, and no fact finding is necessary."

In contrast to the other utilities, Public Service Electric and Gas (PSE&ampG) protested the Columbia filings. Although a "step in the right direction," the pipelines' effort "falls short of conforming with the principles articulated in the AGA proposal," the New Jersey utility said. It urged the Commission not to approve the Columbia proposals until "two critical threshold issues" are resolved.

First, the definition of "recourse" service must be definitively established before pipelines are permitted to depart from standard services. "Some may argue that a recourse service should be a stripped-down 'no-frills' service, while others may contend that a recourse service should offer even more than is currently provided. Until the components of a recourse service are established...the FERC should not approve Columbia's...proposal."

Secondly, an expedited and efficient generic complaint process must be in place before negotiated terms and conditions can occur, PSE&ampG said, adding it believes the current Section 5 complaint procedures are "insufficient and unworkable, even for existing services." Like producers and industrials customers, it also believes FERC should first address the issue of negotiated terms and conditions on a generic basis before it moves to Columbia's proposals.

Susan Parker

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