A very divided FERC last week broke with a decade-old procedureby leapfrogging the preliminary determination (PD) step in fourcontroversial pipeline projects intended to carry Canadian gas fromthe U.S. Midwest to the Northeast gas market. Instead, it deferredaction on the fate of the projects until all of the environmentalreviews are completed – “hopefully” by early next fall. Projectsponsors had mixed reactions: they were disappointed by the breakwith PD procedure, but they also were encouraged by FERC’sassurance of a final vote by fall. And all said – at least publicly- they still planned to move forward with their separate projects,but sources said privately sponsors were re-evaluating whether itwas “worthwhile to go ahead.”

In a 3-2 split, the Commission majority indicated the wide rangeof issues and concernsraised by the projects – specifically, theunparalleled level of landowner opposition, questions about the”need” for the proposed pipelines and “significant and difficult”environmental concerns – warranted a break from its PD procedure,if only in these cases. The majority stressed that its action,although unusual, didn’t necessarily portend doom for thehigh-profile projects.

The “confluence” of the issues in the two main projects,Independence and Millennium, and the connecting links,SupplyLinkand MarketLink, calls for “decision-making that affordsus the ability [to consider] the whole record at one time,” saidChairman James Hoecker. FERC needs to be able to “balance all theinterests and concerns” – public interest, economic, landowner andenvironmental – in one fell swoop, he noted, saying the currentbifurcated certificate process doesn’t permit this.

Hoecker stressed the Commission’s action wouldn’t stop it fromissuing PDs for more routine pipeline projects in the future. “Idon’t contemplate any precedental effect from this decision.” Hesaid he was not opposed to PD orders, which address thenon-environmental and rate aspects of projects. “I recognize thatthe industry has come to rely on them and I recognize that theyhave some benefits that are very important.” Typically, PDs provide”some assurance” that projects will go forward, enabling pipelinesto obtain financing and firm up shipper commitments, Hoecker said.But he noted he had “some questions about whether a PD…wouldpromote these particular goals in these cases.”

Despite Hoecker’s assurances, Commissioner Curt Hebert Jr. stillhad doubts as to whether the majority’s end-run around the PDprocedure was a one-time thing or whether it was the beginning ofthe end of PDs altogether. “…[I]s the recommendation on the tablethat the preliminary determination be abandoned in total?” heasked. Some project sponsors expressed similar concerns. “It’sdifficult for me to see how it couldn’t set a precedent” for otherprojects as well, said Frank Ferazzi of Williams GasPipeline/Transco, adding he didn’t see any factors or circumstancesthat distinguished these four projects from others out there.Transco is the sole sponsor of MarketLink.

Some thought Hoecker was “tap dancing all around” the issue ofthe future of PDs. They interpreted his comments to mean that theCommission will only award PDs to non-controversial projects in thefuture. But these projects don’t really need preliminary rulings,they said. Rather, it’s the projects where significant issues of”need” are raised that require the PDs so sponsors can know whetherto put their “money and cash on the line.”

Commissioner Vicky Bailey said she was at odds with theCommission majority on this issue. Her “first and fundamentalconcern” was that FERC was causing regulatory delay by not awardingthe PDs. She allowed that the four projects were “hard cases,difficult cases,” but she added “I think that in the end allparties are served better by a fair and reasonable decision in atimely fashion…”

Eschewing PDs for these projects “puts pressure on us I believenot to issue PDs in future cases,” Bailey said. “This is a processthat the industry has come to depend on,” even though it’s notformalized in FERC rules or in the Natural Gas Act (NGA).

Bailey suggested the FERC majority was putting too much stock inthe meaning of its PDs. “A PD is just that – a preliminarydecision. It’s not irretrievable; it’s not irresponsible. It’s anindication of our initial assessment up or down. It lets everyoneknow what to expect and to make business and financial decisions,”she said.

She hinted the Commission was holding the four projects”hostage” to the outcome of the mega-notice of proposed rulemaking(NOPR) and notice of inquiry (NOI), which address the PD procedureand whether it should be changed. Hoecker flatly denied thischarge. “In fact, I don’t think that a final certificate order inthese cases will occur in any different point in time than theywould otherwise have.”

The Commission has been under pressure to fully justify the”need” for the projects. Part of the argument against the projectshas been that most of the capacity contracts either have “outs”that would allow customers to be released or they are withaffiliates of the sponsors, one of which was hastily created whenFERC asked to see contracts. Hebert said he wasn’t convinced theapparent rise in the use of affiliate contracts underlying theprojects cast enough doubt on the “need” for the projects towarrant skipping the PD process. He questioned whether “need”determination at FERC now included “environmental analysis or alandowner analysis,” as opposed to a straight “market analysis.” Healso found it “troubling” that FERC appeared to be basing its PDprocedural change on the “number of landowner concerns” rather thanon the “quality or the content of those concerns.”

Under questioning from Bailey, Hoecker said the “best casescenario” calls for the Commission to issue final orders on theprojects “hopefully” early next fall, but he added that a lotdepends on whether the environmental reviews are completed in time.A number of scoping meetings are scheduled for both Independenceand Millennium between now and then.

Although a “little disappointed that FERC didn’t follow itsnormal procedure,” Transco’s Ferazzi said he was encouraged byHoecker’s assurance the projects would have top priority in thecertificate area, and that final decisions were promised in thefall. Based on these assurances, he said Transco will continue tomove forward with its MarketLink expansion from the Leidy, PA, hubto the New York area [CP98-540].

Projects Still on Track

Transco also is one of three partners in the controversialIndependence greenfield project, which would extend 400 miles fromDefiance, OH, to Leidy [CP97-315]. Asked if Independence mightconsider merging with the competing Millennium project in the wakeof FERC’s move, Ferazzi said it’s “hard to rule anything out,” buthe added no “serious discussions” have been held about it lately.

Joe Martucci, a spokesman for Independence sponsor ANR Pipeline,said he “was not aware of any discussions” about possibly combiningthe two projects. “We’re continuing to move forward with the[Independence] project. And we are convinced the market support ismore than adequate to justify its construction as planned,” he toldNGI. “The need for Independence was further underscored…when itwas announced that the Alliance Pipeline would soon beginconstruction,” he said, adding it will be the “critical link” totransporting Canadian gas to East Coast markets. ANR also is solesponsor of SupplyLink, which would provide an upstreamreinforcement of ANR’s existing system to Independence [CP97-319]

In a prepared statement, Millennium sponsor, Columbia GasTransmission, said it was firmly committed to its project as well,and that hoped it “[would] not be tarred with the brush of thehighly vocal landowner objections to our competitor’s project,”namely Independence. The 417-mile Millennium line would run fromLake Erie to Westchester County in New York [CP98-154].

Both Commissioners Linda Breathitt and William Massey backed thechairman’s position. Breathitt said she was “not comfortable” withsending an early message to the financial markets or others aboutthe outcome of the cases. She expressed concern that the PD overtime has evolved into a “form of entitlement” that guaranteescertification.

Massey emphasized the need for FERC to weigh local interests.Closely “intertwined” with landowner concerns is the issue of”need” for the pipeline projects, he said. “If we are going to askproperty owners to give up their land, it must only be because wehave determined that a project is necessary.” He pointed out that55% of the proposed capacity for Independence was subscribed by amarketing affiliate.

But Bailey countered that affiliate shippers were “legitimateplayers” in a competitive market. The days of LDCs as the onlypipeline customers are long over, she said. Hoecker agreed therewas nothing to indicate that affiliate contracts were”unacceptable.”

Susan Parker

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