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Stalled Islander East Project, LNG and Land Access Take Center Stage at Senate Conference

The failure of the Army Corps of Engineers to issue a permit more than two years after FERC approved the construction of the Connecticut-to-New York Islander East Pipeline is an "example of duplicative process, wasted resource and the right hand questioning the left hand's actions" within the federal government, said Sen. Larry Craig of Idaho last Monday.

"Now it is a very cold winter. New York City is experiencing record temperatures. And this morning the national news suggested that the consumers of New York will pay a higher energy bill this year than ever before," the Republican lawmaker said during a natural gas conference sponsored by the Senate Energy and Natural Resources Committee in Washington, DC.

Sen. Pete Domenici (R-NM), chairman of the committee, said the conference, which addressed a broad gamut of natural gas issues, will lay the groundwork for upcoming discussions of the broad energy bill. Domenici and the committee are expected to select the best natural gas proposals offered by industry, regulators and Wall Street, and incorporate them in a gas title to an energy bill.

The proposals made at the Monday conference focused on environmental matters, conservation and efficiency, the reporting of market information, liquefied natural gas jurisdictional issues, ways to increase domestic gas supply, gas pipeline constraints, and impediments to gas infrastructure development.

Craig blamed the higher gas prices this winter in New York, in large part, on the lack of pipeline infrastructure. "The reality is consumers of New York today are, in fact, paying phenomenally high prices" because "we let our [federal] agencies fall all over each other" when it comes to approving and permitting pipelines, he noted during the more than four-hour conference.

Keith Rattie, the chairman of Questar Corp. who represented the Interstate Natural Gas Association of America (INGAA), said that while spot market gas prices were $6/Mcf in Chicago for last Monday's flow, they were about $20/Mcf in Transco's Zone 6 (New York).

"It appears to me we ought to be telling the secretary of defense to get the Army Corps of Engineers off the dime here" on the Islander East Pipeline project, said Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the Senate Energy Committee.

Domenici indicated he may do some gentle prodding of his own to get some action on the pipeline. "The secretary of defense may have direct authority [over the Army Corps of Engineers]. But my subcommittee appropriates its money...They will probably react much, much more adroitly when we call them in to talk about it," he said.

The proposed pipeline, which is sponsored by KeySpan and Duke Energy, would cross Long Island Sound to Long Island, NY, where it would ultimately deliver up to 400 MMcf/d of natural gas. The pipeline project has faced a number of difficulties since being approved by FERC in September 2002, including a challenge by the state of Connecticut under the Coastal Zone Management Act (CZMA). Islander East won that appeal in mid-2004. The project, however, still is battling with the Connecticut Department of Environmental Protection to receive a water quality permit.

In order to speed up project approvals, Rattie called on Congress to give the Federal Energy Regulatory Commission the authority to establish a schedule for federal and state agencies to complete their reviews of projects under the National Environmental Policy Act (NEPA).

Mark Robinson, director of FERC's Office of Energy Projects, supported the proposal. As it stands now, if federal and state agencies like a project, they "play nice" and all goes well, he said. But if one or more agencies oppose a project, the process usually breaks down.

In response to questioning by Bingaman, Robinson said that the Commission was seeking "exclusive" jurisdiction over the siting of LNG terminals. "The state's role would be unchanged from what it is right now...The state has the authority [under the] Coastal Zone Management Act to not authorize an LNG facility. The state also has the authority [under] the Clean Water Act to not authorize and, therefore, an LNG facility could not be constructed," he noted.

"We are not suggesting that [state] authority be touched in any way shape or form," he assured Bingaman and other members of the Senate energy panel during the conference.

"We need help with siting" of LNG terminals. "It's not enough to put LNG [facilities] in the Gulf," said Robinson, who stressed the need for a "rational" siting policy.

The state of California currently is challenging FERC's assertion of exclusive jurisdiction over Sound Energy Solutions' planned LNG terminal for the Port of Long Beach, CA, in the U.S. Court of Appeals for the Ninth Circuit. Given that it's a federal court, "if it gets decided there, it won't be determinative for the land," Domenici said.

"So there would be some reason for us [Congress] to decide...which we think is the best policy" when it comes to federal vs. state jurisdiction over LNG facilities, he noted.

As for LNG's potential safety and security concerns, Linda Stuntz of the National Commission on Energy Policy said she does not believe that LNG will pose more of a problem than petroleum or its by-products. Most of the opposition to LNG facilities is coming from localities in the Northeast and on the California coast. "I remain concerned that folks in the Northeast and California who need this [LNG] the most still have difficulty" with proposed projects, she noted.

When it comes to natural gas supply, "Time is short. The issues [are] clear. We need to act," said Larry Downes, CEO of New Jersey Resources and chairman of the Natural Gas Council. He urged Congress to conduct an "objective, dispassionate" analysis of domestic lands that have been restricted to producers, and to streamline the federal permitting process to avert "serious delays" in drilling. Importantly, Downs said that producers were not asking that the current environmental objectives be "relaxed or loosened."

If policy makers would take action to improve access to onshore and offshore lands, that would be equal to the construction of six new LNG plants, Downes told the committee. In addition, it would prevent the United States from becoming overly dependent on natural gas imports.

Nolty Theriot of the National Ocean Industries Association, which represents offshore producers and other interests, estimated that approximately 80% of the offshore was off limits to oil or gas development, or approximately 79 Tcf.

He also recommended that all Outer Continental Shelf (OCS) areas be assessed for their potential oil and natural gas resources. Theriot said Congress should address what he believes is the states' misuse of the CZMA to hold up offshore development, as well as infrastructure projects. In addition, it should set a strict timetable for the Commerce Department to rule on appeals of states' use of the CZMA to thwart gas projects.

The American Public Gas Association's "No. 1 priority is to bring natural gas prices back to an affordable level," said President and CEO Bert Kalisch. He noted a step in that direction is the State Enhanced Authority for Coastal and Offshore Resources (SEACOR) program, which he said could provide access to more than 145 Tcf of natural gas for potential development.

Kalisch said SEACOR would require the existing offshore moratoria to be set aside, and would provide coastal sates with greater authority and financial incentives to bear the risks and impact of offshore drilling activity.

The solution to the natural gas supply problem is "access, access and access," an official with the New Mexico Oil & Gas Association said. He also noted that the Endangered Species Act, which hinders gas development, "is broken and needs [to be] fixed." And he called for the federal government to establish a 45-day limit for awarding permits.

An official with the U.S. Geological Survey estimated undiscovered U.S. gas resources at 600 Tcf, of which approximately half is conventional resources. An additional 400 Tcf of undiscovered gas resources is located offshore.

Off the 400 Tcf offshore undiscovered gas, it was estimated that 232 Tcf was located in the central and western portions of the Gulf of Mexico, 122 Tcf in Alaska, 33 Tcf off the Atlantic Coast and 18 Tcf off the Pacific Coast.

But a significant amount of the resources is off limits due to moratoria. The majority of officials at the Senate conference said they were unaware of any other country, including Canada, that restricts natural gas drilling to the degree that the United States does.

Dingell: Energy Bill on Fast Tract

An energy bill with a gas title will probably be ready in the March time frame, Funk said. She did not dismiss the possibility that a senator may offer a stand-alone natural gas bill during the new Congress.

On the House side, Rep. John Dingell (D-MI) told FERC Chairman Pat Wood and other Commission members that he expected lawmakers there to "move quickly" on energy legislation this year, using last year's conference report on H.R. 6 as a starting point for the bill.

Dingell, the ranking Democrat on the House Energy and Commerce Committee, submitted several written questions last Monday to Wood and the other three commissioners, seeking input for the bill.

Specifically, the House lawmaker asked the Commission whether it had "adequate authority" to obtain market information necessary for price discovery and effective monitoring of natural gas and electric markets; had sufficient civil and criminal penalty authority to punish violators of the Natural Gas Act and Federal Power Act; and could make an Alaskan natural gas pipeline a reality in this decade.

Wood cited these as FERC's top priorities when he appeared before the House Energy and Air Quality Subcommittee in March 2003. "Are these topics still the Commission's top legislative priorities?" Dingell asked Wood. "If not, please explain and describe your new priorities, including legislative language."

During his subcommittee appearance, the FERC chairman also called for "legislation on a number of other electricity issues, including encouragement of membership in regional transmission organizations (RTOs), transmission rate incentives and transmission siting authority," according to Dingell. "Does current law provide the Commission with adequate authority to address these matters? If you believe new authority is needed, please provide legislative language," he said.

The H.R. 6 conference report includes a number of other provisions related to electricity matters, including standard market design, native load service obligation, voluntary transmission pricing plans and the sanctity of contracts, Dingell noted. "Does the Commission need new legislative authority with respect to these four areas? If the yes, does the Commission favor enactment of the specific language in the conference report?"

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