It's a Go for $1.6 Billion Gulfstream Pipeline in Florida
Duke Energy and Williams got the certificate go-head from FERC last week to proceed with their newly acquired Gulfstream Natural Gas System project, a proposed 744-mile pipeline that would supply gas to the ever-expanding power generation market in Florida.
The Commission certificate came only weeks after the two companies purchased the $1.6 billion Gulfstream project from The Coastal Corp., which had to shed the asset as a condition of its merger with El Paso Corp. The Federal Trade Commission ordered the sale of Gulfstream because Coastal's merger partner, El Paso, already held a dominant position in the gas pipeline market in Florida through its joint ownership of Florida Gas Transmission (FGT), the only pipeline system currently serving the Sunshine State.
When completed, the Gulfstream system will offer Florida gas customers pipeline-on-pipeline competition for the first time ever. The pipeline has a targeted in-service date of June 1, 2002.
After having awarded Gulfstream a preliminary determination (PD) last April and conducted an environmental review of the project, "we find that the public convenience and necessity require the granting of the requested authorization," last week's order noted [CP00-6]. "It is critical that natural gas can be moved to markets that need it," said Chairman Curt Hebert Jr.
The only hitch last week came when the Commission denied Gulfstream's rehearing requests on two critical issues, which together will reduce the project's rate base by more than $150 million. FERC stood firmly behind its earlier decision to eliminate the $150 million that Gulfstream sought to set aside as "contributions in aid of construction" (CIACs) for customers wanting to build laterals and other facilities, and to exclude $4.8 million due to a miscalculation in the project's proposed allowance for funds used during construction (AFUDC)
With respect to the CIACs, "the Commission based its [prior] decision on Gulfstream's inability to identify the actual legitimate original cost of the asset, and on Gulfstream's statements that the CIACs were an optional negotiating tool to facilitate negotiations with shippers," the order said. Because nothing has changed since then, "the assets cannot be included in rate base. To be included in rate base, a cost must be known and measurable."
However, if Gulfstream makes CIACs that are "measurable and reasonable and prudent," it may amend its certificate later to revise its rate base for its initial recourse rates or to establish incremental rates, FERC said.
Likewise, FERC affirmed its earlier ruling on AFUDC. It ordered Gulfstream to use an AFUDC rate for the entire construction period equal to the overall rate of return on rate base approved for the project's recourse rates (70% debt at an interest rate of 8%, and 30% equity at a 14% rate of return). Gulfstream argued that this financing approach was inconsistent with the treatment given to other large-scale pipelines, such as Alliance, Independence and Mojave.
On the plus side, the Commission said it would permit Gulfstream to require a 12-month letter or pre-payment on contracts for long-term service. In its April order, FERC had imposed a three-month letter of credit requirement.
The 744-mile Gulfstream pipeline will run from Mobile Bay, AL, under the Gulf of Mexico and come ashore at Tampa, where it will supply 1.13 Bcf/d of natural gas to power generators, local distributors, municipalities and independent power producers in the central and eastern parts of the state. Gulfstream, of which more than half will be under water (400 miles), will be the largest pipeline construction project to be undertaken in the Gulf so far.
Approximately two-thirds of the pipeline's capacity already is subscribed, primarily to power generators, according to the sponsors. The generation market will be Gulfstream's key focus. The state forecasts that about 10,000 MWs of new gas-fired generation capacity will be built in Florida between now and 2010, which the project's sponsors estimate will boost gas demand by 1.6 Bcf/d in the state.
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