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Tennessee Project Qualifies for Higher Blanket Certificate Cost Cap

FERC Tuesday granted Tennessee Gas Pipeline a waiver of its prior-notice cost limits for an offshore Louisiana lateral project, qualifying it for the higher cost ceiling under the agency's blanket certificate regulations that went into effect after the project was authorized. The El Paso pipeline sought the waiver as the cost of the project jumped to $35.8 million (and is expected to climb further) from the original cost estimate of $10.6 million.

Tennessee began construction of the lateral project in May of this year, still believing it could complete it well below the applicable 2005 prior-notice cost limit of $22 million for blanket certificate projects. However, due to higher hurricane-related costs, the pipeline had to revise its project cost estimate upward to $25.1 million in August and then revise it again to $35.8 million two months later. The project calls for the construction and upgrade of offshore supply lateral facilities to enable Tennessee to connect its system to a deepwater gathering system located offshore Louisiana.

Tennessee told FERC that Hurricanes Katrina and Rita have caused installation costs alone to nearly triple to $18 million from $6.8 million, and the cost of a diver support vessel to rise to $210,000 per day from the $80,000 per day that it had budgeted. The vessel cost for laying, burying and testing pipeline doubled to $225,000-$250,000 per day as well, according to Tennessee.

Although its project was authorized by the Federal Energy Regulatory Commission in May 2005 -- months before the agency temporarily raised the prior-notice cost ceiling in the wake of the hurricanes -- Tennessee argues that it should qualify for the higher ceiling because its project is designed to provide additional supplies of natural gas from the Gulf of Mexico into the interstate pipeline grid.

In November 2005, the Commission raised the cost ceiling for projects that are constructed under blanket certificate prior-notice provisions to $50 million from $22 million. This temporary waiver originally applied only to projects constructed and placed into service by Oct. 31. However, FERC in a later order extended the waiver for facilities that are placed in service by Feb. 28, 2007.

"The Commission finds that the temporary increase in the cost limit for prior-notice projects should apply to Tennessee's project. While authorization of this project took effect several months before the hurricanes, and thus before the Commission adopted the temporary waiver, Tennessee's construction activity was significantly impacted by Hurricanes Katrina and Rita, both in terms of the availability of construction vessels that resulted in our granting an extension of time for completing the project, and in terms of the dramatic increase in the costs of employing those vessels and other equipment once they would become available for Tennessee's project," the FERC order said [CP05-100].

"Tennessee's project exhibits the characteristics of projects the Commission intended to be within the purview of the temporary waiver, and Tennessee's latest cost estimate remains under the Commission's $50 million waiver cap," it noted.

The lateral project was initially required to be in service on May 24 of this year, but Tennessee sought an extension of the deadline until May 2007. FERC gave the pipeline until Nov. 24, 2007 to complete the lateral. The status of the project could not be immediately learned.

On a related issue, FERC said Tennessee's project costs qualify for a presumption of rolled-in rate treatment. "The Commission has applied a presumption in favor of rolled-in rate treatment for the costs of blanket certificate projects because of the de minimis impact on a pipeline system's overall rates," the order said.

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