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Marketers Blast Gas Sale to Williston Affiliate

Marketers Blast Gas Sale to Williston Affiliate

Unaffiliated gas marketers on Williston Basin Interstate Pipe Line's (WBI) system have accused Frontier Gas Storage, a "paper" company that acts as a "surrogate" for WBI, of committing a large portion of its storage gas with "attractive" pricing and scheduling options to the pipeline's marketing affiliate to give it a competitive edge over them, raising new allegations of affiliate abuse and undue preference.

Rainbow Gas and KN Services contend they were foreclosed from bidding on the Frontier gas even before a contract providing WBI affiliate Prairielands Energy Marketing with up to 5 Bcf of stored gas through May 1999 was executed last month. Bear Paw Energy, a gatherer/processor in Colorado, made similar allegations against Frontier. The three followed up with protests at FERC when Frontier submitted the contract to the Commission for its review [CP85-221-105]. MDU Resources Group, parent of WBI, said it was aware of the protests, but it declined to respond last week.

The shippers have asked the Commission to issue an order to stop the planned sale of Frontier gas to Prairielands. This should be followed by a hearing or a technical conference "to examine the key element of this arrangement, which is whether WBI/Frontier sold the Frontier storage gas...to its marketing affiliate Prairielands under terms and conditions that were unknown to and unavailable to third parties...," said Bear Paw. The three protesters contend the Frontier storage gas gives Prairielands preference in several key areas: scheduling of transportation and storage services, price and supply.

But even more important than affiliate abuse, says a source familiar with the case, is the sales aspect of the transaction. Frontier is selling the gas under a rate schedule that has incorporated WBI's tariff. "In short, a pipeline is selling gas," which has been taboo since the advent of Order 636, he noted. "That's our real concern to be brutally honest - that what's going on here is that WBI, Prairielands [and] Frontier are turning back the hands of time."

The history of WBI and Frontier are key to understanding the shippers' allegations. Frontier was formed in the early 1980s by WBI's predecessor, Montana Dakota Utilities (MDU), to resolve its take-or-pay liabilities. Frontier's purpose was to purchase all of the gas that MDU was obligated to buy from producers, store it in MDU's storage fields, and then sell it all back to MDU. The beauty of the arrangement, the source noted, was that it provided MDU with a certain amount of flexibility with respect to paying for all the gas (up to 59 Bcf).

But MDU's plan ran into a little snag in the 1980s, namely the deliverability surplus. As a result, "they couldn't get anyone to buy their gas," he said. "In order to entice people to buy the Frontier gas, WBI [MDU's predecessor] gave Frontier gas a preference coming out of storage." Later as the market price of gas rose, WBI also lowered the price of Frontier storage gas, giving it a price preference in addition to the scheduling preference, the source noted. "By this time, Frontier gas became a pretty good deal," and remains so today.

During the third quarter of 1996, WBI/Frontier marked down the cost of Frontier gas to $1.35/Dth, which is "well below" the prevailing market price for gas at the two principal destinations of Frontier gas - about 30% less than on Colorado Interstate Gas' North system and 35% less than on Northern Border Pipeline at Ventura, IA. This has given WBI, more specifically Prairielands, the ability to undercut its competitors, which primarily are unaffiliated marketers served by the WBI system, Rainbow Gas contends.

But now with Frontier's mission accomplished - resolution of WBI's take-or-pay problems - shippers are questioning the reason for the company's continued existence. They insist that WBI is using Frontier gas solely to give Prairielands a competitive advantage over non-affiliated marketers, and they want FERC to look into this. The shippers also want the Commission to explore the relationship between the two companies. They argue that WBI and Frontier are one and the same company.

MDU Denies Affiliation

"You can look at it in a number of different ways, and you can cut it a number of different ways, but the bottom line is that WBI controls [Frontier gas] and it's stored in WBI's storage fields," the source noted. But MDU Resources, WBI's parent, said Frontier is a special-purpose corporation that isn't affiliated with WBI. John Brookhart, an MDU spokesman, acknowledged that Frontier has no headquarters, and he's not sure if it has a president. However, he said it has its own storage fields in eastern Montana.

Another issue is the amount of storage gas remaining with Frontier. Frontier "conceivably" has more than the 5 Bcf that it plans to sell to Prairielands left in storage, the source noted, "but it's not selling to anyone else." As of last December, Frontier had 14.9 Bcf in storage, Brookhart said, adding that it plans to liquidate the assets over the next 3-4 years.

Unaffiliated marketers are hot over the planned sale of the Frontier gas to Prairielands mainly because of the alleged preferences associated with the gas. While interruptible storage customers would have to "pre-pay" the associated IT transportation upon injection into storage, Frontier customers wouldn't have to do so since the gas is already in storage. And if on a cold winter day a shipper needed to get gas out of storage and the only way it could do so was on firm transportation, it would be required to pay the firm rate on top of the previously paid IT transportation rate. In short, the shipper would "forfeit" the pre-paid IT rate to WBI, Rainbow Gas told FERC. "Conversely, if you're Prairielands, you don't have to assume that risk," the source noted. As a result, Frontier gas had a 25-44 cents/MMBtu competitive advantage over IT storage shippers last winter, Rainbow estimated.

Furthermore, while competitors must buy their gas in the marketplace - usually at much higher prices - and pay for it then, Frontier customers under its "as-metered" LVS-1 agreement aren't billed for any gas until it's removed from storage, Rainbow Gas said. Such customers are "shielded from market risk that could leave pre-paid previously injected [interruptible and firm storage] gas stranded at above-market prices or to be sold at a loss," it added. Moreover, as-metered customers don't have to pay WBI the costs to transport the gas to storage, inject the gas into a storage field, and store the gas.

"...[T]he "as-metered contract between Frontier and Prairielands provides a great advantage to Prairielands," KN Services agreed. Moreover, the fact that the sale price of the gas to Prairielands has not been made public only adds to the WBI marketing affiliate's competitive edge, it said. Lastly, the Frontier gas would give Prairielands priority over IT storage customers when withdrawing gas. These "advantages were obtained discriminatorily," contends KN Services, which urged FERC to block the Frontier-Prairielands' contract and set the matter for hearing.

Susan Parker

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ISSN © 2577-9877 | ISSN © 1532-1266
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