Unaffiliated gas marketers on Williston Basin Interstate PipeLine’s (WBI) system have accused Frontier Gas Storage, a “paper”company that acts as a “surrogate” for WBI, of committing a largeportion of its storage gas with “attractive” pricing and schedulingoptions to the pipeline’s marketing affiliate to give it acompetitive edge over them, raising new allegations of affiliateabuse and undue preference.

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

The shippers have asked the Commission to issue an order to stopthe planned sale of Frontier gas to Prairielands. This should befollowed by a hearing or a technical conference “to examine the keyelement of this arrangement, which is whether WBI/Frontier sold theFrontier storage gas…to its marketing affiliate Prairielandsunder terms and conditions that were unknown to and unavailable tothird parties…,” said Bear Paw. The three protesters contend theFrontier storage gas gives Prairielands preference in several keyareas: scheduling of transportation and storage services, price andsupply.

But even more important than affiliate abuse, says a sourcefamiliar with the case, is the sales aspect of the transaction.Frontier is selling the gas under a rate schedule that hasincorporated 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 goingon here is that WBI, Prairielands [and] Frontier are turning backthe hands of time.”

The history of WBI and Frontier are key to understanding theshippers’ allegations. Frontier was formed in the early 1980s byWBI’s predecessor, Montana Dakota Utilities (MDU), to resolve itstake-or-pay liabilities. Frontier’s purpose was to purchase all ofthe gas that MDU was obligated to buy from producers, store it inMDU’s storage fields, and then sell it all back to MDU. The beautyof the arrangement, the source noted, was that it provided MDU witha certain amount of flexibility with respect to paying for all thegas (up to 59 Bcf).

But MDU’s plan ran into a little snag in the 1980s, namely thedeliverability surplus. As a result, “they couldn’t get anyone tobuy their gas,” he said. “In order to entice people to buy theFrontier gas, WBI [MDU’s predecessor] gave Frontier gas apreference coming out of storage.” Later as the market price of gasrose, WBI also lowered the price of Frontier storage gas, giving ita price preference in addition to the scheduling preference, thesource noted. “By this time, Frontier gas became a pretty gooddeal,” and remains so today.

During the third quarter of 1996, WBI/Frontier marked down thecost of Frontier gas to $1.35/Dth, which is “well below” theprevailing market price for gas at the two principal destinationsof Frontier gas – about 30% less than on Colorado Interstate Gas’North system and 35% less than on Northern Border Pipeline atVentura, IA. This has given WBI, more specifically Prairielands,the ability to undercut its competitors, which primarily areunaffiliated marketers served by the WBI system, Rainbow Gascontends.

But now with Frontier’s mission accomplished – resolution ofWBI’s take-or-pay problems – shippers are questioning the reasonfor the company’s continued existence. They insist that WBI isusing Frontier gas solely to give Prairielands a competitiveadvantage over non-affiliated marketers, and they want FERC to lookinto this. The shippers also want the Commission to explore therelationship between the two companies. They argue that WBI andFrontier are one and the same company.

MDU Denies Affiliation

“You can look at it in a number of different ways, and you cancut it a number of different ways, but the bottom line is that WBIcontrols [Frontier gas] and it’s stored in WBI’s storage fields,”the source noted. But MDU Resources, WBI’s parent, said Frontier isa special-purpose corporation that isn’t affiliated with WBI. JohnBrookhart, an MDU spokesman, acknowledged that Frontier has noheadquarters, and he’s not sure if it has a president. However, hesaid it has its own storage fields in eastern Montana.

Another issue is the amount of storage gas remaining withFrontier. Frontier “conceivably” has more than the 5 Bcf that itplans 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 itplans to liquidate the assets over the next 3-4 years.

Unaffiliated marketers are hot over the planned sale of theFrontier gas to Prairielands mainly because of the allegedpreferences associated with the gas. While interruptible storagecustomers would have to “pre-pay” the associated IT transportationupon injection into storage, Frontier customers wouldn’t have to doso since the gas is already in storage. And if on a cold winter daya shipper needed to get gas out of storage and the only way itcould do so was on firm transportation, it would be required to paythe 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, youdon’t have to assume that risk,” the source noted. As a result,Frontier gas had a 25-44 cents/MMBtu competitive advantage over ITstorage shippers last winter, Rainbow estimated.

Furthermore, while competitors must buy their gas in themarketplace – usually at much higher prices – and pay for it then,Frontier customers under its “as-metered” LVS-1 agreement aren’tbilled for any gas until it’s removed from storage, Rainbow Gassaid. Such customers are “shielded from market risk that couldleave pre-paid previously injected [interruptible and firm storage]gas stranded at above-market prices or to be sold at a loss,” itadded. Moreover, as-metered customers don’t have to pay WBI thecosts to transport the gas to storage, inject the gas into astorage field, and store the gas.

“…[T]he “as-metered contract between Frontier and Prairielandsprovides a great advantage to Prairielands,” KN Services agreed.Moreover, the fact that the sale price of the gas to Prairielandshas not been made public only adds to the WBI marketing affiliate’scompetitive edge, it said. Lastly, the Frontier gas would givePrairielands priority over IT storage customers when withdrawinggas. These “advantages were obtained discriminatorily,” contends KNServices, which urged FERC to block the Frontier-Prairielands’contract and set the matter for hearing.

Susan Parker

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