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Vector Gets Preliminary Nod from FERC, Takes Lead in Midwest Race

Vector Gets Preliminary Nod from FERC, Takes Lead in Midwest Race

The 1 Bcf/d Vector Pipeline project has taken the lead among major pipelines designed to move gas east from Chicago. Vector won preliminary approval on non-environmental grounds from FERC last week, which puts it ahead of the TriState Pipeline, Independence Pipeline and the Tennessee Eastern Express projects in the struggle through the regulatory process.

In a draft order, the Commission said no evidence was produced to demonstrate the Midwest project, which would link the Chicago, IL, and Dawn, ON, gas transportation hubs, was not required by the public convenience and necessity. Vector, however, will bear the full risk of building the $447 million pipeline because it filed for an optional certificate (OC), which allows an applicant to gain Commission authorization for a project without demonstrating market demand for services.

"The [draft order] together with our draft environmental impact statement, which we got at the beginning of last month and which was also very positive, clearly makes us the most mature project moving gas east out of Chicago," said Juri Otsason, vice president of Vector.

The project is so mature, in fact, that if constructed on schedule it will be a year ahead of the major new upstream supply pipeline, Alliance, which is scheduled for service in November 2000. Northern Border's 700 MMcf/d expansion/extension project from western Canada to Chicago is scheduled for service this December, however. And Vector sponsors said they are not concerned about the timing of the project. Otsason said he expects plenty of supply to be available in Chicago for transportation to higher-priced eastern markets.

"If you look at the supply picture into the Chicago or Joliet area, there's lots of excess capacity already over and above what that market requires," he said. "If there is demand at the downstream end of our pipe, we believe the full 1 Bcf/d can be acquired in the Chicago market even without Alliance."

George C. Hass, executive director of business development for CMS Enterprises, which is partnering with Westcoast Energy to build the competing TriState Pipeline, said he believes there won't be enough gas leaving Chicago to fill Vector and TriState. "Both could be approved but only one will be built," said Hass. "We believe it's ours because we can scale up or down in size and still keep our economics. We can match whatever the initial market is in growth and meet future growth by expanding."

Hass wouldn't say how much of TriState's capacity is under contract with shippers. He said the pipeline company intends to include its market subscriptions in its FERC filing later this month. "The project design has been finalized. We're designing to pick up 650 MMcf/d at Joliet and deliver that to White Pigeon, MI, [at a Consumers Gas interconnect] where 450 MMcf/d will go on to Dawn."

Randy Riha, director of project development at Texas Eastern, which has a Midwest pipeline project of its own called Spectrum, said he doesn't see any market support for Chicago-to-Northeast pipelines until Alliance is placed in service and a large amount of new gas-fired power generation is added to the Northeast market.

"On an annual basis, the forward [1999 average] on Chicago-to-New York is 32 cents. We have the cheapest project to move gas from Chicago to New York and that's 70 cents so you can see it's going to take a bit before that basis is going to support a new pipeline." Spectrum would use existing or turned back capacity on several Duke Energy pipelines to provide a Chicago-to-New York route. "We're indifferent. If the differential supports it and the market wants it, we'll do it. If it doesn't, then we'll just continue to fill our pipe in the traditional fashion and move the gas up from the Gulf Coast." Riha said Tetco and affiliate Panhandle Eastern offered the market Spectrum 1998 this year, but the market didn't bite. The company got enough market support earlier this year to receive FERC approval for a 300 MMcf/d expansion of its Lebanon Lateral from Gas City, IN, to Lebanon, OH, but not all of the capacity will be utilized and the supply to be transported may or may not be coming from Chicago.

Riha doesn't paint a pretty picture for Vector. With a recourse rate of 27 cents/Dth, transportation on Vector would cost at least 15 cents more than the recent Chicago-Dawn basis average, he said. "Even if they have their certificate, will they actually go ahead and build it if the differential doesn't support their rates? It seems to me that's a lot of capital to go at risk. Right now, from what I've seen, the market just doesn't support that kind of construction. Any time you have a project that only is supported by marketing affiliates you have to question how viable that is."

Despite filing for an OC, Vector included in its application precedent agreements with four shippers, two of which are affiliated marketers, for 828,300 Dth/d of firm transportation capacity, or 82% of the total capacity of the project. The affiliated marketers signed up for the majority (700,000 Dth/d) of the proposed space. Vector's sponsors include Alliance Pipeline partner IPL Energy and MCN Energy.

MichCon Pipe Lease a Plus

Vector passed its preliminary environmental review at FERC in early September. Otsason said the project is way out ahead of its competitors on the environmental front because more than 95% of its route uses existing right of way. He also noted some of the other projects, particularly Independence, have faced regulatory delays because of tough environmental and landowner opposition.

"I think the whole issue of landowner and environmental concerns is very high on FERC's agenda, but from Vector's perspective that's one of our strengths in the sense that we are primarily following existing rights of way, and we also are leasing 59 miles of existing pipeline so we avoid building through areas just north of Detroit, which is a very densely populated area and would be a difficult area from a right-of-way stand point to build new pipe."

The U.S. portion of the Vector project is designed to be the major component of a hub-to-hub gas transportation system, extending from Joliet, IL, near Chicago to the Dawn Hub in Dawn, ON. The project would involve construction of 270 miles of 42-inch diameter pipeline through Indiana and Michigan to the U.S. Canadian border at the St. Clair river and two 30,000 hp compressor stations. In addition, Vector proposes to lease for 20 years from Michigan Consolidated Gas a 36-inch diameter pipeline that runs between Milford and Bell River Mills, MI. The annual lease payment would be $9 million plus taxes, and the two companies have signed a revenue sharing agreement if service exceeds certificated capacity.

The lease of MichCon's Belle River Loop was one of the main aspects of the Vector project that made it unique and gave it an environmental leg up. Otsason said Vector's sponsors were relieved FERC accepted the lease over the tremendous amount of opposition from competitors. "There don't seem to be any issues around the lease arrangement that they had difficulty with. That was one of the key areas that got their attention at the prefiling meeting," he noted.

The lease came under heavy attack from protesters, particularly competitor ANR Pipeline which was a major part of three potential alternatives to Vector but lost in each case because of poorer economics and greater environmental concerns. ANR argued the lease was not appropriate for an optional certificate because the Belle River line would be used both by MichCon and Vector. FERC said, however, Vector adequately showed the leased line would be operated as part of the Vector system and would be separated from MichCon's facilities.

ANR also took issue with Vector's proposed backhaul service for MichCon using the Bell River loop. The no-fee backhaul service was critical to the lease agreement between Vector and MichCon, but ANR contended it was a violation of FERC's Part 284 service regulations primarily because it would not be offered to any shippers other than MichCon. Vector told FERC MichCon would be the only shipper requesting backhaul service and would do so only in an emergency situation.

"That loop from MichCon's perspective is there as an emergency backstop." MichCon utilizes an existing 36-inch diameter Belle River line for storage access and built the loop as an emergency line. It has never used the line, however, and Otsason said Vector expects to provide few if any backhaul services to MichCon on the line. "It would only be used if there was a problem with the existing line, a break in the line or something. So it obviously would be a rare event." If gas was required, it would be an exchange rather than an actual backhaul, he said.

In response, the Commission said it will require Vector to post monthly on its bulletin board all customers receiving backhaul services and the volumes of gas provided. It also required Vector to make an NGA section 4 filing within the first three years of operation and placed it at risk for the costs of any backhaul service. The Commission also said Vector must credit to its firm shippers any revenues realized from third-party backhaul operations on the Belle River Loop. Otsason said the revenue crediting would not be a problem.

The Commission also took issue with Vector's rate design. Vector filed both a negotiated and a recourse rate. The negotiated rate, which all of Vector's shippers chose, is lower than the recourse rate in the first 10 years but shifts to the positive side thereafter. Vector proposed a 50/50 debt/equity capital structure and a 14.5% return on equity for the recourse rates and a 55/45 debt/equity structure and an 11.5% rate of return for the negotiated rates. During the first year of service, Vector's proposed negotiated rate of $0.221/Dth is $0.092/Dth lower than the recourse rate of $0.313. However, by the 10th year the recourse rate drops to less than the negotiated rate and by the 20th year is $0.064/Dht (32%) lower.

FERC, however, concluded that Vector's proposed rate of return and equity cost ratio results in an "unjustifiably higher recourse rate." The Commission said Vector did not show why its project is more risky than other recently approved pipeline projects so that it would warrant a greater equity return. It also did not prove its equity ratio reflected its actual capital structure. As a result, FERC changed its recourse rate design to reflect a lower equity return of 14% and a capital structure of 70% debt and 30% equity consistent with rulings on Alliance, Maritimes and Northeast and Portland Natural Gas Transmission. Vector's revised recourse rate is $0.267/Dth, $0.046/Dth lower than what it filed. The Commission also required Vector to file either its negotiated rates tariff or its negotiated rate contracts.

To Market, To Market

While Vector has taken the lead in the regulatory process, it is still unclear which Midwest pipeline project is gaining ground finding eastern markets. Vector's partners told Canada's National Energy Board this summer there will be ample markets for all the gas in both Canada and south of the border, provided the right transportation services are available.

After rising by an exceptionally strong rate that averaged 3.5% or 107.5 MMcf/d each year during 1995-96, the growth rate among current sources of central Canadian demand is expected to taper off. The pace is forecast to stay at a healthy 2.1% until 2005 and 1.6% in 2005-10. But pleasant surprises are rated as likely in Ontario, according to Vector. Current gas demand forecasts do not count the "wild card" in Canadian gas demand, the forthcoming overhaul of electricity markets. Sharp increases in demand for gas as power-generation fuel could occur - and sooner, rather than later, as a result of open markets for electricity combined with closure of nuclear plants, Vector told the NEB. Although Ontario could replace some of its atomic power with imports from other provinces and the U.S., "there is a very real prospect that gas-fired generation will be required to replace a portion of the 4,560 MW of shut-down capacity. For example, if gas-fired generation were to replace one-quarter of the shut-down capacity (1,100 MW), this would result in an additional 240 MMcf/d of gas baseload requirements," Vector said.

Otsason said Vector expects to be serving demand in Michigan, Ontario and in the U.S. Northeast through underutilized off-peak capacity on the Union Gas and TransCanada systems.

Gas from Vector will make its way to the U.S. Northeast though Iroquois, Empire, Tennessee, Portland Natural Gas Transmission when it goes into service and potentially through Millennium if it's approved. Exactly when that will be, however, is currently being reviewed.

"I think the timeline for construction is obviously getting tight because the PD came out a little bit later than we had originally targeted and we started out with a pretty tight or ambitious timeline. But right now we believe November 1999 is still achievable although it is tight, and that may change as we look at things in more detail. We're clearly well ahead of our competitors in our timeline."

Rocco Canonica

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