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Independence Project Raked Over by Potential Rival

January 25, 1999
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Independence Project Raked Over by Potential Rival

CNG Transmission Corp. last week called on FERC to dismiss the pending application of potential competitor Independence Pipeline, claiming that the 400-mile project was based on out-dated and faulty demand projections for the Northeast gas market and lacked binding precedent agreements. In addition, it said Independence has drawn "substantial opposition" from affected landowners and environmental groups.

In a major protest, CNG Transmission, which serves many of the northeastern markets that Independence seeks to enter, said the Commission "[would] set the bar for certification very low" if it approved the proposed Independence line despite the project's "extremely speculative market showing." Approving Independence would hasten the movement at FERC towards a "policy of easy certification," which the Clarksburg, WV-based pipeline thinks will lead to problems with turned-back capacity in the Northeast market - similar to those already facing California and Chicago.

CNG Transmission's protest was in response to a Jan. 7th request by Independence - and the sponsors of the MarketLink and SupplyLink projects - for FERC to promptly issue preliminary determinations (PDs) on the non-environmental aspects of their interrelated projects. Its application has been stalled at the Commission for nearly two years, while competing projects are moving through the certificate process, Independence told regulators. Separately, the sponsors wrote Chairman James Hoecker asking that the PDs be issued at this week's Commission meeting, but the projects were not placed on the agenda.

Independence wants FERC to issue a PD for its project "so that it can use that approval to market its capacity to the disadvantage of other projects," CNG Transmission said. "This approach puts the cart before the horse. Preliminary certification must follow a credible demonstration of market demand; it should not be used to manufacture demand."

The Independence project, if given the go-ahead at the Commission, would extend from Defiance, OH, to the Leidy, PA, hub, where it would intersect with up to six different pipelines capable of delivering gas along the entire Eastern Seaboard. The $678 million pipeline, which would have a winter capacity of about 1 Bcf/d, would provide gas producers in Canada, the Rocky Mountain and Mid-Continent regions with a much-needed link to markets in the East and Mid-Atlantic, according to the pipeline's partners. They include ANR Pipeline, Williams' Transcontinental Pipeline and National Fuel Gas Supply. ANR spokesman Joe Martucci declined Friday to comment on CNG's protest, saying the company hadn't had a chance to review it yet.

CNG Transmission insists the Independence line lacks the market support to justify certification. Presently only two non-affiliated shippers - Statoil Energy Inc. and Enron Capital and Trade Resources - have signed precedent agreements for about a total of 129,000 Dth/d. The agreements, both of which are non-binding, represent about 13-14% of the project's capacity, according to CNG Transmission. Independence initially gave Statoil and Enron until November 1998 and June 1998, respectively, to unilaterally terminate their agreements due to lack of market commitments. The contract "outs" were extended to March of this year. They also have until then to get their boards of directors' approvals for the contracts.

"The implications of this...are unmistakable. The marketers are not prepared to commit to Independence. If they had market commitments (and their board of directors were willing to approve the agreements), the contractual 'outs' could have expired with no need for extensions," CNG Transmission told FERC.

But the sponsors of Independence contend that the fate of the project shouldn't turn on the "termination provisions" in the Statoil and Enron agreements. They noted they also have a binding precedent agreement with affiliate DirectLink Gas Marketing for 500,000 Dth/d, which represents 55% of the proposed pipeline's capacity.

CNG Transmission contends DirectLink, the marketing affiliate of Independence, was formed when FERC staff demanded in September 1997 that the pipeline either show market support for the project in 20 days or face dismissal of its application. The DirectLink contract was signed on the same day Independence had to meet FERC's market-support requirement, it said.

"To the best of CNG's knowledge, DirectLink not only had not conducted any marketing business prior to signing its agreement with Independence, it has not conducted any business in the more than fifteen months since that time," it said. "There is no indication that the marketer has located any customers or determined any specific use to make of its Independence capacity. DirectLink appears to be no more than a temporary placeholder created in an attempt to satisfy the Commission's market demand requirement, while Independence continues to seek a real market. If this sort of affiliated agreement suffices to demonstrate market support, the Commission's market-demand requirement is illusory."

Moreover, CNG Transmission contends that Independence relied on "high, outdated projections of demand growth" for its target market to justify its project at FERC. Independence cited Gas Research Institute's (GRI) projection that the eastern market would grow by 1.4 Tcf by the year 2005, it noted. That figure, however, has since been cut to 0.7 Tcf, according to CNG. Overall, projected gas consumption in the East by 2005 has dropped from 6,664 trillion Btus to about 5,900 trillion Btus. And most of the projected growth for the East Coast, according to GRI, isn't expected to occur until the latter part of the 1997-2005 period.

"...[T]he smaller amount of market growth occurring further in the future...will not require a new pipeline of the magnitude of Independence," CNG Transmission said. "Existing and certificated firm and interruptible pipeline transportation capacity, storage capacity and LNG peaking services should be sufficient to meet the expected growth until several years into the next millennium."

CNG also believes FERC should be concerned about the rates that have been proposed by Independence and related projects, SupplyLink and MarketLink. It estimated that the total transportation cost from Chicago to New York City on the three interrelated projects would be about 86 cents for 10-year contracts. But GRI has estimated that the basis differential between Chicago and New England citygates will be only 45 cents by 2005. "Thus, the rates for Independence and its related projects appear to be substantially more than the market would bear."

Susan Parker

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