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Complaints, Contract 'Outs' Stall Northeast Pipeline Projects

Complaints, Contract 'Outs' Stall Northeast Pipeline Projects

Having a U.S. congressman line up against a proposed expansion isn't the worst thing that could happen to a natural gas pipeline, but it ranks right up there with the dreaded FERC investigation or the unexpected financial audit. That's the fate that has befallen Transcontinental Gas Pipe Line's MarketLink project.

Rep. J. Pascrell Jr., who represents the 8th District in northern New Jersey through which MarketLink would pass if it's ever approved, has personally intervened in the case, calling on the Commission to reject the project because of Transco's failure to demonstrate sufficient market demand and explore alternative routing. "Even more importantly I guess would be the safety issue particularly in [the town of] Nutley," which would be most affected by the construction, said Joe Waks, a press aide for Pascrell. Residents there still vividly recall the pipeline explosion that rocked Edison, NJ, five years ago. But, he added, "it's not simply a NIMBY (not in my back yard) issue."

The Democrat lawmaker held a town meeting in Nutley last week, which was attended by more than 150 residents of northern New Jersey, FERC staff members and several Transco officials. It was largely in response to Pascrell's concern that his constituents were being "left out of the process" involving MarketLink at the Commission.

Waks believes Pascrell's involvement could seal the fate of MarketLink. "Having the full weight of a member of Congress [opposed to] it I think is pretty significant," he told NGI. But Allison Bridges, Transco's director of business development, said that "while it may be unusual [to] have a congressman participate, I don't really see it changing the process."

MarketLink isn't the only project with problems. Several mostly Northeast-bound pipeline projects through heavily populated areas remain stuck in regulatory limbo at FERC. They are awaiting preliminary determinations (PDs) after two years due to the agency's concern over the rising level of citizen complaints (6,000 against Independence Pipeline), congressional interest and "out" provisions in the precedent agreements for capacity. These provisions give customers permission to bow out of their agreements by a certain date in the event they fail to obtain certain approvals or market support.

Commission staff has pointed to the increasing incidence of contract "out" provisions as a key reason for not yet processing the applications of the MarketLink, Independence, Millennium and SupplyLink projects. It contends such provisions underscore the uncertain nature of the market support for the projects. Protesting landowners and state/federal lawmakers, as seen in New Jersey, also have singled out the non-binding basis of the contracts as proof of lack of market "need" for the pipeline projects. They further have noted that much of the space is contracted by affiliates of the sponsors.

There have been a number of internal meetings at FERC and most of the commissioners are seriously concerned over the issue. It is possible, sources say, there will be no PDs, and a divided Commission will wait until the environmental studies are completed to act on the projects.

Pipelines concede there has been an increase both in the number and type of contract "outs" lately. "But it doesn't mean that they [the precedent agreements] aren't legitimate market support," said one pipe official. They credit the rise in contract "outs" to the change in pipeline customer mix from mostly LDCs, which had a ready-made, captive market, to non-LDC customers, such as marketers, power generators and power producers. Their markets aren't as assured so they are demanding more conditions in their contracts.

Projects such as MarketLink, Independence, Millennium and SupplyLink are part of the first wave of new pipeline projects where this change in customer mix has been evident, possibly accounting for the higher level of contract "out" provisions in their precedent agreements, said Transco's Bridges. Transco is the sole sponsor of MarketLink and co-sponsor of Independence. "We've sort of entered into this time frame where we're in more of the unbundled world," with marketers assuming the capacity roles of LDCs.

Power generators, which also will account for a "significant part" of future pipeline capacity, face uncertainties associated with siting their plants and obtaining permitting approvals, and as a result are conditioning their commitments for pipeline capacity on these factors. "I think what we're seeing is that...some of these shippers need [more lead] time to have all of their arrangements put in place, but they also need that assurance that the pipeline is going forward so that they, in turn, can make those business arrangements," noted Bridges.

The types of "out" clauses run the gamut, but they usually give customers a release from their agreements if they fail to get the approvals of their boards of directors, fail to obtain the market commitments to justify the capacity requested or are unable to agree to a negotiated rate with a pipeline.

In early January, Commission staff notified Transco that the existence of such contract "out" provisions had caused all of its precedent agreements for its MarketLink project to "fall short" of FERC's standard requiring a "substantial" amount of a project's capacity to be subscribed under long-term contracts or binding precedent agreements. It indicated that until the "uncertain status" of the precedent agreements was resolved with potential customers, it would be unable to complete the processing of Transco's MarketLink application.

Transco countered that its precedent agreement with affiliate Williams Energy Services Co. (WESCO) for 210,000 Dth/d, which equaled 30% of MarketLink's proposed firm capacity, was unencumbered by any contract "out" provisions, and alone should be enough to satisfy the Commission's test for market support. This would be "consistent" with a precedent established last year in which FERC approved a Texas Eastern Transmission expansion based on committments for only 28% of the project's proposed capacity.

Affiliate Deals Valid

In light of prior FERC rulings, Transco further said its agreement with Engage Energy Services for 210,000 Dth should be viewed as "valid market support" for the MarketLink project - even though it contains a "board-of-director out" provision. It noted the Commission previously has approved projects for Maritimes &amp Northeast Pipeline L.L.C. and Iroquois Gas Transmission System that were based on agreements with "outs" that were exercisable after certificates were issued.

Transco filed another precedent agreement last week (Sunset Energy, about 95,000 Dth/d), which brings the total number of shippers to 10 and puts the total capacity commitments for MarketLink beyond the 700,000 Dth/d level that originally had been planned, according to the pipeline. The project, which would serve markets in northeast New Jersey, Pennsylvania and New York, has a completion date of November 2000. But without a PD, that could be just a pipe dream. "We have been encouraging [FERC] to go ahead and issue a PD. We're hopeful that it will [do so] shortly," said Bridges.

Columbia Gas Transmission Corp., a partner in Millennium Pipeline, has joined the growing ranks of increasingly frustrated pipeline sponsors asking FERC to issue PDs post haste so that they can finalize shipper commitments and meet their projected in-service dates.

Millennium's application, which has been pending before the Commission for more than a year, "is now complete and ready for a preliminary determination in every respect," said Columbia Gas President and CEO Catherine G. Abbott in a letter last month to FERC. However, Kevin P. Madden, FERC's director of Office of Pipeline Regulation, expressly cited concern over certain contract-out provisions that would permit Millennium shippers to terminate their agreements if they didn't get approval from their boards of directors by a certain date.

Likewise, sponsors ANR Pipeline, Transco and National Fuel Gas Supply contend the proposed Independence Pipeline rightfully deserves a PD on the non-environmental aspects, having filed binding precedent agreements (mostly with affiliates) for about 55% of the proposed firm capacity. And ANR, the sole sponsor of SupplyLink, insists it has submitted binding agreements for up to 70% of the proposed firm capacity of its project.

Most of the sponsors claim the market will suffer if their projects aren't in place by 2000. That point, however, fails to take into account projections that most of the new gas load from power generation won't start showing up until the 2001-2003 time frame.

Susan Parker

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