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FERC Knocks Northeast Projects for A Loop

FERC Knocks Northeast Projects for A Loop

A very divided FERC last week dealt a potentially crippling blow to the controversial Independence Pipeline and associated SupplyLink and MarketLink expansion projects, requiring them to show documented proof of binding, long-term contracts for more than two-thirds of their project's firm capacity before they can begin construction, as well as to satisfy more than 100 environmental conditions. The Commission dismissed a major affiliate contract, casting doubt on the market support for the eastward-bound Independence and SupplyLink projects.

Surprisingly, the Commission wasn't as critical of the hotly contested MarketLink expansion through Pennsylvania and New Jersey; in fact, Commissioner William Massey had kind words for it. But FERC said the project couldn't start digging until Independence and SupplyLink complied with the "threshold" conditions. FERC has taken an all-or-none attitude toward the projects. However, if neither Independence nor SupplyLink should meet the terms, Massey said the proposed MarketLink expansion - which "appears to have strong market support" - would be given the chance to amend its application "to construct and operate a reduced project, if necessary."

Transcontinental Gas Pipe Line, the sole sponsor of MarketLink, has contended all along that its proposed expansion was not interdependent on the upstream Independence Pipeline and the SupplyLink parts of the multi-state transportation project. In fact, Cuba Wadlington, executive vice president and COO of Williams Gas Pipeline, said last week that "MarketLink would be built" even if greenfield Independence line and SupplyLink project are blocked. Instead of the Independence line, of which it's a co-sponsor, Transco's MarketLink could receive Canadian and Gulf Coast gas supplies from pipelines that tie into the Leidy hub in Pennsylvania.

Although Transco would have hoped for a "clean order," Wadlington said he wasn't disappointed with the decision because it "has defined the requirements for moving forward to construct the pipelines." He was "quite confident" that all three projects would be able to turn their precedent agreements into binding contracts. ANR Pipeline, sponsor of SupplyLink and a co-sponsor of Independence, expressed "cautious optimism" in the wake of the FERC order, saying it remained "firmly committed" to the projects.

Wadlington didn't think FERC's action was out of the ordinary, but others believe the level of market support that the Commission required for the three pipeline projects was unprecedented in the gas industry.

By a vote of 3-2, with Commissioners Vicky Bailey and Curt Hebert Jr. dissenting, the Commission majority approved an interim order that will withhold all certificates until Independence and SupplyLink execute and file long-term contracts with non-affiliates for at least 35% of the firm capacity of their respective projects. The affiliates under contract must have been "actively engaged" in business prior to March 31, 1997, the date the Independence and SupplyLink projects were filed at FERC.

But the order further specifies the three-pronged, multi-state projects cannot begin actual construction until the sponsors have executed contracts for firm capacity equal to the amounts represented in their applications to FERC; for SupplyLink that is 71% of firm capacity; 68% for Independence and 100% for MarketLink. The Commission is requiring a "more concrete demonstration" of market support, Massey said.

He believes the show of market support will be less of a strain for MarketLink, an expansion of Transco's existing 50-year-old facilities in Pennsylvania and New Jersey. "MarketLink has entered into eight precedent agreements [with] seven shippers for all of its firm capacity. While it is true that 60% of this capacity is with marketing affiliates of one of the applicants, the other 40% are with non-affiliated companies, such as Enron and Dynegy Marketing," Massey said.

The interim order, which a FERC staff member likened to a preliminary determination (PD), also imposes a number of "specially crafted" environmental conditions on the projects. For example, some of the conditions require: 1) Transco and Independence to designate an ombudsmen to address landowner complaints; 2) project sponsors to fund a $3 million bond to be held in trust until restoration of disturbed areas is completed; and 3) sponsors to obtain access to all property not previously surveyed before they can begin construction.

Commissioner Bailey believes the stiff contractual and environmental conditions may delay indefinitely or limit the scope of the $1.3 billion SupplyLink-Independence-MarketLink project, which was conceived as three links of a 622-mile pipeline chain that would transport up to 1 Bcf/d of Canadian gas from the Chicago market to New York. Partners for the largest segment, Independence, are ANR, Transco and National Fuel Gas Supply.

Last week's decision "[was] not a caving into people who say 'Not in my backyard," stressed Chairman James Hoecker. But to many, even to Bailey, that's exactly how it seemed. The order was a big win for affected landowners in Ohio, Pennsylvania and New Jersey - whose protests reached Congress and the White House - and a setback for the projects and their sponsors. How serious a setback remains to be seen. It especially assuaged the concerns of New Jersey Gov. Christine Todd Whitman, who had threatened to file a lawsuit if MarketLink was approved.

Whitman last week applauded the Commission's decision to postpone certification of the MarketLink expansion, saying it was a "major initial victory for public safety, for the environment and for all of New Jersey."

For Hoecker, Massey and Commissioner Linda Breathitt, the case turned on a single contract -Independence's contract with affiliate DirectLink Gas Marketing Co. All three indicated they were troubled by the fact that DirectLink was created just when Kevin Madden, director of FERC's Office of Pipeline Regulation, threatened to dismiss the Independence proposal if evidence of market support wasn't provided. FERC last week rejected the DirectLink contract, which was for 55% of the capacity of Independence.

"It is our judgment that a quickly executed contract essentially with oneself is not enough to give this Commission confidence there is support for such a major undertaking," Hoecker said. "This is not an indication that this Commission either dislikes affiliate contracts generically or will insist on particular kinds of shippers in the future.....But in this case, the facts say that there are troublesome factors that lead us to require non-affiliate contracts. This case is not, I emphasize, the beginning of a Commission approach to go behind contracts to determine the efficacy of commercial arrangements," he noted. Nor, he said, does FERC anticipate making a habit of issuing interim orders prior to granting certificates. "Certificate orders that convey eminent domain authorization will be the rule in the future....."

Bailey said she was hard-pressed to understand why the Commission majority ignored the DirectLink contract. "I support all components of this project, and would have voted for an order that would have issued appropriate certificate authorization based on the existing record." The majority's interim order "will do nothing but contribute to delay and possibly result in the project not moving forward as proposed," she said.

Breathitt said there wasn't "enough credible market support for me to hang my hat on in order to certificate a long-line greenfield pipeline project, such as Independence." She noted she didn't generally oppose the use of affiliate contracts, but the DirectLink affiliate "was created virtually overnight apparently to avoid rejection of the application for lack of market support. Despite Independence's many promises of additional evidence of market support, none has been forthcoming." She hoped the case signaled a "heightened recognition that individuals who are affected by our actions are welcomed at the table." The order "takes extraordinary [steps] to meet many of the serious [landowner] concerns."

Susan Parker

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