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Independence, SupplyLink Clear FERC Obstacle, But More Ahead

Independence, SupplyLink Clear FERC Obstacle, But More Ahead

Sponsors of the proposed Independence Pipeline and SupplyLink expansion probably popped a few champagne corks last Wednesday as FERC finally awarded the Midwest-to-East Coast projects their certificates after being ensnared in heated controversy for more than three years. But no sooner had the inked dried on the final order than rehearing requests started trickling into the Commission, possibly signaling more trouble ahead.

The Commission overwhelmingly gave the two associated pipeline projects the green light despite last-ditch attempts by landowners in Ohio and Pennsylvania to stop them dead in their tracks. Potential competitor Millennium Pipeline said it wasn't opposed to the projects, but it raised concerns about apparent inconsistencies in the way that FERC was deciding which precedent agreements were evidence of market support and which ones were not [CP97-315, CP97-319].

Landowners and lawmakers, who represent the states through which Independence would criss-cross, weren't ready to concede defeat, however. In fact, state Rep. Frank LaGrotta of Pennsylvania wasted no time last week in seeking rehearing at FERC. The lawmaker contends FERC should have denied Independence a certificate because the precedent agreements it filed as a show of market support contained "out clauses" for shippers, which rendered them non-binding.

The landowners and Millennium posed similar arguments in their eleventh-hour protests. The Commission responded that it would permit "out clauses" in the precedent agreements filed as evidence of market support, but not in the executed firm contracts that the sponsors must acquire before they can start actual construction.

Before any dirt can be turned, both Independence and SupplyLink must file with FERC binding executed contracts (with no out clauses) that equal the firm capacity commitments reflected in their initial project applications (68.2% for Independence and 71.7% for ANR), the FERC order said. In his rehearing bid, Rep. LaGrotta argued that FERC's decision to impose this condition "sounds like unequivocal evidence to me that they [the precedent agreements] were not binding contracts as submitted on June 26." The projects also must comply with the stringent environmental conditions that FERC imposed in earlier orders.

If the critics of Independence and SupplyLink are unsuccessful on rehearing at FERC, they then could turn to the courts for relief and possibly tie up the projects there. The sponsors declined to comment on this prospect. "We can't speculate on what other parties are going to do," said Joe Martucci, a spokesman for ANR Pipeline, one of three partners in Independence and sole sponsor of the SupplyLink expansion. The other investors in Independence are Transcontinental Gas Pipe Line and National Fuel Gas Co.

The Commission gave sponsors three years to build Independence and place it in service, and two years for SupplyLink. When completed SupplyLink, a 73-mile looping of ANR's existing system, and the 400-mile, 36-inch Independence line will be able to ship to East Coast and Northeast markets about 1 Bcf/d of natural gas that will flow into the Midwest over Alliance Pipeline and Northern Border Pipeline's already-completed extension/expansion. Martucci said construction on both projects is expected to begin in spring 2002 and be finished in November 2002.

The projects have been entangled in a regulatory maze since they were first filed in March 1997, with landowners, state officials, congressional lawmakers and FERC questioning whether there was enough market support to justify them. Independence and SupplyLink finally satisfied the Commission last month when they submitted 10-year precedent agreements for 38% and 78% of their project's total firm capacity, respectively. Much of the capacity was subscribed to by gas marketers --- Dynegy Marketing and Trade and Enron. Duke Energy Trading and Marketing LLC also had signed up for capacity on both projects but backed out soon afterwards, with Dynegy stepping in and picking it up (see NGI, July 3).

Two landowner groups --- the Ohio-Pennsylvania Landowners Association and the Wayne Country (OH) Landowners Association --- claimed the precedent agreements still failed to justify market support for the projects because they didn't disclose any information on the negotiated rates offered to shippers or about the markets to be served by the marketers-shippers, as well as included contract-out clauses. Specifically, they argued that if the Independence project's "marginal demonstration of market need" (38%) was based on rates that were "significantly discounted," then there was no "real evidence" of project need.

But FERC disagreed. "Generally, the contracted rate has no bearing on the issue of the market-need requirement," the order said. Nevertheless, it directed the projects to file at FERC their negotiated-rate contracts or tariff sheets reflecting the "essential elements" of those contracts prior to going into service.

The order also rejected the landowners' request for the Commission to "look behind" the Independence precedent agreements to determine whether enough market support existed. Moreover, it said Independence wasn't required to provide evidence about the end-use markets to be served by the gas marketers that signed up for capacity on its system, or about the availability of gas supply for its system.

"There is no requirement under the Commission's current policy that [pipeline] shippers must be end-use consumers of natural gas. Shippers may be marketers, local distribution customers, producers or end-users. The fact that the majority or even all of the capacity of a proposed pipeline is subscribed by marketers does not render a project speculative," the order noted. "Nor is the up-front designation of a predetermined gas supply necessarily desirable in today's competitive environment."

The landowners and Millennium argued the "out" clauses in the precedent agreements undermined a clear showing of need for Independence and SupplyLink. But FERC noted it had approved pipelines in the past whose precedent agreements included such clauses, and proceeded to do the same for the two projects.

The "out" clauses cited by landowners would have given Independence the right to terminate agreements if it had failed to obtain a final certificate by June 1, 2000, according to FERC. Millennium, on the other hand, took issue with "out" clauses that would give a shipper the right to terminate an agreement at any time during the next year if its board of directors fails to approve it.

Although the Commission's policy on what constitutes a "binding commitment" has not been "clearly articulated" with respect to "board-of-directors out" clauses, FERC said "in our judgment, these precedent agreements.....support a finding that there is a market for this project."

This ruling is contrary to a FERC staff decision in December 1998 that held that Millennium's contracts with "board-of-directors out" provisions were not evidence of market need because the status of the agreements would "remain uncertain until each shipper has notified Millennium that it has received the requisite approval for its agreement or that the out provisions have been waived or modified," Millennium Chairman David C. Pentzien said in a recent letter to FERC.

Also, he pointed out that Millennium was directed to publicly disclose "the complete terms" of its precedent agreements with all shippers. The Independence and SupplyLink sponsors should have been required to supply this "missing information that is needed to determine whether their proposals are in the public interest." Pentzien said he was concerned the Commission wasn't applying standards for projects in a "consistent, uniform manner."

Susan Parker

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