NGI The Weekly Gas Market Report
Having a U.S. congressman line up against a proposed expansionisn’t the worst thing that could happen to a natural gas pipeline,but it ranks right up there with the dreaded FERC investigation orthe unexpected financial audit. That’s the fate that has befallenTranscontinental Gas Pipe Line’s MarketLink project.
Rep. J. Pascrell Jr., who represents the 8th District innorthern New Jersey through which MarketLink would pass if it’sever approved, has personally intervened in the case, calling onthe Commission to reject the project because of Transco’s failureto demonstrate sufficient market demand and explore alternativerouting. “Even more importantly I guess would be the safety issueparticularly in [the town of] Nutley,” which would be most affectedby the construction, said Joe Waks, a press aide for Pascrell.Residents there still vividly recall the pipeline explosion thatrocked Edison, NJ, five years ago. But, he added, “it’s not simplya 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 NewJersey, FERC staff members and several Transco officials. It waslargely in response to Pascrell’s concern that his constituentswere being “left out of the process” involving MarketLink at theCommission.
Waks believes Pascrell’s involvement could seal the fate ofMarketLink. “Having the full weight of a member of Congress[opposed to] it I think is pretty significant,” he told NGI. ButAllison Bridges, Transco’s director of business development, saidthat “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 mostlyNortheast-bound pipeline projects through heavily populated areasremain stuck in regulatory limbo at FERC. They are awaitingpreliminary determinations (PDs) after two years due to theagency’s concern over the rising level of citizen complaints (6,000against Independence Pipeline), congressional interest and “out”provisions in the precedent agreements for capacity. Theseprovisions give customers permission to bow out of their agreementsby a certain date in the event they fail to obtain certainapprovals or market support.
Commission staff has pointed to the increasing incidence ofcontract “out” provisions as a key reason for not yet processingthe applications of the MarketLink, Independence, Millennium andSupplyLink projects. It contends such provisions underscore theuncertain nature of the market support for the projects. Protestinglandowners and state/federal lawmakers, as seen in New Jersey, alsohave singled out the non-binding basis of the contracts as proof oflack of market “need” for the pipeline projects. They further havenoted that much of the space is contracted by affiliates of thesponsors.
There have been a number of internal meetings at FERC and mostof the commissioners are seriously concerned over the issue. It ispossible, sources say, there will be no PDs, and a dividedCommission will wait until the environmental studies are completedto act on the projects.
Pipelines concede there has been an increase both in the numberand type of contract “outs” lately. “But it doesn’t mean that they[the precedent agreements] aren’t legitimate market support,” saidone pipe official. They credit the rise in contract “outs” to thechange in pipeline customer mix from mostly LDCs, which had aready-made, captive market, to non-LDC customers, such asmarketers, power generators and power producers. Their marketsaren’t as assured so they are demanding more conditions in theircontracts.
Projects such as MarketLink, Independence, Millennium andSupplyLink are part of the first wave of new pipeline projectswhere this change in customer mix has been evident, possiblyaccounting for the higher level of contract “out” provisions intheir precedent agreements, said Transco’s Bridges. Transco is thesole sponsor of MarketLink and co-sponsor of Independence. “We’vesort of entered into this time frame where we’re in more of theunbundled world,” with marketers assuming the capacity roles ofLDCs.
Power generators, which also will account for a “significantpart” of future pipeline capacity, face uncertainties associatedwith siting their plants and obtaining permitting approvals, and asa result are conditioning their commitments for pipeline capacityon these factors. “I think what we’re seeing is that…some ofthese shippers need [more lead] time to have all of theirarrangements put in place, but they also need that assurance thatthe pipeline is going forward so that they, in turn, can make thosebusiness arrangements,” noted Bridges.
The types of “out” clauses run the gamut, but they usually givecustomers a release from their agreements if they fail to get theapprovals of their boards of directors, fail to obtain the marketcommitments to justify the capacity requested or are unable toagree to a negotiated rate with a pipeline.
In early January, Commission staff notified Transco that theexistence of such contract “out” provisions had caused all of itsprecedent agreements for its MarketLink project to “fall short” ofFERC’s standard requiring a “substantial” amount of a project’scapacity to be subscribed under long-term contracts or bindingprecedent agreements. It indicated that until the “uncertainstatus” of the precedent agreements was resolved with potentialcustomers, it would be unable to complete the processing ofTransco’s MarketLink application.
Transco countered that its precedent agreement with affiliateWilliams Energy Services Co. (WESCO) for 210,000 Dth/d, whichequaled 30% of MarketLink’s proposed firm capacity, wasunencumbered by any contract “out” provisions, and alone should beenough to satisfy the Commission’s test for market support. Thiswould be “consistent” with a precedent established last year inwhich FERC approved a Texas Eastern Transmission expansion based oncommittments for only 28% of the project’s proposed capacity.
Affiliate Deals Valid
In light of prior FERC rulings, Transco further said itsagreement with Engage Energy Services for 210,000 Dth should beviewed as “valid market support” for the MarketLink project – eventhough it contains a “board-of-director out” provision. It notedthe Commission previously has approved projects for Maritimes &Northeast Pipeline L.L.C. and Iroquois Gas Transmission System thatwere based on agreements with “outs” that were exercisable aftercertificates were issued.
Transco filed another precedent agreement last week (SunsetEnergy, about 95,000 Dth/d), which brings the total number ofshippers to 10 and puts the total capacity commitments forMarketLink beyond the 700,000 Dth/d level that originally had beenplanned, according to the pipeline. The project, which would servemarkets in northeast New Jersey, Pennsylvania and New York, has acompletion date of November 2000. But without a PD, that could bejust a pipe dream. “We have been encouraging [FERC] to go ahead andissue a PD. We’re hopeful that it will [do so] shortly,” saidBridges.
Columbia Gas Transmission Corp., a partner in MillenniumPipeline, has joined the growing ranks of increasingly frustratedpipeline sponsors asking FERC to issue PDs post haste so that theycan finalize shipper commitments and meet their projectedin-service dates.
Millennium’s application, which has been pending before theCommission for more than a year, “is now complete and ready for apreliminary determination in every respect,” said Columbia GasPresident and CEO Catherine G. Abbott in a letter last month toFERC. However, Kevin P. Madden, FERC’s director of Office ofPipeline Regulation, expressly cited concern over certaincontract-out provisions that would permit Millennium shippers toterminate their agreements if they didn’t get approval from theirboards of directors by a certain date.
Likewise, sponsors ANR Pipeline, Transco and National Fuel GasSupply contend the proposed Independence Pipeline rightfullydeserves a PD on the non-environmental aspects, having filedbinding precedent agreements (mostly with affiliates) for about 55%of the proposed firm capacity. And ANR, the sole sponsor ofSupplyLink, insists it has submitted binding agreements for up to70% of the proposed firm capacity of its project.
Most of the sponsors claim the market will suffer if theirprojects aren’t in place by 2000. That point, however, fails totake into account projections that most of the new gas load frompower generation won’t start showing up until the 2001-2003 timeframe.
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