A very divided FERC last week dealt a potentially crippling blowto the controversial Independence Pipeline and associatedSupplyLink and MarketLink expansion projects, requiring them toshow documented proof of binding, long-term contracts for more thantwo-thirds of their project’s firm capacity before they can beginconstruction, as well as to satisfy more than 100 environmentalconditions. The Commission dismissed a major affiliate contract,casting doubt on the market support for the eastward-boundIndependence and SupplyLink projects.
Surprisingly, the Commission wasn’t as critical of the hotlycontested MarketLink expansion through Pennsylvania and New Jersey;in fact, Commissioner William Massey had kind words for it. ButFERC said the project couldn’t start digging until Independence andSupplyLink complied with the “threshold” conditions. FERC has takenan all-or-none attitude toward the projects. However, if neitherIndependence nor SupplyLink should meet the terms, Massey said theproposed MarketLink expansion – which “appears to have strongmarket support” – would be given the chance to amend itsapplication “to construct and operate a reduced project, ifnecessary.”
Transcontinental Gas Pipe Line, the sole sponsor of MarketLink,has contended all along that its proposed expansion was notinterdependent on the upstream Independence Pipeline and theSupplyLink parts of the multi-state transportation project. Infact, Cuba Wadlington, executive vice president and COO of WilliamsGas Pipeline, said last week that “MarketLink would be built” evenif 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 gassupplies from pipelines that tie into the Leidy hub inPennsylvania.
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 thepipelines.” He was “quite confident” that all three projects wouldbe able to turn their precedent agreements into binding contracts.ANR Pipeline, sponsor of SupplyLink and a co-sponsor ofIndependence, expressed “cautious optimism” in the wake of the FERCorder, 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 Commissionrequired for the three pipeline projects was unprecedented in thegas industry.
By a vote of 3-2, with Commissioners Vicky Bailey and CurtHebert Jr. dissenting, the Commission majority approved an interimorder that will withhold all certificates until Independence andSupplyLink execute and file long-term contracts with non-affiliatesfor at least 35% of the firm capacity of their respective projects.The affiliates under contract must have been “actively engaged” inbusiness prior to March 31, 1997, the date the Independence andSupplyLink projects were filed at FERC.
But the order further specifies the three-pronged, multi-stateprojects cannot begin actual construction until the sponsors haveexecuted contracts for firm capacity equal to the amountsrepresented in their applications to FERC; for SupplyLink that is71% of firm capacity; 68% for Independence and 100% for MarketLink.The Commission is requiring a “more concrete demonstration” ofmarket support, Massey said.
He believes the show of market support will be less of a strainfor MarketLink, an expansion of Transco’s existing 50-year-oldfacilities in Pennsylvania and New Jersey. “MarketLink has enteredinto eight precedent agreements [with] seven shippers for all ofits firm capacity. While it is true that 60% of this capacity iswith marketing affiliates of one of the applicants, the other 40%are with non-affiliated companies, such as Enron and DynegyMarketing,” Massey said.
The interim order, which a FERC staff member likened to apreliminary determination (PD), also imposes a number of “speciallycrafted” environmental conditions on the projects. For example,some of the conditions require: 1) Transco and Independence todesignate an ombudsmen to address landowner complaints; 2) projectsponsors to fund a $3 million bond to be held in trust untilrestoration of disturbed areas is completed; and 3) sponsors toobtain access to all property not previously surveyed before theycan begin construction.
Commissioner Bailey believes the stiff contractual andenvironmental conditions may delay indefinitely or limit the scopeof the $1.3 billion SupplyLink-Independence-MarketLink project,which was conceived as three links of a 622-mile pipeline chainthat would transport up to 1 Bcf/d of Canadian gas from the Chicagomarket 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 bigwin for affected landowners in Ohio, Pennsylvania and New Jersey -whose protests reached Congress and the White House – and asetback for the projects and their sponsors. How serious a setbackremains to be seen. It especially assuaged the concerns of NewJersey Gov. Christine Todd Whitman, who had threatened to file alawsuit if MarketLink was approved.
Whitman last week applauded the Commission’s decision topostpone certification of the MarketLink expansion, saying it was a”major initial victory for public safety, for the environment andfor all of New Jersey.”
For Hoecker, Massey and Commissioner Linda Breathitt, the caseturned on a single contract -Independence’s contract with affiliateDirectLink Gas Marketing Co. All three indicated they were troubledby the fact that DirectLink was created just when Kevin Madden,director of FERC’s Office of Pipeline Regulation, threatened todismiss the Independence proposal if evidence of market supportwasn’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 essentiallywith oneself is not enough to give this Commission confidence thereis support for such a major undertaking,” Hoecker said. “This isnot an indication that this Commission either dislikes affiliatecontracts generically or will insist on particular kinds ofshippers in the future…..But in this case, the facts say thatthere are troublesome factors that lead us to require non-affiliatecontracts. This case is not, I emphasize, the beginning of aCommission approach to go behind contracts to determine theefficacy of commercial arrangements,” he noted. Nor, he said, doesFERC anticipate making a habit of issuing interim orders prior togranting certificates. “Certificate orders that convey eminentdomain authorization will be the rule in the future…..”
Bailey said she was hard-pressed to understand why theCommission majority ignored the DirectLink contract. “I support allcomponents of this project, and would have voted for an order thatwould have issued appropriate certificate authorization based onthe existing record.” The majority’s interim order “will do nothingbut contribute to delay and possibly result in the project notmoving forward as proposed,” she said.
Breathitt said there wasn’t “enough credible market support forme to hang my hat on in order to certificate a long-line greenfieldpipeline project, such as Independence.” She noted she didn’tgenerally oppose the use of affiliate contracts, but the DirectLinkaffiliate “was created virtually overnight apparently to avoidrejection of the application for lack of market support. DespiteIndependence’s many promises of additional evidence of marketsupport, none has been forthcoming.” She hoped the case signaled a”heightened recognition that individuals who are affected by ouractions are welcomed at the table.” The order “takes extraordinary[steps] to meet many of the serious [landowner] concerns.”
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