Despite the objections of potential competitor SouthernCalifornia Gas (SoCal), FERC has awarded Questar Southern TrailsPipeline Co. a certificate to build a new 693-mile pipeline thatwould directly serve customers in southern California — aterritory that has long been dominated by SoCal.

The certificate gives Southern Trails, a subsidiary of QuestarPipeline, two years to build and place into service the $155million line, which would provide 207,500 Dth/d of firmtransportation from the Four Corners area (near the borders of NewMexico, Arizona, Utah and Colorado) to the southern California gasmarket.

The pipeline will be made up mostly of a crude oil pipeline thatSouthern Trails has acquired from another Questar company and isconverting for its project, as well as new construction of pipereplacement and realignment facilities. It will be divided into twozones — the East Zone and the West Zone. The East Zone willoriginate in the San Juan Basin in New Mexico and end at theCalifornia border, and will have 87,500 Dth/d of availablecapacity. The West Zone will be wholly within California and willhave 120,000 Dth/d of available capacity.

Questar has envisioned Southern Trails as the last leg of athree-part chain (TransColorado Gas Transmission-Questar-SouthernTrails) that would ship cheaper gas supplies to customers in thesouthern California market in competition with LDC SoCal. Questarowns a 50% interest in TransColorado.

Both SoCal and the California Public Utilities Commission haveopposed the Southern Trails project, saying it would create excesspipeline capacity in the state and could result in a bypass ofSoCal and other LDCs serving the area, creating stranded costs.

But FERC wasn’t convinced, and rejected SoCal’s request forrehearing of the preliminary determination granted to SouthernTrails last October. “SoCal continues to express concerns ofexcessive capacity and resultant financial detriment of aspeculative nature without presenting any objective evidence tosubstantiate that the proposed expansion would result in unfaircompetition or other material harm,” the order said [CP99-163-001].

Furthermore, FERC noted the pipeline received an automaticpresumption of public need in light of the fact that SouthernTrails sought approval for its project under the Commission’soptional-certificate regulations. This presumption will continueuntil or unless a third-party can successfully rebut it, the ordersaid, adding that “SoCal has presented no new arguments to rebutit.”

SoCal also argued that Southern Trails, as anoptional-certificate project, should be subject to the same reviewrequirements as Section 7(c) pipeline projects under FERC’s policystatement for certificating new construction. The policy statementcalls for the Commission to weigh a project’s benefits against itsadverse effects on existing shippers, pipeline competitors andlandowners during the certificate process.

But FERC rejected SoCal’s argument, pointing out that a recentorder clarifying its policy statement stated that the benefits’test didn’t apply to optional-certificate projects that werealready pending at the Commission. Southern Trails filed itsproject application in January 1999.

Southern Trails urged the Commission to reconsider its decisionrequiring the pipeline to include in its levelized initial rateproposal a revenue-crediting mechanism for 90% of all interruptibleand overrun revenues received from shippers (other thanaffiliates). Requiring Southern Trails to credit nearly all of itsIT revenues to firm shippers could prevent it from recovering itscosts, the pipeline argued.

FERC relented somewhat. “…..[W]e will allow Southern Trails,based on the special circumstances of this case, to make asupplemental filing allocating a portion of its costs to IT andrequire it to file a rate case in three years to ensure that it canrecover its estimated cost-of-service,” the order said. As anoptional-certificate pipeline, Southern Trails is at risk for allof the project’s costs.

The Commission believes the pipeline’s rate levelizationproposal, combined with the fact that the project is only”partially subscribed,” creates “significant doubt” as to whetherSouthern Trails will be able to recover all of its costs. So far,Southern Trails has contracted with only one shipper – itsaffiliate Questar Energy Trading Co. for 30,000 Dth/d of firmcapacity in the East Zone for a term of five years and one month.The pipeline told FERC it was in the process of negotiating otherfirm agreements with prospective shippers, which, if executed,would put the balance of capacity in both zones under subscription.

The Commission also frowned on Southern Trails’ proposal to makethe recourse rate unavailable to shippers that have subscribed toservice under a negotiated-rate agreement. The pipeline said itsproposal was intended to prevent negotiated-rate shippers fromswitching over to recourse rates when they become more favorable.

FERC said it recognized that Southern Trails wasn’t trying topreclude negotiated-rate shippers from resorting to resource ratesto obtain additional quantities not covered under theirnegotiated-rate agreement, but it noted the “proposed language canbe interpreted” as doing just that. “Accordingly, we will denyrehearing on this issue.”

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