The dire predictions that natural gas pipelines will be burdenedwith monstrous amounts of unsubscribed capacity as they enter thenew millennium don’t appear to be coming true. First Natural GasPipeline Co. of America reported it had sold out 99% of itstransportation capacity, and Tennessee Gas Pipeline announced lastweek it has sold out 80% of its 5.9 Bcf/d capacity for servicebeginning Nov. 1 of next year.

Tennessee credited the favorable results to a two-year campaignduring which it renegotiated contracts for 80% of the LDC-held firmtransportation capacity that are due to expire on its system onOct. 31 of next year. At the same time, the El Paso Energy pipelinesaid it fully recontracted storage capacity on its system. Itestimated only 15% of its transportation capacity wasn’t renewed byLDCs whose markets are undergoing restructuring.

All told, Tennessee renewed long-term transportation contractsfor about 2.86 Bcf/d of the expiring 3.58 Bcf/d of firm capacity,according Steve Beasley, Tennessee’s vice president of marketingand business development. The contracts were “at or near” thepipeline’s maximum rates and for terms of nearly three years.Surprisingly, most of the renewals were with the pipeline’s largehistorical LDC customers, such as Boston Gas, Atlanta Gas Light,Nicor and National Fuel Gas Distribution.

The renewed transportation contracts, combined with continuinglong-term contracts and short-term contracts, put Tennessee at 80%full for November 2000, Beasley estimated. About 800,000 MMcf/d ofthe expiring firm capacity still remains unsubscribed, but thepipeline doesn’t think it will have any problem re-marketing it.

During phase one of Tennessee’s campaign, “we’ve been kind offocusing our efforts on that…..piece of the pie” that will expirenext year, namely Tennessee’s contracts with its traditional LDCshippers, Beasley said. “In essence, we’ve been spending half ofthe time developing contingency plans not knowing what was going tohappen in [LDC] restructuring. A big part of that was focused onattaching new supplies. And we’ve added a substantial amount of newburnertips” with power plants and industrial customers, he toldNGI.

With phase one completed, Tennessee’s “now in a position” tobegin negotiations with future shippers (phase two). “In thefuture, we’re going to have a changed portfolio, with strongrelationships with a new set of shippers,” such as marketers,producers and power generators, Beasley said. He believes thedemand for Tennessee’s capacity will be particularly strong withthe latter group. “We have on the Tennessee system either filed orunder construction new attachments which represent about 1 MMcf/dof capacity, virtually all [with] power plants.”

Tennessee doesn’t foresee any obstacles to meeting the newdemand. In the Gulf of Mexico, the pipeline has added close to 1MMcf/d of capacity in order to supply customers with deep-watergas, Beasley said. Also, it has access to the increased amounts ofCanadian gas supplies coming into Chicago via backhaul service onits affiliate Midwestern Gas Transmission.

Of the remaining 800 MMcf/d of expiring capacity, Beasley saidabout 110 MMcf/d is in the southern market (Tennessee, Mississippiand Louisiana); 275 MMcf/d is on the Broad Run Spur lateral in WestVirginia that connects Tennessee to the Columbia and CNGTransmission systems; 200 MMcf/d is available at the Ellisburg Hubin Pennsylvania; and about 57 MMcf/d is available to serve the NewYork City market.

The success of Tennessee’s contracting effort is owed to thefact that it “had been as flexible as possible in trying to findinnovative solutions to [customers’] service needs,” Beasley said.But was the pipeline possibly too flexible?

Apparently, FERC’s approval of three service agreements underwhich Berkshire Gas Co. renewed service on Tennessee has created apolicy controversy at the Commission. Amoco Production andIndicated Shippers separately contend the agreements containnegotiated terms and conditions not included in Tennessee’s tariff,a practice that is barred by existing Commission policy[RP96-312-025].

Specifically, the agreements give Berkshire the right toterminate its contracts with Tennessee under specific circumstancesprior to their expiration and the right to turn back capacity incertain instances. Amoco conceded that “neither of these rights isnecessarily harmful to other customers or to competition onTennessee’s system.” Nevertheless, it faulted the Commission forallowing “the negotiation of such provisions 1) prior to changingits policies and rules which prohibit negotiation of such terms; 2)without making the pipeline offer the same negotiated terms to allon a non-discriminatory basis; and 3) without placing the pipelineat risk for the transaction.”

Indicated Shippers, which includes eight major producers, weremore to the point. They argued the October order approving theletter agreements constituted a major rulemaking reversing theCommission’s regulatory prohibition against individually negotiatedterms and conditions of service.

In approving the agreements, FERC reasoned that the”non-conforming term [was] not a condition of service, but rather arate,” according to Amoco. But the fact that Commissioners WilliamMassey and Linda Breathitt dissented underscores the shakiness ofthe majority’s decision, Amoco and Indicated Shippers believe.

“Commissioners Breathitt and Massey have appropriately refusedto accept this reasoning. They have recognized that the Commissionhas [endeavored] to ‘fit a square peg into a round hole.’ TheCommission has attempted to define the problem away by pulling arational out of a hat, defining what is a negotiated term to bewhat it is not — a negotiated rate,” Amoco said.

FERC should reconsider its decision, Indicated Shippers said,and require Tennessee to either change the agreements withBerkshire to eliminate the buyout provisions, or change its tariffto make the option available to other similarly situated shippers.

Susan Parker

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