The 1 Bcf/d Vector Pipeline project has taken the lead amongmajor pipelines designed to move gas east from Chicago. Vector wonpreliminary approval on non-environmental grounds from FERC lastweek, which puts it ahead of the TriState Pipeline, IndependencePipeline and the Tennessee Eastern Express projects in the strugglethrough the regulatory process.
In a draft order, the Commission said no evidence was producedto demonstrate the Midwest project, which would link the Chicago,IL, and Dawn, ON, gas transportation hubs, was not required by thepublic convenience and necessity. Vector, however, will bear thefull risk of building the $447 million pipeline because it filedfor an optional certificate (OC), which allows an applicant to gainCommission authorization for a project without demonstrating marketdemand for services.
“The [draft order] together with our draft environmental impactstatement, which we got at the beginning of last month and whichwas also very positive, clearly makes us the most mature projectmoving gas east out of Chicago,” said Juri Otsason, vice presidentof Vector.
The project is so mature, in fact, that if constructed onschedule it will be a year ahead of the major new upstream supplypipeline, Alliance, which is scheduled for service in November2000. Northern Border’s 700 MMcf/d expansion/extension project fromwestern Canada to Chicago is scheduled for service this December,however. And Vector sponsors said they are not concerned about thetiming of the project. Otsason said he expects plenty of supply tobe available in Chicago for transportation to higher-priced easternmarkets.
“If you look at the supply picture into the Chicago or Jolietarea, there’s lots of excess capacity already over and above whatthat market requires,” he said. “If there is demand at thedownstream end of our pipe, we believe the full 1 Bcf/d can beacquired in the Chicago market even without Alliance.”
George C. Hass, executive director of business development forCMS Enterprises, which is partnering with Westcoast Energy to buildthe competing TriState Pipeline, said he believes there won’t beenough gas leaving Chicago to fill Vector and TriState. “Both couldbe approved but only one will be built,” said Hass. “We believeit’s ours because we can scale up or down in size and still keepour economics. We can match whatever the initial market is ingrowth and meet future growth by expanding.”
Hass wouldn’t say how much of TriState’s capacity is undercontract with shippers. He said the pipeline company intends toinclude its market subscriptions in its FERC filing later thismonth. “The project design has been finalized. We’re designing topick up 650 MMcf/d at Joliet and deliver that to White Pigeon, MI,[at a Consumers Gas interconnect] where 450 MMcf/d will go on toDawn.”
Randy Riha, director of project development at Texas Eastern,which has a Midwest pipeline project of its own called Spectrum,said he doesn’t see any market support for Chicago-to-Northeastpipelines until Alliance is placed in service and a large amount ofnew gas-fired power generation is added to the Northeast market.
“On an annual basis, the forward [1999 average] onChicago-to-New York is 32 cents. We have the cheapest project tomove gas from Chicago to New York and that’s 70 cents so you cansee it’s going to take a bit before that basis is going to supporta new pipeline.” Spectrum would use existing or turned backcapacity on several Duke Energy pipelines to provide aChicago-to-New York route. “We’re indifferent. If the differentialsupports it and the market wants it, we’ll do it. If it doesn’t,then we’ll just continue to fill our pipe in the traditionalfashion and move the gas up from the Gulf Coast.” Riha said Tetcoand affiliate Panhandle Eastern offered the market Spectrum 1998this year, but the market didn’t bite. The company got enoughmarket support earlier this year to receive FERC approval for a 300MMcf/d expansion of its Lebanon Lateral from Gas City, IN, toLebanon, OH, but not all of the capacity will be utilized and thesupply to be transported may or may not be coming from Chicago.
Riha doesn’t paint a pretty picture for Vector. With a recourserate of 27 cents/Dth, transportation on Vector would cost at least15 cents more than the recent Chicago-Dawn basis average, he said.”Even if they have their certificate, will they actually go aheadand build it if the differential doesn’t support their rates? Itseems to me that’s a lot of capital to go at risk. Right now, fromwhat I’ve seen, the market just doesn’t support that kind ofconstruction. Any time you have a project that only is supported bymarketing affiliates you have to question how viable that is.”
Despite filing for an OC, Vector included in its applicationprecedent agreements with four shippers, two of which areaffiliated marketers, for 828,300 Dth/d of firm transportationcapacity, or 82% of the total capacity of the project. Theaffiliated marketers signed up for the majority (700,000 Dth/d) ofthe proposed space. Vector’s sponsors include Alliance Pipelinepartner IPL Energy and MCN Energy.
MichCon Pipe Lease a Plus
Vector passed its preliminary environmental review at FERC inearly September. Otsason said the project is way out ahead of itscompetitors on the environmental front because more than 95% of itsroute uses existing right of way. He also noted some of the otherprojects, particularly Independence, have faced regulatory delaysbecause of tough environmental and landowner opposition.
“I think the whole issue of landowner and environmental concernsis very high on FERC’s agenda, but from Vector’s perspective that’sone of our strengths in the sense that we are primarily followingexisting rights of way, and we also are leasing 59 miles ofexisting pipeline so we avoid building through areas just north ofDetroit, which is a very densely populated area and would be adifficult area from a right-of-way stand point to build new pipe.”
The U.S. portion of the Vector project is designed to be themajor component of a hub-to-hub gas transportation system,extending from Joliet, IL, near Chicago to the Dawn Hub in Dawn,ON. The project would involve construction of 270 miles of 42-inchdiameter pipeline through Indiana and Michigan to the U.S. Canadianborder at the St. Clair river and two 30,000 hp compressorstations. In addition, Vector proposes to lease for 20 years fromMichigan Consolidated Gas a 36-inch diameter pipeline that runsbetween Milford and Bell River Mills, MI. The annual lease paymentwould be $9 million plus taxes, and the two companies have signed arevenue sharing agreement if service exceeds certificated capacity.
The lease of MichCon’s Belle River Loop was one of the mainaspects of the Vector project that made it unique and gave it anenvironmental leg up. Otsason said Vector’s sponsors were relievedFERC accepted the lease over the tremendous amount of oppositionfrom competitors. “There don’t seem to be any issues around thelease arrangement that they had difficulty with. That was one ofthe key areas that got their attention at the prefiling meeting,”he noted.
The lease came under heavy attack from protesters, particularlycompetitor ANR Pipeline which was a major part of three potentialalternatives to Vector but lost in each case because of poorereconomics and greater environmental concerns. ANR argued the leasewas not appropriate for an optional certificate because the BelleRiver line would be used both by MichCon and Vector. FERC said,however, Vector adequately showed the leased line would be operatedas part of the Vector system and would be separated from MichCon’sfacilities.
ANR also took issue with Vector’s proposed backhaul service forMichCon using the Bell River loop. The no-fee backhaul service wascritical to the lease agreement between Vector and MichCon, but ANRcontended it was a violation of FERC’s Part 284 service regulationsprimarily because it would not be offered to any shippers otherthan MichCon. Vector told FERC MichCon would be the only shipperrequesting backhaul service and would do so only in an emergencysituation.
“That loop from MichCon’s perspective is there as an emergencybackstop.” MichCon utilizes an existing 36-inch diameter BelleRiver line for storage access and built the loop as an emergencyline. It has never used the line, however, and Otsason said Vectorexpects to provide few if any backhaul services to MichCon on theline. “It would only be used if there was a problem with theexisting line, a break in the line or something. So it obviouslywould be a rare event.” If gas was required, it would be anexchange rather than an actual backhaul, he said.
In response, the Commission said it will require Vector to postmonthly on its bulletin board all customers receiving backhaulservices and the volumes of gas provided. It also required Vectorto make an NGA section 4 filing within the first three years ofoperation and placed it at risk for the costs of any backhaulservice. The Commission also said Vector must credit to its firmshippers any revenues realized from third-party backhaul operationson the Belle River Loop. Otsason said the revenue crediting wouldnot be a problem.
The Commission also took issue with Vector’s rate design. Vectorfiled both a negotiated and a recourse rate. The negotiated rate,which all of Vector’s shippers chose, is lower than the recourserate in the first 10 years but shifts to the positive sidethereafter. Vector proposed a 50/50 debt/equity capital structureand a 14.5% return on equity for the recourse rates and a 55/45debt/equity structure and an 11.5% rate of return for thenegotiated rates. During the first year of service, Vector’sproposed negotiated rate of $0.221/Dth is $0.092/Dth lower than therecourse rate of $0.313. However, by the 10th year the recourserate drops to less than the negotiated rate and by the 20th year is$0.064/Dht (32%) lower.
FERC, however, concluded that Vector’s proposed rate of returnand equity cost ratio results in an “unjustifiably higher recourserate.” The Commission said Vector did not show why its project ismore risky than other recently approved pipeline projects so thatit would warrant a greater equity return. It also did not prove itsequity ratio reflected its actual capital structure. As a result,FERC changed its recourse rate design to reflect a lower equityreturn of 14% and a capital structure of 70% debt and 30% equityconsistent with rulings on Alliance, Maritimes and Northeast andPortland Natural Gas Transmission. Vector’s revised recourse rateis $0.267/Dth, $0.046/Dth lower than what it filed. The Commissionalso required Vector to file either its negotiated rates tariff orits negotiated rate contracts.
To Market, To Market
While Vector has taken the lead in the regulatory process, it isstill unclear which Midwest pipeline project is gaining groundfinding eastern markets. Vector’s partners told Canada’s NationalEnergy Board this summer there will be ample markets for all thegas in both Canada and south of the border, provided the righttransportation services are available.
After rising by an exceptionally strong rate that averaged 3.5%or 107.5 MMcf/d each year during 1995-96, the growth rate amongcurrent sources of central Canadian demand is expected to taperoff. The pace is forecast to stay at a healthy 2.1% until 2005 and1.6% in 2005-10. But pleasant surprises are rated as likely inOntario, according to Vector. Current gas demand forecasts do notcount the “wild card” in Canadian gas demand, the forthcomingoverhaul of electricity markets. Sharp increases in demand for gasas power-generation fuel could occur – and sooner, rather thanlater, as a result of open markets for electricity combined withclosure of nuclear plants, Vector told the NEB. Although Ontariocould replace some of its atomic power with imports from otherprovinces and the U.S., “there is a very real prospect thatgas-fired generation will be required to replace a portion of the4,560 MW of shut-down capacity. For example, if gas-firedgeneration were to replace one-quarter of the shut-down capacity(1,100 MW), this would result in an additional 240 MMcf/d of gasbaseload requirements,” Vector said.
Otsason said Vector expects to be serving demand in Michigan,Ontario and in the U.S. Northeast through underutilized off-peakcapacity on the Union Gas and TransCanada systems.
Gas from Vector will make its way to the U.S. Northeast thoughIroquois, Empire, Tennessee, Portland Natural Gas Transmission whenit goes into service and potentially through Millennium if it’sapproved. Exactly when that will be, however, is currently beingreviewed.
“I think the timeline for construction is obviously gettingtight because the PD came out a little bit later than we hadoriginally targeted and we started out with a pretty tight orambitious timeline. But right now we believe November 1999 is stillachievable although it is tight, and that may change as we look atthings in more detail. We’re clearly well ahead of our competitorsin our timeline.”
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