New CNG Facilities to Replace Tennessee Agreement

---------------------- Forwarded by Judy Townsend/HOU/ECT on 02/07/2000 10:37
AM ---------------------------

Enron North America Corp.

From: Rebecca W Cantrell 01/10/2000 03:27 PM

To: John Hodge/Corp/Enron@ENRON, Judy Townsend/HOU/ECT@ECT, Katherine L
Kelly/HOU/ECT@ECT, Scott Neal/HOU/ECT@ECT, Barend VanderHorst/HOU/EES@EES,
Carrie Hollomon/HOU/ECT@ect, Robert Superty/HOU/ECT@ECT, Colleen
Sullivan/HOU/ECT@ECT
cc:
Subject: New CNG Facilities to Replace Tennessee Agreement

CNG TRANSMISSION FILES APPLICATION FOR CERTIFICATE TO BUILD NEW PIPELINE AND
COMPRESSION FACILITIES AS SUBSTITUTE FOR TENNESSEE'S LOOP SERVICE

01/06/2000
Foster Natural Gas Report
7
© Copyright 2000, Foster Associates, Inc.

On December 29 CNG Transmission Corp. (CP00-64) submitted a certificate
application to FERC
requesting authorization to construct facilities in Pennsylvania and New York
in order to substitute its own
transportation capacity for market area service entitlements that CNG
currently holds on Tennessee Gas
Pipeline Co. pursuant to terms of an expiring contract. CNG's contract with
Tennessee has a primary term
until 11/1/2000 with a one-year notification requirement to terminate. Acting
quickly on terms of a
settlement (RP00-15) approved by the Commission on 12/21/99, which capped
CNG's upstream costs
and freed CNG to build its own facilities to replace capacity currently
purchased from Tennessee, CNG
proposes to construct approximately 13 miles of 30-inch pipeline (TL474x2), a
loop of its existing pipeline
in Armstrong County, Pennsylvania; to install approximately 13,250 horsepower
of additional compression
in three Pennsylvania counties and approximately 7,000 hp of compression at
Brookman Corners Station,
in Montgomery County, New York; to construct and operate approximately 800
feet of 30-inch pipeline,
known as the Connector Line (TL-510), between TL-474x2 and lines LN-26 and
LN-380 in Armstrong
County; and to abandon approximately 12.9 miles of a 12-inch diameter
pipeline in Armstrong County
known as LN-9 (CNG's existing parallel pipeline, LN-19, purportedly is
sufficient to maintain existing
services to the markets served by this part of CNG's system). These
facilities are designed to re-create
south-to-north delivery capacity on the CNG system to substitute for looping
service that has been
purchased from Tennessee.

In support, CNG claims, first, its proposal results in near-term and
long-term savings to its existing firm
service customers, without degrading service. Second, by not requiring
assignees to maintain firm
upstream entitlements to service on the Tennessee system, the project will
reduce the fixed cost burden for
consumers downstream of CNG's LDC customers. Third, CNG's proposal eases the
constraint for
deliveries on CNG's system from southern receipt points to northern delivery
points, across the Valley Gate
Junction located in central Pennsylvania. CNG, thus, will be able to
eliminate its "standing must-flow"
operational flow order. After placing the proposed facilities in service, CNG
will modify its tariff to eliminate
the requirement that customers with "North of Valley" receipt points --
primarily CNG's interconnection with
Transcontinental Gas Pipe Line Corp. at Leidy, Pennsylvania -- can be
directed to use their capacity to
tender quantities of gas to CNG throughout the Winter Period. Fourth, the
proposed construction will
enable CNG to meet its existing market commitments. During the first three
years after the projected
in-service date of this project, less than 15% of CNG's firm transportation
capacity will be eligible to expire.
Fifth, to the extent that markets can be served in the future either by CNG's
own facilities or by the
turned-back capacity that Tennessee accrues in its Zones 3 through 5, the CNG
construction presents a
competitive alternative.

Background: CNG's long-haul contract with Tennessee provides for delivery of
natural gas from the Gulf of
Mexico, plus reliance on an operational loop of CNG's system, operated by
Tennessee, that allows CNG to
offer more storage and transportation capacity than CNG could provide on its
own. In the aftermath of
Order No. 636, however, CNG unbundled its storage and transportation services
and exited the merchant
function. CNG, which no longer required a significant portion of the
Tennessee capacity from the Gulf to
Tennessee's interconnections with CNG in Tennessee Zone 3, agreed to assign
its upstream capacity on
Tennessee from the production area to a Zone 3 transfer point (South
Webster), while retaining the
capacity from South Webster to delivery points interconnecting with CNG in
Tennessee Zones 4 and 5 to
facilitate dispatching and no-notice service to CNG's customers.

In conjunction with CNG's restructuring settlement, one transaction on the
Tennessee system thus was
separated into two parts, with CNG and its assignees paying Tennessee
reservation and usage charges
for the capacity as if Tennessee had a single customer from the Gulf to the
market area. Tennessee
charged CNG's converting customers the applicable Zone 3 delivery rate for
transporting gas from Zones 0
and 1 to West Virginia and the South Webster transfer point. CNG, in turn, is
charged an incremental rate
for transporting gas from South Webster to CNG's delivery points in Zone 4
and 5, determined by
subtracting the maximum reservation and usage rates applicable to Tennessee's
Zone 3 (including
applicable surcharges) from the maximum reservation and usage rates
(including surcharges) for the haul
rate from the Gulf to either Zone 4 or 5. The incremental rate is
approximately one-third of Tennessee's
maximum tariff rates for Rate Schedule FT-A service from Zones 3 to 5 or
Zones 4 to 5, respectively.

In negotiations to examine the fate of the expiring contract, Tennessee
conveyed to CNG that, in order to
preserve revenue neutrality, the assigned upstream contract that feeds the
CNG/Tennessee market
contract (No. 3919) must match exactly the maximum daily quantity (MDQ) of
the downstream contract. Any
mismatched quantities will be priced to CNG at Tennessee's maximum tariff
rates for FT-A service. Unless
CNG were to require all assignees to continue to hold upstream capacity on
the Tennessee system,
therefore, CNG would no longer qualify for the incremental rate on Tennessee
on the mismatched capacity
retained by CNG. Meanwhile, as CNG's assignees have elected to turn back
upstream Tennessee
capacity, CNG's costs would go up unless CNG chooses to turn back an equal
quantity of service
downstream of South Webster. The cost increase on CNG to its customers, if
all assignees turned back,
would be approximately $27 million per year.

CNG notified Tennessee on November 1 that it will extend only a portion of
its current contract for a
one-year period in order to accommodate a new CNG construction schedule. The
initial termination dates
for CNG's customers' upstream contracts (all assigned from CNG's original
contract with Tennessee) were
the same. Absent the termination notice, the contract provides for an
automatic extension for a primary
term of five years.

Proposal to Build Facilities: Given the circumstances, CNG proposes to build
the facilities needed to serve
its existing market without having to rely on Tennessee for the traditional
looping service provided under
this contract. Thus, CNG's customers would avoid the anticipated Tennessee
cost increase that would
result if CNG renewed the contract at Tennessee's maximum rates. Instead,
CNG's customers will
experience an annual cost decrease as a result when compared to the
transportation costs approved by
the Commission in CNG's Docket TMOO-1.

CNG proposes to roll the costs of this project into CNG's general system
transportation rates. Such
treatment, the applicant argued, is supported by the projected cost decrease
to existing customers as well
as by the system-wide benefits that will result. The benefits outweigh any
adverse impacts on the affected
interests, as examined pursuant to FERC's policy (PL99-3). No subsidies exist
under the circumstances,
as the facilities actually will prevent a cost increase to existing
customers. The proposed construction "also
makes certain cost reductions possible for all of the CNG customers that took
assignment of upstream firm
services on Tennessee during CNG's restructuring proceeding . . . ."
Accordingly, CNG has met the
Commission's policy threshold requirement to establish that its project
satisfies the public convenience
and necessity standard.

Pursuant to the Transportation Cost Recovery Adjustment (TCRA) terms in the
settlement approved by the
Commission on December 21, CNG will continue to collect its TCRA at agreed
levels, a specified portion
of which will be attributed to the costs of the project. The annual cost of
this project to CNG's firm
transportation customers will be $19.8 million, which corresponds to the
incremental payment that CNG
had been making to Tennessee for Zones 3-4 and 3-5 firm transportation
services through the TCRA.

CNG related that turnbacks are due to state retail unbundling initiatives
that reduce the LDCs' need to
maintain pipeline capacity in support of a merchant role. In addition,
increased liquidity in the commodity
market, largely because of Commission policies supporting market centers, has
increased opportunities
to purchase gas in the market area. These developments, coupled with the
potential for significant
fixed-cost savings, motivated CNG's assignees to want to terminate upstream
capacity contracts.
Therefore, while CNG could have required its assignees to maintain upstream
Tennessee capacity, the
proposed construction offers a more effective long-term mechanism to enable
CNG to manage the risk of
future cost increases for its customers.

The applicant said a recognized potential adverse impact on the captive
customers of Tennessee (who
might face cost shifting) is outweighed by the public benefits of CNG's
proposal. Moreover, Tennessee
need re-market only a portion of the former CNG market-area capacity in order
to recoup CNG's
contribution to Tennessee's revenue requirement. Tennessee also has expressed
confidence in its ability
to secure markets for this newly available capacity.

In order to avoid unnecessary construction, CNG indicated it conducted a
reverse open season for two
weeks during October, 1999, in which CNG solicited customer interest in
turning back firm service
entitlements through an announcement on its electronic bulletin board. No
customer sought to turn back
service entitlements in support of the proposed project. To address potential
landowner concerns, CNG
plans to construct this pipeline adjacent to an existing natural gas pipeline
right-of-way, for which CNG
already holds easement agreements. CNG has also directly contacted each
affected landowner and
secured landowner authorization to conduct both engineering and environmental
studies on 100% of the
proposed right-of-way.

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