FERC Approves Denali Open Season Plan
On April 7, 2010 Denali—The Alaska Gas Pipeline, LLC (Denali) filed a request for the Federal Energy Regulatory Commission (Commission) to approve its detailed plan for conducting an open season for the purpose of obtaining binding commitments for the acquisition of initial capacity on Denali’s Alaska Project (Alaska Project).
The Alaska Project is an undertaking advanced on behalf of Denali, a limited liability corporation formed by BP and ConocoPhillips to bring natural gas resources from the Alaska North Slope to North American gas markets. The Alaska Project, to be constructed and operated by Denali, would interconnect at the Alaska – Canadian border with a pipeline (Canada Project) to be constructed and operated by an affiliate, Denali Canada – The Alaska Pipeline (West), Inc. (Denali Canada), transporting gas from the interconnect with the Alaska Project approximately 1,020 miles to its terminus at the Alberta, Canada hub.
Below is a summary of the June 7, 2010 Commissioners order (Order) approving the plan for conducting an open season with modifications for Denali. More information on the Alaska Project or other Denali filings can be found on the Commission’s e-library system at http://elibrary.FERC.gov in the Denali docket PF08-26.
In the Order, the Commission addressed the following concerns raised by various parties commenting on Denali’s plan for open season:
** The Commission disagreed with BP Exploration’s contention that Denali’s creditworthiness requirements are discriminatory. The Commission found that Denali requires all bidders who are subsidiaries of larger companies maintain a credit rating at least at a level of its ultimate parent company or provide a source of collateral to guarantee its obligations to Denali. Denali states this obligation applies to all similarly-situated shippers. Therefore, the requirements are not discriminatory.
** BP Exploration argued that a provision in Denali’s proposed precedent agreement discriminates against recourse rate shippers as well as negotiated rate shippers in terms of being able to challenge rates, tariff terms and conditions. The Commission accepted Denali’s clarification to its proposed precedent agreement. Therefore, finding no discrimination. Denali’s precedent agreement allows a shipper to submit multiple bids, some at recourse rates and others at negotiated rates, though for each bid the shipper must elect either negotiated rates or recourse rates. For those bids where negotiated rates are elected, the shipper must agree to not challenge before the Commission the commercial deal struck between it and Denali. Further, the same shipper, if acting as a recourse rate shipper, is not precluded from challenging the recourse rate-related provisions of Denali’s tariff. Denali claims it is not restricting a negotiated rate shipper’s right to challenge the general terms and conditions of Denali’s tariff to the extent those terms are not addressed in the shipper’s negotiated rate agreement.
** The Commission ordered Denali to more clearly delineate in its open season notice the procedures it will follow for notifying bidders of any reduction in their maximum daily quantity allotment and also to explicitly provide bidders the opportunity to decline any reduced award of capacity.
** ConocoPhillips asked the Commission for clarification on how Denali would notify shippers of any design reconfiguration, or whether shippers would have the right to withdraw their bids as a result of such reconfiguration or the revised rate estimates. The Commission ordered Denali to modify its open season procedures to include a process for notifying bidders of any design reconfiguration that results in a material change in transportation rates or capacity allotment as a result of the precedent agreement and to provide bidders an opportunity to modify or withdraw their bids if there are changes to their capacity allotment or if rates are revised due to a reconfiguration of the system.
** The Commission ordered Denali to revise its proposed precedent agreement to remove a provision that would require a bidder to commit in advance to resubmitting a bid in the event the Commission requires Denali to hold a revised open season. The Commissions states that such a provision could require a prospective shipper to bid on capacity at a rate or under terms it no longer considers sufficient to its interests or acceptable.
** ExxonMobil requested that Denali explain how its proposed non-conforming bid and over-subscribed capacity processes would operate and how the proposal would ensure against undue discrimination or preference. The Commission accepted Denali’s reply comments regarding allocation of capacity in the case of over-subscription. Denali states that in order to qualify as a conforming bid, a prospective shipper’s bid must include a signed precedent agreement containing the appropriate information and must be received by Denali by the close of the open season. Any bid not meeting these requirements or containing conditions that materially change the terms of the precedent agreement will be considered a non-conforming bid. Denali states that it will provide an explanation to any prospective shipper who submits a non-conforming bid that is rejected by Denali. In the case of an over-subscription Denali will allocate capacity first to conforming bids submitted before the end of the open season, then to non-conforming bids submitted before the close of the open season which it ultimately accepts on a non-discriminatory basis. Denali’s use of pro rata allocation insures that shippers within the same category are not discriminated against.
** The State of Alaska raised objections to Denali’s confidentiality requirements with respect to access to materials the reading rooms. The Commission agreed with Denali that under the open season regulations, the only entities entitled to access Denali’s shipper reading room are potential shippers. Based on the competitive nature of the two competing Alaska gasline projects and the State of Alaska’s relationship to The Alaska Pipeline Project (being advanced by TransCanada and ExxonMobil), the Commission found Denali’s concerns reasonable. The Commission agreed that the confidential, proprietary, and competitively sensitive reading room information not be shared with State of Alaska representatives involved in the management oversight of the state’s interests in a competing pipeline project or for purposes other than acquiring capacity in Denali’s open season.
** The Commission is mindful of the State of Alaska’s concern that Alaska’s Constitution prohibits its representatives from agreeing to provisions concerning indemnification and injunctive relief. In handling this concern, the Commission borrowed from previous Trans Alaska Pipeline System (TAPS) proceedings where representatives of Alaska were not required to sign a non-disclosure certificate. However, Alaska was required to provide a list of employees to be granted access to protected materials and those employees were required to treat protected information as confidential pursuant to Alaska’s Executive Branch Ethics Act. The Commission directs that this TAPS model be utilized for the Alaska Project.
** The Commission found that the implementation procedures for standards of conduct designed by Denali adequately protect against a discriminatory open season. The Commission requires Denali to fully comply with the applicable standards of conduct imposed under all FERC Orders that have been issued since Denali filed its plan for open season.
Denali’s proposed Alaska Project will consist of:
** the Alaska Mainline (a 730 mile-long, 48-inch diameter, high pressure pipeline) which is designed to transport up to 4.5 Bcf/d of pipeline quality gas from the outlet of the gas treatment plant to six in-state delivery points and the Alaska–Canada border where the pipeline would connect with the Canada Mainline;
** two transmission lines: a 36-inch diameter pipeline approximately 62 miles in length and designed to deliver 1.1 billion cubic feet per day (Bcf/d) from the Point Thomson Unit to a proposed gas treatment plant; and a 60-inch diameter pipeline approximately 1.2 miles in length and designed to deliver 4.6 Bcf/d from the Prudhoe Bay Unit Central Gas Facility to the gas treatment plant; and
** the gas treatment plant capable of treating and conditioning approximately 5.8 Bcf/d of Alaska North Slope gas and delivering 4.5 Bcf/d of pipeline quality gas on an annual average basis to the Alaska Mainline.
Denali has designed its project to include six delivery points within the State of Alaska. The first delivery point will be at the outlet of the gas treatment plant prior to final compression to provide treated, low-carbon dioxide gas for Alaska North Slope users. The other five in-state delivery points were identified in the In-State Gas Demand Study. Denali states that during the open season process, shippers may express interest in other receipt or delivery points and Denali will consider including such requests in its plan.
Denali proposes a 14 percent return on equity for its recourse rates and a 12 percent return on equity for its negotiated rates. Denali estimates a weighted average cost of debt of 5.1 percent for both recourse rates and negotiated rates. Denali states that it will finance its construction activities with a target of 70 percent debt and 30 percent equity, while it estimates that long term financing for operations will equal 75 percent debt and 25 percent equity. Denali states that rates will be designed using a straight fixed-variable cost classification. Denali further states that negotiated rates will be recalculated annually in order to assure that its rates recover all costs of providing firm service.
Denali proposes to establish three reading room locations where interested entities can review information related to the proposed project. The reading rooms will be located in Houston, Texas; Anchorage, Alaska; and Calgary, Alberta, Canada.