---------------------- 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 
(c) 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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