July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Firm Transportation Contracts: When They Expire - A Five-Step Primer for Pipeline Shippers
An interview with David A. Boger, Stephen D. Moritz and Joseph G. Baran of Strategic Energy Ltd.
The expiration and renegotiation of firm transportation contracts on the pipelines in North America is becoming increasingly complex. For example, TransCanada Pipeline ("TransCanada") in the past consistently renewed its expiring contracts for five- to 10-year periods at maximum rates. It also regularly expanded its capacity, requiring 10-year commitments two years in advance of availability. However, over the last few years rising gas prices in Alberta and the construction of competing projects have squeezed TransCanada. These events have increased the risk of capacity turn-back and created more competitive options for shippers.
We contacted three gas account managers at Strategic Energy Ltd. and asked them to comment on today's market in gas transportation contracts. How do these types of events affect you as a firm shipper? Will you have more or less leverage when your contract expires? How do you even assess your options?
NOTICE OF TERMINATION
How to React, What to Expect?
A shipper that receives a notice of contract termination out of the blue from an interstate natural gas pipeline is already a step behind. Typically, the termination notices must be provided six months to one year in advance of the expiration date. And some contracts have termination provisions that will automatically extend the contract for as much as five years if a termination notice is not given. So planning should have begun a lot earlier - at least six months prior to the notice deadline.
With so many viable options available today, the shipper must do its homework as to the competitive possibilities and have a game plan for negotiating new contract terms before the termination notice is provided. Nevertheless, with the notice in hand, it's time to get to work.
The pipeline will be busy as well. Consider what has to happen to a pipeline from a regulatory perspective when negotiating a new contract. If the new contract is to have a negotiated rate that is below the maximum billable rate, the contract may need to be filed at the U.S. Federal Energy Regulatory Commission, where FERC staffers and other shippers on the pipeline can review and file comments.
These other participants will have the opportunity to comment on the proposed contract rates. Pipelines will also be required to post any negotiated contract rate on their electronic bulletin board, which subjects the discounted rate to bidding. The incumbent shipper generally has the right of first refusal, however, if the contract gets an outside bid.
Think of the termination notice not so much as a burden, but as an opportunity to sever the old relationship with the pipeline and negotiate a new contract under market-indicative terms.
ADDING UP THE RISKS
Am I Set if Demand is Down?
Both the pipeline and the shippers are at risk when firm contracts expire.
Pipelines are looking to sell their firm capacity, preferably at maximum rates and for a long term (10 to 15 years). Shippers contracted for long-term capacity in the past because they had few options