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Firm Transportation Contracts: When They Expire - A Five-Step Primer for Pipeline Shippers

Fortnightly Magazine - March 1 2000

such by the pipeline until it is built. The bottom line is to know clearly the risks of each option and then develop viable alternatives.

EXPLORING COMBINATIONS

Aggregating Contracts, Services, Locations?

At Strategic Energy Ltd., we have often advocated aggregation of capacity under a single transportation contract for clients that have multiple facilities served either directly or indirectly by a common pipeline. The key for this strategy to work is for the pipeline to grant multiple primary delivery points, which can be negotiated if the shipper provides assurances that the alternative delivery points will be used only for deliveries to other company facilities. Pipelines typically will not provide multiple primary delivery points if it involves other points where the shipper can sell gas. Pipelines view such sales as competition for its own firm services.

The ability to aggregate is dependent upon the status of primary capacity to the target delivery points and the pipeline's ability to sell capacity at each point. Multiple delivery points can help the shipper optimize contract load factor and potentially enable the shipper to sell off excess supplies.

ICING THE DEAL

Operational Details?

The most important thing is to do your homework early and identify all options that can be used for leverage.

First, identify all competing pipelines to the same citygate market. There are many U.S. regions that have multiple interstate pipelines that provide alternative sources of transportation and supply. However, in Canada, TransCanada is the only major pipeline that carries supply from the major supply area to the major market areas. Therefore, this option may not be viable for some Canadian markets.

Evaluate the availability of released capacity or citygate sales options to the desired delivery point. The issue to consider is whether such options can replace the term capacity without compromising reliability and flexibility. Another issue is the ability to subscribe to storage fields downstream of your facilities and backhauling the gas to your facility. By developing backhaul opportunities, a shipper may be able to reduce the amount of forward-haul capacity reserved, thus reducing fixed costs.

Operational issues also bear consideration. Are you willing to install and use an alternative fuel to escape a primary firm transportation agreement? The shipper needs to analyze the cost of installing the alternate fuel equipment compared to the costs of firm capacity.

A willingness to alter production schedules or shut down a facility if certain cost parameters are not met also should be considered.

Once viable alternatives are established, know what you want out of the next contract for negotiating purposes. Some final points to consider:

* Multiple delivery points to accommodate load aggregation and capacity optimization,

* Primary receipt points that access competitive production,

* Flexible contract MDQ that reflects load profile,

* Discounted rates that are market-competitive and reflect the capacity release market, and

* Contract term that reflects corporate goals and provides opportunity to take advantage of future developments.

Strategic Energy Ltd. ("SEL") is an energy consulting and management company based in Pittsburgh. As a supply-side energy manager, SEL advises and represents customers in cost-effective energy