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Alliance Gas Pipeline: Early, Late, or Just in Time?

A story of big gambles, big assumptions, and spark spreads now turned upside down.
Fortnightly Magazine - November 15 2000

its firm transportation rates if it does not replace lost shippers.

If supplies remain tight and prices remain high, investments in gas-fueled generation will be less attractive. The benefits these power generation projects would bring in terms of year-round levelized load and resulting lower gas prices for all consumers also will disappear. Not only will developers slow their plans to bring new gas-fueled generation investments online, but they may back out of some investments until the gain from power produced from natural gas improves relative to the cost of power generated from coal and nuclear. They'll work harder to use coal, nuclear, and other types of generation, or refurbish retired or partially retired plants until the price of gas declines relative to the cost of using these other types of generation.

Of course, the cost of coal and nuclear units will rise from refurbishment and operating them at a higher level. The end result is that the future cost of power will increase by more than previously expected. The upper limit on this increased cost of power will be determined ultimately by the price of commodity natural gas, which has more than doubled in just this year.

In any case, natural gas-fueled generation plants still will be sited where obvious shortages of generation exist, because they can be installed more quickly and with less harm to the environment than these other types of generation. Nonetheless, the deceleration of the rate at which this generation is installed will tend to sustain high price volatility.

The success of the Millennium and Millennium West projects, which are connected to each other and to Vector, is particularly dependent on the building of new gas-fueled generation markets in the New York City metropolitan area and nearby markets. As the demand for natural gas for power generation declines because the price of the fuel remains high, the value of Millennium also declines.

Winners and Losers: Takeover Candidates?

Alliance brings clear evidence that competition is alive in the pipes part of gas industry. As evidence, TransCanada already has retired assets in an attempt to lower costs and shore up business with lower fees for service. It also has become increasingly involved in power generation markets, including the acquisition of generation assets.

As of now, Alliance is the winner and TransCanada is the loser in the battle for shipments. Westcoast continues to run through its business playbook, hoping that investors will believe that all of its pipe pieces will fit together to form a competitive advantage.

Its attempt to serve shippers through a rational treatment of available space could make Alliance a model for other pipes. On the other hand, the chemical industry is too risky to expect that many future pipe builds will be engineered to also transport wet gas. Alliance is a special case in this regard. But this capability most probably will enable Alliance to steal some customers from NOVA Chemicals.

The involvement of Williams and El Paso in Alliance supports their continued dominance of pipe markets in the United States. Each is involved in major (greater