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Commission Watch

Alaskan Gas Development
Fortnightly Magazine - February 2005

the Alaska project, most state interests oppose the anchor/presubscription idea unless the anchor shippers are required eventually to conform to the open-season rules when the final binding round capacity bidding is conducted. On the other hand, the Big 3 counter that as long as any potential shipper is given the chance to participate at the start as an anchor, the process will be fair enough. (See Comments of BP Exploration Alaska Inc., ConnocoPhillips Co., and Exxon Mobil Corp., )

Once the bids are in, the FERC regs as proposed contemplate that the project sponsor(s) will evaluate the capacity purchase bids (presumably, in terms of net present value [NPV]) and select the winners. But some worry that the sponsors might twist the evaluation of bids to favor certain shippers.

The state of Alaska notes that developers in other, as-yet-unproven in-state gas fields will not need transport service for a decade or more. The state alleges that the Big 3 majors, as shippers bidding on their own project, might offer capacity purchase bids over 20- or 30-year terms, locking up capacity and shutting others out down the road. They urge FERC to mandate a bid evaluation method that grants no "extra credit" in the NPV determination for contract terms that exceed 20 years. Shell USA, an oil major not part of the Big 3, notes that in prior projects, FERC has held that shippers are not "similarly situated" to each other if their bids differ on account of volume, contract term, receipt points or start dates. Thus, says Shell, FERC has permitted project sponsors to use such difference in the bid evaluation process to justify a contract award.

"It will not be difficult," Shell adds, for the pipeline "to structure the bidding and capacity award process of the open season to prefer the current producers in the area."

Calpine, which claims to represent 3 percent the total U.S. gas buying market, and says it will be buying up to 3.5 Bcf per day by 2010, argues that bidders can artificially inflate the duration terms of their capacity bids, and says it has happened before in the Pacific Northwest (with terms bid as long as 50 years).

On the other hand, the Big 3 reply that bid terms should be given full NPV credit at terms at least as long as 30 years-the nominal useful life of the pipeline.

Pricing and Expansions

The question of how the initial pipeline would expand to accommodate future increases in Alaskan gas production, and how the pipeline would set prices to be paid by shippers for access to that new capacity, marks the most contentious issue surrounding the development of an Alaskan gas pipeline.

As a general rule, until the 1980s, FERC had tended to require gas pipeline sponsors to take expansion costs and roll them into the existing rate base, boosting rates for all shippers, old and new, if the pipeline operated as an integrated system. But that rule applied during the days when pipelines were gas suppliers and provided bundled transportation and sales service.

Starting a decade