c.

What are the technical questions raised by the manner in which section 201 is drafted? How would you resolve these questions? Please provide suggested substitute language if to do so would be helpful.

RESPONSE: (a) As I testified at the March 7, 1991 hearing, the right of mandatory interconnection is indispensable to any legislation in both the market area and supply area.

In many cases, an entrepreneur's ability to build an at-risk project will depend on access to the established interstate system. A brief example illustrates this point. Assume that natural gas producers discover new supplies which are not presently connected to any interstate pipeline. There are two ways for pipeline service to reach the discoveries. The producers or a third party entrepreneur could build an at-risk facility, or the incumbent pipeline could add an extension.

construction

Assuming that some interstate transportation is necessary to bring the newly found gas to market, the two alternatives are competitive with each other only if there is some assurance that the at-risk facility will be interconnected with the incumbent pipeline. Otherwise, the incumbent pipeline can refuse to interconnect, effectively denying access to the interstate grid (and the market) and allowing only the pipeline to build the necessary extension. (There are at least two variations on this theme: the incumbent pipeline might allow the at-risk facility to go forward, but then exact a monopoly rent for the interconnection;

or the incumbent pipeline might attempt to exact a monopolistic price for transporting a gas from or to the interconnection). A pipeline might also refuse to interconnect to preserve its hold on markets at other points on its system.

Mandatory interconnection restores the competitive balance. LL&E advocates an amendment to Section 7 of the Natural Gas Act providing that no holder of a Section 7(c) certificate or operator of an at-risk facility shall refuse to interconnect with an atrisk pipeline if the person seeking interconnection is willing to pay the reasonable cost of the interconnection.

The amendment

would further require certificate holders or at-risk facility operators to receive, transport and deliver gas delivered from or to an at-risk pipeline.

A certificate holder or at-risk operator would be entitled to insist that a requested interconnection occur at an alternative site, provided the alternative was physically, operationally and economically feasible for the new at-risk facility. Siting disputes would be resolved by the Commission. In a similar vein, a certificate holder or at-risk operator would not be required to expand its system's physical capacity in order to accommodate transportation to or from the interconnection. In addition, no order directing the receipt, transportation or delivery of interconnection gas should divest any existing shippers' contractual rights as embodied in an authorized service agreement with the incumbent pipeline.

(b) As a strong proponent of mandatory interconnection in both the supply and market areas, it would be inappropriate for LL&E to comment on Section 201's effectiveness at serving the purpose of limiting market area access to local distribution companies.

contrary

(၁)

Section 201 should neither expand nor reduce the rights accorded LDCs under the existing Section 7(a) of the Natural Gas Act. LL&E would therefore simply redesignate existing Section 7(a) as Section 7(a)(1).

LL&E would redraft proposed Section 7(a)(2) by inserting " or deliver" after the word "receive". This would ensure equal mandatory interconnection rights in the market and supply areas.

Proposed Section 7(a) (3) should be eliminated. Instead, Section 7(a)(2) should provide that parties should select mutually agreeable sites where possible, and that interconnecting pipelines should not be required to expand their existing system capacity or divest their existing customers' contract rights.

RESPONSE TO FOLLOW-UP QUESTIONS

SENATOR PETE V. DOMENICI

SENATE ENERGY AND NATURAL RESOURCES COMMITTEE HEARING

MARCH 7, 1991

H. LEIGHTON STEWARD

THE LOUISIANA LAND AND EXPLORATION COMPANY

QUESTION 2:

If sections 204 and 205 of S.570 were adopted what impact would that have on the Commission's open access transportation program?

RESPONSE: LL&E supports measures for allowing entrepreneurs to construct pipeline facilities on an "at-risk" basis in lieu of traditional certification. An at-risk project is defined by the willingness of private parties to respond to market forces and assume market risks. Under the at-risk approach, a pipeline developer and its subscribing customers use arms-length agreements to allocate cost responsibility and share the risks of underutiliziation and cost

underrecovery.

Non-subscribing customers pay nothing toward the project. Subscribing customers pay no more than they contract to pay.

LL&E advocates establishing procedural options for at-risk development. Under the pre-construction certificate option, the developer would obtain authorization to construct and operate the at-risk facility in accordance with specific statutory standards. Under the non-certificate option, the project would receive neither