Anchorage Daily News

JUNEAU -- A critical element of Gov. Sarah Palin's plan for a natural gas pipeline is requiring the state's preferred builder to seek permission for the project from federal energy regulators.

But the agency that grants such permission -- it's called a certificate of public convenience and necessity -- might not play along, a recent report suggests. Lawyers advising the state are divided.

The Federal Energy Regulatory Commission report to Congress said any applicant proposing to build a multibillion-dollar pipeline to carry North Slope gas to market ideally should have firm commitments from producers to ship the gas on the new pipeline.

Applying for a certificate without those commitments "would be a less than desirable situation," the FERC report says.

It adds: "Clearly, a proposed project which is backed by firm shipper commitments to transport natural gas supplies will have a greater chance of ultimate success."

The report highlights a potential flash point between the major oil companies controlling Slope gas, the Palin administration and the Canadian pipeline company the governor might soon recommend to lawmakers for receiving a state incentive package. The incentives include an exclusive state license and $500 million in state money to be used toward getting the certificate.

A pipeline to carry the Slope's 35 trillion cubic feet of natural gas is one of the state's fondest but most frustrated economic development dreams. Its extreme distance from markets and the enormous cost of a pipeline have kept the gas stranded in the ground for decades.

If TransCanada Corp. receives the state license, it would be bound to hold what's known as an open season, where natural gas producers would bid for space in the pipe to ship gas. The open season would establish the need for a pipeline and would help determine how large a pipe to build.

But oil companies Exxon Mobil, BP and Conoco Phillips are not seeking the state license and seed money and might not pledge any gas to a TransCanada pipeline, which would constitute a failed open season.

Even if that happens, however, the law Palin proposed and lawmakers passed last year, the Alaska Gasline Inducement Act, or AGIA, would require TransCanada to seek a FERC certificate anyway -- a hugely expensive and time-consuming process.

NOT A MESSAGE

Mary O'Driscoll, a FERC spokeswoman in Washington, D.C., said the agency never has granted a certificate for a large natural gas pipeline project without pledges from gas shippers.

"We do not approve them without the firm transportation commitments," she said.

The FERC report, she added, wasn't trying to send any signal that Palin's AGIA process won't work.

"We are not telegraphing anything to anybody," she said. "We're not trying to influence the tussle among proposals or the decisions of the state."

The oil companies have said they first want Palin to negotiate how gas production would be taxed before committing gas to a risky, $30 billion megaproject -- a project they would be obligated to pay for through shipping fees.

Palin's predecessor, Frank Murkowski, attempted to negotiate such a tax deal but Palin hasn't shown the same willingness to haggle with the oil giants.

TransCanada executives have said once they get the state AGIA license, they'll try to persuade the oil companies to pledge their gas to the pipeline.

But one company, Conoco, is pushing a competing plan to build a gas line.

Lawyers with FERC expertise and who are advising the governor and Legislature are split on how the five-member commission might approach an Alaska gas pipeline lacking shippers.

Ken Minesinger, a Washington, D.C., lawyer advising the Palin administration, said the Alaska gas line is unlike any other.

It's backed, he said, by a federal law Congress passed in 2004 that says "the commission shall presume that a public need exists to construct and operate the proposed Alaska natural gas transportation project."

Minesinger said that means the commissioners, who normally want to see proof in the form of shipper commitments that a pipeline is needed, could grant a certificate even if such pledges aren't yet lined up for an Alaska gas line.

Having the commitments beforehand "would be best for everyone," he said, but to conclude FERC wouldn't otherwise grant a certificate "would be a big mistake."

William Mogel, another lawyer advising the Alaska Legislature, has a different outlook.

Even with the congressional presumption of public need, he said, "I would think it would be highly unlikely for a project like the Alaska gas line project to get a certificate without any customers," Mogel said. It's just too expensive a construction project, he said.

FERC might, however, approve a partially filled pipeline, Mogel said.

"It could be less than 100 percent but it couldn't be zero," he said.

PIPELINE FRUSTRATION

Rep. Ralph Samuels, R-Anchorage, chairs the committee that hired Mogel. Samuels, the House majority leader, is no fan of AGIA and cast the Legislature's only vote against the act last year.

His fear is the state could suffer more years of pipeline frustration by going through the exercise of a failed open season and perhaps a rejected FERC certificate application.

"You end up having to have a discussion with the shippers," he said, referring to the North Slope oil companies and taxes. "That doesn't mean you have to roll over."

Tony Palmer, a TransCanada vice president, wouldn't speculate on how the FERC might act if the open season fails.

The company, he said, would abide by terms of AGIA and apply for the certificate anyway. In the meantime, it would try to recruit customers for its pipeline. And if the pipeline initially isn't filled, TransCanada has proposed the U.S. government could step in as a "bridge shipper," or interim rate payer.

"We would always prefer to have customers," Palmer said, before seeking approval for a new pipeline. But the Alaska gas line "is an unusual circumstance," he said.

Last year, a ranking FERC staff member, Robert Cupina, testified before the House Oil and Gas Committee in Juneau on the issue of the certificate.

According to minutes from that hearing, Cupina said FERC could issue a certificate even after a failed open season, and that the FERC certificate policy "does not require a particular level of contract commitment."

However, John Katz, a FERC lawyer, testified this could result in "other entities" filing challenges.

O'Driscoll, the FERC spokeswoman, said FERC staffers by agency policy were not allowed to be interviewed for this story.

Find Wesley Loy online at adn.com/contact/wloy or call him in Juneau at 1-907-586-1531.

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