Trailblazer Pipeline Company LLC Docket No. RP Exhibit No. TPC-0080

Transcription

1 Trailblazer Pipeline Company LLC Docket No. RP- -000

2 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Trailblazer Pipeline Company LLC ) ) ) Docket No. RP SUMMARY OF PREPARED DIRECT TESTIMONY OF GARY SANCHEZ ON BEHALF OF TRAILBLAZER PIPELINE COMPANY LLC Gary Sanchez, Director of Account Services for Trailblazer Pipeline Company LLC ( Trailblazer ), provides Prepared Direct Testimony that addresses several topics with respect to the Trailblazer system. First, Witness Sanchez provides a background about and a description of Trailblazer s system. In addition, he describes the types of services Trailblazer provides under its existing rate schedules. Next, Witness Sanchez discusses the way that shippers currently use the Trailblazer system. Fourth, Witness Sanchez describes Trailblazer s customer groups. Witness Sanchez then discusses the market and business risks that Trailblazer faces. He also explains the circumstances associated with the discounted rates granted on Trailblazer. Finally, Witness Sanchez supports the revenues, credits and billing determinants used to design Trailblazer s rates in this proceeding.

3 Page of UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Trailblazer Pipeline Company LLC ) ) ) Docket No. RP PREPARED DIRECT TESTIMONY OF GARY SANCHEZ ON BEHALF OF TRAILBLAZER PIPELINE COMPANY LLC June, 0

4 Page of TABLE OF CONTENTS GLOSSARY OF TERMS... I. INTRODUCTION... II. BACKGROUND AND DESCRIPTION... III. SERVICES OFFERED... IV. CONTRACT PROFILE OF TRAILBLAZER S SYSTEM... V. CUSTOMER GROUPS... VI. MARKET RISKS AND COMPETITION... VII. DISCOUNTED CONTRACTS... VIII. DESCRIPTION OF SCHEDULES G- and G-...

5 Page of GLOSSARY OF TERMS Bcf/day Billion cubic feet per day Base Period The twelve months ending March, 0. Commission Dth/day EBB Existing Capacity or Existing System Expansion Capacity or Expansion System FERC FL&U FT FTB FTS Expansion Rate IT NFM NGPL Northern Natural PALS Station 0 Tariff TBI Federal Energy Regulatory Commission Dekatherms per day Electronic Bulletin Board The capacity/system that was utilized before April 0, 00. The capacity/system that was certificated in FERC Docket No. CP0-. Federal Energy Regulatory Commission Fuel and Lost and Unaccounted For Firm Transportation Firm Transportation Balancing Trailblazer s single FT rate schedule, that includes separate reservation rates for Existing Capacity and for Expansion Capacity. Interruptible Transportation National Fuel Marketing Company Natural Gas Pipeline Company of America Northern Natural Gas Company Park and Loan Service Compressor Station 0 in Lincoln County, Nebraska Trailblazer Pipeline Company LLC, FERC Gas Tariff, Sixth Revised Volume No.. Tom Brown, Inc. Test Period The period from April, 0 through December, 0. Trailblazer WS Trailblazer Pipeline Company LLC Wheeling Service

6 Page of I. INTRODUCTION 0 Q. Please state your name, occupation and business address. A. My name is Gary Sanchez and my business address is 0 Van Gordon Street, Lakewood, Colorado 0. I am a Director of Account Services for Trailblazer Pipeline Company LLC ( Trailblazer ). Q. Please briefly state your professional experience and qualifications. A. I am a graduate of the Colorado School of Mines, in Golden, Colorado. I began my career in with Western Oil Company, a wholly owned subsidiary of KN Energy, Inc. in Lakewood, Colorado. From to, I worked for various subsidiaries and departments of KN. In, I went to work for Tom Brown, Inc. ( TBI ), an oil and gas producer, as the Manager of Transportation and Exchange. TBI was acquired by EnCana Corporation in May 00 and I then worked as the Manager of Origination and Texas Marketing for EnCana Corporation s subsidiary, EnCana Marketing USA. In March 00, I left EnCana Marketing USA and went to work for National Fuel Marketing Company ( NFM ) as the Manager of Transportation and Storage services. I held various other positions for NFM until February 0. At that time, I left NFM to work as the Business Development Manager for Gas Compressor Consultants, Inc. In June 0, I came to work for Tallgrass Energy Partners, LP, the then-parent of Trailblazer, as the Director of Marketing. In February of 0 I was promoted to my current position of Director of Account Services.

7 Page of 0 Q. What are your current responsibilities as Director of Account Services? A. I am responsible for managing the sales of gas transportation and related services, the development of new services, competitive analysis, and customer service for Trailblazer and as well as other Tallgrass affiliates. Q. On whose behalf are you submitting your prepared testimony in this proceeding? A. I am submitting testimony on behalf of Trailblazer. Q. Have you previously testified before the Federal Energy Regulatory Commission ( Commission or FERC )? A. No. Q. What is the purpose of your direct testimony? A. My testimony covers seven major topics. First, I provide background about and a description of Trailblazer s system. Next, I describe the types of services Trailblazer provides under its existing rate schedules. Third, I discuss the current contract profile of the Trailblazer system. Fourth, I describe the types of customer groups that utilize Trailblazer s system. Fifth, I discuss the market and business risks that Trailblazer faces. Sixth, I explain the circumstances associated with the discounted rates granted on Trailblazer. Finally, I support the revenues, credits and billing determinants used to design Trailblazer s rates in this proceeding as set forth in Schedule G- (Exhibit No. TPC-00), and Schedule G- (Exhibit No. TPC-00). Q. Are you sponsoring any exhibits with your testimony? A. Yes. I am sponsoring the following exhibits with my testimony:

8 Exhibit No. TPC-00 Docket No. RP Page of Schedule G- Test Period Volumes and Revenues 0 Exhibit No. TPC-00 Schedule G- Base Period to Test Period Adjustments Exhibit No. TPC-00 Relationship Between Trailblazer Allocated Volumes and Basis Differentials II. BACKGROUND AND DESCRIPTION Q. Please provide a brief description of Trailblazer s system. A. Trailblazer is a single-barrel, -inch diameter pipeline that runs from interconnections with natural gas pipelines in Weld County in Northeastern Colorado, near the hub at Cheyenne, Wyoming, and travels miles to Gage County, Nebraska, where it interconnects with Natural Gas Pipeline Company of America ( NGPL ) and Northern Natural Gas Company ( Northern Natural ) near Beatrice, Nebraska. The pipelines that interconnect with Trailblazer at its western end near Cheyenne include Colorado Interstate Gas Company, L.L.C.; Tallgrass Interstate Gas Transmission; Rockies Express Pipeline LLC; Wyoming Interstate Company, L.L.C.; and Public Service Company of Colorado. A map of the Trailblazer system is sponsored by Trailblazer Witness David J. Haag as Exhibit No. TPC-00. Trailblazer was built in to move Rockies gas to Mid-Continent pipes for further delivery to markets in the Midwest. When it was certificated, Trailblazer operated as a free-flowing pipeline. In, Trailblazer increased its forward haul capacity to, dekatherms per day ( Dth/day ) through the addition of one electric-powered compressor at Compressor Station 0 ( Station 0 ) in Lincoln County, Nebraska. In 00, as certificated in Docket No. CP0-

9 Page of 0-000, Trailblazer upgraded the -vintage compressor unit at Station 0 and added five new electric and gas-powered mainline compressor units at Compressor Stations 0, 0, and 0. Today, the Trailblazer system has a total system capacity of, Dth/day, which is currently reduced by a Force Majeure, as discussed by Trailblazer Witness Haag in Exhibit No. TPC-00. Q. How did Trailblazer s rate design change when the 00 expansion capacity entered service? A. After the addition of the 00 compression, Trailblazer s system was bifurcated for rate purposes into the, Dth/day of capacity that pre-existed the 00 expansion ( Existing Capacity or Existing System ), and,000 Dth/day of capacity created by the additional compressors ( Expansion Capacity or Expansion System ). Trailblazer has a single Firm Transportation ( FT ) rate schedule, that includes separate reservation rates for Existing Capacity and for Expansion Capacity (separately stated as the FTS Expansion Rate ). Existing System forward-haul shippers pay a base transportation rate plus an embedded fuel cost, plus applicable lost and unaccounted for charges. Shippers on the Expansion System pay a transportation rate and additionally pay an in-kind Fuel and Lost and Unaccounted For ( FL&U ) and electric power cost rate set in separate tracker proceedings. Q. Is Trailblazer dependent on other interstate pipelines as a source of supply? A. Yes, approximately percent of the volumes Trailblazer received during the Base Period were from upstream interstate pipelines. Therefore, as a practical

10 Page of matter, Trailblazer is almost completely dependent on deliveries from upstream interstate pipelines. Q. Does Trailblazer connect to any end-use markets? A. Trailblazer has a few directly connected markets. Trailblazer is connected to a single power plant, a few ethanol and fertilizer plants, and other agriculture-based facilities, as well as two municipal utilities. During the Base Period, deliveries to these end-users accounted for only approximately. percent and deliveries to the municipal utilities accounted for only approximately 0. percent of Trailblazer s total deliveries. Trailblazer delivered the remaining. percent of its volumes during the Base Period to other interstate pipeline companies. III. SERVICES OFFERED Q. What specific services does Trailblazer currently offer? A. Trailblazer offers FT and Interruptible Transportation ( IT ) services. Trailblazer also offers Firm Transportation Balancing ( FTB ) service under Rate Schedule FTB; Park and Loan Service ( PALS ); and Wheeling Service ( WS ). IV. CONTRACT PROFILE OF TRAILBLAZER S SYSTEM 0 Q. Is Trailblazer s Existing System fully subscribed? A. Yes. One hundred percent of the Existing System is subscribed during the Base and Test Periods, and it is utilized at a high load factor. All of this capacity is subscribed under long-term contracts. Q. Is Trailblazer s Expansion System fully subscribed? A. Based on the months ending March, 0, approximately percent of the contracted capacity on the Expansion System is under long-term contracts.

11 Page of 0 Q. Please describe the profiles of the Expansion System contracts? A. There are two long-term maximum recourse rate contracts on the Expansion System. These contracts have expiration dates that are beyond the Test Period, and comprise about percent of the Expansion Capacity. In addition, as shown on Schedule G-, Exhibit No. TPC-00, there are short-term and long-term negotiated rate contracts with six shippers for service on the Expansion System. Q. Did any long-term firm contracts expire during the Base Period? A. There were three Existing System contracts that expired during the Base Period. All of this capacity was re-contracted by other shippers under long-term contracts. There were nine long-term Expansion System contracts that expired in the Base Period, of which eight were re-contracted. The ninth contract on the Expansion System has not yet been subscribed by any other shipper on a long-term basis. Q. What firm contracts are scheduled to expire during the Test Period? A. As shown on Schedule G-, Exhibit No. TPC-00, one contract on the Existing System and nine contracts on the Expansion System expire during the Test Period. The Existing System capacity has been re-contracted on a long-term basis with other shippers. Seven of the expiring Expansion System contracts were short-term agreements. Q. Are there any new contracts coming on during the Test Period? A. Yes, during the Test Period, there will be ten new contracts on the Expansion System, which will make the Expansion System almost fully subscribed, and four new contracts on the Existing System, which will keep the Existing System fully subscribed.

12 Page of 0 V. CUSTOMER GROUPS Q. Please generally describe the types of customers that take service on Trailblazer. A. Trailblazer s customer base is comprised primarily of gas marketers and producers moving gas out of the Rockies from other interstate pipelines to markets further east off of NGPL and Northern Natural. Trailblazer is merely a link in the delivery chain. It is primarily a conduit to move gas from the Rockies to the Mid-Continent. Unlike most other pipelines that transport natural gas out of the Rockies, Trailblazer has limited direct connections to upstream production and limited direct connections to end-use markets. As a result, Trailblazer is dependent upon its upstream interconnected pipelines for gas supply and its downstream interstate connections for market access. Q. Does the lack of diversity in Trailblazer s customer base increase its business risk? A. Yes. For the months ending March, 0, marketers held approximately percent of Trailblazer s Existing System capacity. Marketers have no obligation to serve the gas-consuming public. They are also price sensitive and they typically justify contracting for capacity based on market basis differentials. When basis differentials do not provide a sufficient profit opportunity, the marketers will not contract for transportation.

13 Page of Q. Do producers transport on Trailblazer s system? A. Yes. For the months ending March, 0, approximately percent of Trailblazer s Existing System FT capacity is held by producers. However, only a single producer has their production facilities directly connected to Trailblazer. Generally, producers seek the transport route that provides the highest netback for their gas production. In this regard, they are just as basis-sensitive as the marketers. Producers typically will contract for FT service when they believe the transport will improve the netback price as compared to selling at their plant tailgate. VI. MARKET RISKS AND COMPETITION 0 Q. Please discuss Trailblazer s competitive position. A. According to Genscape s NatGas Basis Report- Rockies, today there is approximately. billion cubic feet per day ( Bcf/day ) of export capacity out of the Rockies. Rockies gas can now access markets in the Midwest, Pacific Northwest, and Southwest United States and this has resulted in a competitive transportation environment. Again, according to Genscape s NatGas Basis Report- Rockies, Rockies exports averaged about.0 Bcf/day for the twelve months ending May, 0, leaving about. Bcf/day of capacity unutilized on average. This makes for a competitive environment for interstate pipelines as they try to add throughput quantities and increase contract demand. Q. Please explain the factors that create demand for capacity on Trailblazer. A. With only a handful of end-use deliveries, Trailblazer is primarily a connector pipeline that links pipelines at the Cheyenne Hub to the interstate pipelines that

14 Page of 0 take this supply to markets in the Midcontinent and Midwest regions. The primary driver for transportation demand on Trailblazer is price differentials, or basis spread, between the Rocky Mountain/Cheyenne Hub supply area and the downstream interstate pipeline interconnects. Prior to 0, the basis spread was narrow and the corresponding demand for Trailblazer capacity was weak, as shown in my Exhibit No. TPC-00 Relationship Between Trailblazer Allocated Volumes and Basis Differentials, which reflects the relationship between Trailblazer s allocated volumes and the basis differentials. According to an article in Natural Gas Intelligence s NGI s Shale Daily from June, 0, Rocky Mountain natural gas production (associated with crude oil production) has been increasing over the past year and as a result these basis spreads have widened, as shown in my Exhibit No. TPC- 00, leading to an increase in demand for Trailblazer capacity. However, markets served by Rocky Mountain natural gas production, specifically the Midwest and Midcontinent demand centers in Illinois, Wisconsin, Minnesota, and Iowa, are also being supplied by increasing natural gas production from shale formations located much closer to those markets. See Natural Gas Intelligence article NGI s Daily Gas Price Index published on October, 0. As the markets served indirectly via Trailblazer gain increasing levels of access to natural gas from the growing production in the shale areas, it is anticipated that Trailblazer will need to compete to retain contracted capacity. Q. Does the lack of direct access to supply basins place Trailblazer at a competitive disadvantage?

15 Page of A. Yes. Trailblazer is a transporter of Rockies gas supply from several basins connected to upstream interstate pipelines. During the Base Period,. percent of Trailblazer s receipts were from pipeline interconnections and. percent of Trailblazer s deliveries were to pipeline interconnections. Without its upstream and downstream pipeline interconnections, Trailblazer effectively is stranded, with no place to transport gas from and no place to deliver gas. Trailblazer s producer and marketer shippers have several alternatives to Trailblazer when it is not economic. Q. Does Trailblazer have direct access to supply basins? A. Trailblazer has very limited direct access to supplies. Q. What factors impact the economics of shipping on Trailblazer? A. Basis differentials and variable transportation costs, such as commodity, fuel, and power costs, are the largest factors that impact the economics of shipping on Trailblazer. As noted above, basis differentials are the difference in prices between two locations. When there is a large basis spread between the Cheyenne Hub and the NGPL and Northern Natural interconnects, Trailblazer s transportation capacity is more valuable. When basis differential narrows, the transportation capacity loses value in the marketplace. VII. DISCOUNTED CONTRACTS 0 Q. Were there any discounted firm service contracts during the Base Period? A. Yes. Q. Were any of the discounted firm service contracts during the Base Period with affiliated shippers?

16 Page of 0 A. No. All of the discounted contracts were with unaffiliated shippers. Q. Why did Trailblazer offer discounted firm service rates? A. Trailblazer offered discounts in response to the market conditions at the time those contracts were signed, i.e., the basis differentials that existed at that time. Q. Does the Trailblazer Tariff allow for discounting? A. Yes. Section. of the General Terms & Conditions of Trailblazer s Tariff provides the general parameters around the discounts that Trailblazer may offer its shippers. When discounts are given to non-affiliates, the Commission presumes that the discounts were required by competition. See, e.g., El Paso Nat. Gas Co., FERC,00, at P (0), reconsideration denied, FERC,00 (0); Gulf S. Pipeline Co., FERC,0, at P (0); Policy for Selective Discounting by Nat. Gas Pipelines, FERC,0, at P, reh g denied, FERC,, at P 0 (00); and N. Nat. Gas Co., FERC,0, at P (00). Q. How does Trailblazer grant discounted rates? A. Trailblazer provides discounts to its shippers on a not unduly discriminatory basis in order to respond to the market conditions that exist at that time for that particular transportation service. Accordingly, Trailblazer has included a discount adjustment for its discounted revenues in the calculation of its unit rates in this proceeding. Q. Were the discounted firm service rates based on the market value of Trailblazer s capacity at the time the contracts were entered?

17 Page of 0 A. Yes. In fact, the majority of the discounts were awarded to the highest bidder in an open season; thus there was no higher price at which Trailblazer could have sold the capacity. Q. Please explain Trailblazer s open season process? A. Trailblazer regularly posts available capacity on its Electronic Bulletin Board ( EBB ). From time to time, Trailblazer offers available FT capacity either in an open season or an auction. Trailblazer s shippers have the opportunity to participate in any such open season or auction. Any open season or auction that is conducted is posted on Trailblazer s EBB. These postings include, but are not limited to: maximum daily quantity stated in Dth/day; primary receipt and primary delivery points at which the capacity is available, and the firm quantities available at such points; the effective date; the term; all applicable rates for the service; the minimum conditions; whether the capacity is subject to a right of first refusal or pre-arranged deal; and the criteria by which any bids will be evaluated by Trailblazer. Shippers interested in the capacity submit a bid form for the volume, points, term, and rate that they are willing to enter into a FT agreement. After the close of the open season, or the auction, Trailblazer evaluates the bids based on the process specified in the open season or auction notice and Trailblazer s Tariff, and awards capacity to the highest acceptable bidder. Q. Is Trailblazer seeking a discount adjustment in this case? A. Yes. As described in greater detail in Witness Haag s testimony Exhibit No. TPC-00, Trailblazer is proposing a discount adjustment in this case for each of the discounted firm service contracts in effect during the Base and Test Periods.

18 Page of 0 Trailblazer has included a discount adjustment for its discounted revenues in the calculation of its unit rates in this proceeding. No discount adjustment has been calculated for any interruptible services, as all interruptible revenues have been credited to firm shippers in this proceeding. Trailblazer is not seeking a discount adjustment for its negotiated rate contracts. VIII. DESCRIPTION OF SCHEDULES G- and G- Q. Please describe Schedule G-, Exhibit No. TPC-00. A. Consistent with C.F.R..(j)()(ii) (0), Schedule G- provides Adjustment Period Revenues, which consist of revenues and billing determinants by month, customer name, rate schedule (i.e., Rate Schedule FTS and Rate Schedule ITS, Rate Schedule PALS and Rate Schedule WS), major rate component (i.e., reservation, commodity, overrun and annual charge Adjustment surcharge) and totals for the Base Period as adjusted for known and measurable changes which are expected to occur within the Adjustment Period. I have also provided a comparison of the Base Period revenues and billing determinants and the revenues and the billing determinants for the Base Period as adjusted. The rates that are expected to be charged in the Adjustment Period are the currently effective rates. The new proposed rates are applied in Statement J, sponsored by Witness Michael G. Smith, Exhibit No. TPC-00. Schedule G- also reflects whether the shipper is an affiliate of Trailblazer, contract number, whether the contract is short-term (i.e., less than one year) or long-term (i.e., one year or greater), the month of the Base Period as

19 Page of 0 adjusted and any capacity release credits and revenues net of capacity release credits. Q. How did you determine the data to be included in Schedule G-, Exhibit No. TPC-00? A. The data shown for shippers in Schedule G- was based upon Schedule G- Base Period Volumes and Revenues (Exhibit No. TPC-000) volumes as a starting point and then adjusted based on known and measurable changes as well as applying rates set forth in Schedule J- Derivation of Rates (Exhibit No. TPC-00), which is sponsored by Trailblazer Witness Smith. Q. Please describe Schedule G-, Exhibit No. TPC-00. A. Consistent with C.F.R..(j)()(iii), Schedule G- specifies adjustments to Base Period volumes and quantifies adjustments to the Test Period. There were no volume variances forecasted for Rate Schedules ITS, WS, and PALS. The main reason for the volume variance for FT Reservation Volumes was due to the non-renewal of one of the contracts on the Expansion System. There are only minor variances to the FTS commodity volumes. Q. How do the reservation rate billing determinants appearing on Schedule G- for the Test Period compare to the average daily reservation rate billing determinants in the Base Period? A. The main difference between the reservation rate billing determinants between the Base Period and Test Periods is a single contract that was not renewed. Q. Please summarize the adjustments that you have made to Base Period commodity volumes in Schedule G- to derive the Test Period.

20 Page of A. The main reservation difference between the Base and Test period is the nonrenewal of one contract. There are only minor variances to the FT commodity volumes. Q. Does this conclude your Prepared Direct Testimony? A. Yes, it does.

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