ing in Part Rehearing and Modifying Prior Order, issued November 14, 1990 appears at 53 FERC ¶ 61,194.]

[Opinion No. 357-A Text]

I. Introduction

This order addresses the requests for rehearing of Opinion No. 357. Opinion No. 357, issued on November 14, 1990, certificated Phase I of the Iroquois/Tennessee Project, one of the discrete projects to serve the Northeast market. Twenty-two (22) parties to this proceeding filed requests for rehearing of the November 14 order.1 Rehearing is granted as to Tennessee's depreciation rate and denied as to the other issues raised.

A. Procedural History

II. Background

The Iroquois/Tennessee Project involves applications filed by Iroquois Gas Transmission System, L.P. (Iroquois), Tennessee Gas Pipeline Company (Tennessee), Texas Eastern Transmission Corporation (Texas Eastern), and Algonquin Gas Transmission Company (Algonquin). Generally, the project involves proposals to construct and operate pipeline facilities, including a major new pipeline system extending from a point on the international border between the United States and Canada through the States of New York and Connecticut and terminating on Long Island, New York. The entire project, as proposed, would transport up to 645,800 Mcf of gas (primarily Canadian) per day on a firm basis to 17 local distribution companies (LDCs), three cogeneration customers, and one electric generation customer in the northeastern United States. It is proposed that Iroquois would deliver part of the gas directly to certain customers and deliver the remaining volumes to Tennessee, Algonquin, and Texas Eastern for redelivery to the remaining Iroquois customers.

This project originated as an application filed by Iroquois on May 30, 1986, in Docket No. CP86-523-000, as amended, for an optional certificate to construct and operate a new pipeline system extending from the United States/Canadian border through eastern New York and western Connecticut to Long Island, New York, a project very similar to the one proposed herein. As a result of the Commission's Northeast open-season proceeding2 and the settlements arising from that proceeding, the application filed in Docket No. CP86-523-000 was dismissed, and the Iroquois/ Tennessee Project was conceived.3 Subsequently, Iroquois, Tennessee, Algonquin, and Texas Eastern filed applications with the Commission implementing the project.

1 The parties who filed for rehearing are listed in Appendix A to this order.

2 Northeast U.S. Pipeline Projects, 40 FERC 61,087 (1987), reh'g granted, 40 FERC ¶ 61,310 (1987) (Notice Inviting Applications to Provide New Gas Service to the Northeast U.S.); 42 FERC ¶ 61,332 (1988), reh'g dismissed, 43 FERC ¶61,287 (1988) (order consolidated applications filed prior to the open-season deadline into 31 distinct projects, preliminarily determined that 20 of the projects appeared to be competitive or mutually exclusive and therefore entitled to consideration in a comparative evidentiary hearing, and identified 7 projects as proposals to serve discrete markets in the Northeast); 43 FERC 61,555 (1988) (order issued June 29, 1988, which identified nine additional projects, tentatively

determined to be competitive or mutually exclusive, as discrete); 44 FERC 61,150 (1988)(order consolidated remaining 13 potentially competitive Northeast open-season projects identified in the June 29, 1988 order, including proposals submitted by Iroquois, Tennessee, Algonquin, and Texas Eastern, into one proceeding and appointed a settlement judge to further the goal of expeditiously processing the openseason applications); 46 FERC ¶ 61,012 (1989)(settlement projects filed November 30, 1988, by Iroquois and the majority of the open-season sponsors, were found to be proposals to serve discrete markets); 47 FERC 61,172 (1989)(order terminated the Northeast U.S. open-season proceedings).

3 On November 30, 1988, Iroquois and the majority of the open-season sponsors filed a formal offer of

At both the state and federal level, proceedings were held assessing the feasibility of and need for the project. For example, although not dispositive of the issues confronting us here, in its article VII proceeding on Iroquois, the Public Service Commission of the State of New York (New York PSC) conducted extensive public hearings covering a three-year period. In November 1989, we conducted a public technical conference on Iroquois' proposed rates. Following federal proceedings and the submission of voluminous data from the parties, the Commission convened an oral argument on July 17, 1990, to afford applicants, opponents, and supporters of the project an opportunity to voice their views on the project, to raise issues of concern, and to rebut allegations and positions presented during the course of the Iroquois proceeding.

On July 30, 1990,5 the Commission issued an order making preliminary determinations regarding certain issues involved in Phase 16 of the Iroquois/Tennessee Project and establishing procedures for a trial-type hearing on the limited issues of market and rates. Final certificate authorization was reserved pending a limited expedited hearing to be conducted on market need and certain rate issues, and the submission to the Commission of findings of fact by an administrative law judge (ALJ). Between August 23 and August 29, 1990, thirty-seven parties filed requests for rehearing and/or clarification of the July 30, 1990 order. The hearing on the project and the submission of findings of fact were completed,7 and on November 14, 1990, the Commission issued certificates implementing Phase I of the Iroquois/Tennessee Project.

B. Overview of the Proposals

1. Iroquois

Iroquois filed in Docket No. CP89-634-000, an application, as amended on December 29, 1989 (Docket No. CP89-634-001), pursuant to section 7(c) of the Natural Gas Act (NGA), for a certificate of public convenience and necessity authorizing: (1) construction and operation of a new pipeline system extending from the New York/Canada border through the States of New York and Connecticut and (2) firm transportation of up to 575,900 Mcf of gas per day to various customers in the (Footnote Continued)

settlement (Principles of Settlement) in which they agreed to resolve all remaining issues of mutual exclusivity by not protesting the processing of three new Northeast settlement projects to be filed with the Commission. On January 12, 1989, the Commission issued an order providing, among other things, that the settlement projects were proposals to serve discrete markets and that a comparative hearing was not required. The offers of settlement were filed on January 17, 1989, and comprised the following three Northeast settlement projects: (1) the joint Iroquois/ Tennessee Project, (2) the ANR Pipeline Company (ANR) Project, and (3) the Champlain Pipeline Company Project (Champlain Project). Applications for certificates of public convenience and necessity implementing the proposed projects were filed on or after January 17, 1989.

* See "Opinion and Order Granting Certificate of Environmental Compatibility and Public Need" (Opinion No. 89-42).

5 52 FERC 61,091.

6 As explained in the July 30, 1990 order and more fully later in this order, the instant proceeding

addresses only the first phase (Phase I) of the Iroquois/Tennessee Project.

7 The hearing was held from August 14, 1990, through August 24, 1990. Within the confines of the limited and expedited nature of the hearing, informal discovery was held throughout the proceeding by the issuance of and voluntary response to "reasonable" data requests. Oral testimony of witnesses, cross and redirect examination, and rebuttal testimony were heard. Numerous documents sponsored by witnesses were considered. On August 30, 1990, the party-participants at the hearing filed briefs in the form of proposed findings of fact, and on September 4, 1990, parties who participated at the hearing (party-participants) filed reply briefs in the form of objections to the proposed findings of fact. On September 11, 1990, the ALJ issued his findings of fact. Thereafter, on September 28, 1990, and October 9, 1990, respectively, the party-participants filed initial and reply briefs with the Commission.

8 The July 30, 1990 and November 14, 1990 orders contain an extensive discussion of the applications filed in this proceeding.

northeastern United States. Iroquois also requested blanket transportation and facilities certificates pursuant to subpart G of Part 284 and subpart F of Part 157, respectively, of the Commission's regulations. Additionally, in Docket No. CP89-815-000, Iroquois amended its application for a Presidential permit9 authorizing the construction, operation, maintenance and connection of facilities at the international border between the United States and Canada for the transportation of natural gas imported from Canada.

2. Tennessee

On January 17, 1989, Tennessee filed in Docket No. CP89-629-000, an application, as amended on January 26, 1990 (Docket No. CP89-629-001), pursuant to section 7(c) of the NGA, for a certificate of public convenience and necessity authorizing: (1) construction and operation of 138.4 miles of pipeline loop and laterals and 8,650 horsepower (hp) of compression facilities, at an estimated cost of $186.3 million, and (2) firm transportation service of up to 232,795 Mcf of gas per day for various customers in the Northeast United States. On January 26, 1990, Tennessee filed an application in Docket No. CP90-639-000, pursuant to section 7(c) of the NGA, for a certificate authorizing: (1) construction and operation of 35.25 miles of pipeline loop and laterals, 7,500 hp of compression, and one meter station and the upgrading of another meter station, all at an estimated cost of $64.2 million, and (2) firm transportation of up to 118,000 Mcf of gas per day for Boston Gas Company, Granite State Transmission, Inc., and New England Power Company (NEP) (former Champlain Pipeline Project shippers).

3. Algonquin

Algonquin filed in Docket No. CP89-661-000, an application, as amended on February 28, 1990 (Docket No. CP89-661-001), for a certificate authorizing: (1) construction and operation of 45.5 miles of pipeline loop and laterals, 12,600 hp of compression, and various metering facilities, all at an estimated cost of $114.7 million, and (2) firm transportation of up to 295,950 MMBtu equivalent of gas per day for NEP and certain shippers in the Northeast United States. Algonquin indicated that 237,250 MMBtu equivalent of gas per day of transportation capacity would be allocated to the Iroquois/Tennessee Project. The remaining transportation capacity is intended to serve the ANR Project proposed in Docket No. CP89-637-000 et al., and certain other customers not related to the Iroquois/Tennessee or ANR projects.10 Algonquin's application did not indicate which facilities would be used for each separate project.

4. Texas Eastern

Texas Eastern filed an application, in Docket No. CP89-1263-000, for a certificate authorizing a firm exchange and transportation service (exchange arrangement) to make available gas supplies to certain of the customers to be served under the Iroquois/Tennessee Project.

Texas Eastern asserted the exchange arrangement was needed because the proposed Iroquois system will not be physically interconnected with the systems of the New Jersey LDC shippers to be served by Iroquois (i.e., Elizabethtown Gas Company

9 Iroquois' application for a Presidential permit was filed pursuant to Executive Order Nos. 10485 and 12038 and the Secretary of Energy's Delegation Order No. 0204-112.

10 The facilities and services related to the ANR Project were authorized on June 26, 1990 (51 FERC 61,359 (1990)).

(Elizabethtown), New Jersey Natural Gas Company (New Jersey Natural), and the Public Service Electric and Gas Company (PSE&G) (collectively the New Jersey shippers)). Thus, in order to deliver gas into the systems of the New Jersey shippers, Texas Eastern proposed to provide a firm exchange and transportation service. Further, in order to perform the exchange service, Texas Eastern proposed to establish a new delivery point at South Commack, New York (the terminus of the Iroquois system and an interconnection with Long Island Lighting Company (LILCO)) for the Brooklyn Union Gas Company (Brooklyn Union), Consolidated Edison Company of New York, Inc. (Consolidated Edison), and LILCO (collectively referred to as the "New York shippers").11

Under the Precedent Agreement, the New York shippers and the New Jersey shippers each would contract with Iroquois for firm transportation of Canadian gas supplies.12 The New Jersey shippers would release their respective daily Iroquois transported volumes to Texas Eastern at South Commack. Then, in satisfaction of the obligations Texas Eastern otherwise would have under existing agreements to deliver gas to the New York shippers at Station 058, Staten Island, New York, Texas Eastern would deliver (or cause to be delivered) at South Commack the gas released by the New Jersey shippers. According to Texas Eastern, Iroquois would redeliver to South Commack the gas made available by the New Jersey shippers. LILCO then would use its facilities to deliver the gas to Brooklyn Union and Consolidated Edison. In addition, concurrently with the New Jersey shippers' release of their Iroquois transported gas to Texas Eastern at South Commack, Texas Eastern would deliver to the New Jersey shippers, at their existing delivery points in New Jersey, gas it otherwise would have delivered to the New York shippers at Station 058.

5. LILCO, Brooklyn Union and Consolidated Edison (New York Shippers)/Docket No. CP89-1339-000: Petition for Declaratory Order

The New York shippers filed a petition for a declaratory order disclaiming Commission jurisdiction under the NGA of the New York shippers' facilities and other operations used to effect deliveries of the New Jersey shippers' Iroquois gas under Texas Eastern's proposed exchange service.

The New York shippers are LDCs operating in contiguous service areas which, taken together, cover the entirety of the Boroughs of Manhattan, the Bronx, Brooklyn, Queens and Staten Island, New York City, as well as the counties of Nassau, Suffolk and Westchester, New York. The New York shippers currently obtain their gas supplies from Transcontinental Gas Pipe Line Corporation (Transco), Texas Eastern and Tennessee through direct interconnections at or within the boundaries of the State of New York. The New York shippers stated that deliveries of gas from these three interstate pipelines are accomplished through the New York Facilities System.13

11 Pursuant to the exchange agreement, Texas Eastern proposes to amend its existing sales and transportation agreements with the New York shippers to establish South Commack as a new delivery point for the New York shippers.

12 The New York shippers and the New Jersey shippers each have arranged to purchase gas from Alberta Northeast Gas, Ltd. (ANE). ANE was established by a group of shippers, including 16 of the Iroquois LDC shippers, to act as a conduit to purchase the gas from TransCanada Pipe Lines Limited (TransCanada) (by its agent Western Gas Mar

keting, Ltd.), Progas Limited (Progas), ATCOR Limited (ATCOR), and Alberta Energy Corporation (AEC).

13 The New York Facilities System is a system of high and medium pressure mains and related facilities separately owned and cooperatively operated by the New York shippers, all located entirely within the State of New York. The shippers coordinate their operations with each other and with the interstate pipelines currently serving the New York Metropolitan area by delivering gas through these facilities.

According to the New York shippers, the New York PSC has jurisdiction over these facilities.

C. The July 30, 1990 Order

As noted above, the July 30, 1990 order made preliminary determinations regarding certain issues involved in Phase I of the Iroquois/Tennessee Project and established procedures for a trial-type hearing on the limited issues of market need and rates. The order set forth the Commission's current views on market and rates, which would serve as a starting point for the hearing. The order stated that upon receiving the findings of fact from the presiding ALJ, and after reviewing the initial and reply briefs, the Commission would consider whether the evidence warrants modification of its current views. The order provided further that all other determinations on issues related to the project are considered the Commission's findings on those matters and are subject to rehearing in accordance with the Commission's regulations.

The order determined that a trial-type hearing is not required, as there appear to be no disputes regarding material issues of fact which cannot be resolved on the written record which already exists in this proceeding. However, the order determined further that in light of the unprecedented level of public comment, input and concern which has been generated by these applications, and based upon the fact that the short delay associated with an expedited and narrowly focused hearing should not, in and of itself, adversely affect the project, for public policy reasons all parties in this proceeding should be afforded another opportunity to air their concerns. Accordingly, the order directed the Chief Administrative Law Judge to appoint an ALJ to convene an expedited, narrowly focused hearing in line with the procedures set forth in the order.

The July 30, 1990 order limited the issue of rates to a consideration of the competitive aspect of the applicants' rate structures. Thus, the order directed the following specific issues be discussed at the hearing: (1) load factor for the design of commodity or usage rates, (2) appropriateness of the modified fixed-variable rate. design, and (3) rate of return and capital structure.

The July 30, 1990 order limited the issue of market to a consideration of: (1) the reasonableness of the assumptions behind the projected growth rates, including the differences for any individual shipper between projected growth rates and historical growth rates, and (2) the feasibility (availability, price, reliability, and related capacity) of increased reliance on peaking supplies.

As a general matter, the order found preliminarily that approval is warranted: (1) for the requests for certificates filed by Iroquois in Docket No. CP89-634-000, as amended, and in Docket No. CP89-815-000 and (2) to the extent discussed in this order, the request for a certificate filed by Tennessee in Docket No. CP89-629-000, as amended. The order found preliminarily that based upon the record evidence, Texas Eastern's application filed in Docket No. CP89-1263-000 for a specific section 7(c) certificate to perform the exchange service should be dismissed since Texas Eastern could perform the exchange under its Part 284 blanket certificate. The order also preliminarily determined to deny the request for a declaratory order filed by the New York shippers.

The order did not address the applications filed by Algonquin (in Docket No. CP89-661-000, as amended) and Tennessee (in Docket No. CP90-639-000). Also, the order did not address a portion of Tennessee's application filed in Docket No. CP89-629-000, as amended. As noted above, although Algonquin proposed to provide