the Federal Power Commission authority, where gas is available in excess of pipeline capacity, to order prorationing of pipeline capacity among shippers.

It has been argued that retaining Section 13 (a) may prove to be an impediment to financing. We find that Section 13 (a) will not be such an impediment, since pipeline companies will be willing to invest in order to insure the construction of such a system. In addition, the possibility of receiving the substantial cash flows from the system which would result from ownership is another incentive to invest in the system.

It is likely that much of the Alaskan gas will be delivered throughout the lower 48 states by displacement rather than by direct delivery. Displacement is a process that would allow Alaska gas to be supplied to conveniently located customers of other pipeline systems that, in turn, could use their "displaced" gas to serve customers of other pipelines. Such a displacement scheme provides considerable savings and ease of delivery but also creates two potential problems. First, a transmission company could thwart the displacement plan by refusing to cooperate and displace gas in its system. To remedy this problem we recommend that legislation be enacted to give the Federal Power Commission, or its successor agency, authority to order participation in displacement programs for Alaskan natural gas.

Displacement also presents potential for anticompetitive activity because implementation of a displacement program requires pipeline companies to meet to agree upon supply reallocation. Obviously, the potential for anticompetitive agreements in the implementation of such a process exists, and almost regardless of the actual risks of such agreements being made, the public perception that such possibilities exist requires some antitrust protection.

This is not an insuperable problem. If the companies do no more than is reasonably necessary to effect the displacements, no antitrust issues should be presented. A method of insuring that no anticompetitive discussions or acts take place is to have interested government agencies monitor such meetings and to have proposed allocation plans subject to government review and approval.

An all-events cost-of-service tariff has been proposed that would guarantee to the owners full reimbursement of all costs associated with the operation of the transportation system. These costs would be passed on to the consumer. These guarantees extend to all unit transportation costs, even if underutilization of the pipeline makes the unit cost excessively high. Guaranteeing these costs would eliminate incentives for the transportation system owners to prudently determine pipeline size and propose the most efficient pipeline based upon expectations of deliverability.

The deliverability of the Prudhoe Bay reserves is unsettled and highly disputed. The forecasts vary substantially; however, 2.0 Bcf/d appears to be the most likely rate of deliverability. The producers have stated their opposition to any form of deliverability guarantee and, since gas and oil production are related, may in the future restrict or eliminate gas production in order to increase the production of higherpriced oil. With the best deliverability estimate being 2.0 Bcf/d and the possibility of less gas production, there is potential for under

utilization of the transportation system. Underutilization will mean higher unit costs of transportation and under the proposed tariff, this higher transportation cost will be borne by the consumer. Deliverability should be carefully evaluated before a system is selected, and the high cost of constructing a system is undertaken. Further, the sizing of the proposed pipelines should be carefully evaluated, since the proposed tariff guarantees may have diminished incentives on the part of the proponents to determine and propose the most efficient pipeline size.

INTERAGENCY TASK FORCE ON ENVIRONMENTAL ISSUES

(JULY 1, 1977)

EXECUTIVE SUMMARY

ENVIRONMENTAL ISSUES

The Arctic Gas route would cross the Arctic National Wildlife Range (ANWR), which was established for the purpose of preserving its specific unique wildlife, wilderness, and recreational values. Its possible inclusion into protected wilderness status is still pending. The proposed pipeline construction activity would eliminate the impacted portion of the ANWR from wilderness status consideration.

Arctic Gas has not adequately demonstrated that they would be able to construct a pipeline from Prudhoe Bay through the Mackenzie Delta area within the proposed time frames; that their proposed mitigative measures would work as effectively as predicted; or that impacts to animal species and natural ecosystems would be short term or minimal. They have not demonstrated that their unconventional technology would work adequately in minimizing impact, or that if damage should occur, mitigative measures would be capable of restoring impacted habitat or animal populations. If the integrity of the ANWR were to be violated by the Arctic Gas pipeline, there could be a diminished degree of incentive in the future to restrict additional exploration or development in the impacted areas.

There is a continuing international cooperative effort to establish an international wildlife/wilderness reserve which would encompass the ANWR and the adjacent sensitive habitat in Canada.

The El Paso route includes both overland pipeline and ocean tanker transportation systems. A liquefied natural gas (LNG) facility in Alaska and one for regasification in California present serious potential for environmental degradation.

The proposed LNG plant at Gravina Point, Alaska would lie within a zone of very high seismicity in the Chugach National Forest. It is located on the shore of Prince William Sound where abundant commercial fisheries and other marine resources are found. An acceptable solution to the heated water discharge has not yet been proposed. El Paso has not presented baseline oceanographic studies necessary to determine if the proposed sea water cooling system is environmentally acceptable. Impacts from the proposed once-through cooling system include: (1) mortality of all living organisms trapped within the cooling system; (2) thermal shock; (3) changes in migration and feeding behavior of affected marine biota; and (4) the effect of toxic substances released in the effluent. The Environmental Task Force concludes that the proposed once-through cooling system would result in

either chosen or eliminated from consideration. There are differences, but they are so small when compared to the uncertainties in the specification of gas distribution and transportation costs as to prevent the selection of a particular system on this basis.

As Alaska gas will amount to approximately 5 percent of total natural gas consumption at the time it becomes available, the principal impact of Alaska gas on natural gas supply and demand will be a small increase in natural gas consumption and a relatively large reduction in natural gas shortages which are expected in the absence of any other action. By reducing the potential shortage, and thus the demand for substitute fuels, the delivery of Alaska gas will cause oil imports to be less than if no delivery system were constructed.

The delivered price of Alaska gas could be higher than the FPC's estimate of the market value price if: (1) the FPC established a field price that was greater than about $1.50 in 1985 or about $2.00 in 1990 (both in 1975 dollars); (2) project cost overruns were such that a fixed field price plus the escalated transportation costs exceeded market value; or (3) cost overruns were such that, under a formula pricing approach, the transportation cost plus the minimum field price exceeded market value. With continued price regulation and rolled-in (average cost) pricing, delivered prices in excess of market value would probably not change the basic conclusion that when significant shortages exist, Alaska gas would be accepted and would increase total consumption by satisfying the demand of industrial customers.

Under rolled-in pricing, the effect of Alaska gas on the average interstate city gate (wholesale) price can be analyzed to determine the marketability of Alaska gas. If we assume that large scale industrial fuel switching may take place only when the average price of gas reaches the price of substitute fuels, such as distillate fuel oil, Alaska gas (as a relatively small portion of total supply) could reach extremely high prices before encountering marketing problems. An analysis of the weighted average city gate price for the Nation and for FEA Region V (6 Midwestern States), which receives a large portion of the Alaska gas, suggests that the Alaska gas delivered price would have to be in excess of $10/mcf before either the national or regional average price reached parity with distillate.

Under an incremental pricing scheme, which would allocate higher priced gas to lower priority users (the industrial sector), the factor determining the maximum price of Alaska gas will be the nature of the industrial sector demand for gas. Under this pricing scheme, Alaska gas would most likely be competing with other incremental gas, such as imported LNG, in order to serve higher priority industrial customers, rather than with other fuels, such as distillate. The price of incremental LNG in 1985 has been estimated at $3.70/mcf and in 1990, $4.50/mcf. These figures probably represent the lower end of a range of prices at which Alaska gas can be marketed, with the upper bound determined by the characteristics of the industrial sector demand.

The FPC recommendation concludes that any decision as to the need for additional new facilities for delivering Alaska gas to the Western States (a Western leg) be deferred for one to two years. This deferral will not delay delivery of gas to the Western States, since the lead