west pipeline system from the Permian and San Juan Basins. Any substantial new supplies from the deep Permian formations-or increased supplies from coal gasification projects—would compound the problem. Indeed, under optimistic assumptions about future gas supplies to the West and the existing capacity to California which would be utilized, there is a serious risk of capacity shortage for the years 1983-87. This shortage can be determined from the data set forth in Exhibit 1. The Exhibit indicates that without a Western Leg, a displacement scheme capacity shortage could exist in 1983-85 and would be uncomfortably close in 1986. If current Canadian supply contracts are renewed, as it is hoped they will be, a capacity shortage could exist in 1983 and later years as well. Finally, it should be noted that full utilization of the Northern Border system for a displacement scheme would preclude the ability to expand the Northern Border system at a low capital cost for additional deliveries to the East if more Alaska gas becomes available. The Nation's gas delivery system must have the overall flexibility to make a rapid and economic response to many variables—the level of future exports from Mexico, the level of future exports from Canada, the rate at which new supplies of Alaskan gas can become available, and the rate at which LNG and coal gasification projects are developed. Therefore, to ensure sufficient capacity for future supplies to California and other Western States, provision should be made for direct delivery of Alaska gas to the West. SIZE AND VOLUME OF A WESTERN LEG The approved facilities for the Western Leg are embodied in the so-called "1580 Design." It would require a 36-inch, 176-mile pipe line, to be constructed by the Alberta Gas Trunkline Ltd. (AGT), from James River Junction in Alberta to Coleman on the British Columbia border, where it would connect with the existing Alberta Natural Gas Company Ltd. (ANG) line in British Columbia. One hundred and five miles of the existing ANG line, from Coleman to Kingsgate on the U.S. border, would be looped with 36-inch pipe. In the U.S., 612 miles of the PGT line from the Canadian border to Malin, Oregon, and 297 miles of the PG&E line from Malin to Antioch, California, would also be looped with 36-inch pipe. No new compression would have to be added to the existing systems. With this project, 659 mmcfd of North Slope gas could be delivered directly to the western U.S., which is roughly the total expected volume of Alaskan gas delivered to the West. PGT intends to deliver 22 mmcfd of this amount to Northwest Pipeline Company for distribution in the Pacific Northwest, and the remainder would be delivered to California, where 200 mmcfd would be distributed by PG&E in the North and 437 mmcfd would be distributed by the Southern California Gas Company in the South. Any share of Alaskan gas or additional Canadian gas greater than 659 mmcfd would not require a new facility but could readily be delivered to the West by displacement. There would easily be sufficient capacity in the Southwest system to absorb this relatively small volume of Western gas. CONCLUSION The evidence clearly suggests that the natural gas pipeline capacity available at present will not be adequate to accommodate both the Sohio Project and the movement of Alaskan gas to the West in the mid-1980's and perhaps beyond. While this conclusion is based on optimistic supply projections, it nevertheless is a significant probability on the basis of which a Western Leg Facility should be planned. There is some risk in authorizing a Western Leg that it or other existing pipeline systems to the West could at some time become somewhat underutilized, perhaps resulting in some increase in per unit costs to gas consumers. But the consequences of not authorizing a Western Leg are even greater. Not only could failure to build a Western Leg under the most reasonable supply projections cause higher direct costs to the consumer, but it could also greatly reduce the West's flexibility to receive new gas supplies if and when they develop in the future. Indeed, whether gas supplies in addition to what are presently projected will be available from sources like Canada and Mexico may well be dictated by whether gas pipeline capacity is available to transport it. If the almost unanimous comments of their elected officials are any indication, the people of the West are willing to accept whatever additional cost may be involved in order to be assured that pipeline capacity will be adequate to meet all future contingencies. Prior to final certification of a Western Leg, there may be better information about potential supplies to determine whether the proposed "1580 Design" is over- or under-sized for the anticipated need. Before the issuance of a final certificate of public convenience and necessity, the Secretary of Energy will determine the size and volume of the Western Leg to be certified, as well as review the need for any pre-building to take direct deliveries for the West Coast of any short-term increases in Canadians exports from Alberta. Any deviation from the capacity of the "1580 Design" will directly reflect any material changes in gas supply or pipeline capacity projections that occur between now and the date the certificate is issued. The Secretary's determination shall be communicated to the FPC and shall be binding on it for purposes of its certification. CHAPTER X-RELATIONSHIP OF THE DECISION TO THE RECOMMENDATION OF THE FEDERAL POWER COMMISSION Section 7(b) of ANGTA requires a statement of the "reasons for any revision, modification of, or substitution for the Commission (FPC) recommendation." This Decision is consistent with the FPC recommendation as set forth in its letter of transmittal dated May 2, 1977: We recommend that an overland route through Canada be selected, if such a route is made available by the Government of Canada on acceptable terms and conditions. The condition has been met, and an overland route is selected by this Decision. Two FPC Commissioners recommended the Alcan system. The other two FPC Commissioners recommended the Arctic Gas system "conditioned upon timely affirmative decisions by the Government of Canada to make the route available," but they said that otherwise Alcan should be approved. There was a failure of that condition with respect to Arctic Gas when the Arctic Gas route was rejected by the Canadian National Energy Board. Therefore, this Decision is in accordance with the specific system recommendation of all FPC members who participated in the May 2, 1977, Recommendation to the President, 32 The Federal Power Commission recommended the deferral for "one to two years the certification of any new facilities for the western leg. ." This Decision provides for approval of the western leg facilities subject to the same condition as other portions of the project. The Secretary of DOE is authorized to make a determination of the necessary capacity for both the western and eastern legs at the time of the issuance of the final certificate of public convenience and necessity. This approval is necessary to entitle all such facilities to the expeditious authorization pursuant to Section 9 of ANGTA. This Decision differs from the Recommendation of the Federal Power Commission in one other material respect. The Commission suggested alternative financing plans-a private risk bearing model and a consumer risk bearing model. In conjunction with private risk bearing, the FPC suggested the use of a "formula" price mechanism whereby a city gate market value indicator (MVI) price 32 The only difference between the Alcan system before the Federal Power Commission and the Alcan system herein approved is the contemplated expansion of pipeline capacity south of Whitehorse, Yukon, and a pipeline rerouting near Whitehorse to facilitate any future connection of Mackenzie Delta Reserves. would be established. The wellhead price would be the difference between the transportation cost and the MVI price. This Decision requires a private assumption of the risk of noncompletion. However, the determination of the wellhead price should be pursuant to the pricing provisions in the pending National Energy Act. Those provisions, along with the financing proposals made herein, will ensure an equitable sharing of project risks and constitute the best method for securing a private financing of the project. CHAPTER XI-AGREEMENT WITH CANADA ISSUES There are certain potential risks associated with any project involving more than one country. These derive from complications which arise when a large scale construction project is subject to the jurisdiction of two federal governments, Canada and the U.S., and the interests of the two governments are not always identical. The potential risks involved were explored extensively during the FPC proceedings on Alaska gas, and further in the Senate hearings and debates prior to ratification of the Transit Pipeline Treaty with Canada. These debates served to crystallize the most important of these issues. An example of the divergence of interests of the two countries was the re-routing of the main pipeline through Dawson which was required by the NEB's July 4th Decision. That re-routing was designed from the Canadian perspective to bring a major gas transportation system within reach of their Mackenzie Delta reserves. From the U.S. perspective, the re-routing was a costly alternative to accommodate an uncertain eventuality-construction of the Dempster Line-which might never occur. During the course of the negotiations, a compromise was worked out on this point which effectively serves the interests of both countries. In return for routing the main line along the original Alcan route, the U.S. agreed to share the costs of extending the Dempster Highway lateral from Dawson to Whitehorse. Whitehorse will be the point at which the lateral pipeline from the Mackenzie Delta gas fields connects to the main line when and if the lateral is built. Virtually all of the other issues which were raised in the FPC proceedings and the Senate hearings and debates were the subject of lengthy negotiations with the Canadians. The discussion which follows covers the issues of primary Canadian concern in reaching this decision, along with the resolution of those issues which has been achieved through the negotiations. Taxes and impact assistance The first risk with a trans-Canada system is unanticipated costs arising from potential Canadian taxes and impact asssitance. The FPC proceeding considered the risk of taxes imposed by the Canadian provincial governments, and it was concluded that Canadian legislation or compacts would be necessary to bind the Canadian provinces directly to the antidiscriminatory tax provisions of the Treaty. The Canadian Government has undertaken to negotiate FederalProvincial agreements with the three western provinces-British Columbia, Alberta and Saskatchewan-to assure their implementation of the Treaty. The Federal Government has obtained public statements from all three provinces endorsing the principles of the treaty, and those statements are annexed and made part of the Agreement. These statements and subsequent Federal-Provincial Agreements, backing up the unequivocal responsibility of the Canadian Government under the Treaty, will provide adequate assurance on this point. The degree of practical protection afforded by the Treaty was subject to some question in the Yukon Territory, as there are currently no similar pipelines against which to measure possible discriminatory treatment. Therefore, ad valorem (property) taxation in the Yukon was negotiated as part of the Agreement on Principles. The agreed rate of property taxation is essentially comparable to that in Alaska, and will continue for 25 years or until a similar pipeline is built, at which time the Treaty protections will apply. The only contingency which would change the agreed taxation regime is if the State of Alaska changes its property tax regime. A related issue was the $200 million socioeconomic impact payment recommended by the NEB in its July 4th decision. There are precedents in the United States for socioeconomic impact assistance. Normally, however, compensation for such impacts has been through federal government loans and subsidies. In negotiations with Canadian representatives, it was strongly urged that this payment be structured as a loan from the pipeline company to be repaid through reduction of future property-tax liability. In fact, such an arrangement has been worked out between the Canadian project sponsors and the Canadian government. As a result, cost of service to U.S. consumers will not be affected by this arrangement. Native claims A source of additional concern is the settlement of Canadian native claims. Some parties have questioned whether the cost of the settlement-the cost was almost $1 billion in the case of Alaska native claims-would be imposed on consumers of Alaska gas through some type of transit fee or tax. The Canadian government has publicly stated on a number of occasions that it considers settlement of native claims as an internal Canadian matter to be resolved separately from any trans-Canada pipeline consideration. Canada has also undertaken to assure the United States that no charges against the pipeline related to the settlement of such claims will be levied. Another concern has been that the uncertain status of a Canadian native claims settlement may affect Alcan's ability to secure financing. Lenders might be reluctant to commit funds without firm assurance on the final schedule for completion of the pipeline. The Agreement on Principles commits both countries to a timetable which is specified in the Agreement. The Agreement also commits both countries to seek legislation as required to remove |