January 2011 Vol. 66 No. 1

Washington Watch

FERC Investigates Pipeline Rates; PHMSA Rejects INGAA Pleas

The Federal Energy Regulatory Commission (FERC) is investigating the possibility that two interstate pipelines are charging unreasonable rates. The FERC opened mid-November investigations of Kinder Morgan Interstate Gas Transmission LLC and Ozark Gas Transmission LLC, a unit of Spectra Energy Partners LP., based on reviews of Form 2 cost of service and revenue information submitted by the two companies for 2008 and 2009.

None of the FERC commissioners gave any indication that they were beginning to look closely at pipeline rates more broadly, and that these two investigations were the front end of a longer string of upcoming cases. However, Chairman Jon Wellinghoff noted that the Kinder Morgan and Ozark investigations come one year after FERC initiated a Section 5 rate case against three interstate pipelines. “Two of those proceedings have since resulted in uncontested settlements that provide significant benefits, such as reduced rates, reduced fuel retention factors and, in one case, a revenue sharing arrangement with pipeline customers,” he stated. FERC dropped the third case against MidAmerican Energy Holdings Co.’s Northern Natural Gas pipeline when public service commissions in Northern’s service area argued consumers would be hurt if FERC acted against Northern.

Attorneys representing public service commissions in Arkansas and Missouri, who have indicated an interest in the proceeding, did not respond to inquiries about whether they supported or opposed a reduction in KMIGT and Ozark rates.

Kinder Morgan’s 5,100-mile system runs through Colorado, Wyoming, Kansas, Nebraska and Missouri. FERC calculated KMIGT’s estimated return on equity for 2008 at 27.10 percent and 29.25 percent for 2009, inclusive of the dollar value of excess fuel retained by the company. When the dollar value of the excess fuel retained by the company is excluded, Kinder Morgan’s estimated return on equity for 2008 is 15.69 percent and 17.81 percent for 2009.

Ozark Gas Transmission owns and operates an estimated 565-mile interstate pipeline system in Arkansas, Missouri and Oklahoma. From Ozark’s 2008 and 2009 Form 2 reports, FERC staff calculated the company’s estimated return on equity, inclusive of revenues received from the sale of shipper-supplied gas, to be 27.81 percent for 2008 and 31.01percent for 2009. When the revenue from the sale of shipper-supplied gas is excluded, the Commission estimates the company’s return on equity to be 15.25 percent for 2008 and 25.63 percent for 2009.

Both Kinder Morgan and Ozark produced general statements after the investigations were announced. KMIGT noted that the FERC staff bears the burden of proving that Kinder Morgan’s rates are no longer just and reasonable. The company seemed to also, at the same time, be preparing for the worst. Referring to the possibility FERC would find its rates unreasonable, it said: “If there is a change in rates, typically the rates are changed from the point of the decision moving forward, rather than a refund to customers.” KMIGT spokesman Larry Pierce declined to comment further.

Gregory J. Rizzo, president and chief executive officer, Spectra Energy Partners LP, pointed out that Ozark did benefit in 2009 from an opportunity to transport additional natural gas volumes due to another pipeline company being offline, which increased annual revenues. He added that the company expected lower projected revenues in 2010 and a potential reduction in its revenues in 2011 of up to $10 million, related to increased competition from new pipelines and expiring contracts.

PHMSA Rejects INGAA Pleas On New Safety Reporting
New pipeline safety reporting requirements went into effect on Jan. 1, 2011, although implementation has been delayed for some of the changes. Gas and hazardous liquid lines now must report an unintentional release of gas that results in an estimated gas loss of 3 million cubic feet (Mcf) or more. That represents a setback for INGAA, which had pressed for a 20,000 Mcf threshold. In addition, each operator of a gas pipeline, gas pipeline facility, LNG plant or LNG facility must obtain from the Pipeline and Hazardous Materials Safety Administration (PHMSA) an Operator Identification Number (OPID) by Jan. 1, 2012. Many pipelines already have OPIDs. Those OPIDs will be used by the PHMSA to create a new National Registry of Pipeline and LNG Operators.

The most controversial issue in the rulemaking was PHMSA’s desire to expand the definition of “incident” to include unintentional leaks of 3,000 Mcf of gas. The key elements in the current and longstanding requirement are a leak causing more than $50,000 in damage, causing a death or deemed significant by the operator. Intentional releases of gas have to be reported if they result in death, inpatient hospitalization or $50,000 in property damage. Transmission or gathering pipeline operators must submit DOT Form PHMSA F 7100.2 as soon as practicable but not more than 30 days after detection of an incident.

The Interstate Natural Gas Association of America (INGAA) had argued in 2009, after the PHMSA put out a proposed rule, that the 3,000 Mcf threshold would cause its members to file incident reports for a significant number of the low risk pinhole and fitting leaks, which are presently reported in the annual report. “The number of incident reports, and the cost of reporting, will increase sharply, and the incident database, which has proven useful in policy analysis and development, will lose its continuity,” argued Dan Regan, INGAA’s regulatory attorney and Terry D. Boss, senior vice president for environment, safety and operations.

The reporting changes imposed on pipelines are the result of recommendations from the National Transportation Safety Board (NTSB), Government Accounting Office (GAO) and Section 15 of the PIPES Act of 2006.

PHMSA Wants To Move Deadline For Control Room Management
Interstate pipelines think some aspects of the Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed “speed up” of its new pipeline controller safety requirements are irresponsible. PHMSA issued the final control room management rule in December 2009. Pipelines were suppose to have developed programs by Aug. 1, 2011 and implemented them by Feb. 1, 2013.

But out of nowhere, on Sept. 17, 2010, PHMSA said it wants to expedite the program implementation deadline to Aug. 1, 2011 for most of the requirements. The agency’s reason for wanting to move up the implementation deadlines is that it believes “most of the effort to comply with many of the provisions will have already been completed by the Aug. 1, 2011.”

Very few companies agree with that assessment. Most interstate and intrastate pipelines do agree that the control room management rule is perfectly fine with its original deadlines. But almost no one thinks moving the implementation deadline up to Aug. 1, 2011 is a good idea. Count Patrick Carey, director of D.O.T. compliance services with El Paso Pipeline Group, in the skeptic category. He says the industry will be hiring about 200 new controllers to comply with the new shift length, rotation and hour of service limitations in the final rule. Training those new employees will take time and will not be complete by Aug. 1, 2011, Carey states. He says El Paso can support an expedited implementation schedule, just not the one the PHMSA suggested.

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