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Producers Urge FERC to Reject Transco's Bid for Higher Overrun, Imbalance Penalties

Four major producers have called on FERC to reject a tariff proposal by Williams Co.'s Transcontinental Gas Pipeline Corp. to significantly increase penalties for unauthorized daily overruns and daily operational flow order (OFO) imbalances on its system.

In late October Transco asked the Federal Energy Regulatory Commission to raise its penalties, which currently are $25/Dth for unauthorized daily overruns and OFO imbalances, to the higher of $50/Dth or three times the highest weekly Reference Spot Price for the current month for the zones in which the overruns or imbalances occurred [RP06-65].

Transco and other major pipelines, such as Duke's Texas Eastern Transmission, have requested higher penalties this winter season, saying that their existing penalties are not a sufficient deterrent to shipper overruns and imbalances in light of the high price of natural gas and tight demand. Absent higher penalties, the pipelines argue their systems could face reliability problems this winter.

ExxonMobil, ConocoPhillips, Shell Offshore Inc. and Chevron USA Inc. question whether Transco's penalty proposal is "just and reasonable," consistent with the Commission's regulations regarding penalties, and whether it would ensure system reliability or would in fact jeopardize Transco's system integrity by threatening suppliers that are attempting to restore supplies in the Gulf of Mexico in the wake of the hurricanes.

"In support of its increased penalties, Transco cites anticipated gas price increases in the upcoming winter, but provides no justification for the magnitude of the increased penalties nor any explanation why such penalties are needed to protect system integrity," the producers said. "Even if higher gas prices necessitate tying the penalties to index prices, Transco offers no explanation why it must establish the penalties at the higher of $50 or three times the highest weekly index price," they noted.

"Transco suggests that shippers will ignore or disregard its OFO postings or make unauthorized overruns when its penalties are lower than the market price for gas." But producers argue that the pipeline could deter overruns/imbalances with much lower penalties than those proposed by Transco. "A penalty of half the proposed level, or 1.5 times the highest weekly index price, would provide the necessary incentive to shippers to act in conformity with their tariff obligations so as to avoid penalties," they said.

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