Shippers Condemn Northwest's Must-Flow OFOs
Several northern Nevada industrial gas users have accused
Northwest Pipeline of violating its tariff by holding them hostage
to must-flow operational flow orders (OFOs) that it has issued
daily since early December in an effort to compensate for the
sizable capacity shortfall on its system.
In a Section 5 complaint filed on Dec. 15, the industrial gas
customers called on FERC to direct Northwest to "cease and desist"
the alleged violation of the tariff, which they claim is forcing
them and other customers at the northern end of the pipeline to
subsidize the gas acquisition and transportation costs of customers
on the southern end of Northwest's system.
The effect of the must-flow OFOs is to compel shippers to make
up the capacity shortfall on Northwest's system via displacement,
the industrials noted. Northwest's firm contractual demand is
720,000 Dth/d, but its physical capacity is only 474,000 Dth/d.
Pan-Alberta Gas (U.S.) Inc. provides 144,000 Dth/d through a
displacement arrangement, while certain shippers are left to make
up the remaining 102,000 Dth/d.
The industrial users contend they shouldn't be penalized for not
complying with the must-flow OFOs if they have made "good faith
efforts" to obtain gas supply to meet Northwest's order, but have
been unsuccessful. They point out that Northwest's tariff exempts
such shippers. At issue, however, is whether the "good faith
efforts" clause applies to purchasing gas at reasonable costs,
which is how the industrials interpret the tariff, or whether it
means that shippers should be required to buy gas "at any price" to
meet a must-flow OFO. The latter, according to the industrial
users, is Northwest's position.
The "regulatory history" of Northwest's tariff "makes clear that
'good faith efforts' to obtain a gas supply at the Stanfield [OR]
receipt point need not extend to purchasing 'gas at any price,' but
rather must be viewed in the context of current conditions and
circumstances, i.e. available prices and supplies," the industrial
customers said. "Where a shipper can secure gas needed to meet a
must-flow order only at the basin price differentials that
currently prevail, and assuming that the shipper can document such
efforts and impacts for Northwest verification, the shipper's
request for exemption from penalties must be granted." Northwest
twice has refused such a request by the industrial customers, they
In anticipation of the high gas prices this month, the Nevada
industrial users said they chose to switch to alternative fuels
"where feasible" or to curtail operations rather than use their
released capacity on Northwest. Nevertheless, the pipeline's daily
must-flow OFOs "have forced them into the volatile daily gas market
to avoid extremely high non-compliance penalties, undermining their
business decisions to rely on alternative fuels," they told FERC
The non-compliance penalties on Northwest are equal to the
greater of $10/Dth or four times the highest spot rate at Sumas,
Stanfield, Kingsgate, Opal or Ignacio for the month of
non-compliance, according to the industrial gas users. Based on the
spot rate at Stanfield, the penalty this month was $58.15/Dth.
If one of the Nevada industrial users, Newmont Mining Corp., had
defied Northwest's order to flow 25% of its contract demand, or
1,000/Dth, on any December day, it would have been penalized
$58,160 for that one day, they said. If all of the Nevada
industrial customers had violated the pipeline's order, they
estimated the one-day penalty would have been $149,471.
In addition to facing penalties, the industrial shippers contend
they are losing money on the gas they are buying to comply with the
must-flow OFOs. The industrials said they "must ship the gas to a
point where they cannot use it, [and] can only sell it at the Rocky
Mountain basin prices, which is a fraction of the price at which,
[under] current conditions, they purchased it."
The industrial shippers want FERC to do more than just interpret
the "good faith efforts" exemption in their favor. They contend
that Northwest' tariff allowing must-flow OFOs "as currently
structured" is both "unreasonable and unduly discriminatory."
That's because it requires one group of shippers to incur gas
acquisition and transportation costs solely to subsidize service to
another group of shippers, they argued. They believe the shippers
who benefit should pay for the displacement capacity costs.
Currently, the must-flow OFOs "result in southbound flows [on
Northwest] that create northbound capacity for the benefit of
shippers with south-to-north entitlements. Those same
south-to-north shippers could, however, themselves purchase spot
gas in the Canadian supply areas and ship such volumes southward on
an interruptible basis on Northwest, i.e. do what [the industrial]
shippers and others have been directed to do. They could pay the
costs of the capacity that they want."
As an alternative, Northwest could require a sharing of
displacement capacity costs by all shippers using its system at a
given time when capacity is short, or it could invest in facilities
so that it has the physical capacity to meet all of its contractual
commitments, the industrial users said.