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FERC Rejects OFO Complaint Against Northwest

FERC Rejects OFO Complaint Against Northwest

FERC last week denied a complaint in which several Nevada industrial shippers sought exemption from continual must-flow operational flow orders (OFOs) on Northwest Pipeline's system, and to be reimbursed for the costs of complying with those OFOs. But the Commission did hold out some hope for the shippers, saying it would consider proposals to provide future relief from the pipeline's constant OFOs.

In a Section 5 complaint filed in December, a group of northern Nevada industrial gas users claimed that Northwest was violating its tariff by holding them hostage to the must-flow OFOs even though --- after "good faith efforts" on their part --- they were unable to obtain gas at reasonable prices to comply with orders. They urged FERC to order the pipeline to "cease and desist" the alleged violation.

The Commission last week found that Northwest had not run afoul of its existing tariff, but rather "has reasonably interpreted its must-flow OFO provisions in light of precedent." Consequently, "the Commission will not direct Northwest to cease and desist issuing must-flow OFOs when it is necessary for the operational integrity of its system," the order said [RP01-189].

The Northwest system is heavily dependent on displacement capacity to maintain operational integrity because its contract demand outstrips its physical capacity. Northwest's 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 other Northwest shippers (those flowing north to south) are left to make up the remaining 102,000 Dth/d. When there is inadequate north-to-south flow, the pipeline's tariff permits it to issue must-flow OFOs so it can fulfill its contract obligations.

The Nevada industrial users argued that they shouldn't be penalized in the event they can't comply with the must-flow OFOs because Northwest's tariff specifically exempts shippers that have made "good faith efforts" to obtain gas supply, but were unsuccessful. At issue in the complaint case was whether "good faith efforts" exemptions applied when shippers were unable to obtain gas at reasonable costs, which was how the industrials interpreted the tariff, or whether shippers that were subject to the must-flow OFOs were required to buy gas - irrespective of the price.

The interpretation of the northern Nevada industrial group "is in error," the order said. It noted that Northwest's tariff exempts only those shippers that are unable to "physically obtain" gas supply after making "good faith efforts," which wasn't the case in this complaint. The industrial group "is able to obtain gas supply, but at spot market (albeit high) prices," the order said.

The Commission denied reimbursement because it said the must-flow costs incurred by the industrials "were caused in large part by the business choices" that they made. They "purchased deeply discounted capacity with the knowledge that their primary points were at Stanfield (OR) and Muddy Creek (WY) and that they could be required to flow from those points to create displacement capacity. At that time, other (but more expensive) capacity was available that would not have been subject to the must-flow OFO," the order noted. As a result, the industrial group "chose not to reduce its risk of having to comply with a must-flow OFO even when it had notice that an OFO was imminent."

In their complaint, the industrials wanted FERC to go beyond just interpreting the "good faith efforts" exemption in their favor. They also asked the Commission to find that Northwest's tariff allowing must-flow OFOs "as currently structured" has become "unreasonable and unduly discriminatory." It requires shippers on the northern end of the pipe to pay all of the costs to provide displaced capacity for the shippers at the southern end of the system, the industrials said. The southern shippers get all of the benefits, they noted, but foot none of the costs.

While the industrials lost on the first count, FERC last week appeared willing to at least consider the possibility that Northwest's OFO tariff provisions may need to be revised. But the complaint case was not the "most appropriate forum" to review the issue, it said. Rather, it should be analyzed as part of Northwest's Order 637 compliance proceeding, along with a number of related issues --- segmentation, imbalance provisions, scheduling and capacity release.

It directed interested parties to file "limited additional comments" on Northwest's OFO tariff provisions and penalty levels in the pipeline's Order 637 compliance proceeding within 15 days of its order.

Alternative proposals to Northwest's existing must-flow OFOs --- such as requiring the pipeline's shippers who benefit to maintain the displacement capacity, requiring Northwest to invest in facilities to expand its physical capacity, or Duke's suggestion to allow OFO-recipients to invoke the 'good faith" exemption when their losses approach $35/Dth --- will be entertained, the order said. The Nevada industrial group recommended the first two proposals as possible solutions.

Susan Parker

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