Interstate natural gas pipeline shippers Friday called on FERC to put an end to the pipeline practice of recovering fuel costs through fixed fuel retention percentages. They contend that the practice leads to significant over-recovery of fuel by pipes from their shippers.

"The Commission should not continue to allow the recovery of pipeline fuel costs through fixed fuel retention percentages, primarily because many pipelines may be over-recovering fuel based on fixed fuel percentages that were established under rate and fuel settlements that were entered into more than 10 years ago," said Calpine Corp. in comments filed at the Federal Energy Regulatory Commission (FERC). Calpine, which owns nearly 24,000 MW of generating capacity, is one of the largest natural gas consumers in North America.

Instead, Calpine and other pipeline shippers said they advocated the adoption of an annual tracker for recovery of pipeline fuel costs and a true-up mechanism to promote more accurate tracking of fuel costs. FERC in a Sept. 20 notice of inquiry asked companies to comment on the fuel retention practices of pipelines and whether reforms were needed [RM07-20].

Currently, interstate pipeline require customers to contribute a small percentage of the gas volumes that they tender for transportation service to provide fuel for compressors and to make up for lost and unaccounted-for gas. Each pipeline states the percentage it retains in its open-access tariff. Fuel retention rates for pipelines range from fractions of a percent to as high as 13%, according to FERC.

The Natural Gas Supply Association (NGSA), in a recent study of pipeline returns, estimated that 32 pipelines, representing 80% of interstate throughput, generated about $2.1 billion in excess retained fuel over a five-year period ending in 2005. A review by the Federal Energy Regulatory Commission of data filed by pipes in their 2005 Form No. 2 filings indicated that major pipelines appeared to have retained or carried over in their accounts a net sum of more than 97 Bcf in fuel beyond what was consumed, lost or unaccounted-for.

At average 2005 prices, this represented more than $711 million in value, according to the Commission. Of that amount, 58 Bcf, with a value of $427 million, was attributable to pipelines that do not have a tracker mechanism in their tariff, and nearly 39 Bcf, with a value of more than $285, was attributable to pipelines with a tracker and no true-up or a tracker with a true-up mechanism, the agency said.

Like Calpine, Apache Corp. said it supported the implementation of an annual tracker for recovery of fuel costs and a true-up mechanism. "The central premise of a fuel tracker is to limit pipeline recovery of fuel and lost and unaccounted-for gas to as close to actual levels as possible. A true-up with both positive and negative adjustments based on actual quantities in a standard test period will help ensure that pipelines recover an appropriate allowance for fuel and lost and unaccounted-for gas," the independent gas producer said.

Apache proposed that FERC require pipelines to establish a 2% cap on recovery of lost and unaccounted-for gas. "Most interstate pipeline fall comfortably within this threshold for lost and unaccounted-for gas on their transmission, gathering and storage systems. Limiting lost and unaccounted-for gas by maintaining and repairing pipelines is good for the environment and public safety," it said.

In addition, Apache suggested that pipelines be required to make tracker filings at the Commission. The filings would include information on the amount of gas received into a pipeline; the estimated amount of gas used for fuel, flared or vented for construction, repair, maintenance or other operational uses; the estimated amount of liquid hydrocarbons and condensate removed from the gas; and the estimated amount of gas lost and the location where lost.

"Requiring pipelines to report such information would provide another means of ensuring that interstate natural gas pipelines do not over-recover their fuel costs," and would improve fuel efficiency, reduce lost and unaccounted-for gas and lead to more accurate information, Apache noted.

The NGSA, which represents gas producers, "supports a uniform policy that requires all interstate natural gas pipelines with fixed fuel percentages to convert to a fuel tracker that also includes a true-up mechanism. The Commission's findings, as well as studies by NGSA, "clearly show significant levels of over-collection of fuel by some pipelines that have fixed fuel charges...These excessive over-collections provide strong evidence that the continued use of fixed fuel percentages by pipelines is no longer just and reasonable."

The American Chemistry Council (ACC), which represents businesses that use a total of 2 Tcf of gas annually, also urged FERC to reform its fuel-retention policies to minimize the potential for cost over-recovery. It noted that FERC data indicate that the average cost over-recovery per pipeline is significantly higher for those using fixed fuel percentages ($17.8 million per company) compared to those using the tracker approach with or without a true-up ($6.2 million per company).

"This discrepancy appears to indicate that the [fixed fuel percentage] approach induces an inherent bias toward cost over-recovery compared to methodologies which track and true-up actual fuel and lost and unaccounted-for gas. The impact of cost over-recovery is magnified by high and volatile natural gas prices, leading to excessive costs on end consumers of natural gas," the ACC said.

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