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Producers, Intrastate Pipes Support Hub Approach for Posting Volumes

April 21, 2008
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Expressing concern over FERC's proposed rule requiring interstate and intrastate pipes to post actual flow volumes, producer and intrastate pipeline groups last week called on the agency to limit the scope of the proposal's posting requirement for intrastate pipelines to only those intrastates that serve major hubs or market centers.

The Independent Petroleum Association of America (IPAA), which represents independent producers, "supports the use of hubs to make more manageable the amount of data to be posted and, in turn, mitigate the cost of posting that could be passed through to producers," the group told the Federal Energy Regulatory Commission (FERC) in reply comments [RM08-2].

"IPAA cautions that the focus on hubs should ensure that any list of hubs be up-to-date. Based on comments made at [an] April 3 conference, it appears that the list of 13 hubs referenced in [FERC's notice of proposed rulemaking, or NOPR] may not accurately reflect the most active hubs in today's natural gas market. If hubs are to be used as an initial screen for limiting posting requirements, then the number of hubs should not be restricted to 13," the IPAA said.

The NOPR, which was issued in December, would require interstate pipelines and certain "major" intrastate pipelines to post daily capacity information, scheduled flows and actual flow volumes that affect the wholesale interstate market (see NGI, Dec. 24, 2007). The objective of the proposed rule is to increase the transparency of the gas market.

There appears to be a "broad consensus that the Commission should limit any posting requirement imposed on [intrastate] pipelines to the posting of scheduled volumes...where multiple pipelines interconnect and are recognized as market centers or hubs. Such a proposal significantly reduces the costs and burdens that would be imposed by the proposed rule and would provide the Commission with information pertinent to its statutory objective of promoting transparency in interstate natural gas markets," said the Texas Pipeline Association (TPA), which represents intrastate pipes.

Under TPA's "Hub Approach," major intrastate pipeline would be required to post only scheduled volumes, not actual flows, at each delivery and receipt point at the 13 major hubs listed in the NOPR. If FERC should approve a hub concept, the group believes the agency would have to adopt a mechanism to periodically change any of the hubs at which daily reporting is required.

"Such a mechanism...must provide sufficient notice to allow newly covered [intrastate] pipelines to update their equipment and information systems to comply with the posting requirement. The Commission should provide at least six months notice before changing the location of a reportable major hub," the TPA said.

The intrastate pipeline group also called on FERC to hold a technical conference to determine 1) which hubs would initially be subject to the posting requirements; 2) what criteria the Commission would use to determine whether a change in a major hub is necessary; and 3) what parameters define a hub.

Bentek Corp. called the hub approach "fatally flawed" because the 13 major hubs identified in the NOPR "constituted only about 15% of the points at which natural gas trades on [the IntercontinentalExchange]," according to the TPA. "Bentek failed to note, however, that the overwhelming majority of the points at which gas is traded on...ICE are locations at which [intrastate] pipelines are not present."

The Natural Gas Supply Association (NGSA), which represents major producers, said it supported a hub approach, but it said its proposal was "more closely aligned" with FERC's objective. "NGSA's hub approach requires the [intrastate] pipelines feeding the 13 hubs noted in the NOPR to post mainline and certain receipt and delivery meter flow information," the group said.

"The NGSA approach is different from the TPA approach. The TPA suggests...posting only the aggregate volume at the hub itself. While the TPA hub approach has merit in its simplicity, it does not address the Commission's interest in improving market transparency through flow information upstream of the hubs. These key points could shed light on capacity constraints or outages impacting market pricing conditions at the hub, and thus improve market transparency," the major producer group said.

At the April 3 technical conference FERC staff said the 13 hubs listed in the NOPR were for "illustrative purposes," and acknowledged that there were other areas where intrastate pipeline flows impact the wholesale gas market. "The identification of hubs for reporting purposes must be dynamic enough to allow market forces to work to develop or dissolve hubs naturally...Any hub approach must not chill the market's ability to create or dissolve hubs that evolve from underlying supply and demand fundamentals and infrastructure characteristics," the NGSA said.

As an alternative to the hub approach, the group recommended that FERC adopt a 50 Bcf per year reporting threshold for intrastate pipelines. This would capture approximately 90% of the intrastate pipeline volumes and would apply to only the largest 57 intrastate pipelines, the NGSA said. "By comparison, the Commission's proposed 10 Bcf per year threshold captures almost twice as many intrastate pipelines while only increasing the amount of intrastate flow data by 9%."

Interstate natural gas pipelines remain opposed to the NOPR's requirement that they and major intrastate pipelines post actual flows rather than scheduled volumes. Williston Basin Interstate Pipeline's "review of the initial comments filed in this proceeding has not changed its belief that scheduled volume information is the information which is most relevant to market participants," it said.

"Scheduled volume information already provides significant market transparency...Actual flowing volumes would include pipeline operational volumes. Operational volumes are not and would not be reflective of current market conditions. Therefore, market participants could end up relying on nonmarket-based information to formulate decisions," Williston Basin said.

Spectra Energy Transmission LLC agreed, saying that requiring interstate pipelines to post flow information "would mislead and confuse the wholesale natural gas market and impose unnecessary costs." As a result of the NOPR, Spectra Energy Transmission projected that it would spend at least $100 million to install metering equipment at approximately 100 mainline locations.

Kinder Morgan Interstate Pipelines estimated that its pipelines would incur costs of $300 million to install additional measurement equipment, hire more personnel to operate and maintain the equipment, and make significant modifications to its computer system. These additional pipeline costs would be passed through to shippers, including producers.

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