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Pipe Customers Mull Options on Fuel Cost Over-Recoveries

Efforts to revive an inquiry into over-recovery of fuel costs by interstate natural gas pipelines, which FERC scrapped in late 2008 to the dismay of shippers, could resurface this year depending on a change in the makeup of the Federal Energy Regulatory Commission under the Obama administration.

In November FERC terminated an inquiry into the fuel retention practices of interstate gas pipelines, saying there was no basis for the agency to proceed with generic action to deal with over-recoveries. The order said shippers' requests to impose a fuel tracker and a true-up mechanism on every pipeline to prevent cost over-recoveries would be difficult to justify under the requirements of Section 5 of the Natural Gas Act (NGA). The agency instead supported examination of fuel retention practices on a pipeline-by-pipeline basis (see NGI, Nov. 24, 2008). The decision was a major win for interstate pipelines, but a setback for pipeline shippers.

Dena Wiggins, general counsel for the Process Gas Consumers Group (PGC), believes it's futile to ask the current sitting Commissioners to rehear the case at this time because the response, in all likelihood, would be the same. "We're better off to see what happens if we get some new FERC Commissioners," she told NGI.

"The other option is to file [Section 5] complaints against individual pipelines that have been the 'most egregious earners'" of income from the over-recovery of fuel costs, Wiggins said. She noted that it was "premature" to say what PGC or other shippers will do, or which interstate pipelines will be targeted.

But the Section 5 complaint process under the NGA does not give shippers much remedy since the NGA, unlike the Federal Power Act, does not provide for retroactive refunds; it only provides for refunds that are prospective from the date of a FERC decision. This absence of retroactive refund authority in the NGA is the reason few shipper complaints are filed against pipelines at FERC.

The only way to amend the NGA is through Congress, and the America Public Gas Association (APGA) plans to make changing this inequity a "high priority in the 111th Congress," said APGA Executive Vice President Dave Schryver. Currently there exists a disincentive for shippers to file Section 5 complaints at FERC, while the "incentive is for pipelines to drag out proceedings as long as they can," he said.

Donald Santa, a former FERC Commissioner and president of the Interstate Natural Gas Association of America (INGAA), said it would be "somewhat unusual" for FERC to reopen a case shortly after closing it, "absent some new facts and circumstances." If it should be revisited, "our position would remain the same -- that the one-size-fits-all policy [for fuel retention] does not make sense." This issue is "more complex than it appears on the surface," Santa said, adding that pipeline customers receive "trade-offs," such as rate certainty and other benefits, in return for over-recovery of fuel costs.

Fueling Wiggins' determination are the results of a study commissioned by the PGC and the Independent Petroleum Association of America, which found that several interstate pipelines are reaping millions of dollars in additional income each year from excess fuel costs paid by shippers. The study concluded that in 2006 alone fuel cost over-recoveries accounted for 37.5% ($435.8 million) of the net operating income of 11 leading interstate gas pipelines ($1.16 billion).

"I was really surprised in the face of this compelling data that the Commission took no action" in November, Wiggins said. Interstate pipelines generally require customers to contribute a small percentage of the volumes of natural gas tendered for transportation service to provide fuel for compressors and to make up for lost-and-unaccounted-for (LAUF) gas.

The study by Massachusetts-based Foresite Energy Services LLC, which was conducted over a three-year period (2004-2006), reviewed the tariffs of the largest 38 pipelines in the nation whose annual throughput exceeded 200 MMDth in 2006, as well as four smaller pipelines that did not have fuel trackers and/or true-up provisions in their tariffs.

Of the 42 pipelines examined, 11 were found to not have a fuel tracker and true-up mechanism in place that prevented a pipeline from either over-recovering or under-recovering from shippers its actual fuel used, including LAUF gas. All of the data was taken directly from pipelines' annual FERC Form No. 2 filings, according to the study.

The study concluded that the 11 interstate pipelines over-recovered an average $393 million annually in fuel costs between 2004-2006. The pipelines with the most fuel cost over-recoveries were Natural Gas Pipeline Company of America (NGPL) with an average of $137.4 million annually, and Tennessee Gas Pipeline with an average of $115.4 million each year during the period. Next in line was Transwestern Pipeline, with an average of $42.25 million annually in fuel cost over-recoveries.

The fuel cost over-recoveries accounted for more than half of some of the pipelines annual net operating income during the three-year period. NGPL's income from fuel cost over-recoveries averaged 50.7% of its annual income between 2004-2006, while Tennessee's fuel over-recovery income averaged 64.6% of its annual income, Transwestern's averaged 56.7% over the three-year period, Gulf South Pipeline's fuel cost over-recoveries averaged 53.8% and National Fuel Gas Co.'s over-recoveries averaged 46.6%, according to the shipper study.

The interstate pipeline with the lowest fuel cost over-recoveries was Northern Border Pipeline Co., averaging 0.8% of its annual net operating income during the three-year period.

The study also compared actual fuel used by pipelines to excess fuel retained. It found that Gulf South retained 139.5% more fuel than it used in compression and LAUF gas between 2004 and 2006; National Fuel recovered 108.7% more fuel than it used; NGPL recovered nearly 100% more fuel during the period; Transwestern retained 77.4% more fuel than it used; and Trailblazer Pipeline recovered 63% more fuel than it consumed.

While a number of shippers support a fuel tracker with a true-up to prevent fuel cost over-recoveries, gas pipelines argue that there is no need to change Commission policy, which allows pipelines to either charge a fixed cost or use a tracker mechanism to recover fuel costs.

INGAA, which represents interstate gas pipelines, is opposed to a uniform method -- such as the shipper-favored tracker with a true-up mechanism -- being prescribed for pipelines to use in recovering the costs of fuel retention. Not only do pipelines "differ substantially in their physical configuration in ways that affect fuel usage and retention rates, but...they operate in different market environments and have reached different accommodations or negotiated settlement agreements with their customers over the years on the appropriate treatment of fuel," the pipe group told FERC during the inquiry proceeding.

"The optimum policy continues to be a case-by-case approach to the issue," INGAA said. "The Commission should continue to permit each pipeline to establish the mechanism [for recovery] that works best for that pipeline and its customers -- whether a fixed in-kind fuel retention percentage or tracker with or without a true-up mechanism."

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