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Shippers Condemn Northwest's Must-Flow OFOs

December 25, 2000
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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 noted.

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 [RP01-189].

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.

Susan Parker

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