INGAA: Obstacles Hinder Pipeline Expansion
Firing a shot across the bow of local distribution companies (LDCs), INGAA Chairman Stanley C. Horton, CEO of Enron Gas Transportation Services Co., said last week the LDCs are standing in the way of desperately needed interstate pipeline capacity.
There are significant problems looming on the horizon for the pipeline industry as consumer concerns increase in tandem with gas prices, Horton noted. Two regions need immediate pipeline capacity help: the Pacific and the Northeast. But several obstacles stand in the way, not the least of which is LDC rivalry.
"In both regions, pipelines have run into continued opposition from local distribution companies who fear that adding more pipelines will be overbuilding pipeline capacity, thereby cheapening pipeline capacity. We don't think that pipelines ought to be overbuilt for economic reasons and environmental reasons," said Horton, speaking last week at INGAA's offices in Washington, D.C. "We don't want pipelines that are half full."
He said as recently as last fall that Transwestern ran into stiff opposition from California's LDCs over a proposed expansion of 140 MMcf/d, about 10%. The utilities claimed additional pipeline capacity to California was not needed. "I'm sorry, but additional pipeline capacity was needed and is needed in California."
Horton said Transwestern plans to try again soon because its system has been running full since the El Paso explosion last August. "I would expect that we will continue to run full for many months to come. We are now sold out of firm capacity through 2004 or 2005..... We are contemplating an expansion of our system and have run an open season." He said meetings on the project would be held later this week. "I can tell you it's not going to be below 150 MMcf/d."
PG&E Gas Transmission-Northwest also is planning to expand by 200 MMcf/d and Kern River has a project on file at FERC. In addition, FERC has asked El Paso to use the All America Pipeline to create new gas transportation capacity to California.
Nearly every pipeline into the state is trying something to ease supply constraints that apparently are behind the price increases there. But those plans will do nothing unless local distributors lift their opposition and do a little expanding of their own, said Horton.
Southern California Gas Co. should take some of the blame for the recent spot price spikes at the Southern California border, he said. Spot prices there reached $69/MMBtu in December, which was the highest wholesale price ever recorded since wellhead decontrol. Earlier this month, prices shot back up above $40/MMBtu.
"You've got to expand the intrastate systems in California. Takeaway capacity is a constraint. Just creating a bigger straw going into California is not going to resolve the problem. You have to look at the intrastate lines and the distribution system," Horton said.
There is a "tremendous amount" of interstate pipeline capacity going into California that "does not match up" with smaller intrastate lines. Horton said the LDCs recently have shown some willingness to consider solutions. "We have engaged in some conversations with SoCal Gas and hopefully it will lead to movement on their side. I certainly think they have a reason to want to do something about this."
Horton refuted claims that marketing affiliate abuse was partly behind spot price increases at the California border. "The only area where [Enron] could [do that] would be on Transwestern Pipeline; that's the only physical asset we have that can move gas into California. The fact that they have not subscribed any new capacity on our system since the whole California thing blew up [argues against that]. I think the last time I saw they had less than 10-15 MMcf/d of total capacity on the Transwestern system and those were at rates that we offer everyone else." He also disputed any suggestions that other companies were engaging in marketing affiliate abuse, noting that FERC regulations and oversight have been more than adequate to prevent such abuse.
Demand growth, heavy reliance on gas-fired generation in the state and intrastate and interstate pipeline constraints were all contributing factors to the recent price run-up out West. The pipeline industry is working hard to cover its part of the bargain, said Horton. California isn't the only place in need of capacity. Horton expects $2.3 billion to $2.5 billion per year will be spent on interstate pipeline capacity expansions across the country over the next decade.
LDC opposition is one thing standing in the way of future pipeline growth. Another is proposed pipeline safety measures, he said. The pipeline safety bill that recently passed the Senate could do significant financial damage to pipelines and distributors and also could harm the market, Horton indicated, by taking pipelines out of service for testing every five years.
"We are concerned about potential reliability and loss of capacity problems that potentially could be caused by the pipeline safety legislation that was passed by the Senate. It contains some fairly restrictive language calling for five-year inspection timetables. Our problem is that as you inspect these lines through pigging or hydrostatic testing, for some period of time those lines will be out of service.
"We think there are some places where maybe you ought to test with more frequency and other places where you ought to test a lot less frequently," said Horton. "But if you have a law that says you have to test every five years, I'm not sure for the money that you spent, it is going to provide a corresponding increase in safety."
What INGAA would like is not something that mandates testing on a certain time interval but rather a testing program "built upon knowledge," he said. "We have a risk assessment program that we use at Enron and that I imagine most other pipelines use also. In this risk assessment model there are hundreds of data elements that go into this model that tells us where the greatest chance that you might have a pipeline failure are...based upon history, soil conditions, that kind of pipe, etc. We think that's a much better program than going around every five years and dig and hydrostatic test every piece of pipe you have."
INGAA's Action Plan
Horton said in addition to influencing the shape of the new pipeline safety laws, INGAA's agenda this year will include a number of other activities:
- participate in the technical conference on marketing affiliates and the two-track regulatory system at FERC;
- promote the settlement of Order 637 proceedings to "prevent a one-size-fits-all approach and ensure adoption of compliance initiatives that recognize the physical configuration and the limitation of each pipeline;
- promote the need for flexible service to electric generators;
- continue to ensure that the pipeline returns given by FERC are commensurate returns to attract capital under reasonable conditions so $2.5 billion can be spent annually on increasing pipeline infrastructure;
- support a program that promotes greater public knowledge of the pipelines' safety record and discourage ineffective regulations and legislation;
- pursue a gas pipeline safety integrity rulemaking at the Office of Pipeline Safety (OPS) that is rational, cost effective and flexible;
- provide input in the OPS's proposed community outreach rule to better assure the public that gas pipelines are safe;
- use the Internet better to inform the public on non-safety issues;
- encourage legislators to include in any national energy policy provisions that address delays in permitting and construction of new pipelines, promote the need for a TransAlaska Natural Gas Pipeline, increase access to federal lands, and provide incentives such as Section 29 tax credits to encourage development of new supply sources;
- work with FERC and other agencies to streamline and coordinate the permitting process and allow flexibility in construction practices;
- promote the co-firing of coal and natural gas in power generation as a means of emissions reductions; and
- monitor climate change hearings and discussions and focus on those requirements that would increase natural gas use.
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