FERC yesterday denied a complaint in which several Nevadaindustrial shippers sought exemption from continual must-flowoperation flow orders (OFOs) on Northwest Pipeline’s system, and tobe reimbursed for the costs of complying with the OFOs. But theCommission did hold out some hope for the shippers, saying it wouldconsider proposals to provide relief from the pipeline’s constantOFOs.

In a Section 5 complaint filed in December, a group of northernNevada industrial gas users claimed that Northwest was violatingits tariff by continuing to hold them hostage to the OFOs eventhough — after “good faith efforts” on their part — they wereunable to obtain gas at reasonable prices to comply with orders.They asked FERC to “cease and desist” the alleged tariff violation.

The Commission yesterday found that Northwest was not inviolation of its existing tariff, but rather “has reasonablyinterpreted its must-flow OFO provisions in light of precedent.”Consequently, “the Commission will not direct Northwest to ceaseand desist issuing must-flow OFOs when it is necessary for theoperational integrity of its system,” the order said [RP01-189].

The Northwest system is heavily dependent on displacementcapacity to maintain operational integrity because its contractdemand outstrips its physical capacity. Northwest’s contractualdemand is 720,000 Dth/d, but its physical capacity is only 474,000Dth/d. Pan-Alberta Gas (U.S.) Inc. provides 144,000 Dth/d through adisplacement arrangement, while other Northwest shippers are leftto make up the remaining 102,000 Dth/d.

The Nevada industrial users argued that they shouldn’t bepenalized in the event they can’t comply with the must-flow OFOsbecause Northwest’s tariff specifically exempts shippers that havemade “good faith efforts” to obtain gas supply, but wereunsuccessful. At issue was whether “good faith efforts” applied topurchasing gas at reasonable costs, which was how the industrialsinterpreted the tariff, or whether it meant that shippers should berequired to buy gas — irrespective of the price — to meet amust-flow order.

The northern Nevada industrial group “is in error,” the ordersaid. It noted that Northwest’s tariff only exempts those shippersthat are unable to “physically obtain” gas supply after making”good faith efforts,” which wasn’t the case in this complaint. Theindustrial group “is able to obtain gas supply, but at spot market(albeit high) prices,” the order said.

The Commission denied reimbursement because the must-flow costsincurred by the industrials “were caused in large part by thebusiness choices” that they made. They “purchased deeply discountedcapacity with the knowledge that their primary points were atStanfield (OR) and Muddy Creek (WY) and that they could be requiredto flow from those points to create displacement capacity. At thattime, other (but more expensive) capacity was available that wouldnot have been subject to the must-flow OFO,” the order noted. As aresult, the industrial group “chose not to reduce its risk ofhaving to comply with a must-flow OFO even when it had notice thatan OFO was imminent.”

The industrials also complained the OFO provisions ofNorthwest’s tariff have become “unjust, unreasonable to undulydiscriminatory” because they require shippers on the northern endof the pipe to incur gas acquisition and transportation costs inorder to provide displaced capacity for the benefit of shippers atthe southern end of the system.

FERC, however, held that this was not the “most appropriateforum” to consider this issue. Instead, it said it should beanalyzed as part of Northwest’s Order 637 compliance proceeding,along with a number of related issues — segmentation, imbalanceprovisions, scheduling and capacity release.

It directed interested parties to file “limited additionalcomments” on Northwest’s OFO tariff provisions and penalty levelsin the pipeline’s Order 637 compliance proceeding within 15 days.

Alternative proposals to Northwest’s existing must-flow OFOs —such as requiring the pipeline’s shippers who benefit to maintainthe displacement capacity, requiring Northwest to invest infacilities to expand its physical capacity, or to allowOFO-recipients to invoke the “good faith” exemption when theirlosses approach $35/Dth — will be entertained, the order said.The Nevada industrial group recommended the first two proposals aspossible solutions.

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