Shippers on El Paso Natural Gas generally have expressed support for the pipeline’s request to waive some of the penalties that were incurred during the unprecedented cold weather in Texas, New Mexico and Arizona in February, which led to supply disruptions and rolling blackouts and ultimately put a strain on the energy infrastructure in the region.

Southern California Gas Co. (SoCalGas), the largest firm transportation customer on El Paso’s system, and its affiliate San Diego Gas & Electric Co. (SDG&E), did not take a position on the pipeline’s request, except to say they thought penalties were essential to creating discipline on a system. A group of producers had a mixed reaction to El Paso’s proposal.

Last month the El Paso Corp. pipeline asked the Federal Energy Regulatory Commission to waive all critical condition penalties and charges incurred by the pipeline’s shippers on the first two days of the freeze: Feb. 2 and 3. And for those shippers that packed El Paso’s system on Feb. 4, it requested that the Commission waive penalties for hourly scheduling and maximum delivery obligation/maximum hourly obligation violations on that day.

However, El Paso did not request a waiver of penalties for those shippers that continued to take gas supplies in excess of their deliveries to the pipeline on Feb. 4. Specifically, it asked that they be assessed the critical operating condition (COC) daily imbalance charge for the day. Nor did it request a general waiver of the strained operating condition (SOC) daily imbalance penalties for any shipper on Feb. 6-7.

During the February freeze-off, El Paso said that not only did it deliver gas supplies that were tendered to the pipeline, but also an additional 1.5 Bcf from linepack and gas supplies from its Washington Ranch storage facility in Eddy County, NM.

In seeking the penalty waivers, El Paso told FERC that the “powerful confluence of dramatic supply disruptions, extreme demand spikes and widespread third-party operational failures strained the Southwest’s energy infrastructure like no other event in recent memory.” A Commission inquiry into the electric outages and gas delivery disruptions is ongoing.

This event “placed many of [El Paso’s] utility-based shippers in the very difficult position of having to choose between either significantly limiting their takes of gas to match tendered supplies — potentially resulting in a loss of service to their firm temperature-sensitive customers — or overrunning [El Paso’s] system by taking more gas than they had provided.

“Given the unprecedented and extreme circumstances, many shippers made the latter choice. Consequently, many of these shippers incurred critical condition penalties [under El Paso’s] tariff,” the pipeline said [RP11-2288].

New Mexico Gas Co. Inc. (NMGC), a local distribution company (LDC) serving the state, backed El Paso’s request, noting that many of the disruptions on its system in February were out of its hands. “In particular, two purchases of additional gas that NMGC had scheduled for the evening of Feb. 2 and the morning of Feb. 3 were not delivered…Because these volumes were not delivered, NMGC was forced to declare system emergencies on its system and curtail service to over 28,000 customers throughout the state,” the LDC said.

To prevent a bad situation from becoming worse, the company said it scheduled extra gas supplies for Feb. 2 and 3; packed its line; contacted its large commercial and industrial customers to request that they voluntarily curtail or reduce their gas usage; issued statewide pleas for residential conservation; monitored gas supply and pipeline pressures constantly in early February; attempted to secure additional supplies and worked with El Paso to take deliveries of gas at alternative receipt points.

“In short, NMGC did not incur penalties and charges on the El Paso system out of negligence,” it said.

While supporting El Paso’s proposal to waive most of the penalties incurred during early February, Indicated Shippers — BP America Production, BP Energy Co., ConocoPhillips Co. and Shell Energy North America (US) LP — said they opposed the pipeline’s position that a supply force majeure should not qualify for an automatic waiver of SOC/COC [critical operating condition] penalties.

In its July filing, EL Paso said it “does not agree that a lack of supply allows customers to take natural gas quantities at a level greater than the pipeline receives on the customer’s behalf, or to avoid automatically the incurrence of associated penalties authorized by the tariff.”

Indicated Shippers also took issue with El Paso’s decision not to allow the sharing of penalties incurred during the critical period in early February. “According to the waiver filing, if a shipper incurs a penalty [in February], even if El Paso waives that penalty, the shipper would not be entitled to share in any of the penalty revenues,” the group pointed out.

El Paso’s tariff allows the sharing of penalty charges with “non-offending” shippers, Indicated Shippers said. “In the waiver filing, El Paso is acknowledging that the events leading to the assessment of penalties were outside the shipper’s control. Given that both the shipper and El Paso agree that the shipper did not bring down the assessment of penalties upon itself, there is no reason to consider this type of shipper as ‘offending’ for purposes of sharing in the penalty revenues for SOC/COC daily imbalance penalties.”

In response to Indicated Shippers, El Paso said that “though [El Paso] requests waiver of certain penalties and charges incurred during the February weather event, a penalty waiver does not change a shipper’s status of having incurred a penalty. Accordingly…shippers who incurred COC or SOC penalties are still considered ‘offending shippers’ and will not share in the SOC/COC penalty amounts collected during February 2011.”

SoCalGas and SDG&E neither protested nor supported El Paso’s waiver request. Rather, their “fundamental interest…is to emphasize that penalties are essential incentives to creating discipline on the [El Paso] system by rationalizing shipper performance with contractual obligation.

“Such discipline is vital for California customers, such as SoCalGas and SDG&E, because [El Paso’s] ability to meet its delivery obligations to California customers is directly contingent on whether and to what extent east-of-California customers are required to match their receipts and their deliveries. Discrepancies between receipts and deliveries can seriously jeopardize deliveries to California and result in associated service disruptions,” the sister utilities said.

“Penalties and charges promote discipline and, to avoid unintended consequences, should only be waived in unique circumstances.”

A group of municipal distributors in New Mexico and Arizona called El Paso’s proposal a “fair, deliberate, thoughtful and reasonable response to numerous waiver request from numerous different shippers.”

The members of the El Paso Municipal Customer Group (EPMCG), like other El Paso shippers, “could anticipate neither the extent that demand would spike nor the supply disruptions. Although they attempted to make alternative supply arrangements subsequently, EPMCG members incurred COC penalties rather than shutting off servicing to human needs customers during a life-threatening cold spell,” the municipal utilities told FERC.

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