Several northern Nevada industrial gas users have accusedNorthwest Pipeline of violating its tariff by holding them hostageto must-flow operational flow orders (OFOs) that it has issueddaily since early December in an effort to compensate for thesizable capacity shortfall on its system.
In a Section 5 complaint filed on Dec. 15, the industrial gascustomers called on FERC to direct Northwest to “cease and desist”the alleged violation of the tariff, which they claim is forcingthem and other customers at the northern end of the pipeline tosubsidize the gas acquisition and transportation costs of customerson the southern end of Northwest’s system.
The effect of the must-flow OFOs is to compel shippers to makeup the capacity shortfall on Northwest’s system via displacement,the industrials noted. Northwest’s firm contractual demand is720,000 Dth/d, but its physical capacity is only 474,000 Dth/d.Pan-Alberta Gas (U.S.) Inc. provides 144,000 Dth/d through adisplacement arrangement, while certain shippers are left to makeup the remaining 102,000 Dth/d.
The industrial users contend they shouldn’t be penalized for notcomplying with the must-flow OFOs if they have made “good faithefforts” to obtain gas supply to meet Northwest’s order, but havebeen unsuccessful. They point out that Northwest’s tariff exemptssuch shippers. At issue, however, is whether the “good faithefforts” clause applies to purchasing gas at reasonable costs,which is how the industrials interpret the tariff, or whether itmeans that shippers should be required to buy gas “at any price” tomeet a must-flow OFO. The latter, according to the industrialusers, 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,’ butrather must be viewed in the context of current conditions andcircumstances, i.e. available prices and supplies,” the industrialcustomers said. “Where a shipper can secure gas needed to meet amust-flow order only at the basin price differentials thatcurrently prevail, and assuming that the shipper can document suchefforts and impacts for Northwest verification, the shipper’srequest for exemption from penalties must be granted.” Northwesttwice has refused such a request by the industrial customers, theynoted.
In anticipation of the high gas prices this month, the Nevadaindustrial users said they chose to switch to alternative fuels”where feasible” or to curtail operations rather than use theirreleased capacity on Northwest. Nevertheless, the pipeline’s dailymust-flow OFOs “have forced them into the volatile daily gas marketto avoid extremely high non-compliance penalties, undermining theirbusiness decisions to rely on alternative fuels,” they told FERC[RP01-189].
The non-compliance penalties on Northwest are equal to thegreater of $10/Dth or four times the highest spot rate at Sumas,Stanfield, Kingsgate, Opal or Ignacio for the month ofnon-compliance, according to the industrial gas users. Based on thespot rate at Stanfield, the penalty this month was $58.15/Dth.
If one of the Nevada industrial users, Newmont Mining Corp., haddefied Northwest’s order to flow 25% of its contract demand, or1,000/Dth, on any December day, it would have been penalized$58,160 for that one day, they said. If all of the Nevadaindustrial customers had violated the pipeline’s order, theyestimated the one-day penalty would have been $149,471.
In addition to facing penalties, the industrial shippers contendthey are losing money on the gas they are buying to comply with themust-flow OFOs. The industrials said they “must ship the gas to apoint where they cannot use it, [and] can only sell it at the RockyMountain 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 interpretthe “good faith efforts” exemption in their favor. They contendthat Northwest’ tariff allowing must-flow OFOs “as currentlystructured” is both “unreasonable and unduly discriminatory.”That’s because it requires one group of shippers to incur gasacquisition and transportation costs solely to subsidize service toanother group of shippers, they argued. They believe the shipperswho benefit should pay for the displacement capacity costs.
Currently, the must-flow OFOs “result in southbound flows [onNorthwest] that create northbound capacity for the benefit ofshippers with south-to-north entitlements. Those samesouth-to-north shippers could, however, themselves purchase spotgas in the Canadian supply areas and ship such volumes southward onan interruptible basis on Northwest, i.e. do what [the industrial]shippers and others have been directed to do. They could pay thecosts of the capacity that they want.”
As an alternative, Northwest could require a sharing ofdisplacement capacity costs by all shippers using its system at agiven time when capacity is short, or it could invest in facilitiesso that it has the physical capacity to meet all of its contractualcommitments, the industrial users said.
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