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 the daily must-flow 
operational flow orders (OFOs) that it has issued since early December in an 
effort to compensate for the sizable capacity shortfall on its system. 

In a Section 5 complaint filed Friday, 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 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 because Northwest's tariff exempts shippers that have 
made "good faith efforts" to obtain gas supply, but have been unsuccessful. 
At issue is whether the "good faith efforts" 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]. 

In order to comply with Northwest's orders, 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 users said they have had to comply with Northwest's must-flow 
OFOs, given the hefty penalties they would face otherwise. The penalties 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. 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, the one-day penalty would have been $149,471. 

The industrial shippers want FERC to go beyond interpreting 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, who 
see no additional benefits, 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.