PHMSA Worries About Pipeline Safety, Senate Bill Worries Pipeline Industry

Six months after giving pipelines the green light to use high stress pipelines more widely, the Pipeline and Hazardous Materials Safety Administration (PHMSA) is now highlighting safety concerns with new pipelines operating at 80 percent of specified minimum yield strength (SMYS).

The concerns are the results of intensified inspections over the past year and a half. Prior to last November, pipelines could build lines at 80 percent if they were granted special permits granted by PHMSA. After the agency published a final rule last November, any pipeline could operate at 80 percent in a class 1 location – up from 72 percent of SMYS – without a special permit.

Pipelines pressed to get out from under the special permit requirement because of the huge construction boom in the industry and the need to move more gas more quickly, and ostensibly more cheaply too. Operating at 80 percent allows pipelines to do just that; but the thinner pipe used raises the risk that problems with coating, welding or steel could have bigger repercussions than they would at 72 percent of SMYS or lower.

Alan Mayberry, director, engineering and emergency support at PHMSA, says inspectors had turned up new pipe that had just been buried, after being inspected by the company, whose coating was problematic. There have been problems with welds, too. Mayberry declines to quantify the problems. No enforcement actions have been taken yet. But he explains that “some cases are pending.”

That is the backdrop to the public meeting PHMSA held on April 23 in Fort Worth, TX. Without providing any inspection data prior to the meeting, the agency said the get together was necessary because it had “identified issues regarding procedures and inspection of pipeline coating, welding and general pipeline construction practices. Many of the issues required immediate response from operators to avoid impacting long term pipeline integrity before the pipeline was put into service.”

The Interstate Natural Gas Association of America (INGAA) had already been aware of PHMSA’s concern. It held a “Safety Culture” workshop in Houston on March 23 and a Quality Assurance Quality Control Workshop two days later where a number of the construction issues of concern to PHMSA were laid out. Steve Nanney, project manager, engineering and emergency response at PHMSA, showed slides of scarred, gouged and mis-welded pipe as examples of the problems PHMSA is finding.

Patricia Klinger, a deputy associate administrator for governmental, international and public affairs, says the workshop “shows we are very serious, and that there could be a serious problem especially with all the pipeline building expected over the next 10 years. The point we are trying to make is ‘let’s get it right now.’ ”

Terry Boss, INGAA senior vice president, explains that supply of pipe, construction materials, construction firms and quality control personnel have had a hard time keeping up with demand. “Everyone is stretched to the hilt,” he explains. As a result, a lot of new companies have gotten into the pipeline supply and construction business with some of them clearly not being ready to meet the higher safety requirements for 80 percent SMYS pipelines. This has resulted in defective pipe being supplied, poor welds and other problems which have turned up in PHMSA inspections.

Senate bill worries pipeline industry

The pipeline industry is worried about a new Senate bill which gives FERC wider latitude to award rebates to customers who the agency finds have been subject to unfair rates. The Natural Gas and Electricity Review and Enforcement Act (S. 672) by Sen. Maria Cantwell (D WA) would allow FERC to force pipelines to give up the same kind of rebates which are now required of electric utilities under the Federal Power Act. Cantwell is chairman of the Senate Energy and Natural Resources energy subcommittee. Her legislation is likely to be included in the broad energy bill that committee is now putting together. The House Energy & Commerce Committee is writing its own omnibus bill. No House member has yet introduced a version of the Cantwell bill.

The anti pipeline legislation is being pushed by the American Public Gas Association which corralled 19 other trade associations, consumer advocacy groups and joint action agencies into signing a letter to Senate and House leaders on April 6. The coalition cited a recent report from the Natural Gas Supply Association that shows that from 2003 2007 pipelines earned roughly $3.7 billion more than they would have collected on an average 12 percent return on equity. The data for the report analyzed the cost recovery of 32 major pipelines (80 percent of the market) based on financial data that they are required to file annually with the FERC. The study also shows that seven of the 32 pipelines earned on average equity returns in excess of 20 percent. “These excess returns rightfully belong in consumers’ pockets,” said Bert Kalisch, president & CEO of the American Public Gas Association (APGA).

Don Santa, the INGAA president, says the APGA has been trying for years to amend Section 5 of the Natural Gas Act, which pipeline customers use when they file a case at FERC charging that pipeline rates are unreasonable. Those efforts have always been unsuccessful, Santa explains, and he doesn’t see any changes in the political landscape which would make Congress more receptive in 2009 to the APGA’s drive to modify Section 5 so that FERC could order pipelines to issue retroactive rebates.

Currently, FERC can only collect for damages from the date of the completion of the case. Cantwell’s bill would allow collection of refunds starting from the date at which FERC or a pipeline customer filed the case. Another provision would allow FERC to issue temporary cease and desist restraining orders to pipelines if the commission finds the pipeline is taking an action of “significant harm” to natural gas consumers.

A Cantwell aide said the bill is aimed more at energy trading companies than pipelines, though it catches pipelines in its web nonetheless. Although Congress gave FERC enhanced “anti manipulation” power in the 2005 Energy Act, that did not prevent the commission from stopping Amaranth Advisors LLC, who FERC took enforcement action against. However, Amaranth liquidated its assets before FERC could collect the full penalties assessed. That is where the new cease and desist authority would come in.

At hearings on March 26, Sen. Jeff Bingaman (D NM), chairman of the Senate Energy & Natural Resources Committee, essentially endorsed the Cantwell bill. That resulted in an April 2 letter to Bingaman from Santa who argued that the premise of the Cantwell bill was faulty, and that its effect would be to scare away investors in pipelines who might worry that the new regulatory language could affect pipeline revenue streams, and hence their return on investments.

In terms of the Cantwell provisions themselves, Santa said that the pricing histories of the electric and natural gas industries are different, and the rebate provision in the Federal Power Act was added because of specific complaints about wholesale sales of electricity. Pipelines, on the other hand, do not sell natural gas; their rates are based on the transportation of that gas. “The real question for the Congress is whether adopting the FPA retroactive refund model for natural gas really will improve consumer welfare, or whether it will slow the development of energy infrastructure that will bring new, competitive natural gas supplies to the market and ultimately benefit consumers and the economy,” Santa wrote.

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