PHMSA Assesses Big Safety Penalty Against El Paso

Two weeks after the new administrator of the federal pipeline safety agency formally took over the agency, the Pipeline and Hazardous Materials Safety Administration (PHMSA) announced Colorado Interstate Gas (CIG) Company was paying the biggest fine the agency has ever levied under its own authority. What PHMSA did not say in the press release it issued on Dec. 1, 2009, was that the El Paso subsidiary had been fined $3.3 million in the original proposed civil penalty in March 2008, but that had been negotiated down over the past 18 months.

Although El Paso and its subsidiaries cooperated fully with PHMSA, company spokesman Richard Wheatley says, “We do not believe the penalty reflects the complex facts of this incident and believe it fails to take into account the serious errors of the constructing pipeline company and its contractors, which led, we believe, to the tragic results. We have taken a number of proactive actions since the 2006 incident, including thoroughly reviewing our policies and procedures.”

PHMSA argued, among other things, that CIG passed inaccurate line marking information to a construction company working on Kinder Morgan’s Rockies Express Pipeline. REX was building a new pipeline adjacent to an existing line operated by Wyoming Interstate Co.(WIC), a CIG subsidiary. WIC gave the construction company REX alignment sheets marked with a disclaimer as to their accuracy. Those sheets did not show a bend in the WIC pipeline. As a result, a bulldozer operator hit the WIC pipeline and was killed in 2006. Federal regulations require pipeline operators to establish and follow procedures for properly locating and marking their underground systems before excavation work is commenced to prevent accidental contact and safety risks. CIG argued that it told the construction company that accurate maps were available 10 miles away at its Cheyenne facility. But PHMSA responded that the accurate maps had to be available at the job site.

“Pipeline and other underground facility damage is almost entirely preventable,” says Cynthia L. Quarterman, PHMSA Administrator. “Pipeline operators must be the first line of defense in protecting the public from incidents related to their systems.”

One pipeline industry official suggested Quarterman was sending a message about the Obama administration’s toughness on pipeline safety. But this enforcement case began under the George W. Bush administration, with the fine being reduced under the Obama administration. It is true, however, that the fine is the biggest PHMSA has ever handed out, on its own authority. But there have been much bigger fines in instances where PHMSA has teamed with the Justice Department, for example. In July 2007, PHMSA and the Department of Justice announced the settlement of a civil action against El Paso Pipeline Company, arising out of an incident near Carlsbad, NM, in which 12 people were killed. That settlement included a civil penalty of $15.5 million. That case represented the largest judicial settlement ever brought under the Federal Pipeline Safety Laws.

Asked whether the Obama PHMSA was sending the industry a message with the $2.3 million fine, Damon Hill, a PHMSA spokesman, says, “The message is in the press release.” He is referring to quotes from Quarterman and Treasury Secretary Ray LaHood who was quoted as saying: “The Department will hold pipeline operators accountable for the safety of those who live and work in the vicinity of their systems and negligence will not be tolerated.”

Quarterman replaces Carl T. Johnson, the PHMSA administrator during the last year of the Bush administration, who was widely viewed as an ineffective placeholder. Quarterman comes to PHMSA from a Washington law firm called Steptoe & Johnson where she represented producers and pipeline companies in matters before the Department of the Interior, the Federal Energy Regulatory Commission and the Department of Transportation. Prior to that she was deputy director of Minerals Management Service within the Interior Department during the Clinton administration. Her number two at PHMSA is now Cynthia Douglass, who replaces Stacey Gerard as assistant administrator and chief safety officer.

FERC Questions Pipeline Rates In Case With Broad Implications (subhed)

An apparently pioneering FERC investigation into interstate pipeline rates has led to an unusual verbal attack on FERC by one of the commission’s targets. A FERC investigation in November alleges that Northern Natural Gas Company, Great Lakes Gas Transmission LP, and Natural Gas Pipeline Company of America may be substantially over recovering their cost of service.

Keith M. Sappenfield II, director, U.S. regulatory affairs, midstream and marketing EnCana Oil & Gas (USA) Inc., says this is the first time FERC has opened a Section 5 (under the Natural Gas Act) rate case on its own. EnCana has shipped on all three lines at one time or another, and has intervened in each of the three rate cases. Sappenfield explains that shippers typically file these Section 5 rate cases, and pay the attendant costs, which can be substantial, which acts as a deterrent to their being filed by shippers unhappy about pipeline rates. Pipelines themselves can file Section 4 rate cases when they want an adjustment to their rates.

FERC’s investigation of the three companies resulted from a staff review of pipeline Form 2 cost of service and revenue information, including more detailed information required by Order No. 710, issued in March 2008. “Protecting consumers against unjust and unreasonable rates is a fundamental responsibility of the commission under the Natural Gas Act,” says FERC Chairman Jon Wellinghoff. “Launching these investigations is important to the commission fulfilling that responsibility.”

In announcing the investigation, FERC said the three pipelines, based on the Form 2 data, appeared to have estimated earned returns on equity of above 20 percent. FERC typically allows returns in the area of 12 14 percent. Sappenfield notes that should those 20 plus percent returns turn out to be accurate after the commission looks at company data, and should FERC knock down those rates to the 12 14 percent vicinity, many other interstate pipelines may also be headed toward FERC initiated Section 5 rate cases because many of them are at the 18 19 percent level, according to Sappenfield.

Mark Hewett, president of Northern Natural Gas Company, blasted the investigation in highly acerbic terms. In a teleconference with customers on Nov. 24, he called the FERC basis for the order “fundamentally flawed.” He added, “I believe the FERC’s inflammatory determinations, which were paraded in the press for political gain, were based on a snapshot of incomplete data and are entirely inappropriate.” Hewett argued that Northern’s last rate case was in November 2006 while Natural Gas Pipeline and Great Lakes Gas Transmission have not been in a rate proceeding for 14 years and 18 years, respectively. He added Northern’s customers have the lowest transportation rates in the upper Midwest.

Michael Barnes, communications manager, for TransCanada’s U.S. pipelines, one of which is Great Lakes, says, “We are definitely not taking an adversarial role with FERC. Our approach is a little softer. We will fully work with FERC to produce the records they requested. But we believe our rates are just and reasonable.”

A spokeswoman for Kinder Morgan, which owns 20 percent of NGPL, says the company will cooperate with FERC. The other 80 percent is owned by Myria Holdings, an investment holding company which purchased 80 percent of NGPL from Kinder Morgan, Inc., a private company, on Feb. 15, 2008.

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