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U.S. DOT/RSPA - Memorandum re: Comments on Response to Peer Review Comments Regarding Consumer Effects of the Anticipated Integrity Rule for High Consequence Areas
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Page 11 U.S. Department of Transportation Research and Special Programs Administration To: Marvin Fell, RSPNOPS From: Piyali Talukdar, DTS-42, RSPANolpe Center Date: 6/27/02 Re: Comments on “ResDonse to Peer Review Comments Regarding Consumer Effects of the Anticipated Inteaitv Rule for Hi& Consequence Areas” It is important to remember that the INGAA/EEA study does not include any increase in operato-s’ costs (increasing the variable cost of transmission) as a result of the proposed integrity management rule, the projected increase in price (potentially up to $1.5 billion per year in 2002 real $) comes solely due to supply-demand imbalance createdprojected in the EEA model. The original Volpe Center review of the INGAAIEEA study indicated that the results presented in the EENINGAA study do not justify the conclusion that the proposed natural gas integrity managenient rule in high consequence areas will significantly restrict natural gas supply and increase energy costs to consumers. The Volpe Center reviewer concluded that given the assumptions of the study anc the methodology used, results of the study could be viewed as a “worst-case” scenario. The EEA’s response and explanation after the peer review did not change this conclusion. The Volpe Center review did not downplay the price impact of the EEAANGAA study, we suggc:st that the results of the study should taken as a worst-case scenario. The Volpe Center reviewer believes that a major assumption of the model “a reduction of pipeline capacity into a regional market has an impact on the delivered price of the gas at the market.center because the potential supply of gas will be restricted below the requested demand of the natural gas consumers” (page 7 assumr tion #3 of the Volpe Review Report) is restrictive and does not take account of the existing redundan :y in the pipeline network. Therefore, natural gas commodity price may not be significantly impacted by the anticipated shutdowns of a portion of the natural gas transmission lines. The price impact m.y be minimized or eliminated if the integrity inspections can be conducted during off peak season (th; t is when natural gas demand is lower than the supply/transportation capacity of the pipeline system, and/or enough capacity/storage exist in the network to pick up any slack in throughput created in the sections of inspected pipelines The Volpe Center review suggested that differentiating between real costs of the proposed reguL.tion and any transfer payment would help the study. Again the review did never attribute the increast:d price solely to be a transfer payment (Volpe Center Review Report, page 20). However, we suggested that it would be helpful if EENINGAA can identify the proportion of $1.5 billion per year 1#
Page 2Jute 27, 2002 price increase that can be categorized as a transfer payment.’ Price estimates should reflect real costs of the resources (natural gas). This proposed regulation does not impact natural gas production jt the wellhead and has no impact on the wellhead prices. EEA/INGAA agrees that “there is significait redundancy in the transmission system to deal with capacity reduction” (Response to Peer Review Comments, page 6). In cases where the pipeline capacity are fully utilized, no storage availabili .y and inelastic demand, any pipeline capacity reduction (assuming that inspection actually reduce the volume of throughputhpply of natural gas in a particular market center) would affect the value of natural gas available to the society and the resulting price increase in the market center would br: categorized as a cost of the regulation. However, EENINGAA also provided a good example c f transfer payment in their response - “capacity reduction or restriction results in reduced options and flexibility for shippers, which shows up as increasing basis or increasing prices for released capacity.” (Page 6 of the Response) It would be helpful if there were a way for EEA/INGAA tc identify the proportion of price increase that arises due to “reduced option and flexibility for the shipper.” If natural gas price increases because of reduction in options or flexibility for shipper:, then this part of the price increase should be considered a shift of monetary payments made by the si ipper to the pipeline operators but does not affect the real resource costs of natural gas available to society. Again, the Volpe Center review does not downplay the importance of natural gas price increase, but simply asks what is the proportion of price increase that would be considered as a cost of regul: tion and what proportion should be regarded as a transfer payment (distributional effect of the regulttion). The Volpe Center reviewer believes that pigging can be done at least in some part of the delive y laterals (page 10 of the Volpe Center Review). We also believe that a 30 percent reduction in pipeline capacity for 3 days in an easy-to-pig line is a conservative (worst-case) estimate. We i gree that pigging requires a constant pressure be maintained on the pipeline in the segment where thl: inspection is being conducted; therefore there is no need for the lines to be shut down during t h e actual testing. Throughput on the pigged segment may be decreased or even increased (in somi: cases) to maintain the desired pressure in the line. However, the demand for gas available at the market center may or may not be affected as (i) the pressure required by the inspection (which Jaries from pipeline to pipeline) may be enough to cany the demanded volume of gas, especially in tile off- peak season, (ii) there may be loop or other lines available to carry any shortfalls attributable tci the inspection procedure, (iii) storage capacity at the market center may be enough to replace any throughput reduction that occurs during the in-line inspection, and (iv) there may be excess car acity in other pipelines entering the market center that can accommodate any throughput reduction c iused by the inspection. The average monthly capacity reduction again does not translate into a decrease in throughput in the market center. EENrNGAA comments do not provide enough supportive information to justi y why inspection in one line will be translated into reduced capacity which is translated into reduced qolume of natural gas at the market center. How the model accommodates storage capacity, pipeline interconnections, hel-switchmg ability is still unclear. In the example, inspection on pipeline 4 which has 3 loops and 100% piggable (easy to pig lines) still results in 3% monthly capacity reduction at the market center (page 15 of the response to the Peer Review). The Volpe Center reviewer stands by her earlier comments that EEAIMGAA study represents the worst-case scenario. As Volpe Center review suggested weather plays the most significant variable in determining 1 he natural gas price. According to EEA/“GAA response “much colder than normal winter weatlier can dwarf the price impacts shown by the EEA study” (page 19 of the Response). Similarly wann2r weather will substantially change the result of the study. ’ According to OMB guidelines, transfer payments should be identified and excluded in calculating bent fit-cost of a federal program. OMB Circular No A-94, Oct 29,1992 2#
Page 3June 27, 2002 Again, we believe the EENINGAA price impact represents a possible but worst-case scenario as the examples provided in page 20-2 1 with industrial customers scheduling their routine maintenance: during Christmas and New Year. 3#
This material provides agency context. It does not replace binding regulatory text, and its legal effect depends on the underlying authority and facts.