U.S. DOT/PHMSA - Report - Initial Regulatory Flexibility Analysis

Page 1Initial Regulatory Flexibility Analysis Pipeline Safety: Expanding the Use of Excess Flow Valves in Gas Distribution Systems to Applications Other Than Single-Family Residences PHMSA-2011-0009 Prepared by Economic Analysis Division Volpe National Transportation Systems Center Research and Innovative Technology Administration U.S. Department of Transportation For: Office of Pipeline Safety Pipeline and Hazardous Materials Safety Administration (PHMSA) U.S. Department of Transportation Sept. 25, 2013 1#

Page 2March 20, 2013 1 Reasons for Agency Action Executive Order 12866 states that "Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people ... ." Part of the mission of the Pipeline and Hazardous Materials Safety Administration (PHMSA) is to ensure the safety of the natural gas system. Government regulation of pipeline safety standards addresses the market failure of negative externalities, namely the costs that pipeline incidents impose on other parties for which there is no market compensation. Recognizing the safety benefits of excess flow valve installation in natural gas distribution systems, Section 22 of the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 directed PHMSA to require the installation of excess flow valves (EFVs) on multi-family residential and small commercial entities. In addition, PHMSA is required to respond to the National Transportation Safety Board’s (NTSB) recommendation P-01-2, which recommends that PHMSA “require that excess flow valves be installed in all new and renewed gas service lines, regardless of a customer’s classification, when the operating conditions are compatible with readily available valves.” The proposed rule requires operators of gas distribution pipelines to install EFVs on all new or entirely replaced residential and commercial service lines where the known load does not exceed 1,000 Standard Cubic Feet per Hour (SCFH) and to install manual shutoff valves on all other new or entirely replaced lines. 2 Objectives of, and legal basis for, the proposed rule This proposed rule implements statutory mandates of Section 22 of the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 by requiring the installation of EFVs on new and entirely replaced service lines serving branched single-family residences, multi-family residences, and small commercial entities with known loads not exceeding 1,000 SCFH. The proposed rule also addresses NTSB recommendation P-01-2, which calls for EFVs to be installed in all new and replaced lines regardless of customer classification where operating conditions are compatible with readily available valves. Recognizing that broader expansion of EFVs, particularly where known loads exceed 1,000 SCFH, presents challenges, PHMSA is proposing the use of curb valves (manual service line shut-off valves) for facilities with known loads that exceed 1,000 SCFH. PHMSA believes the proposed rule will satisfy Recommendation P-01-2 by ensuring all service lines have adequate protection from either EFVs or curb valves according to operational conditions. 2#

Page 3March 20, 2013 3 Description and estimate of the number of small entities to which the proposed rule will apply This rule applies to all operators of gas distribution systems. This includes gas distribution operators who file annual reports with PHMSA, plus master meter and small LPG operators who do not file annual reports. No data on revenues or headcount are available for master meter and small LPG operators, but most of the 6,184 operators in these categories1 can be presumed to be small entities due to the nature of their operations. Among distribution operators, there were 1,289 operators with unique OPIDs who submitted an annual report to PHMSA in 2011. These include private natural gas distributors, private companies of other types that operate service lines, and municipalities. Using a dataset provided by Dun and Bradstreet with information on these operators, , this analysis breaks down the percentage of each type of operator within the industry and identifies the percentage that are small businesses. There were 363 companies that identified Natural Gas Distribution as a business operation (the dataset listed up to 6 codes per company). Of those that did not indicate Natural Gas Distribution, 601 included a public NAICS code (a code beginning with 92). Fifteen operators were unclassified and the remaining 310 were other companies, largely electric utilities and other petroleum related industries. Figure 1 below summarizes the breakdown. Figure 1. Industry Breakdown of Gas Distribution Line Operators 1 According to PHMSA’s Operator Management System, there are 5,295 master meter and 889 small LPG operators, for a total of 6,184 operators, as of 9/20/2013. 3#

Page 4March 20, 2013 15 310 363 601 Natural Gas Distributor Public Sector Entity Other Company Unknown According to the Small Business Administration’s Table of Size Standards Footnote 19, size standards are not developed for public sector operations. Instead, “concerns performing operational services for the administration of a government program are classified under the NAICS private sector industry based on the activities performed.” The NAICS code for Natural Gas Distribution is 221210 and the small business size threshold is 500 employees. Of the 1,289 companies, 1,221 (95%) had fewer than 500 employees. By industry sector, 55 of the 363 natural gas distributors are considered large, or 15%. In the public sector, eight entities listed more than 500 employees, or 1% of the public sector distribution companies. Among the other companies, 15, or 5%, listed more than 500 employees. Unclassified operators do not have employment data. The table below breaks down operators by type and the number of service lines they operate. It tracks along with employees fairly closely, with distributors tilting to larger networks and public sector entities on the smaller end. Under 1,000 service lines 1,001- 50,000 lines Over 50,000 lines Lines unknown Percent of Total Service Lines Natural Gas 23% 53% 24% 1% 73% Distributor Public Sector Entity 55% 44% 0% 1% 3% Other Company 49% 39% 10% 2% 18% Unknown Type 32% 40% 28% 0% 6% 4#

Page 5March 20, 2013 Total 44% 45% 10% 1% Overall, because of the high percentage of gas distribution operators classified as small entities, as well as the master meter and small LPG operators that are presumed to be small entities, the proposed rule would impact a substantial number of small entities. 4 Description of the projected reporting, recordkeeping and other compliance requirements of the proposed rule and their impact on small entities 4.1 Excess Flow Valves 4.1.1 Requirements PHMSA proposes to add four new categories of service for which an EFV must be installed on all new or replaced lines. The four new categories that will be added to the existing requirement (49 CFR § 192.383) for single-family residences (SFRs) served by a single service line are: - Branched service lines to a SFR installed concurrently with the primary SFR service line (a single EFV may be installed to protect both lines) - Branched service lines to an SFR installed off a previously installed SFR service line that does not contain an EFV - Multi-family installations, including duplexes, triplexes, and fourplexes with known customer loads at time of service installation, based on installed meter capacity, that do not exceed 1,000 standard cubic feet per hour (SCFH) per service - A single, small commercial customer, served by a single service line, with known customer load at time of service installation, based on installed meter capacity, that do not exceed 1,000 SCFH per service. The section will continue to include exceptions for cases where installation would not be feasible. These exceptions, currently listed in 192.383(b)(1)-(4) of the section, are: - When the service line does not operate at a pressure of 10 psig or greater throughout the year - When the operator has prior experience with contaminants in the gas stream that could interfere with the EFV’s operation or cause loss of service to the customer - When an EFV could interfere with necessary operations or maintenance activities, such as blowing liquids from the line 5#

Page 6March 20, 2013 - When an EFV meeting performance standards in 192.381 is not commercially available to the operator. The exceptions will reduce the potential cost of the regulation. As there is no data available to estimate the proportion of lines that are excepted, the analysis will assume conservatively that all lines have operating conditions suitable for an EFV. The revision also adds a regulation allowing optional installation of EFVs if requested by a customer. Because this component deals with voluntary action only, it will not be considered in the regulatory flexibility analysis. However, the analysis does include the associated notification and recordkeeping costs for informing customers of this option. 4.1.2 Cost to small entities Each additional valve imposes a small cost on the operator, as the cost of installation is estimated at $30 per EFV. Industry comments have referred to the cost as “relatively minimal.”2 These costs may be slightly larger for smaller operators due to economies of scale in purchasing valves; however, the cost is minimal. Additionally, public operators and natural gas distributors are able to pass on increased costs through rate adjustments, further minimizing impacts to those entities. The one-time costs incurred by the operators during the installation of new or replaced service lines provide safety benefits for approximately 50 years following installation. 4.2 Curb Valve 4.2.1 Requirements The proposed rule adds section 385 to part 192. This section would require operators to install a manual service line shut-off valve (curb valve) on any new or replaced service line for which an EFV is not installed in accordance with section 192.383. 4.2.2 Cost to small entities Similar to costs related to excess flow valves, each additional valve imposes a small cost on the operator of approximately $55 per installation. These costs may be slightly larger for smaller operators due to economies of scale in purchasing valves; however, the cost is minimal. Additionally, public operators and natural gas distributors are able to pass on increased costs through rate adjustments, further minimizing impacts to those entities. Similar to EFVs, the one-time costs incurred by the operators during the installation of new or replaced service lines provide safety benefits for approximately 50 years following installation. 4.3 Recordkeeping Requirements and Cost to Small Entities The proposed rule in part expands the scope of an existing rule that requires recordkeeping. Specifically, operators are required to report annually the number of EFVs installed that calendar year and the total number of EFVs in their system. This portion of the rule will increase the number of lines subject to the requirement but does not itself add additional recordkeeping burden. The curb valve requirement, while 2 PHMSA-2012-0086-0003, Comment by the American Gas Association, submitted 7/17/2012, pg. 2 6#

Page 7March 20, 2013 new, also imposes no additional recordkeeping requirement. The notification and recordkeeping costs associated with the new notification requirement for optional EFV installation are estimated at $42 per firm annually, which is a minimal cost even for the smallest operators. 4.4 Professional Skill Required No additional professional skills are required. The proposed rule in part expands the scope of an existing rule to new service lines, so skills required by the previous rule already exist within the entity. The curb valve requirement, while new, imposes no additional skill requirement as curb valve installation is a common practice within the industry. 5 Federal rules which may duplicate, overlap or conflict with the proposed rule To the best of the knowledge of PHMSA, no other Federal rules duplicate, overlap, or conflict with the proposed rule. 6 Alternatives Considered PHMSA considered the following alternatives to the proposed rule: no-action, the full implementation of NTSB’s Recommendation P-01-2 (requiring EFVs on service lines regardless of known load size), and the hybrid approach selected. The no-action alternative did not address the objectives of Section 22 of the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, and the full implementation of Recommendation P-01-2 would have increased the potential economic impact of the proposed rule. Because the proposed rule is focused on ensuring safety and does not have a significant economic impact on small entities, PHMSA did not consider establishing different compliance or reporting requirements or timetables for small entities. 7 Effect on the Cost of Credit The proposed rule is not projected to increase the cost of credit for small entities in any way. 8 Summary and Conclusion The natural gas distribution industry does have a substantial number of small entities as defined by the SBA small business threshold of having fewer than 500 employees. However, the rule does not have a significant impact on small entities because the additional costs are minimal. 7#