U.S. DOT/PHMSA - Regulatory Flexibility Analysis

Page 1Regulatory 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 October 2016 1#

Page 21 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 (EFV) 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 EFVs on multi-family residential and small commercial entities. In addition, PHMSA is responding 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 final 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 (or large EFVs, if they are shown through engineering analysis to be feasible) on new or entirely replaced lines with known loads exceeding 1,000 SCFH. 2 Objectives of, and legal basis for, the final rule This final rule implements the statutory mandate 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 final 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 the broader expansion of EFVs, particularly where known loads exceed 1,000 SCFH, presents challenges, PHMSA is requiring the use of curb valves (manual service line shut-off valves) or EFVs, if appropriate, for facilities with known loads exceeding 1,000 SCFH. PHMSA believes the proposed rule will satisfy NTSB Recommendation P-01-2 by ensuring all service lines have adequate protection through the installation of either EFVs or curb valves according to operational conditions. 2#

Page 33 Description and estimate of the number of small entities to which the final rule will apply This rule applies to all operators of gas distribution systems. This includes gas distribution operators who file annual reports with PHMSA, as well as master meter and small LPG operators who do not file annual reports. No data on revenues or headcounts are available for master meter and small LPG operators, but most of the 6,327 operators in these categories1 can be presumed to be small entities due to the nature of their operations. Among distribution operators, PHMSA’s annual report data from 2015 indicate there are 1,329 unique entities that are affected. These include private natural gas distributors, private companies of other types that operate service lines, and municipalities. PHMSA defined small entities by using the definition of "small business" found in the Small Business Act (5 U.S.C. section 601(3)). The Small Business Act authorizes the Small Business Administration (SBA) to define "small business" by issuing regulations. The SBA periodically reviews and reissues these definitions. SBA (2014) has established size standards for various types of economic activities, or industries, under the North American Industry Classification System (NAICS). These size standards generally define small businesses based on the number of employees or annual receipts. Under the Regulatory Flexibility Act, a "small governmental jurisdiction" is the government of a city, county, town, township, village, school district, or special district with a population of less than 50,000 (5 U.S.C. section 601(5)). States and tribal governments are not considered small governments. Operators’ annual reports to PHMSA provide information about the scope of their operations but do not formally identify their small entity status. Thus, to estimate the number of gas distribution operators affected by the rule that are small businesses or small governmental jurisdictions, PHMSA combined annual report data with information provided by Dun and Bradstreet. Dun and Bradstreet provides PHMSA with estimates of small business classifications based on SBA size standards for operators that file an annual report, along with a flag for public sector entities that is based on information such as entity name and NAICS code. These data indicate that approximately 820 affected operators (about 60 percent) are public entities; a number of these are likely to be small governmental jurisdictions. Among the private sector entities, approximately 160 are small entities according to the SBA size definition for their NAICS code. The most common of these is NAICS 221210, natural gas distribution, for which the standard is 1,000 employees. Overall, while the number of small entities is not known with precision, it appears to be substantial when considering gas distribution operators that are small businesses or small governmental jurisdictions, as well as the master meter and small LPG operators that are presumed to be small entities. 1 According to PHMSA’s Operator Management System, there are 5,324 master meter and 913 small LPG operators, for a total of 6,327 operators, as of May 2016. 3#

Page 44 Description of the projected reporting, recordkeeping and other compliance requirements of the final rule and their impact on small entities 4.1 Excess Flow Valves 4.1.1 Requirements PHMSA is adding four new categories of service for which an EFV must be installed on all new or replaced lines. The four new categories being added to the existing requirement (49 CFR § 192.383) are: - Branched service lines to a single family residence (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; and - 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; and - 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. 4#

Page 5The rule also requires the installation of EFVs, if operating conditions allow, when requested by a customer. Because that component deals only with voluntary actions for which the gas operator is typically reimbursed for all relevant costs, 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. Prior survey data3 and docket comments indicate that the cost of mandated EFV installations is typically passed through to gas utility rate-payers (customers). The cost of the EFV component of the rule on an annualized basis is estimated at $7.3 million per year. When compared against the total of roughly 70 million natural gas customers, this suggests an incremental cost per customer of $0.10 per year. This is a very small fraction of a typical household’s gas utility costs and an even smaller fraction of median household income. Thus, the incremental cost can be considered de minimus. 4.2 Curb Valve 4.2.1 Requirements The final rule adds a new § 192.385. This section requires 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 § 192.383. 4.2.2 Cost to small entities Similar to costs related to EFVs, each additional curb 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. The cost of mandated curb valve installation would also be passed through to gas utility rate-payers (customers). The annualized cost of the curb valve component of the rule, $3.0 million per year, is equivalent to roughly $0.04 per gas customer annually, and is thus also de minimus. 4.3 Recordkeeping Requirements and Cost to Small Entities The final 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 new, also imposes no additional recordkeeping requirement. The notification and recordkeeping 2 PHMSA-2012-0086-0003, Comment by the American Gas Association, submitted 7/17/2012, pg. 2 3 National Regulatory Research Institute, Survey on Excess Flow Valves: Installations, Cost, Operating Performance, and Gas Operator Policy, March 2007. 5#

Page 6costs associated with the new notification requirement for EFV installation upon request are estimated at $0.3 million per year, which is a minute fraction of overall gas utility industry revenues, which are in the tens of billions.4 This figure is also equivalent to $63 per operator annually, which is a minimal cost even for the smallest operators, or less than one cent per year per gas customer. 4.4 Professional Skill Required No additional professional skills are required. The final 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 final rule To the best of the knowledge of PHMSA, no other Federal rules duplicate, overlap, or conflict with the final rule. 6 Alternatives Considered PHMSA considered the following alternatives to the final 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 final rule. Because the final 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 final rule is not projected to increase the cost of credit for small entities in any way. 8 Summary and Conclusion Overall, the rule does not have a significant economic impact on a substantial number of small entities. While the natural gas distribution industry includes many small entities, including both small businesses and small governmental jurisdictions, the impacts of the rule are clearly de minimus, both in relation to operator revenues and to the utility rate-payers to whom the incremental costs would ultimately be allocated. 4 In 2010, the most recent year for which industrywide figures are available through AGA’s Gas Facts publication, industrywide revenues were approximately $73 billion. Natural gas prices have generally decreased since that time. 6#