Sen. Wyden’s Ascendency Causing Concern

December 2012, Vol. 239 No. 12

The results of the presidential and congressional elections portend “more of the same” with regard to issues of interest to the gas transmission industry. Regulatory dockets already under way will continue along their current track.

Those dockets concern greenhouse gas emissions, the integrity management program and fracking. But the most significant result of the election may be legislative, meaning the retirement of Energy and Natural Resources Chairman Sen. Jeff Bingaman (D-NM). Sen. Ron Wyden’s (D-OR) ascension to the chairmanship brings a legislator who has been sometimes critical of pipeline operations to a position where he can, to put it politely, cause trouble for the industry. But the biggest concern may be a person, not an issue.

Wyden has been an outspoken critic of some proposed Oregon pipeline projects, complaining about routes that would travel through sensitive areas, such as the Palomar project slated to run through Mt. Hood National Forest. That pipeline is on hold in part because an LNG terminal linked to the project filed for bankruptcy. A few days before the election, Wyden voiced opposition to the export of LNG from the U.S. to countries with which America has a free trade agreement (FTA). That has been legal for years. The Department of Energy rubber stamps such applications. So any restrictions would be a step backward. In fact, in the last Congress, many legislators pushed for more liberal DOE exports of LNG – for which there have been many applications – to non-FTA countries. The DOE closely examines those, and almost all of them are under review. Wyden also proposed amendments last summer that would have impeded construction of the Keystone XL pipeline.

Asked whether Wyden might pursue legislation giving the states more say in pipeline siting, Keith Chu, Wyden’s press secretary, says, “Sen. Wyden has long said state and local governments should have a role in siting facilities that may impact local communities, but it’s too early to talk about what bills Sen. Wyden may pursue next year.”

Wyden ascends to the chairmanship of the Energy Committee in a Senate that has a slightly larger Democratic majority than in the past Congress. The House remains in GOP hands and President Obama still occupies the Oval Office. Neither energy issues broadly nor pipeline issues specifically will be the first order of business in the capital where legislators and the president try to fashion some sort of compromise on the “fiscal cliff” the country faces on Jan. 1. That is the $500 billion combination of tax increases and spending cuts that go into effect if the two parties don’t agree on some sort of deficit-reduction plan.

The need to come up with additional revenue certainly raises the possibility of higher taxes for the energy industry, primarily the producers. Jack Gerard, president of the American Petroleum Institute, says oil and gas producers pay an effective 41% corporate income tax rate. He says that is higher than the effective rate of 26% paid on average by all S&P industrials. He argues the major tax benefit oil companies enjoy is a cost-recovery deduction, which is available to all industries. “Our view is we should all be treated equal, so if there is a decision made that the U.S. should have cost-recovery provisions, it ought to apply to all industries.”

Any elimination of deductions would not affect pipelines. The threat to gas transmission companies comes more from the possibility of an increase in the individual tax rate on dividends, says Martin Edwards, vice president at the Interstate Natural Gas Association of America (INGAA). Higher taxes on dividends would discourage some people from investing in pipeline companies which are attractive investments because of their relatively high dividends. Similarly, any change in the tax status of master limited partnerships (MLPs), a category into which many pipeline companies fall, could also hurt the ability of MLPs to attract capital.

The next Congress is unlikely to revisit the issue of pipeline safety, having passed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011. That bill, signed by President Obama on Jan. 3, 2012, made no significant changes to the integrity management program although it did provide the Pipeline and Hazardous Materials Safety Administration (PHMSA) with a list of studies to do, and pipelines with some new information to collect and report.

Industry Unhappy With Expanded PHMSA Data Request

That new information collection requirement has been controversial. INGAA and individual companies tried to convince PHMSA to change some of the data it wants to request in the expanded annual and incident reports companies will have to fill out, in the former case by the end of 2012. The annual report is especially important because it will be used, based on a requirement in the 2012 pipeline safety bill, by PHMSA and Congress to determine: 1) whether to expand the integrity management program beyond high consequence areas (HCAs), 2) whether to test previously untested gas transmission pipelines located in HCAs and operating at pressure greater than 30% of specified minimum yield strength, 3) whether to require inline inspection.

The annual report must be filed by March 15, 2013. Those reports will be based on data collected by Dec. 31, 2012. Then a second report must be completed by July 3, 2013 telling PHMSA where verification records are insufficient to confirm the established MAOP of a given segment, and where MAOP “exceeds the build-up allowed for operation of pressure-limiting or control devices…” INGAA and various pipeline companies asked PHMSA to push back the due date of the annual report to July 3, 2013 so they would only have to collect data once, not up until Dec. 31, 2012 and then again up until July 3, 2013. But PHMSA declined to push back the annual report deadline.

Moreover, numerous companies plus INGAA complained about the expanded data PHMSA will ask for. The big changes to the annual report come in sections “Q” and “R,” particularly Q which solicits information on the presence of verification records establishing MAOP. Jeff Maples, director, Gas Operations, Paiute Pipeline Company, explains, “The addition of Parts Q and R is significant. The amount of effort involved to collect and quantify the data in the manner requested by the annual transmission report is substantial.” He says the PHMSA report will require companies to report information beyond what is required by the 2012 pipeline act.

INGAA proposed replacing proposed parts Q and R with a substitute that would collect the information necessary to characterize the amount of pipe to be addressed through various Fitness for Service (FFS) methods. PHMSA has made some changes in those two sections in the latest version it submitted to the White House Office of Management and Budget on Oct, 1, 2012. The industry had a chance to provide the OMB with comments during November. OMB must approve the annual report before PHMSA can order companies to complete it.

Terry Boss, senior vice president of INGAA, did not directly answer a question about whether PHMSA changes to sections Q and R satisfied INGAA. He says, “It appears that PHMSA has understood the importance of collecting additional information about this subject on the annual report.” He did not directly address a question about whether PHMSA in whole, partially, or not at all, adopted the FFS methodology INGAA wanted it to use in those two new sections.