APGA Ready For Opportunities And Challenges

April 2013, Vol. 240 No. 4

Jeff Share, Editor

Since it was formed in 1961, the American Public Gas Association (AGPA) has played an instrumental role in the operations of more than 700 member companies in 36 states. The non-profit trade group has a number of vital functions that serve the interests of the industry and ultimately the consumers who are buying that natural gas in increasing amounts and will continue to do so far into the future.

APGA represents its members before Congress and other federal agencies by carefully assembling regulatory and legislative positions. The Washington, DC-based association also holds meetings, seminars and workshops throughout the year designed to help member companies improve their reliability, operational efficiency and regulatory environment.

The topic might be safety, new technologies, public policy, even global markets, but the certainty is that those members representing municipal gas distribution systems, public utility districts and county districts or other public agencies with natural gas distribution facilities will stand to benefit.

In this interview, Wade Stinson, PE, chairman of the Board of Directors of APGA and Jimmie Butler, chairman of APGA’s Operations & Safety Committee, discuss at length several of the key issues confronting their members as they watch the Natural Gas Revolution continue to evolve.

Stinson is associate general manager-Operations of City Utilities of Springfield, MO where, among other responsibilities, he is in charge of operations of the gas distribution system. He previously served as Vice President, Construction & Maintenance at Memphis (TN) Light, Gas & Water before joining City Utilities in June 2005.

Butler is manager of the Gas Department of Huntsville Utilities in Alabama. Prior to joining Huntsville Utilities in 2006 he worked in a variety of areas within the Gas Operations Department of Mobile Gas Service.

P&GJ: What are APGA’s top priorities for 2013?

Stinson: A new Congress presents new opportunities as well as potential new challenges. We anticipate APGA will focus on several issues including: the export of liquefied natural gas (LNG); natural gas vehicles (NGVs); efficiency standards; the preservation of tax-exempt financing; and reform of Section 5 of the Natural Gas Act (NGA).

Section 5 addresses the ability of FERC to order refunds to consumers when FERC determines that a pipeline has over-collected transportation charges. Pipelines’ transportation rates are regulated under the NGA and are required to be “just and reasonable” in a similar manner to which electricity transmission rates are regulated under the Federal Power Act. Under the Federal Power Act, if a complaint is filed and FERC rules that the rate the customers have paid was unjust and unreasonable, FERC has the authority to order refunds of overpayments from the date the complaint case was filed. FERC does not have the same authority under the NGA. Under Section 5 of the NGA, FERC can only rule that a rate reduction take effect prospectively after FERC’s order is issued, which more often than not occurs years after a complaint is filed.

Given the time and expense of a complaint proceeding and the pipeline’s obvious and strong incentive to delay the proceeding (since no refunds can be ordered under Section 5), the absence of refund authority in Section 5 completely undermines its effectiveness and leads to a high likelihood of excessive transportation rates. APGA has pushed for a legislative change to amend Section 5 in a manner identical to which Congress amended the Federal Power Act.

Butler: Closely tied to Section 5 is the issue of pipeline safety user fees. Since 1986 the Pipeline and Hazardous Materials Safety Administration’s (PHMSA) gas safety budget has been paid for by user fees collected by transmission and LNG operators. In 1986 the fee was $23.99 per mile. In 2012 it was $231 per mile, a nearly 500% increase even adjusting for inflation.

The concept of this system is that the cost of regulatory oversight over the natural gas pipeline system should be paid by gas customers that benefit from efficient and safe pipeline transportation. Most of the gas consumed in the U.S. passes through the interstate pipeline system so that is the logical place to collect the fee. Pipeline operators can pass on this cost to their customers through adjustment to transportation rates; however, many pipeline operators have chosen not to pursue this option because other costs included in their transportation rates may have gone down.

There has been discussion of implementing a “tracker” at FERC that would automatically adjust pipeline rates for increases in user fees. While we sympathize with the pipelines about the increases in user fees, APGA strongly opposes allowing one component of pipeline rates – the user fee – to automatically adjust up without some mechanism for periodic review of all the components of pipeline rates. APGA would support the user fee tracker if Section 5 was amended as we have proposed.

P&GJ: Why is APGA opposed to exporting LNG?

Stinson: APGA opposes the large-scale export of domestically produced natural gas in the form of liquefied natural gas (LNG) for three reasons.

1) Export of LNG will increase the price of natural gas for consumers and businesses. This has been substantiated by Department of Energy studies, private studies, and by the applications filed at the DOE by exporters themselves. The very conservative price estimates of these organizations project an up to 10% increase in the price of natural gas and a 1-3% increase in price for electricity.

2) Export of LNG will sacrifice the United States’ best opportunity to reduce its dependence on foreign oil by utilizing natural gas vehicles (NGVs). As the domestic price of natural gas increases, the fuel cost advantage of NGVs vs. gasoline vehicles declines, thereby making them less attractive. This means the U.S. will continue to be dependent upon imported petroleum products which imperils our national security and exacerbates the nation’s trade deficit.

3) Export of LNG will squander the domestic manufacturing renaissance as natural-gas intensive manufacturers are highly price sensitive with respect to natural gas. In short, if the price of natural gas increases, the $90 billion of private investment that has been committed by manufacturers to new production in the U.S. will be located abroad. This means thousands of lost job opportunities for Americans and reduced economic activity.

P&GJ: Isn’t it likely that producers will cut back on natural gas production without higher prices?

Stinson: APGA believes the domestic demand picture for the United States is very robust and therefore it is highly unlikely that producers will cut back on production. A bit of context is perhaps helpful; the U.S. produced about 67 Bcf/d of natural gas in 2011. What we have seen over the last year is the price of natural gas increase from a low of $1.94 in 2012 to about $3.42 as of Feb. 6, 2013.

In short, the market is working and the price is already increasing significantly. In addition, production levels for 2012 are expected to be on par or above with those from 2011. So, in the short run, we have seen prices increase and production remain steady.

In the long run, over the next 15-20 years, estimates project that between 50-80 gigawatts of electric generation from coal is expected to be retired due to the low cost of natural gas and environmental regulations. Though not all of this will be replaced by natural gas, the vast majority of it will, meaning that there is potentially 10 Bcf/d of new demand just from electric generation.

On top of that, the manufacturing renaissance that is driven by affordable natural gas could consume up to 11 Bcf/d. In addition, some estimates have projected that natural gas vehicles could consume up to 5 Bcf/d within 15-20 years. Add all of those new sources of demand up and you get a very conservative estimate of 26 Bcf/d of new demand alone. 26 Bcf/d of new demand will be a huge challenge for producers to meet and will allow them to make significant profit for years to come.

P&GJ: Besides LNG, what other issues on Capitol Hill concern APGA members?

Stinson: There are a number of issues we anticipate working on in the 113th Congress; as mentioned above those include Section 5 reform and the preservation of tax-exempt financing which has been a valuable tool for our members. APGA anticipates that climate change legislation may also be discussed and, if that is the case, we have argued that the direct use of natural gas should be part of the solution to reducing greenhouse gas emissions.

P&GJ: Speaking of direct use of natural gas, what is APGA’s stand on the DOE ruling increasing the Annual Fuel Utilization Efficiency? Can you give some examples as to how this will affect the utilities, such as with gas furnaces?

Stinson: While APGA supports authentic energy efficiency efforts, we will not support efficiency rules and rulemakings in name only. And, the Furnace Rule was just that — an efficiency rule in name only (raising the minimum furnace efficiency in the 30 northern states from 78% AFUE to 90% AFUE). The Department of Energy’s Direct Final Rulemaking on natural gas furnaces reached into the 30 northern states, failed to segregate the new market from the replacement market, and we believed would fail to achieve the claims made by its supporters.

Rather than improving energy efficiency, especially those along the southern tier of the affected 30 northern states and for many consumers in the replacement market, (1) the increased first costs would have exceeded the benefits, (2) burden consumers who are sensitive to first-costs, and (3) driven some consumers to less-costly alternatives that, on a full fuel cycle basis, are less efficient, generate higher emissions, and would be more expensive over the life of the heating unit.

Butler: In theory, higher furnace efficiency standards sound like a good thing for consumers and for the environment. However, this rule would lead many consumers to switch from natural gas furnaces to heating alternatives that are less expensive on a first-cost basis, but are ultimately less energy-efficient and result in higher consumer costs in the long term. For example, efficiency standards do not take into account energy lost due to inefficiencies in electric power generation and transmission.

For many American consumers the furnace rule, although intended to improve energy efficiency, would ultimately undermine energy efficiency, increase emissions, and increase the costs to heat their home.

P&GJ: How is APGA involved in the effort to promote NGVs? What are some of the challenges here?

Stinson: APGA is extremely active in the NGV space. APGA created an NGV Committee in 2011 to promote NGVs and refueling infrastructure, assist with member projects, and coordinate advocacy efforts at the federal level to promote NGVs.

We at APGA and our members are committed to supporting policies at the federal and state levels which deploy NGVs for heavy, medium, and light-duty vehicles. We are very engaged in advocacy and education of the policymakers, other utilities, and the general public about the cost savings, energy security, and air quality improvements that NGVs provide to utilities, businesses, and individuals.

Also, our members aren’t just advocating for NGVs, they are also investing heavily in them. Municipalities have begun to make the transition to NGVs and are installing refueling infrastructure all over the country. Our members have private and public stations in use now from Nebraska to Florida and almost everywhere in between and are committed to doing more.

The two biggest challenges facing NGVs are the “chicken and egg problem” and inconsistent federal policies to promote them. Put simply, the chicken and egg problem for NGVs is how to develop the NGV market: does the NGV refueling infrastructure get built first and then OEMs will begin to produce large quantities of NGVs or is it vice versa?

One other significant challenge is the “boom-and-bust” approach of federal policy. Congress has provided tax credits for alternative fuel vehicles, their fuels, and support infrastructure over the past eight to ten years on a short-term basis. Credits for purchasing NGVs have been in place for one or two years at a time, making long-term purchasing decisions almost impossible.

P&GJ: How large is APGA today in terms of member companies and number of customers? Is the association showing signs of growth and what is it doing to try and increase membership?

Butler: There are about 1,000 public gas systems serving about 5 million customers in 36 states. About 700 are APGA members. The increasing administrative burden of federal regulations is making it harder for small utilities to stay in business. Take the Control Room Management rule for example. Its definition of a controller is so broad that any utility manager that can view gate station pressures or flows on a smart phone app is treated as if he/she is an interstate pipeline controller.

The utility must create a written fatigue management plan for that manager and his/her boss, who in many municipal utilities is the mayor. Such an overly broad definition has no safety benefit whatsoever, but very real and significant administrative costs.

Stinson: APGA’s strategy for membership is pretty simple – APGA seeks to provide members with value that exceeds the cost of their APGA dues. Most public gas systems are too small to afford in-house engineering and regulatory compliance expertise, so APGA helps by monitoring regulations from PHMSA, the Environmental Protection Agency and others, summarizing the requirements of new rules and providing tools to help them comply.

For example, in 2009 EPA issued a 300+ page greenhouse gas reporting rule that would have affected every public gas system no matter how small. APGA successfully sued EPA to exempt small systems from reporting. We produced a free calculation spreadsheet members could use to determine if they were over or under the reporting threshold.

And for those large enough to report, we provided a free model greenhouse gas monitoring plan. We did something similar with public awareness in 2006 and we support the APGA Security and Integrity Foundation which provides low-cost services for operator qualification, operation and maintenance procedures and the SHRIMP Distribution Integrity Management Program tool.

P&GJ: What progress have APGA members made in replacing higher-risk infrastructure?

Butler: Between 2000 and 2010 APGA members removed from service 33% of bare steel mains and 29% of cast iron mains. Many members had completely eliminated cast iron even before the DOT Call to Action in April 2011. Since then our largest member, Philadelphia Gas Works, has worked with the Pennsylvania Public Utility Commission on rate treatment to accelerate cast iron replacement at PGW.

P&GJ: Can you provide an update on how the SHRIMP program is progressing?

Over 1,300 systems are using SHRIMP (Simple, Handy, Risk-based Integrity Management Plan). These range in size from some of the very largest utilities to small master meter operators, e.g. mobile home parks and garden apartments. SHRIMP has recently been updated to allow users to re-evaluate their DIMP (Distribution Integrity Management Program) plans and have SHRIMP log the changes from one plan to the next.

Improvements in the works include refining the risk-ranking model to include statistical analysis of each user’s leak repair and excavation damage trends and also tracking and analysis of performance measures. On March 20 we held a users’ group meeting and heard from users on other concepts to make SHRIMP more valuable to users.

P&GJ: How is the Shale Gas Revolution affecting APGA members?

Stinson: The advent of shale gas has presented the U.S. with a unique opportunity to reduce our dependence on foreign energy while providing consumers with lower and more stable natural gas prices. As a result of these more affordable prices, natural gas demand is increasing for power generation, industrial use, and NGVs.

P&GJ: What tools are you using to improve communications with your members?

Stinson: Since APGA member systems are located throughout the country, maintaining effective communication with them despite their distance from Washington is very important so as to keep them apprised of national level issues, new initiatives, APGA activities and other issues of interest to public gas utility systems. APGA distributes three routine publications to members – a weekly e-mail called The Weekly Update, a biweekly newsletter called Public Gas News, and a quarterly magazine called THE SOURCE.

These publications offer comprehensive insight into a variety of topics and events that our industry faces. In addition, e-mails and social media updates are used to deliver timely information to our members on need-to-know occurrences. Our website, www.apga.org, also offers a database of information for our members to reference and learn more about APGA issues and activities.

P&GJ: What is the near-term outlook for new pipeline construction among APGA members?

Butler: APGA’s members are primarily distribution operators. Only about 5% of the approximately 1,000 public gas systems in the U.S. have pipe classified as transmission and most of that is small, 10 inches diameter or less. APGA members continue to extend mains and services to serve new customers as well as replace existing pipe identified through their Distribution Integrity Management Programs. The amount of new construction is, therefore, closely tied to the health of the economy and housing markets.