Natural Gas Transportation and Transportation Rates
Authors: Kumar Jatinder , Belmont William R. 
Published: December 2007

Changes in the U.S. natural gas market over recent years have caused competition to move from a regional to a national market. This has focused the attention of regulators on gas transportation. This paper briefly reviews federal and state regulations on natural gas transportation and transportation rates.

Introduction

In recent years. the natural gas market in the u.s. has been experiencing drastic changes. The gas market has changed from a sellers' to a buyers' market. and gas prices have declined substantially and are still experiencing a downward trend. The competition among sellers has increased enormously. and the competition in the natural gas market has moved from the regional to the national market. with purchasers seeking out new supplies from a much broader spectrum of suppliers. This changed situation has focused the attention of regulators on gas transportation because transportation has been a major bottleneck in the way of increased competition.1

In this paper, a brief review of regulations related to gas transportation and transportation rates at both federal and state levels will be presented.

Gas Transportation

Federal Regulations.

A large number of interstate pipelines. and to some extent intrastate pipelines. have been transporting gas since the early stages of the natural gas industry. In recent years. as more focus has been directed to transportation, the Federal Energy Regulatory Commission (FERC) issued a number of orders and approved several gas-transportation programs proposed by interstate pipelines.2,3 The most notable earlier FERC orders were Orders 46, 60, 234-B, and 319. FERC Order 46 relates to transportation for distributors. and Order 60 relates to transportation by one interstate pipeline on behalf of another pipeline. At present, there are three major types of applications for transportation filed before FERC. These are generally known as Sec.7(c). Sec. 311. and Order 436.

Section 7(c) Transportation.

FERC issued Orders 234-B and 319 to permit transportation under Sec. 7(c) of the Natural Gas Act (NGA). Sec. 7(c) allows exceptions from certificate requirements for certain types of temporary or emergency transportation arrangements. In other words. FERC's rules (Subpart F of 18 CFR. Part 157). permitted interstate pipelines to obtain FERC's authority to engage in a number of transportation contracts in a single filing under Sec. 7(c). Pregrant of abandonment and approval for construction of necessary facilities was included in the blanket certificate.

Transportation on behalf of a high-priority end user or an end user that owns or purchases gas from a producer, intrastate pipeline, or local distribution company (LDC) was authorized without prior notice to the FERC for a term of 5 years (10 years if the end user owned the production). For a longer term, prior notice was required. Transportation on behalf of an LDC. intrastate pipeline, or interstate pipeline was also authorized on prior notice. The notice of the FERC had to describe the parties and the transactions and had to include a copy of the contract.

For a temporary, experimental period extending from Aug. 5, 1983, to June 30, 1985, gas not dedicated to interstate commerce before enactment of the Natural Gas Policy Act of 1978 (NGPA) could be transported for any end user under a blanket certificate. Transportation without notice was authorized for 120 days, and transportation for a longer period was authorized after notice.3

Self-Implementing Sec. 311 Service.

In addition to blanket certificates under Sec. 7(c). FERC permits both interstate and intrastate pipelines to transport gas under Sec. 311 of the NGPA, generally without prior notice or approval by FERC. Sec. 311(a) (1) authorizes transportation by interstate pipelines on behalf of intrastate pipelines, LDC's, and Hinshaw pipelines. Sec. 311(a)(2) permitted intrastate pipelines to transport gas for interstate pipelines, LDC's, Hinshaw pipelines, and end users. If the intrastate pipeline sought transportation for an end user, the end user had to qualify under Subpart F of Part 157.

Order 436.

FERC issued Order 436 on Oct. 9, 1985, to open the access to transportation on a nondiscriminatory basis. This order has been hailed as a major cornerstone in the area of gas regulation.

Order 436 does not require any pipeline to become an "open-access" transportation. but it requires that any pipeline offering transportation under Order 436 must provide service to all customers on a nondiscriminatory basis. Part A deals with the transportation aspect. The effective date for Part A was Nov. 1, 1985.

The ruling provides for a suitable transition period for fundamental choices in the industry, such as what services to offer, how to structure basic contractual arrangements, and how to allocate the risks and fixed costs.

The items that are covered during the transition period include "grandfathering" of certain transactions, applications for self-implementing transportation authority, setting of rates under the rate conditions, and the exercising by firm-sales customers of the conditional opportunity to reduce or to change the manner in which they purchase their natural gas requirements. These items and the respective implementation dates are addressed below.

Ongoing NGPA Sec. 311 Transportation.

Ongoing self-implementing transportation service (Secs. 284.105 and 284.125) on or before Oct. 9, 1985, may be continued until the earlier of (1) expiration of original or extended term of the authorized transportation agreement, or (2) Oct. 9, 1987.

The rate conditions for Sec. 284.7 (including interim rates) apply to previously authorized transactions by interstate pipelines. Transportation arrangements under Sees. 284.107 and 284.127 are also grandfathered except for rate conditions (interstate pipelines) and reporting conditions (interstate and intrastate pipelines). The new reporting requirements were effective Nov. 1, 1985.

Order 319 - Blanket Certificate Transportation on Behalf of High-Priority End-Users.

Sec. 284.223(g)(1) provides that those end users whose transportation agreements had commenced on or before Oct. 9, 1985, are fully authorized as certificated. Rate conditions of Sec. 284.7, consistent with the general rule, will apply.

Federal Regulations.

A large number of interstate pipelines. and to some extent intrastate pipelines. have been transporting gas since the early stages of the natural gas industry. In recent years. as more focus has been directed to transportation, the Federal Energy Regulatory Commission (FERC) issued a number of orders and approved several gas-transportation programs proposed by interstate pipelines.2,3 The most notable earlier FERC orders were Orders 46, 60, 234-B, and 319. FERC Order 46 relates to transportation for distributors. and Order 60 relates to transportation by one interstate pipeline on behalf of another pipeline. At present, there are three major types of applications for transportation filed before FERC. These are generally known as Sec.7(c). Sec. 311. and Order 436.

Section 7(c) Transportation.

FERC issued Orders 234-B and 319 to permit transportation under Sec. 7(c) of the Natural Gas Act (NGA). Sec. 7(c) allows exceptions from certificate requirements for certain types of temporary or emergency transportation arrangements. In other words. FERC's rules (Subpart F of 18 CFR. Part 157). permitted interstate pipelines to obtain FERC's authority to engage in a number of transportation contracts in a single filing under Sec. 7(c). Pregrant of abandonment and approval for construction of necessary facilities was included in the blanket certificate.

Transportation on behalf of a high-priority end user or an end user that owns or purchases gas from a producer, intrastate pipeline, or local distribution company (LDC) was authorized without prior notice to the FERC for a term of 5 years (10 years if the end user owned the production). For a longer term, prior notice was required. Transportation on behalf of an LDC. intrastate pipeline, or interstate pipeline was also authorized on prior notice. The notice of the FERC had to describe the parties and the transactions and had to include a copy of the contract.

For a temporary, experimental period extending from Aug. 5, 1983, to June 30, 1985, gas not dedicated to interstate commerce before enactment of the Natural Gas Policy Act of 1978 (NGPA) could be transported for any end user under a blanket certificate. Transportation without notice was authorized for 120 days, and transportation for a longer period was authorized after notice.3

Self-Implementing Sec. 311 Service.

In addition to blanket certificates under Sec. 7(c). FERC permits both interstate and intrastate pipelines to transport gas under Sec. 311 of the NGPA, generally without prior notice or approval by FERC. Sec. 311(a) (1) authorizes transportation by interstate pipelines on behalf of intrastate pipelines, LDC's, and Hinshaw pipelines. Sec. 311(a)(2) permitted intrastate pipelines to transport gas for interstate pipelines, LDC's, Hinshaw pipelines, and end users. If the intrastate pipeline sought transportation for an end user, the end user had to qualify under Subpart F of Part 157.

Order 436.

FERC issued Order 436 on Oct. 9, 1985, to open the access to transportation on a nondiscriminatory basis. This order has been hailed as a major cornerstone in the area of gas regulation.

Order 436 does not require any pipeline to become an "open-access" transportation. but it requires that any pipeline offering transportation under Order 436 must provide service to all customers on a nondiscriminatory basis. Part A deals with the transportation aspect. The effective date for Part A was Nov. 1, 1985.

The ruling provides for a suitable transition period for fundamental choices in the industry, such as what services to offer, how to structure basic contractual arrangements, and how to allocate the risks and fixed costs.

The items that are covered during the transition period include "grandfathering" of certain transactions, applications for self-implementing transportation authority, setting of rates under the rate conditions, and the exercising by firm-sales customers of the conditional opportunity to reduce or to change the manner in which they purchase their natural gas requirements. These items and the respective implementation dates are addressed below.

Ongoing NGPA Sec. 311 Transportation.

Ongoing self-implementing transportation service (Secs. 284.105 and 284.125) on or before Oct. 9, 1985, may be continued until the earlier of (1) expiration of original or extended term of the authorized transportation agreement, or (2) Oct. 9, 1987.

The rate conditions for Sec. 284.7 (including interim rates) apply to previously authorized transactions by interstate pipelines. Transportation arrangements under Sees. 284.107 and 284.127 are also grandfathered except for rate conditions (interstate pipelines) and reporting conditions (interstate and intrastate pipelines). The new reporting requirements were effective Nov. 1, 1985.

Order 319 - Blanket Certificate Transportation on Behalf of High-Priority End-Users.

Sec. 284.223(g)(1) provides that those end users whose transportation agreements had commenced on or before Oct. 9, 1985, are fully authorized as certificated. Rate conditions of Sec. 284.7, consistent with the general rule, will apply.

Section 7(c) Transportation.

FERC issued Orders 234-B and 319 to permit transportation under Sec. 7(c) of the Natural Gas Act (NGA). Sec. 7(c) allows exceptions from certificate requirements for certain types of temporary or emergency transportation arrangements. In other words. FERC's rules (Subpart F of 18 CFR. Part 157). permitted interstate pipelines to obtain FERC's authority to engage in a number of transportation contracts in a single filing under Sec. 7(c). Pregrant of abandonment and approval for construction of necessary facilities was included in the blanket certificate.

Transportation on behalf of a high-priority end user or an end user that owns or purchases gas from a producer, intrastate pipeline, or local distribution company (LDC) was authorized without prior notice to the FERC for a term of 5 years (10 years if the end user owned the production). For a longer term, prior notice was required. Transportation on behalf of an LDC. intrastate pipeline, or interstate pipeline was also authorized on prior notice. The notice of the FERC had to describe the parties and the transactions and had to include a copy of the contract.

For a temporary, experimental period extending from Aug. 5, 1983, to June 30, 1985, gas not dedicated to interstate commerce before enactment of the Natural Gas Policy Act of 1978 (NGPA) could be transported for any end user under a blanket certificate. Transportation without notice was authorized for 120 days, and transportation for a longer period was authorized after notice.3

Self-Implementing Sec. 311 Service.

In addition to blanket certificates under Sec. 7(c). FERC permits both interstate and intrastate pipelines to transport gas under Sec. 311 of the NGPA, generally without prior notice or approval by FERC. Sec. 311(a) (1) authorizes transportation by interstate pipelines on behalf of intrastate pipelines, LDC's, and Hinshaw pipelines. Sec. 311(a)(2) permitted intrastate pipelines to transport gas for interstate pipelines, LDC's, Hinshaw pipelines, and end users. If the intrastate pipeline sought transportation for an end user, the end user had to qualify under Subpart F of Part 157.

Order 436.

FERC issued Order 436 on Oct. 9, 1985, to open the access to transportation on a nondiscriminatory basis. This order has been hailed as a major cornerstone in the area of gas regulation.

Order 436 does not require any pipeline to become an "open-access" transportation. but it requires that any pipeline offering transportation under Order 436 must provide service to all customers on a nondiscriminatory basis. Part A deals with the transportation aspect. The effective date for Part A was Nov. 1, 1985.

The ruling provides for a suitable transition period for fundamental choices in the industry, such as what services to offer, how to structure basic contractual arrangements, and how to allocate the risks and fixed costs.

The items that are covered during the transition period include "grandfathering" of certain transactions, applications for self-implementing transportation authority, setting of rates under the rate conditions, and the exercising by firm-sales customers of the conditional opportunity to reduce or to change the manner in which they purchase their natural gas requirements. These items and the respective implementation dates are addressed below.

Ongoing NGPA Sec. 311 Transportation.

Ongoing self-implementing transportation service (Secs. 284.105 and 284.125) on or before Oct. 9, 1985, may be continued until the earlier of (1) expiration of original or extended term of the authorized transportation agreement, or (2) Oct. 9, 1987.

The rate conditions for Sec. 284.7 (including interim rates) apply to previously authorized transactions by interstate pipelines. Transportation arrangements under Sees. 284.107 and 284.127 are also grandfathered except for rate conditions (interstate pipelines) and reporting conditions (interstate and intrastate pipelines). The new reporting requirements were effective Nov. 1, 1985.

Order 319 - Blanket Certificate Transportation on Behalf of High-Priority End-Users.

Sec. 284.223(g)(1) provides that those end users whose transportation agreements had commenced on or before Oct. 9, 1985, are fully authorized as certificated. Rate conditions of Sec. 284.7, consistent with the general rule, will apply.

Ongoing NGPA Sec. 311 Transportation.

Ongoing self-implementing transportation service (Secs. 284.105 and 284.125) on or before Oct. 9, 1985, may be continued until the earlier of (1) expiration of original or extended term of the authorized transportation agreement, or (2) Oct. 9, 1987.

The rate conditions for Sec. 284.7 (including interim rates) apply to previously authorized transactions by interstate pipelines. Transportation arrangements under Sees. 284.107 and 284.127 are also grandfathered except for rate conditions (interstate pipelines) and reporting conditions (interstate and intrastate pipelines). The new reporting requirements were effective Nov. 1, 1985.

Order 319 - Blanket Certificate Transportation on Behalf of High-Priority End-Users.

Sec. 284.223(g)(1) provides that those end users whose transportation agreements had commenced on or before Oct. 9, 1985, are fully authorized as certificated. Rate conditions of Sec. 284.7, consistent with the general rule, will apply.