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Firm Transportation Contracts: When They Expire - A Five-Step Primer for Pipeline Shippers

Fortnightly Magazine - March 1 2000

start by looking for longer-term releases. One good source of term releases is the utilities that may be willing to release term capacity at a discount. However, there may be limited recall provisions and specific receipt and delivery points attached to such deals. These issues need to be worked out with the releasing party prior to consummating the deal. Also, when looking for secondary deals, a shipper should look all along the pipeline system, not just from other shippers in its market area.

Do not ignore alternative supply options that may prompt a shift in primary receipt point specifications. If the current supply area pricing is consistently higher than another, and the transportation rates from both points are the same, then the shipper would benefit from renegotiating a change in the receipt points, assuming that supply reliability is not compromised.

For example, in the changing Canadian energy market, gas prices at Aeco have fluctuated considerably over the past couple of years but have increased steadily. Shippers continually must monitor gas supply prices to spot trends and have the flexibility in their transportation contracts to take advantage of them.

Also consider a possible aggregation of multiple company locations. If the shipper's multiple locations can be served off of the same pipeline, the shipper should evaluate how they can be aggregated. That could prove to be a difficult process, however, due to operational concerns on the pipeline. Nevertheless, it could prove very rewarding. The contract load factor would be better managed because the shipper would have alternative delivery points under one contract.


Flexibility, Cost, Reliability?

The shipper has several options when negotiating a new transportation contract. Ultimately the shipper wants to negotiate a contract that will maximize flexibility and lower costs without compromising reliability.

Leverage is the key for negotiating such contracts. Leverage can be derived from

* Delaying to negotiate with a pipeline until capacity is turned back and the pipeline is more willing to sell capacity at a discount;

* Competing pipelines that deliver to the same utility citygate or can be accessed via a bypass;

* Obtaining firm capacity from the secondary market;

* Using a gas marketer that has access to its own capacity, which can be incorporated in a citygate price offering;

* Using interruptible capacity with some type of backup;

* The threat of switching energy sourcing to an alternative fuel; and

* Shutting down the facility if certain cost parameters are not met.

To gain effective leverage, the options must be legitimate. Waiting to approach a pipeline regarding a new contract until after capacity has been turned back may offer an effective strategy if the shipper is confident that there is not a high demand for capacity on the system. Yet this strategy can backfire if the pipeline is successful in renegotiating the expiring contracts. The pipeline also will question whether a third-party marketer will provide the same level of service as the pipeline's primary firm deliveries. A pipeline expansion project that eventually may present a competitive threat may not be viewed as