To: Editors, News Directors

Date: June 25, 2004

For: Immediate Release

 

 

Natural Gas Infrastructure Expansion

Decision Grants Pre-Approval of Expenses if New Supply Line is Built

 

PHOENIX – Consistent with a December 18, 2003 policy statement on natural gas pipeline and storage costs, the Commissioners voted yesterday to allow Southwest Gas to recover prudent costs associated with securing additional natural gas supplies.  The Commission granted pre-approval of specific charges related to the block of pipeline capacity Southwest Gas plans to acquire if the Silver Canyon pipeline project is built.

Southwest Gas filed for pre-approval of cost recovery for participation in the Silver Canyon natural gas pipeline project.  Kinder Morgan Energy Partners has proposed building this new pipeline to supply Arizona’s growing need for natural gas.  The Silver Canyon pipeline would supply natural gas from the San Juan basin in northwest New Mexico.  Any application to build the Silver Canyon pipeline would be reviewed by and decided by the Federal Energy Regulatory Commission, not the Arizona Corporation Commission.

Before pipelines are constructed, potential developers hold something called an “Open Season” to see which natural gas users would buy capacity from the project.  This process allows heavy natural gas users such as power plants, mines and municipal or public utilities to tell the project developer how much pipeline capacity they would buy from the line and at what price.  Pipeline projects may or may not be constructed, based on commitments made by potential users.

Why does Arizona need more natural gas?

Virtually all of Arizona’s natural gas supplies have been provided through the El Paso Natural Gas pipeline system.  Significant demand for natural gas in the Southwest, particularly for power generation, coupled with the lack of additional infrastructure construction has led to the need for Arizona to seek other resources. 

For many years, Arizona natural gas users had contracts with El Paso that enabled them to draw as much gas as they needed, whenever it was needed.  These “full requirements” contracts were scuttled in the aftermath of California’s energy crisis.  Despite vigorous opposition from the Arizona Corporation Commission and Arizona gas users, the Federal Energy Regulatory Commission (FERC) ruled that these contracts had to be converted to what is called “contract demand” – or contracts with specific capacity limitations.

Natural gas prices continue to be highly volatile.  With restricted availability but ever-growing demand, the state is at the mercy of the North American natural gas market.  Arizona utilities use a combination of long- and short-term contracts to attempt to mitigate the effect of high prices on their operations.  Sustained high prices ultimately trickle down to the consumer.  If Arizona utilities and natural gas users have more supply options, the resulting competition could bring lower costs.

“It hasn’t been easy to deal with the consumer impact of the higher natural gas prices of recent years,” Chairman Marc Spitzer said.  “Higher costs mean higher rates.  What we see here today is the supply industry, the utility industry and ratepayer groups in full agreement that something must be done to increase supply.”

Does the Commission’s decision approve the pipeline?

No.  The Commission’s decision was limited in scope.  It was a ruling on Southwest Gas’ application to pre-approve specific costs the utility expects to incur if the company buys gas from this pipeline.  The Commission granted conditional pre-approval to recover those costs, subject to ongoing review by the Commission.  There are nine separate conditions which must be met by Southwest Gas before any costs are factored into customer rates.

Have the Commissioners endorsed the Silver Canyon project?

No.  The Commissioners have indicated general support for an additional pipeline to supply Arizona with natural gas but yesterday’s decision is not an endorsement of the Silver Canyon project or any other project proposed for the state.

Where would this Silver Canyon pipeline go?

As currently proposed by Kinder Morgan, the pipeline would originate in the San Juan supply basin in northwestern New Mexico and would enter Arizona along the I-40 alignment.  The proposed path roughly parallels the northern pipeline system of El Paso Natural Gas to a point east of Flagstaff.  The pipeline would then head south to Phoenix, skirting the metro area on the north and west sides. 

Steve Harris, president of the Silver Canyon pipeline indicated that a potential route would take the pipeline near Cornville and the Sedona area.  Before the company files with FERC, Harris indicated that there would be a period of about a year involving contact with landowners, community officials, the Bureau of Land Management and other entities to help determine the optimal route for the line. 

Commissioner Kristin Mayes urged Harris to make early and frequent contact with communities that could be impacted by the construction of the pipeline.

“I want to ensure that local officials and community residents know what could be coming so they can have time to properly address the environmental, archeological and safety issues that may arise out of this project,” Commissioner Mayes said.

Will the Commission have to approve the pipeline?

“Before this pipeline is constructed, I expect that the federal government will perform detailed studies to minimize the line’s impact on the environment,” Commissioner Bill Mundell explained.  “The Commission will not dictate the route or location of the pipeline.  We do not play a direct role in when and where the line goes.  The Silver Canyon project is an interstate pipeline and it is the federal government that must grant approval for the project.”

“We have spoken publicly about the need for increased natural gas supply,” Commissioner Jeff Hatch-Miller said.  “By participating with other groups in the review process, we will look to ensure that the people, plants and animals along the right of way are safe and not adversely impacted by the addition of this needed supply.”

Prior to its operation, the Commission’s pipeline safety staff would oversee testing to determine that the line is safe to activate.  The pipeline operator would be subject to ongoing safety and maintenance inspections that are performed under authority granted to the Commission by the U.S. Department of Transportation’s Office of Pipeline Safety.  However, the Commission does not play a direct role in deciding where the pipeline is placed. 

“Pre-approval of these expenses is a new policy for the Commission.  This policy is necessary to encourage critically-needed additional pipeline capacity to meet our growing natural gas needs,” Commissioner Mike Gleason said.  “Our policy statement recognizes that having more than one natural gas pipeline is important.  Competition can result in lower costs and offers natural gas users the ability to access cheaper gas found in the San Juan and Rocky Mountain basins.”

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