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With miles of aging pipe, midstream and utility giants face new compliance costs

North America's largest pipeline companies and utilities operate tens of thousands of miles of pipe installed a half-century ago or earlier. Those assets position the companies to shoulder the weight of one of the biggest pipeline safety reforms of the last decade.

The U.S. Pipeline and Hazardous Materials Safety Administration, or PHMSA, last fall revealed new testing requirements that will chiefly affect gas transmission lines installed before November 1970. The Safety of Gas Transmission Pipelines rule goes into effect on July 1, starting a multiyear process that will require companies to assess thousands of miles of pipe.

The new regulation is meant to close a loophole that contributed to one of the worst pipeline accidents in U.S. history: the 2010 PG&E Corp. gas transmission line explosion in San Bruno, Calif., that killed eight people, injured dozens and destroyed 38 homes.

PHMSA estimated 168,000 miles of the nation's 301,000 miles of onshore gas transmission pipelines went into service before key regulations went into effect in 1970.

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To be clear, installation date alone does not determines whether pipe will come under scrutiny. Depending on a number of factors, some of the pre-1970 miles will not require testing, while some infrastructure installed after November 1970 will need a fresh assessment. Another limit on the public's window into how many miles will need assessment is that PHMSA does not require pipeline operators to publicly disclose which portions of their lines fall within the scope of the rule, making it difficult to assess each company's exact exposure.

Still, the year of installation is a key trigger for compliance. S&P Global Market Intelligence analyzed PHMSA data to find which companies have the most pre-1970 transmission and gathering pipe in their systems, although the agency is still finalizing rules for gathering lines.

These operators include some of the top midstream companies by market capitalization — including Kinder Morgan Inc., TC Energy Corp., Enbridge Inc. and Williams Cos. Inc. — as well as large utilities including Dominion Energy Inc., PG&E and Atmos Energy Corp.. Subsidiaries of U.S. conglomerates Berkshire Hathaway Inc. and Loews Corp. also rank high on the list.

Rule creates new regulatory landscape for transmission lines

The long-delayed rule addressed a loophole that allowed operators to forgo tests to reestablish how much pressure can flow through gas transmission lines. For decades, federal law permitted companies to set and maintain a line's maximum allowable operating pressure, or MAOP, at a level established during the five years prior to July 1970.

Now, for lines that took advantage of this so-called grandfather clause, companies will have to run tests on portions that operate at high stress levels and run through high-consequence areas — densely populated regions where an accident is more likely to cause death, injury or property destruction.

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In a sign of how much work could lie ahead for some companies, PHMSA gave operators 15 years to fully comply with the rule. That compliance window should prevent overlapping tests from shutting down multiple lines simultaneously and causing supply issues, according to Keith Coyle, an attorney at Babst Calland and a former PHMSA adviser. The timeline should also help keep testing costs from spiking amid a run on assessment services, he added.

Many companies have gotten a head start during the roughly eight years it took regulators to finish the rulemaking, Coyle said. Northern Natural Gas Co., a subsidiary of Warren Buffett's Berkshire Hathaway, said it has been preparing for the gas transmission rule for several years but that compliance work will keep the operator busy for several more.

"Acting in advance of the enactment of the new rule, Northern has completed its maximum operating pressure record verification well ahead of schedule and has planned and committed to a multi-year investment of capital that will allow us to increase the number of pipeline inspections above and beyond applicable regulatory requirements," Michael Loeffler, Northern's senior director of external affairs, said in an email.

Companies exposed to rule in different ways

Northern operates a gas transmission system that stretches from southwest Texas to Nebraska, where it branches out across the Midwest and stretches north to Minnesota and Michigan's Upper Peninsula. With more than 12,000 miles of pipe installed prior to 1970, it has the most pre-1970 mileage in any single system.

Kinder Morgan is the top operator of pre-1970 mileage with nearly 33,000 miles of the legacy pipe, which represents two-thirds of its total mileage. The half-century-old or older pipe is spread over eight systems, with 87% of that mileage concentrated in four systems. By the numbers, the Houston-based midstream giant is one of the companies most exposed to the rule's requirements, but the actual impact the regulation will have on the operator in coming years depends on how much of its system is already in compliance or falls outside of the scope of the rule. Kinder Morgan declined to comment for this story.

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Like Berkshire Hathaway, much of Williams' regulatory exposure is through a single line: the Transcontinental Gas Pipe Line Co. LLC, a 10,000-mile transmission system from South Texas to New York City. Loews' exposure through its Boardwalk Pipelines Holding Corp. business is split between two lines with more than 4,000 pre-1970 miles each, while TC Energy and Enbridge have several thousand pre-1970 miles spread over five and six systems, respectively.

Most of Enbridge's legacy mileage is installed in the Texas Eastern Transmission LP system, which ranks seventh among systems with pre-1970 pipe. The line, which began construction in 1942, experienced a rupture in August 2019, blowing a crater in a mobile home park in Lincoln County, W.Va., and killing one person. Investigators have not yet determined the cause of the explosion.

The multiutility with the most pre-1970 mileage, PG&E Corp., has nearly all of that pipe in a single system. The same is true for large-cap utilities such as Atmos Energy, Sempra Energy, CMS Energy Corp., DTE Energy Co. and Southern Co. Dominion's 4,550 miles of pre-1970 pipe, however, is spread over seven systems.

The top 30 pre-1970 pipeline operators also cover several midcap utilities, including MDU Resources Group Inc., Black Hills Corp., NorthWestern Corp., ONE Gas Inc. and Southwest Gas Holdings Inc.

Some companies may have lots of pre-1970 mileage, little regulatory exposure

Companies will not have to reestablish MAOP on some of the grandfathered lines because they did so at some point in the past five decades, according to Coyle. That might be because the risk profile for the area above the line changed, or the operator increased pressure on the line during that time, both of which require a company to reestablish MAOP, he said.

Information provided by CenterPoint Energy Inc. illustrates how PHMSA's testing requirements may apply to less than a company's total pre-1970 mileage. CenterPoint's gas transmission system includes 570 miles of pre-1970 pipe, but the company believes only 40 miles of that system located in Arkansas, or 7%, will fall within the scope of the new rule.

Companies must have documented their work for it to count towards compliance. Operators need to produce traceable, verifiable and complete records, or else they will have to take one of six approved MAOP verification steps, including conducting new tests, lowering the line's operating pressure or replacing the pipe.

"I think that's an issue where you'll see some debate about what qualifies as [traceable, verifiable and complete] record. What's good enough for some of these pipelines?" Coyle said.

Some companies could conduct tests out of an abundance of caution in cases where questions arise over whether records are adequate, he added. Operators could also test lines that run beneath low-risk areas, which the rule does not require, because it sometimes makes sense to run diagnostic tools through the entire line, rather than portions beneath high-consequence areas, he added.

PHMSA expects MAOP reconfirmation to cost the industry about $26 million to $28 million per year, a fraction of the $31.6 billion utilities alone spent in 2019 on safety investments in gas distribution and transmission systems, according to the American Gas Association.