Interruptible transmission service

What Is Interruptible Transmission Service?

Interruptible transmission service is a type of contractual arrangement in energy markets, particularly prevalent in the natural gas and electricity sectors, where a customer agrees to have their service temporarily curtailed or interrupted by the utility provider under specified conditions. This service falls under the broader financial category of energy markets and utility services. In exchange for this flexibility, customers typically receive a lower rate for the transmission of their energy commodity compared to those with firm service agreements⁴². The core principle of interruptible transmission service is to allow energy providers to manage system capacity and demand fluctuations, especially during peak periods or unforeseen supply constraints. Businesses utilizing interruptible transmission service often have the capability to switch to alternative fuel sources or temporarily reduce their energy consumption when an interruption event occurs⁴¹.

History and Origin

The concept of interruptible transmission service evolved as energy infrastructure, particularly natural gas pipelines, developed to serve a wide range of customers with varying reliability needs. As natural gas transportation systems expanded, the need arose to prioritize certain deliveries, such as those to residential customers and hospitals, over others during times of high demand or limited supply³⁹, ⁴⁰. The Federal Energy Regulatory Commission (FERC), which regulates interstate natural gas transportation, plays a significant role in defining and overseeing these service types. For instance, 18 CFR § 284.9 outlines specific provisions for interruptible transportation service, stipulating that interstate pipelines offering firm service must also offer interruptible service, and that interruptible service receives lower priority and cannot have a reservation fee or minimum bill provision.³⁸ Over the years, FERC's policies, such as Order No. 809, have addressed coordination between natural gas pipelines and electric utilities, including aspects of the "no-bump" rule which dictates that flowing interruptible volumes may not be immediately displaced by firm service in the final intraday nomination cycle.³⁷ These regulatory frameworks have shaped how interruptible transmission service is structured and utilized in the market.

Key Takeaways

• Interruptible transmission service offers a lower price for energy transmission in exchange for the customer's agreement to potential service interruptions.
• This service is crucial for utility companies to manage peak demand, system constraints, and ensure supply reliability for high-priority customers.
• Customers who benefit most from interruptible service typically have flexible energy needs and access to alternative fuel sources.
• The terms and conditions of interruptible transmission service are governed by regulatory bodies like the Federal Energy Regulatory Commission (FERC) through published tariffs.
• While cost-effective, interruptible service carries the risk of supply disruptions, which can impact operations if not properly managed with backup plans.

Interpreting the Interruptible Transmission Service

Interpreting interruptible transmission service involves understanding its inherent trade-off: lower cost versus reliability. For industrial or commercial customers, the decision to opt for interruptible transmission service is primarily driven by cost management, as it offers a discounted rate on natural gas or electricity delivery compared to firm service.³⁶ The "interpretation" is less about a numerical value and more about operational strategy. Businesses assess their operational flexibility and the criticality of uninterrupted supply. For example, a manufacturing plant with dual-fuel boilers (capable of switching from natural gas to heating oil) might find interruptible service highly advantageous because they can maintain production even during a curtailment event.³⁵ Conversely, facilities with mission-critical infrastructure, like data centers, typically cannot tolerate such interruptions and therefore opt for more reliable, albeit more expensive, firm service.³⁴ The frequency and duration of expected interruptions, as outlined in the utility's tariffs, are key factors in this interpretation.³³

Hypothetical Example

Consider "Alpha Manufacturing," a company that uses natural gas for its heating and some non-critical industrial processes. Alpha's energy needs are substantial, but its processes allow for a temporary shutdown or a switch to a backup propane system without significant financial loss.

Alpha currently pays a firm rate for its natural gas transmission, ensuring uninterrupted supply. However, after reviewing their operational flexibility, Alpha decides to switch to interruptible transmission service. Under the new contract, the transmission cost drops by 15%. In return, Alpha agrees that their natural gas supply can be curtailed or interrupted by the local utility when demand on the grid is exceptionally high, typically during severe winter cold snaps.

One January morning, the utility declares an "interruptible event" due to record-low temperatures causing a surge in residential heating demand. Alpha receives a pre-determined notice (e.g., 2-4 hours) to reduce or cease its natural gas consumption. Alpha's operations team promptly switches the relevant equipment to run on their stored propane, incurring a higher fuel cost for the duration of the interruption but avoiding the much higher penalty charges for exceeding their curtailed gas usage.³² Once the event concludes, the utility notifies Alpha, and they seamlessly switch back to the more cost-effective natural gas, having saved money on overall transmission costs throughout the year. This example highlights the interplay between energy costs, operational flexibility, and risk management in utilizing interruptible transmission service.

Practical Applications

Interruptible transmission service is widely applied in various sectors that consume significant amounts of energy and possess the operational flexibility to manage supply disruptions.

• Industrial and Manufacturing Facilities: Many industrial plants, particularly those with large-scale heating or process requirements, often utilize interruptible natural gas or electricity services. These facilities frequently have the infrastructure to switch to alternative fuels (such as propane or fuel oil) or can temporarily scale back non-essential operations during an interruption, thereby benefiting from reduced overall energy costs.³¹
• Commercial Buildings: Large commercial complexes, including office buildings and retail centers, may leverage interruptible service for their heating, ventilation, and air conditioning (HVAC) systems. During periods of high demand, they can adjust thermostats or temporarily reduce power to non-critical zones, optimizing energy expenditures.³⁰
• Power Generation: Some natural gas-fired power plants may contract for interruptible gas transportation. While critical for electricity generation, some older or less frequently dispatched plants might choose this service if they have alternative fuel capabilities or can manage short-term gas supply variability, though many newer facilities require more reliable firm service.²⁹

The Federal Energy Regulatory Commission (FERC) regulates interstate natural gas pipelines, and their policies, including those governing interruptible service, are critical to how these services are offered and managed across the United States. Pipeline operators must file "tariffs" with FERC, which outline the terms and conditions under which transportation services, including interruptible service, are provided.²⁸

Limitations and Criticisms

Despite its cost-saving benefits, interruptible transmission service comes with significant limitations and criticisms, primarily centered on reliability and potential financial exposure. The fundamental drawback is the lack of guaranteed supply; service can be suspended or curtailed at the utility's discretion, particularly during peak demand periods, extreme weather events, or system constraints.²⁶, ²⁷ This uncertainty can pose substantial operational risks for businesses that cannot easily switch to alternative fuels or withstand temporary shutdowns.

A major criticism, particularly from firm service customers and power generators, has been the potential for interruptible service to receive undue priority or avoid "bumping" by higher-priority firm service, as per certain regulatory rules. Historically, there have been debates and requests for the Federal Energy Regulatory Commission (FERC) to re-evaluate policies like the "no-bump" rule, where flowing interruptible gas might not be immediately displaced by a firm customer's increased demand, leading to inefficiencies and higher costs for firm transportation holders.²⁴, ²⁵ The Government Accountability Office (GAO) has also highlighted that while interstate natural gas transportation is generally reliable, interruptions, especially those without advance notice, can have serious effects, underscoring the inherent risk in interruptible contracts.²³ For facilities with mission-critical operations, such as modern data centers, relying on interruptible gas service can be a significant liability, as a loss of fuel supply directly impacts their ability to maintain continuous operation and meet uptime expectations.²² The potential for significant "overrun charges" or penalties if a customer continues to consume gas during a declared interruption event further emphasizes the financial risk associated with this service.²¹

Interruptible Transmission Service vs. Firm Transmission Service

Interruptible transmission service and firm transmission service represent two distinct contractual arrangements for the delivery of energy commodities, primarily natural gas and electricity, differing fundamentally in their priority of service and pricing models.

The main point of confusion often arises because interruptible transmission service is cheaper, leading some to overlook the critical difference in reliability. While firm service guarantees capacity, interruptible service offers an "as-available" capacity. This means that while firm service customers pay to reserve pipeline capacity regardless of usage, interruptible customers only pay when they use the service, but their access can be suspended if that capacity is needed by a higher-priority firm customer.⁹

FAQs

1. Who typically uses interruptible transmission service?

Interruptible transmission service is primarily used by large commercial and industrial customers, such as manufacturing plants or office buildings, that have flexible energy needs or the ability to switch to alternative fuel sources (like propane or heating oil) during periods when their primary energy supply is interrupted.⁷, ⁸

2. Why would a business choose interruptible service over firm service?

Businesses choose interruptible transmission service to achieve significant cost savings on their energy transmission rates. The discounted price compensates for the inherent risk of service interruptions, making it an attractive option for those with operational flexibility and robust risk management strategies.⁶

3. How often do interruptions occur?

The frequency and duration of interruptions vary depending on factors such as weather conditions, peak demand periods, and system constraints. While there's no exact formula, utility companies typically outline the expected conditions for curtailment in their tariffs and provide advance notice when an interruption is anticipated.⁴, ⁵

4. What happens if a customer uses gas during an interruption?

If a customer continues to consume energy during a declared interruptible event when they are expected to cease or reduce usage, they can incur substantial "overrun charges" or penalties from the utility provider.³ These charges are designed to deter non-compliance and protect the integrity of the energy supply system.

5. Is interruptible transmission service regulated?

Yes, interruptible transmission service, especially for interstate natural gas pipelines, is heavily regulated by government bodies such as the Federal Energy Regulatory Commission (FERC) in the United States. FERC establishes the rules, rates, and terms under which these services are offered through publicly filed tariffs.¹, ²