The gas pipeline industry is hardly glamorous. But it is lucrative
and loosely regulated.

Last weekend, two oil and gas pipeline companies announced
they would combine to create the biggest such firm in the U.S. when Kinder
Morgan offered more than $20 billion to buy El Paso. If the deal goes through,
the companies say, the behemoth would become the continent’s fourth largest
energy corporation.

While the pipeline business has operated largely, well,
underground, several recent accidents have drawn attention to safety and the
web of regulations that governs the nation’s 2.3 million miles of gas
pipelines. A growing controversy over a plan to build
a major oil pipeline from Canada’s Tar Sands to Texas has also spotlighted industry
practices.

On Monday, the Senate passed
a pipeline safety bill that would increase fines, hire more inspectors and
implement stronger safety standards. The industry has supported the measure,
but some advocates have called for larger changes.

Here’s a primer on the industry and its regulations.

The Regulations

The system that regulates natural gas pipelines is complex
and, critics contend, lax.

“There isn’t much regulation and it doesn’t really work,” said
Rick Kessler, who sits on the board of the advocacy group Pipeline Safety
Trust. Kessler is also a federal lobbyist on energy issues, but he does not
represent pipeline companies.

To build a pipeline to transport gas from Pennsylvania to
New York, company X would have to seek a permit from the Federal Energy
Regulatory Commission and prove that the line is needed. If the company
convinces FERC of the need and that the proposed route is appropriate, the
government could grant company X the right to seize property through eminent
domain if it can’t work out deals with landowners.

If the pipeline were not going to cross state lines a state
commission would generally oversee the siting of the line. Texas is one of the
more industry-friendly states on siting. It grants companies relatively wide
latitude to seize property for new lines.

Once a line is approved, a different agency takes over to handle
safety issues. The federal Pipeline and Hazardous Materials Safety
Administration sets minimum safety standards, which states can supplement. If a
pipe crosses state borders, enforcement generally falls to the federal
government, while most states inspect lines that don’t leave the state.

But whether the regulators are from Washington or the states, “They
don’t come out and necessarily walk the pipeline,” said Richard Kuprewicz, a
former pipeline engineer for Arco who is now a consultant.

In fact, it is generally the pipeline operators themselves who inspect
their own lines and report problems. Most government oversight involves
checking the paperwork, making sure that things are up to code.

“It’s compliance with the regulations,” Kuprewicz said. “It’s not,
‘Are you safe or not.’”

The pipeline industry points to its safety record.  Despite several high profile accidents
– such as the explosion that killed 8 people in San Bruno, Calif., last
year – the number of incidents has not changed dramatically in recent
years. There are typically about 275 gas pipeline accidents a year that kill 10
to 15 people and injure about 65 to 70. There was a jump in the number of
accidents on transmission lines from 2002 to 2004, but the numbers have
generally held steady since then, according
to PHMSA.

The industry group for interstate transmission lines, the
Interstate Natural Gas Association of America, did not respond to requests for
comment.

Lydia Meigs, a spokeswoman for the American Gas Association, which
represents the utilities that operate most of the 2 million miles of shorter distribution
lines (the type of lines involved in recent high-profile
accidents) said the industry is best suited to enforce best practices.

Critics disagree, pointing to the San Bruno explosion, where
the operator didn’t
run tests that could have detected the faulty weld that eventually failed.

There’s also an entire class of pipelines that is largely
unregulated. There are an estimated 200,000 miles of gathering lines –
pipes that lead from wells to processing plants –  in sparsely populated areas for which
PHMSA does not set safety standards (the agency does regulate such lines in
higher density areas). Most states do not regulate these lines either, so there
is no reporting on any leaks that may be found. Siting is generally worked out
by energy companies and landowners.

These rural gathering lines are considered to be low risk
not only because relatively few people live near them but also because they are
generally smaller and operate at lower pressures than the lines that send gas
from state to state. But in March, a federal
advisory committee found that newer gathering lines, particularly those in
shale gas development areas, are running at higher pressures and that operators
should be required to submit safety reports. PHMSA, the federal regulator, is
now considering whether to issue new regulations to cover these lines.

Currently, PHMSA has 125 inspectors to cover 290,000 miles
of gas and liquids lines, while about 300 state inspectors oversee the
remaining 2.2 million miles, according to PHMSA.

The Business

The industry is dominated by a handful of companies,
including El Paso, Enbridge and Williams Gas Pipeline, according to Fadel
Gheit, an oil and gas analyst with Oppenheimer and Co.

Kinder Morgan, for example, currently operates more than
37,000 miles of lines, carrying not only gas but also
oil and carbon dioxide. Last year, the company had a net income of $1.3
billion on $8 billion in revenue.

The Federal Energy Regulatory Commission sets guidelines for
what companies can charge to transport gas. The rates are based on market
supply and demand and on the amount of money the company has to spend to build
and maintain the line. A gas producer such as Exxon will generally buy a
certain amount of transmission capacity and negotiate a rate within FERC’s
guidelines.

“It’s like buying a seat on a flight,” Gheit said.

It’s a relatively predictable industry, Gheit said, because
supply and demand don’t fluctuate wildly from year to year. When a company
builds a line, it generally locks in long term contracts.

Increased gas development has led to a push for new lines. FERC
has approved dozens of new projects over the past couple of years. The
Interstate Natural Gas Association of America says that, due to projected
increases in production and consumption, the industry will need to build
35,600 miles of transmission lines and 414,000 miles of gathering lines by
2035, at a cost of nearly $140 billion dollars.

Key Pipeline Stats*

Miles of all types of pipelines, gas and liquid –
more than 2.5 million

Miles of federally regulated gas transmission and
gathering lines – 321,000

Miles of gas distribution lines – about 2 million

Miles of unregulated gas gathering lines – about
210,000

*Source: Pipeline and Hazardous Materials Safety
Administration