What is the difference between firm and interruptible services?
Our Blue Merle Sheltie, Crosby, lives for hanging out on the sofa in our living room. To his dismay, when a human wants to sit on the couch, he gets the boot. It could be fair to say that Crosby has interruptible sofa sitting rights, and the humans have firm rights.
As it relates to oil and gas, services like transportation and storage can be considered firm or interruptible. According to the Code of Federal Regulations, interruptible service means that “the capacity used to provide the service is subject to a prior claim by another customer or another class of service and receives a lower priority than such other classes of service.” The regulations go on to say that a reservation fee can’t be charged for interruptible service and take-or-pay contracts also aren’t allowed. Interruptible service is usually a bit pricier than firm service; for example, TransCanada Corporation (TRP) upcharges by 110% of firm tolls.
Firm service is basically the opposite of interruptible. Customers with firm contracts have access to the storage or transportation capacity they have contracted for whenever they need it. In other words, firm service customers are akin to the parents who were smart enough to spring for the FastPass at Disney World. These firm contracts may have proved to be an especially wise decision this year, as we’ve seen demand for storage capacity increase with lower commodity prices.
Newcomer Columbia Pipeline Partners (CPPL) discusses how interruptible transportation and storage capacity fits into its business model in its IPO prospectus. The SEC filing explains that interruptible services are often used by customers who don’t need or have been unable to contract for firm services. Interruptible services may also come in handy for customers who have overrun their reserved capacity level. In 2013, CPPL reported that approximately 93.1% of their transportation and storage revenues came from reservation fees paid under firm contacts, 5.0% came from usage fees under firm contacts, and the other 1.9% came from interruptible services. MLP investors generally prefer a high percentage of firm service.
From CPPL’s example, we see that interruptible services may often be a small piece of the revenue pie. However, this option allows for additional asset utilization, which always seems like a good idea—just ask this guy.