March 9, 2016 / 10:24 PM / a year ago

Shippers say expansion would solve Colonial Pipeline glut

HOUSTON, March 9 (Reuters) - Colonial Pipeline said it has come up with multiple ways to manage its glutted system while trying to be fair to shippers, but a fuel executive for the top U.S. airline said expanding the largest domestic refined products pipeline system would solve the problems.

"We wouldn't be here at all if we attacked the elephant in the room, which is expanding capacity," Michael Baer, managing director of fuel and energy procurement for American Airlines Group Inc, said at a Federal Energy Regulatory Commission conference on Wednesday.

The rare gathering of regulators, Colonial and shippers allowed those who rely on the critical artery that links domestic Gulf Coast refineries to U.S. Northeast markets to critique or praise the pipeline's plan to change how space is allocated on the 2.5 million barrels per day system.

FERC approved the changes, but put them on hold until July to allow for more debate and possible revisions.

Colonial's congestion spawned secondary markets where more shippers trade space between themselves, driving up costs for some wholesale gasoline and diesel buyers. Opponents say the changes will squeeze access and limit competition on the common-carrier system obligated to accommodate all shippers.

Scott Matthew, director of East Coast fuel products for Western Refining Inc's trading arm, said the restrictions would be detrimental to Mid-Atlantic petroleum product supply as some shippers - including Western - could be shut out.

American is among several airlines that rely on Colonial to move jet fuel to markets they serve along the pipeline system's route. Baer said American would buy more fuel to move to markets along the Eastern Seaboard if more capacity were available, and Colonial "has a duty" to expand.

If FERC focuses solely on the flap over changes to rules that govern how Colonial moves fuels, "we will continue to fight about allocating scarce capacity," Baer said.

Colonial has been quietly shopping a multibillion-dollar, multi-year expansion proposal, but has yet to pick a project and cost that customers want.

Steve Brose, an attorney representing Colonial, said on Wednesday that the immediate issue involves the current system.

"Expansion sure is a solution to a lot of things. What we have to do right now is deal with the world as we know it," he said. (Reporting By Kristen Hays; Editing by Bernard Orr)

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