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The Gas Storage Market: What Does it Tell Us?

Fortnightly Magazine - April 15 1996

efficiency, hedging, deferring new facilities, and leasing.

Pipelines and LDCs differed the most on leasing (em which shouldn't prove surprising, given the difference in their sales obligations. Leasing was the most important reason for pipeline ownership of gas storage facilities; the least important reason for LDCs. Thus, the evolution of the gas storage market and the increasing importance of leasing is driven primarily by the pipelines. However, since LDCs are providing and offering storage services, leasing is not necssarily an unimportant strategy for them.

Another significant difference between pipelines and LDCs is evident in their ranking of gas storage as a surrogate for reserves: That reason showed up as Most Important for LDCs, but second-to-least important for pipelines. While both sectors have an obligation to serve, most pipeline storage fields are located near production, giving them less need to use storage as a surrogate for reserves.

Hedging ranked last in importance for pipelines, and tied for third place for LDCs. Pipelines are not using gas storage as a hedging tool with much frequency; LDCs are somewhat more active in this area.

Does your company lease storage to third parties? What percent? Overall, 80.6 percent of respondents indicated that their company leases storage to third parties. While the pipelines' high response rate of 93.3 percent comes as no surprise, the LDCs' response rate of 68.8 percent is somewhat unexpected, given LDC responses on leasing in Table 2. However, Table 3 indicates that while a majority of LDCs responded that they leased storage, only one-fifth (20.6 percent) of facilities are actually used for that purpose.

Nevertheless, the data indicate that LDC leasing is nontrivial. One possible explanation: As distribution becomes more competitive, customers are demanding access to storage services from their LDCs. This answer suggests that to the extent that bundled retail sales fall in importance, LDCs will play an ever-larger role in developing gas storage markets, as bundled retail sales disappear.

How do you design rates for end users who lease gas storage? We posed this question to gauge the extent of competitive pressure, if any, in the gas storage market. The degree to which cost-of-service studies (COSS) dominate in determining rates charged to third parties would indicate lack of significant competitive pressure.

The data in Table 4 present mixed results. (Also, the rows do not sum to 100 percent because of multiple responses.) For pipelines, rate determination comes primarily from traditional rate-base regulation, through COSS. Of course, the FERC regulates storage service rates and requires a demonstration of lack of market power for price deregulation. Some of the pipeline respondents did indicate, however, that the FERC rate is used as a cap, while market pressures determine the final price. This fact is shown in Table 4, where 17 and 8 percent of pipelines responded that they employ negotiations and auctions, respectively, to determine final rates.

Interestingly, LDCs claim more experience with market rates, negotiations, and auctions. Seventy percent of LDCs say they use COSS to determine final rates; 40 percent use market rates; 30 percent, negotiations; and 40 percent, auctions.

This data