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The Gas Storage Conundrum

Congress allows market-based rates. How will FERC respond?

Fortnightly Magazine - November 2005

Under Natural Gas Act (NGA) Sections 4(a) and (b), and 5(a), natural gas companies engaged in interstate commerce must charge just and reasonable, non-discriminatory rates. 1 When the Federal Energy Regulatory Commission (FERC) determines rates are unjust and unreasonable, § 5(a) requires that agency, either on its own motion or on complaint to it, to determine and order just and reasonable, non-discriminatory rates on a prospective basis. 2

Because these laws are so critical to predictable interstate gas storage and transportation rate regulation, NGA §§ 4 and 5 are not amended every day. In fact, except for minor § 4(e) rewording in 1962, §§ 4 and 5 had not been changed from 1938 until the Energy Policy Act of 2005 (EPACT05), effective Aug. 8, 2005.

If only in that sense, as a rare amendment to a venerable statute, EPACT05 § 312, New Natural Gas Storage Facilities, made headlines by appending a new subsection (f) to § 4. But the new law also tells us of Congress's effort to meet today's national need for gas storage capacity and services. 3

New NGA § 4(f) adds an option for interstate, market-based storage rate making. It would encourage new storage facilities by permitting FERC to authorize market-based storage rates, even when the applicant is unable to demonstrate it lacks market power. After authorizing such rates, FERC periodically must review them.

The problem with the new law is that it does not specify those review periods. To give gas storage providers more rate predictability and encourage investment in new storage facilities in the first place, FERC needs to define when it will carry out its new mandate to review § 4(f) authorized and effective market-based rates.

Navigating Between a Policy Rock And Hard Place

New § 4(f) first would encourage interstate gas storage project sponsors to build new infrastructure by providing for FERC market-based rate authorizations under a relaxed standard (no showing of a lack of market power). The new law also requires FERC to protect storage customers and consumers generally from storage-provider market power, and in no uncertain terms to review periodically new § 4(f) market-based rates. However, without FERC explanation of when it intends to exercise that rate-review power, the latter policy to prevent market power likely will inhibit the former policy to promote storage infrastructure.

The intention was to promote needed interstate storage infrastructure, but the statute's plain words authorize gas market-based rates absent a showing of a lack of market power only when those rates shall be subject periodically to plenary FERC rate review. New § 4(f) rates thus would be market-based storage rates constantly subject to legally-required, pro-active agency review of undefined periodicity.

New § 4(f)'s legislative history includes an earlier, rejected proposal, detailed below, that may have been considered to define such periodic rate reviews to mean periods not more frequent than triennially. Perhaps not to encumber FERC's ability to search for gas storage market manipulators, that three-year review period limit was not enacted.

From the storage provider's vantage,

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