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The Gas Storage Conundrum

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

Fortnightly Magazine - November 2005

it is hard to see why the new § 4(f) game would be worth that undefined rate review candle, with reviews of rates launched as FERC determines. Absent FERC elucidation of how often it will review such market-based rates, no one should be surprised by a tepid gas-storage project sponsor response to the opportunity for such a rate option.

Promoting Infrastructure, Preventing Market Power

New § 4(f) did not appear suddenly. FERC long has appreciated the substantial role market-based rates play in promoting development of needed, new gas storage infrastructure and storage services. Interstate natural-gas pipeline companies have explained that the ratemaking flexibility that market-based storage rates provide attracts and retains new gas markets. 4

For example, the gas share for new markets for electricity generation, subject to dampening effects from gas-cost increases, is projected to rise from 16 percent in 2003 to 24 percent in 2025. 5 According to pipelines and electric generator shippers, growing electric markets require long-term price certainty to assure financing for such gas-intensive storage ventures, as well as specialized rate designs to meet daily electric generation swings in takes. 6 Market-based rate-making flexibility helps meet those requirements.

Under NGA rate policy, lack of market power has been the sine qua non to permit market-based gas storage rates since FERC's 1992 Richfield ruling. 7 Until new § 4(f), FERC forbade market-based ratemaking in the presence of market power. The two in combination were believed to fail in protecting storage-service customers from unjust, unreasonable, unduly discriminatory rates and charges.

FERC policy from 1996 requires an applicant for market-based rate authority to establish that it lacks significant market power before market-based rates become an option. 8 FERC determines whether the applicant can withhold or restrict services and, as a result, increase prices by a significant amount for a significant time. FERC also determines whether the applicant can discriminate unduly in price, or terms and conditions, which is especially a concern when the market-based rate applicant can deal with affiliates. 9

If not quite set in stone, market-based gas-storage rates that the FERC thus traditionally authorized at least were considered to retain their market-based status absent new developments. 10 In its regulation of the electric industry, FERC also places a similar condition on public utilities making power sales at market-based rates. That is, utilities are to report within 30 days any change in status reflecting a departure from the characteristics FERC relied on in granting the market-based rate authority. 11 FERC's market-based rates approvals rely on applicant-presented facts, and the commission may reconsider those approvals should circumstances change.

Red Lake vs. FERC Standoff

Market-based storage rate proposals can fizzle out. An applicant can claim that its storage infrastructure project will not proceed without market-based rates. If the applicant is not exaggerating, and if FERC is unable to find a lack of market power, a standoff can result.

One such impasse occurred in 2003. A FERC order denied market-based rate authority for Red Lake Gas Storage L.P.'s proposed Arizona gas storage facility. 12 Red Lake's project would have helped develop the region's