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The Gas Storage Conundrum

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

Fortnightly Magazine - November 2005

gas infrastructure by providing high deliverability service to meet growing market demand, giving customers increased ratemaking flexibility in those markets. FERC nevertheless decided to preclude exercise of what it found to be unmitigated market power in the relevant storage market during peak periods for the foreseeable future, and to require Red Lake to file cost-based, § 4 rate proposals instead. 13

Observing Red Lake's storage market to be highly concentrated and lacking in alternatives, the commission nevertheless left a door open for a more favorable future outcome. It did so by denying market-based rates without prejudice to re-application if Red Lake could show changed circumstances, such as new entrants placed in service and direct competition.

On rehearing, the clash between promoting infrastructure and preventing market power intensified. Red Lake repeated that its project would not go forward absent market-based rate authorization. 14 It argued that its assumption of revenue loss risk in the event of insufficient business justified market-based rates. Red Lake also insisted that failure to grant it market-based rates would discourage other companies from providing gas-storage market infrastructure.

FERC did not budge. Rehearing was denied, and the proceeding terminated, shutting the door on further movement in the docket. The agency said the price for promoting gas-storage infrastructure was "too high":

We believe rather that our orders in this proceeding send the appropriate message, , that customers must be protected from the exercise of market power, even in an incipient market like this, and that the price of market development demanded by Red Lake (market-based rates) is too high. 15

Policy to prevent market power, in one sense, may be understood to have prevailed when FERC does not act and the application languishes. But, the fact remains that new storage capacity is not being constructed and new storage services are not being provided. New § 4(f) should provide the agency a middle ground with its novel twist that FERC, after making certain required determinations, now may authorize market-based rates despite the fact that the applicant cannot show lack of market power.

Devil in the Details

Promotion of needed storage infrastructure through new § 4(f) may not prove efficacious. What the statute gives on one hand, as an additional FERC option to permit market-based rates, it complicates on the other hand with newly required periodic rate review.

New § 4(f) provides for FERC exercise of NGA or National Gas Policy Act of 1978 (NGPA) authority to allow a natural-gas company, or any individual or corporation that will be a natural-gas company on completion of proposed infrastructure construction, to provide storage or storage-related services at market-based rates, even if the applicant's lack of market power has not been demonstrated. The new law applies to new storage capacity related to a specific facility placed in service after Aug. 8, 2005.

New § 4(f) market-based ratemaking, even absent demonstrated lack of market power, is authorized if FERC determines it is in the public interest, and is necessary to encourage storage capacity construction in an area needing storage services. Customers are to be protected adequately. The