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The Gas Storage Conundrum

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

Fortnightly Magazine - November 2005

agency shall ensure reasonable terms and conditions are in place to protect consumers. Also, after the market-based rate is authorized and effective, FERC periodically shall review the rate's ongoing justness and reasonableness.

Rates Reviewed as FERC Sees Fit

The just and reasonable, anti-discriminatory legal standards FERC now must use to review new § 4(f) market-based rates periodically are declared in the NGA's §§ 4(a) and (b), and 5(a). Pre-EPACT05, market-based rates were authorized under those standards and, after FERC review on the agency's own motion or on complaint, they were subject to determination and order under § 5(a). Post-EPACT05, storage providers with new § 4(f) market-based rates, after storage construction is complete and storage-related services have begun, constantly would have to plan against the day such FERC periodic rate review gears up.

As the basic power for FERC review of all rates and charges made in the first instance by natural gas companies, 16 § 5(a) allows the agency to review rates, and to order lawful rates into prospective effect, either on its own motion or on complaint. The commission now is to review new § 4(f) market-based rates periodically and, using its § 5(a) basic power, determine and order any necessary lawful rates into similarly prospective effect. 17

A possible model for timing such periodic rate review is FERC's requirement that NGPA intrastate pipelines providing interstate storage and transportation services must petition for new fair and equitable rates every three years. 18 In another possible model, look to the commission's orders authorizing market-based rates for the sale of power. They routinely direct applicants to file an updated market-power analysis within three years, while reserving the right to require such analysis at any intervening time. 19

Those familiar triennial rate reviews may have served as ultimately unsuccessful prototypes for the new § 4(f)(3) requirement for periodic FERC review. Indeed, the EPACT05 legislative history includes both an unenacted Senate bill, 20 and a Congressional Record entry, 21 with each presenting the same proposed version of a § 4(f)(3) using the triennial rate review limit, thus:

(3) If the commission authorizes a natural-gas company to charge market-based rates under this subsection, the commission shall review periodically (but not more frequently than triennially) whether the market-based rate is just, reasonable, and not unduly discriminatory or preferential.

That no-more-often-than-three-years definition for § 4(f)(3) periodic rate review was not enacted. Instead, new § 4(f) market-based rates are to be reviewed periodically as FERC chooses. Rate review without defined timing marks a striking change from traditional, after-the-fact review of market-based rate authorizations, where the applicant shows lack of market power. In those situations, FERC merely requires a successful market-based rate applicant to notify the agency within 10 days if future changes in circumstances significantly affect the applicant's present market power status. 22

A New Puzzle

Possibly designed to mitigate standoffs when a storage project will not go ahead without market-based rates and market power has not been shown lacking, new NGA § 4(f) provides for market-based rates, but with the consideration that FERC shall review such rates as