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Mitigating Volatility Or Inviting Market Power?

FERC lowers the bar for obtaining market- based rates for natural-gas storage.

Fortnightly Magazine - September 2006

are no longer justified, FERC then should not interfere with the contracts entered into between the storage provider and its customers prior to such determination. This concern stemmed from the fact that long-term contracts typically are required to underpin the financing of independent storage and that failure to respect the sanctity of these contracts would impede such financing; and

5. The periodic review requirement should be imposed on a prospective basis only. Facilities currently charging market-based rates should not be subject to it.

Interstate Pipelines and Affiliated Storage Companies

Ten interstate pipelines, storage companies (including two separate LDC groups) affiliated with interstate pipelines, and one interstate pipeline group filed comments to the NOPR. The issues raised by these entities generally can be categorized as follows:

1. Support for the expansion of the definition of the relevant product market to include non-storage competitive alternatives for purposes of conducting a market power analysis;

2. Elimination of the proposal to require an automatic five-year market power review;

3. Section 4(f) eligibility for market-based rates for new capacity from existing facilities;

4. In determination of an applicant’s market power, the capacity of the applicant’s affiliates should not be included in the calculation, or, if affiliated capacity is considered, it should be included on the competitive alternative side of the equation. The commenters argued that the requirement that affiliated capacity be considered in the applicant’s market-power analysis is a vestige of outdated FERC policy, and intervening events have eviscerated the need for such a requirement; and

5. FERC should allow pipelines to seek market-based rates for all classes of storage and related services, such as park and loan services and other services that provide storage-type imbalance management functions.

Local Distribution Companies

Four LDC groups filed comments to the NOPR. Not surprisingly, these were the least enthusiastic about the proposed rule changes. While one stated that it supported the overall regulatory framework suggested in the NOPR for implementing Section 4(f), another, taking perhaps the most extreme position of all, suggested that FERC should withdraw the NOPR and significantly revise its approach to implementing Section 4(f) consistent with that section’s explicit terms, which (it notes) explicitly requires consumer and customer protections. One commenter, echoing the concerns of the independent storage providers, suggested that the proposed regulations do not adequately protect customers of cost-based storage services from a misallocation of costs when a single storage service provider operates both cost-based rate and market-based rate storage services. One states that customers can and should be protected by a modification in the proposed regulations that requires storage service providers to account for costs incurred in providing market-based rate storage services separately from cost-based rate storage services. Another opposed the broadening of standards to permit market-based rates for existing storage services as being unnecessary and potentially harmful to customers.

Producers and Marketers

One marketing company and two industry groups representing natural-gas producers filed comments to the NOPR. The marketing company and one of the industry groups urged FERC not to expand the definition of the relevant product market for storage to include close