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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

substitutes for gas-storage services, as FERC has proposed in the NOPR. As an alternative, the industry group suggests that if FERC modifies its current policy regarding market-based rates, such modifications should be applicable only to new storage facilities, not expansions of existing facilities. It further suggests that a series of technical conferences or workshops should be conducted to allow industry participation so FERC could successfully devise a proper market-based rate program. Although it did not directly challenge FERC’s proposal to expand the definition of the relevant product market for storage, the other industry group encourages FERC to consider the effect the expanded definition could have on all services under FERC’s jurisdiction, not just within the confines of an individual application by a storage operator.

Shareholder-Owned Electric Companies

An association of U.S. shareholder-owned electric utilities and an individual shareholder-owned electric utility filed comments to the NOPR. The association of electric utilities generally agree with the analysis provided by FERC in the NOPR. While the individual electric utility also generally agree with FERC’s proposed rules, it suggests that: (i) while FERC implies in the NOPR that an unsuccessful open season could serve as a generic indicator of the need for storage in a specific area, parties protesting the application should be allowed to present evidence showing that the public interest would be better served by cost-based rate treatment; and (ii) FERC should adopt a market power analysis for gas storage markets that takes into account the potential impact on the national market and factors into its “competitiveness” analysis the interdependence of the gas and electric markets.

State Utility Commission

The New York Public Service Commission (NYPSC) supports FERC’s efforts to encourage storage development, but cautions the commission to evaluate market-power studies on a case-by-case basis, because local production in New York is not, in many instances, a viable alternative to storage service. The NYPSC also suggests that FERC hold to a “public interest” standard in determining whether a new storage facility should be granted market-based rates, notwithstanding the failure of the applicant to demonstrate a lack of market power.

As the NYPSC noted, it is in the “public interest” to encourage the entrance of independent, third-party storage providers. Conversely, it may not be in the public interest to encourage the construction of new storage facilities by a pipeline with a dominant market share in the relevant product and geographic markets. Finally, the NYPSC suggests that generic safeguards should be imposed to protect customers from market-power abuse, and specifically suggests that a condition prohibiting the withholding of capacity should be included in such safeguards.

Gas Consumer Groups

A group representing industrial consumers of natural gas and a separate group representing end-use customers filed comments to the NOPR. The industrial consumer group argues that the inclusion of non-traditional market substitutes in the market-power analysis is unnecessary, because developers of new storage facilities could avail themselves of Section 4(f) and thereby obtain market-based rates even if they could not establish the absence of market power. The group requests that FERC convene a technical conference to determine appropriate