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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

the public interest and necessary to encourage the construction of needed storage capacity and that customers are adequately protected. In the NOPR, FERC interpreted Section 4(f) as applying only to new storage facilities not in existence on Aug. 8, 2005, the date EPACT is enacted, though as will be seen below, that conclusion is not shared by all parties.

FERC also proposes to subject those obtaining market-based rates, after a market-power determination has been conducted, to periodic market-power reviews to ensure that abuses do not develop. FERC’s proposed regulations, however, do not similarly require a periodic review at specified intervals in cases where market-based rates are allowed under Section 4(f) of the NGA. Although Section 4(f) specifically requires FERC to “review periodically whether the market-based rate is just, reasonable, and not unduly discriminatory or preferential,” FERC argues that a periodic market-power review is not necessary for market-based rates granted under Section 4(f), because FERC can meet the periodic review requirement through regular monitoring and taking appropriate action under Section 5 of the NGA either sua sponte or in response to a complaint.

Not surprisingly, the NOPR met with an energetic response. Thirty-two parties, representing hundreds of constituents and almost every facet of the natural-gas industry from producer to consumer, filed comments with FERC related to the NOPR by the filing deadline of Feb. 27, 2006. An additional party filed comments one day later and requested that FERC consider the comments during FERC’s review. In addition, although reply comments are not authorized specifically in the NOPR, five parties filed reply comments and three other parties filed supplemental comments between March 3, 2006, and May 31, 2006. The parties filing comments can be grouped loosely into the following categories: (a) independent storage developers; (b) interstate pipelines or affiliated storage companies; (c) local distribution companies; (d) producers and marketers; (e) investor-owned electric companies; (f) a state utility commission; (g) industrial users of natural gas; and (h) a consumer group. The positions taken by the commenters, predictably, ran the gamut from enthusiastic support to outright horror. The comments of each group are summarized below.

Independent Storage Developers

Eleven independent storage developers or equity providers to independent storage projects filed comments to the NOPR. The issues raised by these entities 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. General agreement that Section 4(f) should apply only to new facilities, not expansions of existing capacity;

3. A need for FERC to recognize and address the differences between independent storage developers and storage providers affiliated with interstate pipelines to be sure that subsidization through rolled-in rates or other preferences does not occur. This comment was predicated on the conviction that independent storage inherently tends to drive market efficiencies by linking unrelated providers via hubs and enhancing the pipeline grid;

4. FERC should modify its rules to provide that if market-based rates are authorized for a facility, but upon its periodic review FERC determines that market-based rates