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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

generic safeguards to protect customers. Similarly, the customer advocate group suggests that if FERC develops a set of generic safeguards to protect customers, then FERC should present the safeguards to interested parties for comment. In addition, the group urges FERC to require applicants for market-based storage rates to post continuous, real-time data on the amount of contracted storage service and storage capability for each storage service offered, thereby enabling interested parties to determine whether a storage operator is attempting to exercise market power by withholding capacity.

Order No. 678

FERC considered each of the positions of the parties and issued its 121-page Order No. 678 on June 19, 2006. FERC officially adopted modifications to its regulations related to market-based natural-gas storage rates. FERC’s new regulations significantly ease the burden for storage providers to obtain market-based rate treatment in order to encourage the development of new storage facilities. Order No. 678 addresses industry concerns regarding the difficulty of storage providers in obtaining market-based storage rates under FERC’s previous policies in two ways.

1. Inclusion of Non-traditional Alternatives. First, FERC modifies its market-power analysis requirements to allow storage providers to include non-traditional storage alternatives, such as local production, availability of LNG, and pipeline capacity in its market-power analyses. As noted by FERC, broadening the range of storage alternatives that may be considered as competitors “is supported by changes in the natural-gas markets that have occurred since the mid 1990s. In today’s markets, these non-storage products may well serve as adequate substitutes for gas storage in appropriate circumstances.” (Order No. 678, at ¶ 25.) The legitimacy of the storage alternatives will be considered prospectively by FERC on a case-by-case basis, and the commission will not require applicants previously granted market-based rates to resubmit an application under the broader definition of product market adopted by FERC in Order No. 678.

2. Market Power and “New Facilities.” Second, FERC implements NGA Section 4(f), which, as noted above, permits FERC to allow market-based rates for new storage facilities—even if the storage provider is unable to show that it lacks market power— if FERC finds that the market-based rates are in the public interest and necessary to encourage the construction of needed storage capacity, and that customers are adequately protected. Although FERC in its NOPR of Dec. 22, 2005, originally interpreted Section 4(f) as applying only to new storage facilities not in existence on Aug. 8, 2005, the date EPACT was enacted, in Order No. 678 FERC reversed its course and interpreted Section 4(f) to apply both to greenfield storage facilities and expansions of existing facilities. FERC noted that “significant and substantial enhancements to storage capacity can be achieved at existing fields and it is unnecessary to exclude service from such expansions from consideration for market-based rates by narrowly interpreting the term ‘facility’ in the context of Section 4(f).” (Order No. 678, at ¶ 115.)

Other Notable Provisions of Order 678: Periodic Review. In another reversal of course, in Order No. 678 FERC removes the requirement proposed in the NOPR subjecting those obtaining market-based rates, after a market-power determination