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Presumed Power

Growing gas storage depends on fair regulatory treatment.

Fortnightly Magazine - September 2010

lawful market-based rates.

FERC’s important NGA §4(f) public interest determination requires consideration of: whether additional capacity is needed in the geographic area; the risk faced by project sponsors; and a showing that the facilities wouldn’t be built but for market-based rate treatment. 11 Applicants can demonstrate need in the geographical area by showing general lack of storage, full use of existing storage capacity, other pipeline constraints into the market, projected increased gas demand, customer interest, high gas prices or volatility, or other information. While receptive to other showings, FERC explained that presenting the results of an open season offering capacity at cost-based rates, which was unsuccessful in obtaining long-term commitments, best demonstrates that cost-based rates are insufficient and market-based rates are needed.

• Southern Star: Need to expand existing storage: Despite the Order No. 678 observation that it might be more difficult for an existing storage provider to meet the public interest standard, all four storage providers that have received NGA §4(f) final rule market-based rates sought to expand or enhance their existing storage facilities. No new, independent projects were authorized for either interstate or intrastate applicants. For example, FERC determined on May 20, 2010, that market-based storage rates for Southern Star Central Gas Pipeline would be lawful rates in the public interest. 12 This storage provider’s NGA certificate application to expand its facilities demonstrated need because its existing storage capacity, including previous expansions, had been fully subscribed since 1993. Need also was shown because, despite significant interest in new storage capacity, customers hadn’t contracted for it long-term. The applicant held three binding open seasons, with the first offering up to 5 Bcf of storage capacity at cost-based reserve rates. Customers weren’t willing to enter into long-term contracts needed to support cost-based rates. FERC thus found market-based rates necessary to encourage construction of the proposed storage capacity expansion.

• Columbia Gas: Under-recovery risk from cost-based rates: In 2009, FERC ensured that market-based rates were lawful and in the public interest for Columbia Gas Transmission, based on need and risk shown in its NGA certificate application for expanded storage facilities. 13 A 2004 FERC staff report 14 estimated a substantial need for incremental working gas capacity in the applicant’s markets. The applicant’s existing storage capacity was fully contracted. Customers showed significant interest in new storage capacity, but were unwilling to contract long-term under cost-based rates. A binding open season for up to 15 Bcf of storage capacity at incremental, cost-based recourse rates had elicited no acceptable, long-term bids. The applicant pointed to its risk in constructing and operating partially subscribed storage-capacity facilities under cost-based rates, due to inability to recover its cost-of-service, to earn a fair return, and to avoid cost overruns. Given the lack of response to its open season for 15 Bcf of working gas capacity, the applicant proposed to construct a total of only 6.7 Bcf of capacity. Moreover, it would construct the unsubscribed portion of that 6.7 Bcf only if allowed to charge market-based rates for that portion.

• Texas Gas: Poorly-subscribed open season shows risk: In 2008, in