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Presumed Power

Growing gas storage depends on fair regulatory treatment.

Fortnightly Magazine - September 2010

Energy Policy Act of 2005 (EPAct 2005) permits FERC to authorize storage and storage-related services at market-based rates “notwithstanding the fact that the company is unable to demonstrate that [it] lacks market power.” 7 EPAct 2005 thus amended NGA §4, adding a new subsection (f). NGA §4(f) applies to specific new storage facilities, providing capacity and associated services, placed in service after Aug. 8, 2005, such as new storage caverns, reservoirs, or aquifers, or new facilities expanding or enhancing existing facilities. The new subsection further requires that: 1) market-based rates must be in the public interest and necessary to encourage storage capacity construction in the geographic area needing storage services; 2) customers must be protected adequately with reasonable terms and conditions in interstate tariffs or intrastate statements of operating conditions to protect consumers; and 3) FERC shall review the lawfulness of NGA §4(f) market-based rates periodically.

To implement NGA §4(f), FERC issued a final rulemaking order and adopted regulations in 2006 [NGA §4(f) final rule]. Asserting that it can’t rely on competition to ensure lawful rates under Congress’s additional approach, FERC recast Congress’s statutory description of an applicant as unable to demonstrate that it lacks market power, into an agency regulation declaring that an applicant “will be presumed by the Commission to have market power.” 8

Congress could have written a market-power presumption into law, but it didn’t. Instead, Congress described NGA §4(f) applicants more inclusively as unable to demonstrate that they lacked market power. That was not a market-power presumption by another name. Potential storage providers may consider the distinction to be more than a quibble.

To regulate market power by some or even most NGA §4(f) applicants, Congress substituted FERC’s public interest determinations, determinations of need to encourage storage capacity, and determinations of customer protections, for the lack-of-market-power studies filed under FERC’s traditional approach. An additional regulatory presumption of applicant market power therefore is unnecessary to ensure lawful rates, because Congress concluded that the important NGA §4(f) FERC determinations were sufficient whether or not market power is present.

Despite FERC’s disclaimer that its presumption isn’t a generic finding that would apply in other situations, 9 there’s some reason for the industry’s underwhelming use of the NGA §4(f) final rule. The agency’s market-power presumption may be inhibiting storage providers from using Congress’s additional approach to an unanticipated degree. If that hypothesis is right, FERC could consider relaxing the inhibition by removing the presumption, and conforming its regulations more exactly to Congress’s statutory description of an applicant’s inability to demonstrate lack of market power.

Public Interest Determinations

To ensure lawful rates, FERC navigates between encouraging storage infrastructure and protecting competition. In its first four precedents under Congress’s additional approach, FERC generally determines whether: 1) a need to serve the public interest with new storage facility construction is shown in an auction for storage capacity; and 2) a fair and transparent auction protects customers by preventing capacity withholding, with a reserve price set only high enough to allow the applicant to recover its investment. 10 If those answers are “yes,” FERC may authorize