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Presumed Power

Growing gas storage depends on fair regulatory treatment.

Fortnightly Magazine - September 2010

Texas Gas Transmission, LLC ,15 FERC approved market-based rates relying on need, risk, and the 2004 FERC staff report. The applicant’s NGA certificate application showed that its existing storage capacity, including two previous expansion projects, was fully contracted, and it had received requests for additional firm storage. Also, the placement of the proposed, expanded storage facilities could mitigate impacts of certain existing pipeline constraints into the storage provider’s market. Texas Gas was FERC’s first occasion to determine that insufficient customer open-season subscriptions showed cost-based rates didn’t encourage storage capacity construction, making way to ensure lawful market-based rates. Only one bid was received, for some 2 Bcf of the project’s proposed 8.25 Bcf of capacity for a 10-year term. Despite a later 10-year agreement for approximately 3 Bcf of additional capacity, the applicant indicated it hadn’t found a sufficient number of customers willing to make long-term contracts for the full, proposed project capacity. Arguing it lacked an opportunity to earn a fair, cost-based rates return on investment, the applicant was willing to incur the risk to construct all the proposed capacity under market-based rates.

• Northern Natural: Public interest without an open season: Unlike the more recent Southern Star, Columbia Gas , and Texas Gas orders, the first order under FERC’s NGA §4(f) final rule, for Northern Natural Gas in 2006, 16 didn’t determine market-based rates in the public interest based on insufficient storage capacity open-season subscriptions. Rather, market-based rates were authorized as lawful due to the geographic area’s need for storage and the project’s substantial engineering risks. Despite the fact that its proposed expansion project was subscribed fully with long-term contracts, some with a 20-year term, and that shippers desired more aquifer storage capacity, the applicant still sought a declaratory order authorizing market-based rates. FERC found those facts showed additional storage was needed in the geographic area, while observing that its NGA §4(f) final rule doesn’t require an applicant to pursue cost-based rates in an open season before being allowed to seek market-based rates. FERC determined whether market-based rates are in the public interest by focusing on the applicant’s significant engineering risks, including unknown but likely large gas treatment costs to remove hydrogen sulfide, the costs of possible additional treatment facilities to maintain pipeline quality specifications, the costs for additional wells to be drilled to maintain deliverability at approximately $2 million each to develop, and difficult determinations of base gas volumes and prices. Given those risks, the applicant had declared that the expansion wouldn’t proceed without market-based rates. FERC concluded, if cost projections were incorrect, that market-based rates would provide rate security during long-term shipper contracts, with the applicant assuming the amply demonstrated risks of cost increases, thereby protecting customers instead of subjecting them to future rate increases under cost-based rates.

Customer Protection Determinations

FERC’s important NGA §4(f) customer protection determination can be accomplished in various ways. 17 Customers of interstate pipelines like those discussed here, and of intrastate entities for which no FERC authorizations have been made, should be given non-discriminatory access 18 to new storage capacity and services through