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Presumed Power

Growing gas storage depends on fair regulatory treatment.

Fortnightly Magazine - September 2010

a fair and transparent open season auction. Open season proposals should prevent capacity withholding, which creates artificial scarcities that can allow storage providers to exercise market power to increase prices by a significant amount for a significant time.

A reserve price, or minimum acceptable bid, should be set only high enough to allow the applicant to recover its investment in the proposed storage facilities. Because a FERC-mandated reserve price would amount to indirect cost-based ratemaking, applicants may propose reserve prices that are reasonable prices in the market to be served, balancing the need to prevent capacity withholding 19 with the applicant’s revenue needs. Examples of reserve pricing include competing storage seller rates, the applicant’s total costs in an appropriate ratemaking context, or already-agreed, highest arms-length prices to a non-affiliate in an initial open season. New storage services shouldn’t cause existing customers additional costs, risks, or service degradations. Costs, services, and commitments should be accounted for separately, with records retained under FERC’s Uniform System of Accounts. 20 Customers should be protected by an applicant’s generally applicable, FERC-approved, open access transportation tariff or statement of operating conditions, declaring the general terms and conditions (GT&Cs) for the service.

Southern Star: Order No. 637 auction principles followed : Most recently, FERC found that Southern Star had protected customers, thus ensuring lawful rates. 21 A transparent process set forth and available in the applicant’s open access transportation tariff met FERC principles for proper interstate pipeline capacity auction design. 22 The applicant appropriately designed a cost-based reserve price using storage facility construction costs and FERC-approved cost-of-service determinants. Failing agreement on a price, the cost-based reserve price would be the minimum acceptable bid for firm and interruptible storage. The applicant proposed to post all available market-based rate storage capacity on its electronic bulletin board prior to auctions initiated either by the storage provider for available excess capacity, or by a customer requesting available firm service. Existing customers weren’t subjected to additional costs, risks, or service degradations. NGA §4(f) facilities would be paid for only by those customers contracting for the new capacity. Existing customers wouldn’t subsidize construction, operation, or maintenance of the storage facilities expansion, because market-based costs and revenues would be isolated from future rate proceedings concerning the existing cost-based services. Storage injections, withdrawals, and inventory balances related to market-based rate expansion customers would be identified and tracked separately. Separate books and records would be kept with applicable cross references under FERC regulations. 23

Columbia Gas: Arms-length auction price and term : In the next most recently issued order, FERC determined that Columbia Gas’s open seasons ensured lawful rates by protecting customers adequately. 24 FERC modified and conditioned the applicant’s proposal for customer-initiated auctions by suggesting firmly that both price and term be set by arms-length negotiations. Absent a negotiated agreement, the applicant would set the reserve price up to the cost-based rate for the expansion storage field, with the auction-initiating customer setting the term. To avoid undue discrimination, the applicant may not accept a bid below the auction reserve price. The applicant must design a