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Presumed Power

Growing gas storage depends on fair regulatory treatment.

Fortnightly Magazine - September 2010

cost-based reserve price using estimated project costs and existing, FERC-approved, cost-of-service components from its other rates. FERC found reserve prices to be reasonable if based on arms-length prices between the applicant and its customer, or between a competing storage seller and its customer, excluding affiliate transactions in both situations. Further, such prices should occur within a reasonable time prior to the auction, i.e., 12 months. The auction term should match the contract term used to set the reserve price, and tariffs should delineate the geographic area where sellers are considered competitors. The applicant proposed to account separately for its market-based and cost-based storage services, which FERC required to be cross-referenced under its regulations. Sufficient protections were in place to protect cost-based storage service customers, whose capacity would remain subject to the applicant’s tariff and cost-based rates when their contracts expired. Only customers using the newly-created storage capacity would pay the costs associated with the new facilities. The applicant bore the risks of any cost overruns or revenue under collections.

Texas Gas: Tariff GT&Cs protect customers : With exceptions that were resolved after a later compliance filing, FERC found that Texas Gas had protected customers adequately with an open season, including an incremental, cost-based reserve price. 25 When contracts for existing, cost-based storage services expire, that capacity would continue to be posted for sale under the applicant’s current tariff subject to cost-based rates. The storage expansion was incremental to the existing storage services, and the level and quality of the existing services were unchanged, with the applicant bearing the risks of any cost overruns or revenue under-collections. Storage expansion facilities’ costs and revenues received separate accounting. Only customers using the expansion facilities would pay the associated costs, and the market-based storage services were governed by the applicant’s FERC tariff GT&Cs.

Before Texas Gas’s filing of its revised proposal, FERC had disagreed that the proposed auction would protect customers. The revised proposal ensured lawful rates 26 by meeting FERC’s Order No. 637, et al. requirements for a transparent auction, initiated either by the applicant or a customer. The reserve price for the initial, unsubscribed capacity auction was the price agreed to by a non-affiliated customer in the project’s open season. For later auctions, the reserve price was either that agreed to in arms-length negotiation with a non-affiliated customer, or a price no higher than the storage expansion facilities’ cost-based rate using previously vetted FERC ratemaking components. The applicant couldn’t exercise market power when it initiated an auction or when there was no price agreement because it had to post a reserve price no higher than the cost-based reserve price. FERC also rejected the applicant’s proposal to offer, in addition to its existing, cost-based interruptible storage service, a new, market-based rate interruptible storage service without an auction. Distinguishing the NGA §4(f) final rule and its market-power presumption from the traditional approach for market-based rates, FERC saw no consumer safeguards to prevent physical or economic withholding of storage capacity. Finally, capacity available for existing, cost-based interruptible service wouldn’t be affected adversely because nomination, scheduling,