NGI The Weekly Gas Market Report / NGI All News Access

Industry Groups Split over Market-Based Rates for Independent Storage Developers

Industry Groups Split over Market-Based Rates for Independent Storage Developers

Key industry groups are divided over whether FERC should grant "blanket" market-based rate authority to independent storage developers to encourage the growth of more natural gas storage. But they all agree that if the Commission relaxes its market power test for new independent storage facilities, it should require greater accountability from them to shield customers from potential abuses.

The American Gas Association (AGA), which represents local distribution companies (LDC), "is not opposed to allowing market-based rates for new storage projects sponsored by independent, non-pipeline affiliate storage developers," the group told FERC [PL04-17, AD04-11]. AGA sees this as an addition to the Commission's existing policy that permits market-based rates for storage providers that can prove they lack market power through a traditional market power test.

But "it is critical that consumer protections be put in place that ensure that all market risks lay with the project's owners and that there are no captive customers of the project," the LDC group noted. In addition, periodic review of the market-based storage services would be an "important check on the continued appropriateness" of a facility's market-based rate authority, it said.

"Key to the authority to allow market-based rates" would be the imposition of reporting requirements, which would allow FERC to determine whether the rates are just and reasonable and whether market forces are truly determining the price, the AGA noted.

The Interstate Natural Gas Association of America (INGAA), which represents interstate gas pipelines, supports the movement toward a more liberal test for market-based rates, for both independent storage developers and pipeline-related storage.

"Independent storage operators have made a strong case for market-based rates for the development of new storage facilities based on the absence of market power and the need for pricing freedom to attract investment," the group said. "Those same fundamental reasons apply to new storage developed by pipelines as well, so that any liberalization of the Commission's market power policy for storage should not favor any one industry segment."

INGAA noted that both the INGAA Foundation and the National Petroleum Council have reported there will be a need for "very substantial new storage" over the next two decades, at a cost in the range of $4 billion to $6 billion.

The Federal Energy Regulatory Commission requested that energy companies submit comments following the "State of the Natural Gas Industry Conference" last month, which focused on storage (see NGI, Oct. 25). Independent storage operators at the daylong event called on the agency to grant blanket market-based rate authority, as well as waivers of the shipper-must-hold-title and capacity-release regulations. Market-based rates allow a storage provider to sell services at whatever price the market will bear, rather than at a regulated rate.

The American Public Gas Association (APGA), which represents municipal gas distributors, said it opposed a proposal that independent storage developers be granted market-based rates that "would last in perpetuity without regard to changed circumstances." Rather, it believes the FERC "should permit market-based rates only where it is convinced, either through traditional tests or revised tests that are suitable for truly independent storage developers, that such storage developers are unable to exercise market power."

If storage developers "are really arguing that they must be granted [market-based rates] in perpetuity from the outset of a project, then, in APGA's view, their proposal is a non-starter...However, if the storage developers are willing to accept the fact that if their situation changes from one of not having market power to one of having such power, [and] the rates they charge will have to be examined by the FERC for justness and reasonableness, then APGA would agree that their suggestions [should] be taken seriously."

A producer group, the Natural Gas Supply Association (NGSA), said the Commission must find a "legally defensible way" to ensure that any new, relaxed market test is applied only to new independent storage entrants. "If the Commission chooses to alter its current market power analysis for new independent energy storage projects, it must be clear about what constitutes a truly independent storage provider," it noted.

"By no means should the Commission allow any new policy relaxing the current market power test for storage to creep into traditionally regulated pipeline transportation services and integrated storage."

Moreover, "under a new, less-restrictive market power test for independent storage providers, certain mitigation procedures should be required to provide adequate protection to storage customers. These mitigation measures [would] go beyond what the Commission has traditionally required when a storage provider has been able to successfully show that it lacks market power under the current market power test," the NGSA said.

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.