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Final Rule Seeks to Spur Development of Gas Storage Facilities

FERC last Thursday issued a final rule that reforms the agency's pricing policies to jump-start the development and construction of new underground natural gas storage facilities in the United States.

The final rule for the most part tracks the notice of proposed rulemaking (NOPR) on storage pricing policies that was issued in December with two exceptions -- it eliminates a generic five-year reporting requirement for storage holders of market-based rates, and it expands the definition of storage facilities that can seek market-based rates under the new Natural Gas Act Section 4(f) that was added by the Energy Policy Act of 2005 (EPAct).

As with the NOPR, the final rule provides two approaches for prospective developers of gas storage facilities to seek market-based rate authority. The first approach includes a more expansive definition of the relevant product market that factors in nonstorage substitutes when deciding whether market power exists. The nonstorage substitutes could include available pipeline capacity, supplies from local gas production, liquefied natural gas and released transportation capacity, which would be available to the same customers to be served by the new storage operations [RM05-23, AD04-11].

The final rule still puts the burden on the storage applicant to show that it does not possess the ability to exercise significant market power. The initial screen of 1,800 on the Herfindahl-Hirschman Index (HHI), which equates to the existence of about five storage operators (other than the applicant) or substitute suppliers in the relevant product region, will remain the agency's standard for determining the existence of market power. Anything above 1,800 HHI is a signal to FERC that market power may exist, and requires further investigation by the agency. The final rule differs from the NOPR in that it does not impose a periodic review requirement once every five years for new and existing storage facilities that hold market-based rates.

The second approach, which implements rules under the new NGA Section 4(f) that was added in EPAct, would allow an applicant to seek authority to charge market-based rates even if they have market power -- if the Commission determines the project is necessary for the public interest and customers are adequately protected from manipulation.

The NOPR allowed only greenfield storage projects, not expansions, that are placed in service after Aug. 8, 2005, the enactment date of EPAct, to seek market-based rates under Section 4(f). However, FERC revised the requirement in the final rule to allow "pretty much any storage facility constructed after Aug. 8, 2005" to apply for market-based rates under Section 4(f).

The final rule hopefully will spur the development of new storage facilities in an attempt to reduce price volatility in the gas market and meet peak demand, said Chairman Joseph Kelliher. He noted that Congress sent a "clear signal" to FERC last year to be more flexible in awarding market-based rates to promote storage development, which has lagged over the past two decades.

"Since 1988, natural gas demand in the United States has risen 24%. Over the same period, gas storage capacity increased only 1.4%. While construction of storage capacity has lagged behind the demand for natural gas, we have seen record levels of price volatility. This suggests that current storage capacity is inadequate," Kelliher said.

FERC staff reported that it only has one application for new storage capacity pending at the agency -- from Bobcat Gas Storage (see NGI, Feb. 27).

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