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NGSA Says FERC's Proposed Storage Reforms Go Beyond What Congress Intended

FERC's December initiative proposing reforms of the agency's market-power test to promote the construction of more natural gas storage sites goes beyond what Congress intended when it adopted additional storage incentives as part of the Energy Policy Act of 2005 (EPAct), the Natural Gas Supply Association (NGSA) told FERC Monday.

The Federal Energy Regulatory Commission has "rightfully determined" that, consistent with options provided by EPAct, no prior market-power screen to determine market dominance is needed for an applicant of a proposed storage facility, even if the applicant wields market power, said the group, which represents producers, in comments filed at the Commission. However, the NGSA said FERC still must continue to ensure that rates charged by these storage providers are "just and reasonable" under the law, and should provide for periodic reviews to protect storage customers.

The agency should deny the request of owners of existing storage facilities who may attempt to use the new EPAct to obtain market-based rates without a market-power test, the NGSA said. Existing storage owners still can use the traditional market-power test to obtain market-based rates, if they can show there is sufficient competition for their services, it noted.

"Since 1996, FERC [has] had 40 requests from storage operators for market-based rates and approved all but one. There is no need to proceed with such massive changes to the market-based test based on these percentages, one out of 40," the producer group said. "Existing storage facility owners made their investment decisions during a period in which the EPAct options did not exist and obviously believed that they could successfully recover their costs as well as a return on equity sufficient to cover the risk of their investment."

The NGSA supports FERC's goal of increasing storage by encouraging additional investments, "but this can be accomplished without changing the traditional market-power test," said Patricia Jagtiani, the group's vice president of regulatory affairs. "It is a test that has successfully withstood the test of time."

The NGSA called on the Commission to convene a technical conference for all parties involved to make certain that the EPAct provisions are implemented as Congress intended.

In mid-December, FERC proposed two methods for developers of gas storage facilities to seek market-based rate authority. Under the first method, storage developers can seek authorization for market-based rates under a new flexible approach that would factor in potential substitutes to storage in the relevant product market when deciding whether market power exists. Those potential substitutes could include available pipeline capacity, supplies from local gas production, liquefied natural gas (LNG) and released transportation capacity, which are available to the same customers to be served by the new storage operations (see Daily GPI, Dec. 16, 2005).

"Instead of treating gas in storage as a discrete product, the Commission recognizes that storage gas competes with other gas that can be delivered in the same geographic market," Chairman Joseph Kelliher said at the time.

As for the second method, the Commission proposes to implement rules under the new Natural Gas Act Section 4(f) that would permit market-based rates for new storage capacity that was placed into service after Aug. 8, 2005, the enactment date of EPAct [RM05-23, AD04-11]. Section 4(f) of the bill authorized market-based rates for new storage projects 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.

With respect to the second method, the Commission requested comments on ways to protect storage customers, possibly including prohibitions on withholding service, price caps or recourse rates, making it clear that it will be up to the applicant to show how customers will be protected. Projects filed at FERC after the Aug. 8 enactment of the new energy law can bypass the market power test and apply to be considered under Section 4(f). This section would apply to greenfield storage projects, not expansions.

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