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FERC Shows Rate Design Flexibility in Two Storage Rulings

FERC Shows Rate Design Flexibility in Two Storage Rulings

In an effort to display its storage rate design flexibility, FERC granted Saltville Gas Storage in Virginia rehearing Thursday on its novel cost-based rates, and awarded a certificate to the Pine Prairie storage project in Evangeline Parish, LA, with authorization to charge market-based rates.

Commissioner Sudeen Kelly called Sempra's 24 Bcf Pine Prairie salt cavern project a "poster child for market-based rate authority." Kelly noted that the project will be connected to six interstate gas pipelines: Tennessee Gas Pipeline, Transcontinental Gas Pipe Line, Texas Gas Transmission, Texas Eastern Transmission, ANR Pipeline and Florida Gas Transmission. The project will have three storage caverns, the first of which will have 6 Bcf of working gas capacity.

Sempra plans to add a second 6 Bcf cavern before expanding the two caverns to 8 Bcf and then adding a third 8 Bcf cavern. When all three caverns are completed, Pine Prairie will have an injection capability of 1.2 Bcf/d and withdrawal capability of 2.4 Bcf/d. The company told the Commission that if it received a certificate prior to Nov. 30, it expected to have its first cavern in place in 2006 and its second cavern in service by 2008 when several proposed liquefied natural gas import terminals in the Gulf Coast region are expected to enter commercial operation.

"Staff's analysis showed that [Pine Prairie] will have only 3% of the market," said Kelly. "The [Herfindahl-Herschman Index market power] analysis shows a 1,562 HHI for working gas capacity and an HHI of 1,131 for peak-day deliverability, and that is well under the threshold of 1,800 and indicates the applicants would not be able to exert market power in any of the relevant market areas. So I support [the project]."

Commissioner Joseph T. Kelliher also supported the rulings on both storage projects. In the Saltville case, he said, "I think we're doing the right thing by granting rehearing. We're showing flexibility for projects that have cost-based rates... It's appropriate after a quarter century to show a little bit of flexibility on our costs-rate policy with respect to gas storage."

In the Saltville case, FERC granted rehearing of its June 14 order, which authorized Saltville to construct and operate the salt dome storage project in Smyth and Washington counties, VA. The project includes 4.79 Bcf of working gas capacity, 220 MMcf/d of injection capability and 550 MMcf/d of deliverability. It is connected to the East Tennessee Natural Gas pipeline system in Virginia and provides storage services in the Mid-Atlantic region.

While the Commission approved the project's cost-based rates and granted it authority to charge negotiated rates in its June order, it did not allow Saltville to put a new rate mechanism in place. Saltville wanted to create three equally weighted reservation rate components for capacity, deliverability and injectability, but the Commission denied its request.

Saltville subsequently requested rehearing. It said the Commission should "refresh" its cost-based rate design, particularly what is referred to as the "Equitable Method," to account for the flexibilities and rapid response capability of salt dome storage projects.

Saltville explained that FERC's application of the Equitable Method's 50/50 fixed-cost classification between capacity and deliverability components is "unfair and unworkable" when applied to salt dome storage "because no value is placed upon the third service component they offer -- the right to inject gas at a specific entitlement level, or 'injectability.'

"Injectability is a necessary and valuable service component for rapid-response storage service customers and a defining characteristic of the innovative services that Saltville offers," the company told FERC.

Saltville, which is a partnership between NUI Corp. and Duke Energy, said the Commission's rejection of its unique rate design would "chill" development of more storage projects like its own. Without some change, the agency "will stifle innovative, much-needed natural gas infrastructure development in the United States" (see Daily GPI, June 16). The Commission said on Thursday that it is interested in revisiting the matter through rehearing.

FERC Chairman Patrick Wood said these two storage cases should not be considered a Commission response to the comments coming in for FERC's State of the Industry Conference on gas storage a few weeks ago.

"Last Tuesday we asked for comments...on what to do about whether to apply the HHI test at all to people who would otherwise fail (the test, such as Red Lake storage). We'll take that issue up in a future case," said Wood. "So those looking to divine the entrails in these two cases should wait a little longer. But this is a good chance to focus on the need to have storage and the need for us to be creative and reflect the industry and yet observe our statutory obligations here, not only on the environmental and the siting side, but on the rate design also."

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