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Market-Based Rate NOPR Could 'Chill' Project Financing, Says Attorney

January 23, 2006
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The initiative proposed by FERC in December to reform pricing policies to promote more natural gas storage development in the United States may help to encourage development of new capacity that otherwise would not be built, but the changes could "chill" financing for new projects, a lawyer who has long represented natural gas and electricity marketers said Thursday.

James F. Bowe Jr., a partner with Dewey Ballantine LLP, moderated a panel at Platts Fourth Annual Gas Storage Outlook in Houston. He represents financial institutions and project developers in connection with U.S. and international energy project financings. He told a near capacity crowd the notice of proposed rulemaking (NOPR) by the Federal Energy Regulatory Commission last December was well intentioned, but he also pointed out pitfalls.

FERC is taking public comments about the NOPR, which proposes two methods for prospective developers of gas storage facilities to seek market-based rates, using either the traditional method or authorization for rates under a more flexible approach (see NGI, Dec. 19, 2005).

"The environment says it wants more storage. FERC says it wants more storage, but the link is still tenuous for the financing of 10-15 years," Bowe said, citing market interest in contracts with short terms of about five years. "There is a disconnect with the lending community. This is the number one potential constraint to new storage."

Bowe said the flexible rules "may help encourage development of new storage capacity that would otherwise not be built. But I'm not optimistic about that." Among other things, he was not a supporter of FERC's plan to require periodic, five-year reviews of market-based rates.

"FERC also has to give some examples of what will pass muster. FERC has been extraordinarily cooperative, but the real problem is not FERC, but whether the potential customer can commit to make a long-term commitment to storage. It will take more than a few tweaks to FERC's market-based rates policies to turn the tide in favor of new storage development," Bowe said.

"The term 'long-term' is almost a joke...20-year, 15-year, 10-year. You don't see those much in the storage agreements..." Bowe pointed to new generally accepted accounting principles (GAAP), which have been overhauled in the past few years. "GAAP accounting rules screw people where their positions become more valuable over time."

Berne Moseley, FERC's director of pipeline certificates, said the Commission's purpose is to "ensure we're not an impediment" to the storage process. He pointed to the Alternative Rate Policy statement of 1996, which has had a good success rate. He said of 40 proposals for storage capacity, FERC has approved all but four. However, he admitted the process is far from perfect.

"Customer protection is a balancing act," said Moseley. "It's up to the applicant to propose a method,but it has to be suited to the project. FERC won't take away anything to chill storage, but we have to come up with safe harbors. We don't want there to be any disincentive, but we are focused on customer safeguards."

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