Red Lake Storage's Plea for Market Rates Shot Down, Project Terminated

Aquila affiliate Red Lake Gas Storage LP took it on the chin at FERC Wednesday. Not only did the Commission reject its plea for market-based rate authority for a proposed salt cavern natural gas storage facility in Mohave County, AZ, it terminated the entire proceeding.

"We actually took them at what they said. They said they [couldn't] do without market-based rates, and we said 'fine.' So we ceased the proceeding," said FERC Chairman Pat Wood during a press briefing following the agency's regular meeting. "We indicated in this order that there's plenty of flexibility under the Commission's regulation with regulated rates to accomplish what they [Red Lake] want."

In late January, FERC issued a preliminary determination approving the Red Lake storage project, but it denied market-based rates for the facility. It concluded that Aquila, which also owns Market Hub Partners' Lodi storage cavern in San Joaquin County, CA, would have too much market power in the Southwest region during peak demand periods [CP02-420].

Red Lake sought rehearing of the market-based rate ruling, saying the Commission had based its decision on market conditions that no longer existed in the California and southwestern market areas. Weak gas demand (down 18% from the peak in mid-2001) in the Southwest and California, new pipeline and storage capacity (37% slack capacity this year on interstate pipelines in the region), and changing capacity-allocation schemes on El Paso Natural Gas would make it impossible for the Red Lake storage project to wield market power and drive up prices, the Aquila affiliate argued at the time.

Red Lake also hinted strongly that the future of the storage project hinged on FERC awarding it market-based rate authority.

Wood said the Commission plans to hold a technical conference to address "more broadly" the issue of storage demand in the Southwest, and to "find out if there are other applicants [who] may be interested" in moving forward with projects.

"If you look at everybody at one time, you could perhaps get a different market concentration number than we got when you got [only] one applicant coming forward," he noted.

The Red Lake storage project called for the construction of two salt caverns with 4-8 Bcf of working gas capacity in each, 1.5 Bcf of base or cushion gas in each and a maximum injection rate of 450 MMcf/d for both caverns combined. It also proposed 31 miles of header pipeline and 33,000 hp of compression.

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