“Don’t even think about it” was the response that most conference participants gave FERC Thursday regarding the idea of creating uncommitted reserved storage and pipeline capacity to help dampen price volatility and lower gas prices. The idea was mentioned in a recent FERC staff report on natural gas storage and was presented as a topic of discussion at FERC’s State of the Natural Gas Industry Conference on Thursday in Washington, D.C.
“I understand the rationale for it, and it’s a noble gesture, as was Prohibition, as was pervasive wellhead-to-burner tip regulation,” said John M. Hopper, CEO of independent storage development company Falcon Gas Storage. “The goal is noble; the question is whether that’s the way to get there, and obviously we think that it’s not.”
Hopper said there are many reasons why adding a storage or pipeline capacity reserve to the market is not a good idea. “First of all, I don’t see a way to do that without the cost of that storage being subsidized by commercial and residential ratepayers, which I don’t think is what the Commission has in mind.”
He also said he doesn’t see how independent storage operators would be able to participate in such a reserve. It would have to be handled by regulated utility companies with regulated storage assets so that the costs could be passed through to ratepayers. It also would send the wrong pricing signals to the market, said Hopper.
Storage operators have enough to worry about already, including lining up creditworthy customers who are willing to sign relatively long-term contracts, trying to get financing when customers are demanding contracts with shorter terms, and paying higher insurance costs because of nearby storage fields blowing up (such as Duke Energy’s Moss Bluff facility). The last thing storage operators need, said Hopper, is artificial price pressure working against them.
Consultant James Wilson of LECG LLS told the Commission creating uncommitted storage space would have an effect that is exactly opposite to what the Commission is seeking.
“More capacity is better,” Wilson said. “The short-term impact of [such a] program could be to depress basis differentials and price volatility as intended. But regardless of how the program might be implemented, by depressing basis differentials and volatility in this manner it would reward and encourage those market participants who have declined to support the system financially by providing them with protection they aren’t paying for while punishing those market participants who have committed to firm capacity demand charges by diminishing the need for and value of their firm capacity holdings.
“The result would be to reduce the incentive to hold firm capacity or commit to potential new capacity offered in open seasons, exactly the opposite of the incentive the Commission’s market driven policy requires,” said Wilson. “Such a program could, therefore, cause market driven capacity expansions to slow or come to a halt.”
Wilson also noted that the California Public Utility Commission asked similar questions about uncommitted reserved pipeline and storage capacity earlier this year and “all commenters criticized and opposed the concept, with an exception of a few parties who would be the providers of the reserves.”
The CPUC identified numerous issues and problems, he said, “regarding how such reserves could be provided, how they would be used, how the storage would be refilled, how it would be paid for. They were unable to find good answers to many of these questions.”
Timothy J. Oaks, manager of federal regulatory affairs at UGI Utilities who was speaking at FERC on behalf of the American Gas Association, said such an action by the Commission could reopen problems that were solved by Order 636 in the early 1990s. He said local distribution companies would be concerned about the impact reserve capacity would have on the capacity release market.
“Under 636, the capacity release mechanism was directly tied to the recognition that firm customers need to…mitigate fixed cost,” said Oaks. “Additional unused capacity, which will be available virtually 100% of the time, would significantly reduce the value of the capacity in the release market, thereby weakening the cost mitigation we received under 636. Such an event would necessitate reconfiguration of the regulatory pact we received under Order 636,” Oaks warned FERC.
He noted that FERC staff in its report on storage referred to several storage projects that have been canceled, some because they did not receive market-based rate authorization from FERC. Storage capacity is sufficient to meet demand currently, staff found. But adding more capacity with market-based approaches would be a good idea.
Both Oaks and Wilson said they support FERC staff’s proposal to relax the requirements in the current market-based rate test to encourage more storage development. Giving storage developers more flexibility in designing services and rates would better encourage development of new capacity, said Wilson.
“Another option might be to develop incentives to spur storage development,” said Oaks. However, he said that AGA believes it is critical that “all market risks lay with the project’s owners, and that no captive customers are involved with the project.” Oaks also said a periodic review of market-based rate storage services would be another important step the Commission should take if the test for market-based rates is relaxed.
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