FERC last Thursday upheld its final rule that gives the agency more flexibility to issue market-based rates to storage developers — a move that it hopes will spur the development and construction of new underground natural gas storage facilities in the United States.

On rehearing of the final rule, the Federal Energy Regulatory Commission (FERC) denied pleas to limit the expansion of the product market definition that allows the agency to consider storage substitutes when it decides whether an applicant has market power and qualifies for market-based rates for storage services. Recipients of market-based rates can charge whatever the market will bear for their storage services. Storage developers prefer these rates over traditional cost-based rates.

The final rule, which implements congressional directives in the Energy Policy Act of 2005, includes a more expansive definition of the relevant product market that factors in nonstorage substitutes when deciding whether market power exists. The nonstorage substitutes could include available pipeline capacity, supplies from local gas production, liquefied natural gas and released transportation capacity, which would be available to the same customers to be served by the new storage operations [RM05-23, AD04-11].

The rule also would allow an applicant to seek authority to charge market-based rates even if it has market power — provided the Commission determines the project is necessary for the public interest and customers are adequately protected from manipulation.

Moreover, FERC rejected requests to make only new storage caverns, reservoirs and aquifers — not expansions of existing facilities — eligible for market-based rates. Although the agency limited eligibility to greenfield storage projects in the proposed rule, it expanded eligibility in the final rule to allow “pretty much any storage facility constructed after Aug. 8, 2005” to apply for market-based rates.

The order denied requests to require that storage applicants report to FERC at least every five years on the adequacy of the customer protections that were put into place as a condition of receiving market-based rates.

Chairman Joseph Kelliher has pressed for more storage capacity since joining the Commission and believes the final rule will help to achieve that aim. “There is a need to expand gas storage capacity. There is no question that we have not reached the physical limits of our gas storage capacity. We have significant untapped potential. Yet, gas storage capacity has expanded by only 1.4% since 1988. Pricing reforms can help develop untapped storage capacity, to the benefit of consumers and the markets themselves,” he said.

“Congress sent a clear signal in the Energy Policy Act of 2005 that it wanted FERC to be more flexible with respect to market-based rates for new storage capacity. The final rule responded to Congress’ recognition of the need for more gas storage capacity, by reforming FERC’s market power analysis developed under our preexisting statutory authority, as well as by implementing our new Energy Policy Act authority.”

In a related order, FERC last Thursday gave Northern Natural authorization to charge market-based rates to initial shippers that submitted winning bids in an auction and signed precedent agreements for firm delivery service from a planned expansion of its Redfield aquifer storage field in Dallas County, IA [RP06-437]. The Commission majority said Northern Natural met all of the new criteria for market-based rates, making it the first jurisdictional storage provider to receive market-based rates under the final rule.

But Commissioner Suedeen Kelly dissented. She noted that Congress allowed the “extraordinary step” of giving a “monopolist what it wishes” if it meets two criteria — the storage project is necessary for the public interest and customers are protected. “I don’t believe that either of those criteria were [met] in this case,” Kelly said.

Requiring Northern Natural to offer cost-based recourse rates as well will not provide the needed protection for customers, she noted. In effect, FERC has given the MidAmerican Energy pipeline “carte blanche” to charge whatever it wants for its storage services, Kelly said.

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