In order to spur more natural gas storage development, FERC should grant independent storage operators “blanket” market-based rate authority, approve waivers of the shipper-must-hold-title and capacity-release regulations, ease the public’s fears associated with the development of new storage facilities, and treat storage facilities as it did liquefied natural gas (LNG) projects nearly two years ago, several independent storage operators told the Commission last week.

“FERC needs to act now for the same reason that it needed to act two years ago to sweep away some of the regulatory underbrush that was impeding the development of new LNG terminals,” said James F. Bowe, who represented Red Lake Gas Storage LP, during the agency’s daylong “State of the Natural Gas Industry Conference” on Thursday, which focused on storage.

“Perhaps it [is] appropriate to look at merchant storage facilities in the same way as the Commission looked at LNG facilities. Look at them as new market entrants, providing additional options to customers. No customers are obligated to sign up for service with these facilities. The Commission should, as it decided in the Hackberry decision, take steps to ensure that its policies are not impeding investment” in new storage projects, he noted.

Under the Hackberry ruling, which was issued in December 2002, FERC excused LNG terminals from its open-access jurisdiction, allowing them to charge customers whatever the market would bear for terminal services.

Asked if only independent storage operators should be candidates for market-based rates, Carl Levander of Columbia Gas Transmission said “I don’t know that I would take that position.” He questioned whether there was a “legitimate” reason to exclude pipeline storage operators. But Levander agreed that “at a minimum” FERC should give market-based rates to independent operators.

The Commission’s “somewhat mechanical” assessment of market power, which is used to determine whether market-based rates are warranted, is a “major impediment” to the development of storage projects, Bowe said. No one passes the FERC market-power test in the West and Southwest, where storage is needed, but nearly every project planned for the Midwest and Northeast passes, where storage is plentiful, he noted. “That strikes me as counterintuitive.”

The Commission has the “legal authority” to award market-based rates, Bowe said. Moreover, there are a number of routes available to FERC to ensure that market-based rates are constrained by the market, such as imposing periodic reporting requirements as to the level of contractual commitments and the Section 5 complaint process, he noted.

Bowe acknowledged that this would be a “departure” from existing Commission policy, but he noted that the agency has taken similar action in “other contexts.” He pointed to the electric side, where he said new power generation prior to 1997 was awarded market-based rates.

Bowe and others disputed claims that new storage facilities possess market power like pipelines. “On Day One, there’s no such thing as market power” for a new storage entrant that does not control transmission, he said. “Over time, could market power be developed? Maybe. I’m not clear that it could happen,” he noted.

“Why would new storage available to the market be deemed to have power when the market’s existing and functioning today without it?” asked Ryan O’Neal, vice president of development for Sempra Energy International. “If you’re introducing [storage] options to the market, I don’t understand how that would be viewed as exercising control.”

If the Commission decides against market-based rates for independent storage providers, Bowe said it needs to make clear that its negotiated-rate policy does not preclude the use of commodity pricing in storage negotiated rates. Columbia’s Levander agreed that the opportunity to have negotiated rates based on commodity indexes would be “beneficial.”

Storage operators urged FERC to take quick action to promote more storage, given the wave of LNG that is headed for the U.S. “The Commission needs to act coming out of this proceeding…We need a policy statement yesterday, but certainly by the end of the year,” Bowe said.

Aquila affiliate Red Lake Gas Storage is considered the “poster child” for what’s wrong with the storage market. FERC on several occasions rejected the company’s plea for market-based rates for its salt cavern gas project in Mohave County, AZ. The company complained that it couldn’t do the 12 Bcf project without market-based rates, so FERC terminated the proceeding altogether in June 2003.

Whether Red Lake refiles the storage project at the Commission “depends of course” on the agency’s actions following the conference, Bowe told Chairman Pat Wood. “Red Lake’s year may be here…depending on what the Commission does.” With market-based rates, he vowed “Red Lake will rise again.”

More rate flexibility from FERC is critical for independent storage providers, which have provided 75% of the incremental storage capacity over the past couple of years, said Matt Morrow, president of ENSTOR Operating Co. The company has storage operating facilities in Alberta, Canada, and Katy, TX, and plans to triple the size of its business over the next decade.

He estimated that approximately 35-50 Bcf of new storage capacity will have to be added each year to keep pace with the fluctuating demand for natural gas. But this will be a challenge in light of the increased development costs, lack of long-term storage commitments (most storage contracts are for a three-year term) and regulatory constraints. He noted that the cost of cushion gas has “skyrocketed,” and the price of steel used to create line-pipe, compressors and valves has jumped 150% over the last six months.

ENSTOR must have rate flexibility (market-based rates) to charge higher rates in periods of high demand, and lower rates in periods of low demand to justify the economics of a project, Morrow told FERC staff and Commissioners. In addition the Commission should allow waivers of the shipper-must-hold-title and capacity-release rules for storage operators.

Under the FERC’s shipper-must-hold-title rule, a storage project cannot be a shipper even though the market may want it to provide service of delivered gas to a citygate. Independent storage providers want to be able to compete with larger interstate pipelines that have storage and can make deliveries off their pipeline grid. A waiver would allow independents to take transportation and deliver gas to where a customer is located.

“Specifically, we’d like the Commission to consider granting storage operators the ability to enter into transportation and storage arrangements with third-party pipelines and storage companies so that entities like ENSTOR can compete fairly with larger interstates and with the natural gas marketers and traders who compete with us in the gray market,” Morrow said.

He also asked FERC to consider hub-to-hub transfers, which would permit a shipper, for example, to inject natural gas in Texas and then take it out in Ohio.

Donald J. Zinko of EPNG Marketing, an EL Paso Corp. subsidiary, called on FERC to help the company alleviate the public’s anxiety about its $250 million Copper Eagle storage project near Phoenix, AZ. He cited “misinformation coming out of the public [about the project], which we couldn’t counter,” as well as negative press.

Zinko suggested that the Commission educate the public about the safety of storage facilities, similar to what it has been doing with LNG facilities. The agency has “much more credibility in that area than we as an energy company could have,” he said.

“We feel this field can be made extremely safe, and is very much needed.” Zinko noted that there are no storage facilities in the state of Arizona through which EPNG’s affiliate El Paso Natural Gas runs through.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.