A federal appeals court in Washington, DC, Tuesday upheld a FERC order that limited Northern Natural Gas’ exercise of market-rate authority to initial customers of its planned aquifer storage field in Redfield, IA.

At the crux of the case is a 2006 order in which the Federal Energy Regulatory Commission authorized market-based rates only to Northern Natural initial shippers that submitted winning bids and signed precedent agreements for the Iowa storage project. In 2010, Northern sought to extend its market-based rate authority to include the “resale of market-based rate capacity” that becomes available through the expiration of existing service agreements or upon bankruptcy. FERC denied granting Northern the authority to charge market rates for existing contracts that expire.

However, the Commission approved Northern Natural’s request to charge market-based rates for resales of storage in the event of bankruptcy, default or other turned-back capacity during the 20-year term of the original contracts. “It makes sense for FERC to interpret its grant of market rates for the original 20-year contracts as encompassing replacement contracts that merely fill in a gap caused by the fortuitous failing of one of the original shippers,” the court said.

We are disappointed in the decision,” attorneys for Northern Natural gas said, adding that they are taking their time to review the ruling.

“Northern objects to [FERC’s] interpretation [of the section in the Natural Gas Act pertaining to market rates], and further argues that even if it is correct, its effect, at least vis-a-vis Northern, should be prospective only. We reject both claims,” said a three-judge panel for the U.S. Court of Appeals for the District of Columbia Circuit.

The court said the order may not have made clear that the Commission would in later years reject Northern Natural’s petition for an extension of its ability to charge market rates. “To the contrary, the Commission’s language may well have been misleading…But the misleading characterization of Northern’s future options does not provide a basis for precluding the Commission from applying to the Iowa project the interpretation that it has demanded by [ the Natural Gas Act] and it has uniformly embraced.”

In November 2006, FERC upheld a final rule giving the agency more flexibility to issue market-based rates to storage developers to spur the development and construction of underground natural gas storage facilities (see Daily GPI, Nov. 17, 2006). Northern Natural was the first jurisdictional storage provider to receive market-base rates under the final rule.

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