Saltville Gas Storage Co. received a certificate under Section 7(c) of the Natural Gas Act (NGA) from FERC last Monday for operation of its high-deliverability gas storage field in southwestern Virginia. However, FERC said its “novel” rate design must be entirely scrapped and new rates must be filed in 30 days with an effective date a month later.

“Saltville’s proposed project will provide public benefits by meeting a portion of the growing energy market needs in the Virginia and Mid Atlantic region,” the Commission said, noting benefits for serving industrial, residential and power generation demand growth.

“Serving this generation load is critical to the continued economic growth of the Virginia and Mid Atlantic region and to the region’s goal of improving air quality by increasing the use of clean burning natural gas for electric generation and other industrial purposes,” FERC noted. The Commission also referred to the project’s pipeline balancing benefits during peak demand periods.

Saltville, which is a partnership between NUI Corp. and Duke Energy, was granted a Hinshaw exemption by FERC on April 11, 2002 and was allowed to operate largely outside of the Commission’s jurisdiction. On Aug. 6, 2002, the Virginia Corporation Commission also authorized the proposed storage facilities.

But a complaint was filed at FERC by Cargill and then later by Greenbrier Pipeline urging the Commission to review its Hinshaw status. In a rehearing order on Sept. 11, 2003, FERC snatched the exemption away from the company, noting that Saltville’s intrastate generation markets had gone away and virtually all of the gas in its storage fields would be held on behalf of customers located outside of Virginia.

The storage field already is operating in Smyth and Washington counties, VA, but will continue to grow in phases over the next few years with an ultimate capacity of 5.8 Bcf of working gas, 220 MMcf/d of injection capability and 550 MMcf/d of deliverability. Working gas capacity will grow from 2.1 Bcf in 2004 to 5.8 Bcf by 2007. Daily injection capacity will increase from 104 MMcf in 2004 to 220 MMcf in 2006. And daily withdrawal capacity will increase from 208 MMcf in 2004 to 486 MMcf in 2007.

Affiliate Virginia Gas Pipeline Co. (VGPC) operates the storage project, which is located adjacent to VGPC’s existing storage field. The project is connected to affiliate East Tennessee Gas’s interstate pipeline system near Chilhowie, VA, via a 6.7 mile 24-inch diameter pipeline.

The new Section 7(c) certificate leaves the storage operations intact but requires the rate design to be completely redone, which undoubtedly will impact contracts with shippers. The storage project has firm service agreements with Public Service Company of North Carolina, Virginia Gas Distribution, Elk River Public Utility District, Oak Ridge Utility District, NUI Energy Brokers, Carolina Power & Light (CP&L) and Washington Gas Light (WGL). It also has summer only service agreements with CP&L and WGL and interruptible agreements with several shippers.

FERC noted Saltville’s unique rate design in which its capacity charges are based on the number of gas storage cycles or “turns” into and out of storage. However, the Commission said the design does not follow its guidelines requiring that 50% of the fixed costs of the project be collected based on deliverability and 50% collected based on storage capacity. As a result the Commission ordered the company to file rates that meet its “Equitable method” guidelines.

Saltville also designed its rates based on a portion of its 2004 capacity but FERC noted that its capacity will increase sharply over the next few years. “To ensure that the rates charged more closely reflect Saltville’s costs and capacities during each period of development, the Commission will require Saltville to propose phased rates that reflect the increments of costs and the substantial capacity additions expected through 2007,” FERC said.

The Commission also told Saltville to base its rates on 100% of its projected capacity rather than 90%, redesign its interruptible services and make a filing at the end of its first three years of operation to justify its final recourse rates.

Public Service Company of North Carolina filed comments urging the Commission to preserve the integrity of its storage agreement with Saltville, but FERC said the agreement will have to be evaluated based on the refiled rate design. “Whether Saltville will have to renegotiate its rates with PSNC will depend on the rates it derives and whether PSNC’s rates are in accordance with the new recourse rates,” FERC said.

©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.