FERC Loosens Market Power Test for Storage Projects

The Federal Energy Regulatory Commission (FERC) Thursday introduced its long-awaited initiative to allow expansion of natural gas storage under market-based rates, which Chairman Joseph Kelliher said was one more action aimed at improving operation of the natural gas market and reducing price volatility.

The draft notice of proposed rulemaking (NOPR) would allow storage operators to seek authorization for market-based rates under a new test for market power, which would allow the consideration of alternative supplies available to consumers from sources other than competing storage operations. Those competing sources could include available pipeline capacity, supplies from local gas production or from LNG, which are available to the same customers to be supplied by the new storage operations.

"Instead of treating gas in storage as a discrete product, the Commission recognizes that storage gas competes with other gas that can be delivered in the same geographic market.," Kelliher said. "The goal is clear -- to reduce the volatility of natural gas prices by encouraging expansion of gas storage capacity."

And, following up on the recently-enacted Energy Policy Act, the draft NOPR also sets the policy for the new section 4F of the Natural Gas Act, which authorizes market-based rates for new storage projects even if they have market power -- if the Commission determines the project is necessary for the public interest and customers are adequately protected from manipulation.

The Commission has requested comments on methods to protect customers, possibly including prohibitions on withholding service, price caps or recourse rates, making it clear that it will be up to the applicant to show how customers will be protected. Projects filed at FERC after the Aug. 8 enactment of the new energy law can bypass the market power test and apply to be considered under Section 4F. This section would apply to greenfield projects, not expansions.

Kelliher noted that growth in storage capacity "has been static for a number of years," while gas demand, prices and volatility have been increasing.

"This is one of the Commission's responses to a winter of record high gas prices," Kelliher said, noting FERC also has improved its ability to detect market manipulation by entering into an agreement with the Commodity Futures Trading Commission, issuing proposed anti-manipulation rules, and acting quickly on emergency filings following the hurricanes and new infrastructure construction projects to speed the efficient operation of the delivery system.

Commissioner Suedeen Kelly said she was "uneasy about authorizing market-based rates for providers that can exercise market power," finding it "extraordinary" that Congress should single out the storage industry to allow monopoly power. She noted that FERC had only turned down three storage applications for market-based rates recently and two of them were constructed under cost-based rates.

Market watchers point out that the cost of putting in the base or cushion gas in a new storage project is a big deterrent to new storage development with today's high prices.

Comments on the NOPR are due within 60 days of publication in the Federal Register.

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