Originally published July 11, 2006
In the Energy Policy Act of 2005 ("EPAct 2005"), Congress mandated market-based rates for new natural gas storage facilities even where the applicant is unable to demonstrate that it lacks market power if FERC finds that "market-based rates are in the public interest and necessary to encourage the construction of the storage capacity in the area needing storage services [and] customers are adequately protected." The Federal Energy Regulatory Commission ("FERC") has issued a Final Rule regarding market-based rates for underground natural gas storage facilities to implement this provision of EPAct 2005. The new rule changes FERC’s market-power test to include pipeline capacity and other non-storage alternatives as possible substitutes for storage, and it authorizes the use of market-based rates for new storage capacity under certain circumstances even if the applicant is unable to demonstrate that it lacks market power.
Changes to the Market-Power Test
The Final Rule amends the market-power test to include as potential competitive alternatives, "other storage, local natural gas supply, LNG, financial instruments and pipeline capacity." For a non-storage alternative to be treated as a substitute it must be available to customers and have a price and quality that permits customers to substitute the alternative for the applicant's storage services. FERC will continue to make determinations regarding alternatives and market power on a case-by-case basis. FERC rejected multiple proposals to reduce the burden on applicants for market-based rates, including amending the market-power test to exclude consideration of capacity held by the applicants' affiliates and raising the HHI threshold level, which would have reduced the level of scrutiny FERC would exercise over applications for market-based rates.
Market-Based Rates Even With Market Power
Section 312 of EPAct 2005, which authorized FERC to provide market-based rates even where the applicant is unable to demonstrate that it lacks market power, applies to new capacity related to a "specific facility" placed in service after the date of the EPAct 2005. FERC initially interpreted EPAct 2005 to exclude this special treatment for new capacity at existing facilities. However, the Final Rule concludes that any new capacity is eligible for the special treatment under Section 312. FERC did note, however, that "it is unlikely that market-based rate authorization would be necessary, or in the public interest, to encourage relatively risk-free expansions of storage." Therefore, although existing facilities may apply for market-based rates for any new capacity, it is unlikely that they will receive it without demonstrating a lack of market power.
EPAct 2005 establishes as a prerequisite for granting market-based rate authority a determination that customers are adequately protected. FERC's Final Rule requires applicants to propose methods for protecting customers and offers several ways applicants might satisfy this requirement. To protect existing customers, applicants will be required to demonstrate that existing customers are not subject to additional costs, risks, or degradation of service as a result of the new storage project. With regard to new and potential customers, FERC suggests that conducting a fair and transparent open season can demonstrate non-discriminatory access. FERC also agreed with the conclusion of PGC and others that provisions preventing withholding would provide important protection for customers. Finally, FERC explained that, although rates may be individually negotiated, including general terms and conditions of service in a generally applicable tariff also will protect open-access.
No Periodic Review
FERC initially proposed a periodic review of market-based rate authority to occur every five years, and Section 312 of EPAct 2005 requires periodic review of storage facilities authorized under that section. However, FERC reversed course by only requiring that market-based rates comply with existing reporting requirements under 18 CFR Part 284.13, but reserved the option to impose other reporting requirements on a case-by-case basis. Concluding that its own monitoring and existing reporting requirements satisfy the EPAct 2005 review requirement, FERC decided not to require periodic review because it found the benefits of such a generic requirement are outweighed by its costs, particularly considering most market-based storage facilities it has approved have only a small presence in the market. Therefore, under the Final Rule, there is no periodic review requirement for market-based rate authority granted to natural gas storage service providers.
© 2006 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.