Having heard no convincing argument to limit the scope of its rule, FERC on November 16 upheld new flexible rate regulation intended to stimulate the natural gas storage market. On rehearing, the commission retained the basic elements of order 678, which allows market-based rates for new storage projects without imposition of a traditional market power test.
After embracing the rehearing order, the commission put it into practice, approving market-based rates for firm deferred delivery service from a proposed expansion of a Northern Natural Gas aquifer storage field in Redfield, Iowa. Northern Natural was the first storage operator to request market-based rates using criteria established under order 678.
"We have acted to strengthen our natural gas infrastructure, improve access to domestic natural gas supplies and increase our liquefied natural gas import capacity."
-FERC Chairman Joseph Kelliher
The Northern Natural authorization (RP06-437) came over the objections of Commissioner Suedeen Kelly, who insisted that the company had not made the case that market-based rates were needed or that customers would be adequately protected.
The new rule represents another step in the commission's campaign to promote development of new gas storage capacity, which has grown nationally just 1.4% since 1988, FERC Chairman Joseph Kelliher pointed out.
The commission for years has allowed market-based rates for storage services where an applicant has been able to prove a lack of market power in their traditional market. But with the encouragement of Congress in the Energy Policy Act, the commission moved to broaden the definition of market power to include not only other storage projects in a given area but also "close substitutes" such as pipelines, production fields or liquefied natural gas imports.
The expanded rate authority is designed to provide incentives to build underground storage away from the Gulf Coast, especially in areas with limited underground storage but rising production or demand such as in the Rocky Mountain, Southeast and the Southwest regions.
As first articulated in EPAct, the new rule establishes that market-based rates are appropriate for storage if: the new facility or expansion is placed in service after August 8, 2005 (date of EPAct enactment); the rates are deemed to be in the public interest and necessary to encourage construction of capacity in a certain area; and customers are adequately protected from adverse impacts of the new rates.
On rehearing, the commission stood behind its earlier decision not to impose a five-year reporting requirement for companies granted market-based rates based on a demonstration that they do not control their market. Existing reporting requirements suffice for the commission to keep an eye on the market, and most projects are relatively small and pose a limited market power threat, it reasoned. FERC also retained the new definition of storage facilities eligible for market-based rates to allow almost any storage developer to apply.
In discussing the rule, Kelliher stressed that it was part of a broader commission effort to control gas price volatility. "A year ago, we were struggling with record gas prices. One year later, prices have fallen significantly. While overall price levels have fallen, price volatility remains," he observed.
FERC has "taken a number of steps to reduce price volatility in natural gas markets and provide greater assurance we can meet peak demand," he said. "We have acted to strengthen our natural gas infrastructure, improve access to domestic natural gas supplies and increase our liquefied natural gas import capacity." In addition, the commission has encouraged greater efficiency, promoted hedging "which can reduce exposure to price volatility," and is "considering exercising our new price transparency authority."
Another way to reduce price volatility is to expand storage capacity by establishing greater rate flexibility, the chairman continued. "There is no question that we have not reached the physical limits of our gas storage capacity," he said, pointing to "significant untapped potential" and the minimal growth over the past 20 years.
Created: December 11, 2006
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Northern Natural to request market-based rates
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