FERC Issues Final Rule on Rate Regulation of Certain Natural Gas Storage Facilities

On June 19th, the Federal Energy Regulatory Commission (FERC or Commission) issued Order No. 678, a final rule that amends Part 284 of its regulations to establish two new methods for obtaining market-based rates for underground natural gas storage services. The final rule modifies the existing market-power test to permit consideration of competitive alternatives to storage in defining the relevant product market. Second, the final rule adopts regulations implementing § 312 of the Energy Policy Act of 2005 (EPAct 2005), which added a new § 4(f) to the Natural Gas Act (NGA), and permits the Commission, in appropriate circumstances, to authorize market-based rates for storage, even if the storage provider is unable to show that it lacks market power.

The final rule applies to all interstate natural gas storage providers, including intrastate pipelines providing storage services pursuant to § 311 of the Natural Gas Policy Act of 1978 (NGPA). The final rule becomes effective on July 27, 2006.

Key Issues in the Final Rule

Market Power Test. Currently, FERC evaluates requests to charge market-based rates for storage services in accordance with its 1996 Alternative Rate Policy Statement, which establishes procedures for service providers to demonstrate that they lack significant market power. In Order No. 678, FERC modified its approach, adopting a more expansive test for determining the relevant product market for storage to expressly include close substitutes for gas storage services. Under the broader test, a storage applicant can include other services, such as local gas supply, LNG, financial instruments, and pipeline capacity, in its market power study. FERC will evaluate potential substitutes on a case-by-case basis. In order to show that a non-storage product or service is a “good alternative,” the storage applicant is required to show that the service is available soon enough, has a price low enough, and has a quality high enough to permit customers to substitute the alternative for the applicant’s services.

Market-based rates for storage under new NGA § 4(f). Order No. 678 implements § 312 of the EPAct 2005, permitting FERC to authorize new natural gas storage projects related to a specific facility to provide service at market-based rates, even if the applicant is unable to demonstrate that it lacks market power. FERC may authorize market-based rates “for new storage capacity related to a specific facility placed in service after the date of enactment,” which was August 8, 2005.

The final rule expands eligibility for market-based rates pursuant to § 4(f). In its Notice of Proposed Rulemaking (NOPR), FERC had proposed to define the term “specific facility” as a new cavern, reservoir, or aquifer that is developed after August 8, 2005 - a definition that would have excluded expansions of existing facilities from eligibility. The final rule adopts a more traditional definition of the term “facility” that makes new capacity added as a result of any new facility, including expansions of existing facilities, eligible for market-based rates. In order to authorize a storage provider to charge market-based rates, FERC must determine that: (1) market-based rates are in the public interest; (2) market-based rates are necessary to encourage the construction of the storage capacity; (3) the area in which the storage project is proposed needs storage services; and (4) customers are adequately protected. The applicant bears the burden of proving that market-based rates are necessary to encourage the construction of storage capacity, that storage services are needed in the area, and that customers are adequately protected. The final rule discusses ways in which these showings may be made, but allows each applicant to offer a relevant method of protecting customers best suited to its project. Finally, Order No. 678 states that providers with market-based rates under § 4(f) will be presumed to have market power.

Periodic Review. In the NOPR, FERC had proposed to require storage applicants who receive market-based rate authority as a result of a market power analysis to file an updated market power analysis every five years. The final rule abandons this approach, but emphasizes that providers must notify FERC of any change of circumstances affecting market power. In the final rule, FERC reserves the ability to impose additional reporting requirements for storage providers with market share above 10%, and to implement a five-year reporting requirement in the future should FERC determine that such a requirement is needed.

Interstate pipelines. Interstate pipelines or storage providers that want to provide storage service under market-based rates not filed as part of a certificate application are required to file a request for declaratory order. Procedures will then be established to consider the request and to determine eligibility to charge market-based rates under either methodology and to develop any mitigation measures.

Intrastate pipelines. Intrastate pipelines, local distribution companies, or Hinshaw pipelines that want to charge market-based rates for storage service under the NGPA would be required to file applications under the existing regulations that apply to service under NGPA § 311.