|
GAS DEVELOPMENTS AT FERC
A Bi-Monthly Report on Matters of Interest to Gas-Fired Generators
IN THIS ISSUE:
New Rules Proposed to Address Growing Generator Demand for Market Area Gas Storage
Continuing Chairman Joseph T.
Kelliher’s focus on policy changes to encourage energy infrastructure development, the Federal Energy Regulatory Commission (FERC) recently issued a notice of proposed rulemaking in Docket No. RM05-23-000 that seeks to modify storage pricing rules. Although intended to encourage new storage development in market areas nationwide, the proposed rule particularly seeks to encourage development in markets such as the Southwest, which lack and need storage but where new project development has stalled. The notice also proposes rules implementing Section 312 of the Energy Policy Act of 2005 (“EPAct 2005”), which, effective Aug. 8, 2005, allows market-based rates for new storage services even if a developer cannot demonstrate the absence of market power, if FERC first determines both that the project is needed, and that customers are otherwise adequately protected.
Storage volumes are now being used not just to meet traditional winter heating demand, but also to supply gas to meet the daily, or even hourly, demands of gas-fired electric generation plants, which is a rapidly growing portion of the gas market. Thus, FERC believes storage developers need to be encouraged to develop projects designed not just to meet local distributor requirements of a single annual injection-withdrawal cycle storage facility, but also to meet electric generator requirements of a high deliverability and injection storage facility capable of cycling working gas multiple times during the year to meet swings in demand. However, FERC is concerned that cost of service rates based on long term contracts (the prevailing rate model for recovering the costs of a single annual cycle storage facility), may not be economically feasible for gas generators who value storage service only during transient periods of peak demand, and who may be unwilling to enter into long term contracts. Therefore, to make new projects economically feasible and to encourage increased storage capacity nationwide, FERC believes it may need to allow storage operators to earn higher revenues from short-term services during peak demand periods via market-based rates.
Under FERC’s 1996 Alternative Rate Policy Statement, storage developers can charge market-based rates only if they lack significant market power. Under the market screening tool used, the broader the relevant product market, the more likely the applicant will be able to demonstrate the absence of significant market power. Here FERC proposes to make it easier for storage developers to demonstrate that they lack significant market power (and thus can charge market-based rates) by allowing applicants to argue that the relevant product market includes not just other storage alternatives but also non-storage alternatives that are a close substitute, such as available pipeline capacity, local gas production, or liquified natural gas (LNG) terminals.
FERC interprets its expanded market-based rate authority under EPAct 2005 as applying to developers of new facilities placed in service after Aug. 8, 2005, and not including developers of new storage at existing facilities. Although FERC proposes that applicants bear the burden of showing that market-based rates and storage services are necessary, as the legislation requires, the proposed rule gives little guidance on how that showing should be met. Nor does the agency appear to have given much consideration as to how, as a threshold matter, it will determine that customers are adequately protected from potential market power abuse, suggesting the addition of new storage itself will provide sufficient countervailing benefits to the marketplace. Comments are due by Feb. 27, 2006.
Producers/Pipelines Solicit Changes to Energy Infrastructure Project Development Rules
FERC is soliciting public comment on whether to consider several regulatory and policy changes requested by the Interstate Natural Gas Association of America and the Natural Gas Supply Association (“Petitioners”) via a Nov. 22, 2005 Petition for Rulemaking in Docket No. RM06-8-000. Petitioners have asked FERC to initiate a rulemaking proceeding to consider substantially expanding the types of construction activities that can be undertaken by pipelines under blanket certificate rules; and separately, to issue a policy statement or rule clarifying that it would not be unduly discriminatory for a pipeline to give a new project’s “foundation shippers” more favorable rates than subsequent shippers because such initial shippers are needed to render the new project feasible in the first place. Comments on the threshold issue of whether to issue a rulemaking on these topics, not on the substance of the proposals, are due by
Jan. 17, 2006.
Petitioners maintain that requested changes to the blanket rules support FERC’s goal of expediting the development of needed energy infrastructure development. Since the early 1980s, pipelines have held blanket transportation certificates, which allow construction of certain kinds of transportation facilities without first filing a full certificate application and then awaiting Commission approval—a time consuming and expensive process. Instead, facilities that qualify for such blanket treatment can be built quickly by pipelines, on either a prior notice or a self-implementing basis. Petitioners contend that existing limits on the kinds of facilities that qualify for blanket treatment are outmoded and should be modified to allow more expedited construction of needed infrastructure. Petitioners request FERC to expand eligibility under the blanket rules to include mainline facility expansions, facilities constructed to expand storage field deliverability, and lateral facilities constructed to transport regasified LNG, and to increase the dollar limits on blanket facility authorization, which, they contend, have not kept pace with construction costs.
Likely to be the most controversial element of any future rulemaking is Petitioners’ request that FERC allow foundation or anchor shippers for a major new pipeline or storage project to receive more favorable rate treatment from pipelines than shippers who subsequently sign on after the open season is completed. Recently, the agency rejected a “pre-subscription preference,” proposed by gas producers in connection with establishing the rules for the conduct of open seasons for projects under the Alaska Natural Gas Pipeline Act (Docket No. RM05-1-000), as inconsistent with open access requirements. Mindful of FERC’s action there, Petitioners are careful to point out that this rate proposal would not apply to projects in Alaska and that they have designed the proposed rate preference so all shippers who sign up for capacity in the open season, not just those shippers involved in initial project development, would equally benefit from the proposed rule.
For more information, please contact:
This Law Letter is a publication
of the Energy Department of Davis Wright Tremaine LLP. Our purpose
in publishing this Law Letter is to inform our clients and friends
of recent developments in energy law. It is not intended, nor
should it be used, as a substitute for specific legal advice
as legal counsel may only be given in response to inquiries
regarding particular situations.
Copyright © 2006, Davis Wright
Tremaine LLP.
return to Advisory Bulletins main page
|
.jpg)
