IN THIS ISSUE:
- FERC Authorizes Market-Based Rates for New Gas Storage Facilities
- FERC Refuses to Mandate Nationwide Gas Quality and Interchangeability Standards
- To Spur Gas Infrastructure Development, FERC Proposes to Expand Its Blanket Certificate Rules
FERC Authorizes Market-Based Rates for New Gas Storage Facilities
Federal Energy Regulatory Commission (FERC) Chairman Joseph T. Kelliher continues to fast track implementation of new authorities granted to the agency by Congress under the Energy Policy Act of 2005 (EPAct 2005). Using its EPAct 2005 authority, the FERC on June 19, 2006, issued new pricing rules designed to foster gas storage facility development, a mere six months after the proposal was first advanced. (For a report on the original proposal, see the January 2006 issue of “Gas Developments at FERC.”) By liberalizing the pricing rules for storage, FERC hopes to generate more storage infrastructure development, thereby reducing price volatility in gas markets and providing markets with greater assurance that peak gas demands can be met.
The final rule, which tracks the original proposal in most respects, provides developers two ways to obtain market-based (as opposed to cost-based) pricing for new storage services, a change designed to make more profitable, and thus encourage, new storage development. First, developers can seek approval under a market power test modified to consider close substitutes to existing storage when defining the relevant product market. This modification will make it easier for storage developers to demonstrate that they lack market power and thus qualify for market-based rates. Second, developers can apply under new regulations implementing Section 312 of EPAct 2005, adding a new section 4(f) to the Natural Gas Act (NGA), which permits FERC to approve market-based rates for storage developments even where a developer cannot demonstrate an absence of market power if FERC believes such developments are in the public interest and necessary to encourage needed storage services in a particular area. Such new storage facilities must have been placed in service after August 8, 2005, the date of enactment of EPAct 2005.
In a statement accompanying the new rule, Chairman Kelliher observed that the early filling of gas underground reservoirs this summer demonstrates a current shortage of storage capacity. He explained that since 1988, natural gas demand in the United States has risen 24 percent, while gas storage capacity has increased only 1.4 percent. Citing the currently full storage capacity, Chairman Kelliher asserted that a lack of available storage might cause some domestic gas production to be shut-in. This outcome would intensify policymakers’ and gas consumers’ continuing concerns regarding high natural gas prices and the need to increase supply.
In one major change from the original proposal, FERC modifies its interpretation of what constitutes new storage facilities placed in service after August 8, 2005. Previously, FERC interpreted this provision as requiring that the entire storage facility be placed in service after August 8, 2005. In the final rule, FERC adopts a more expansive definition that also allows market-based rate treatment for new capacity added at existing storage facilities after that date. In addition, FERC eliminates the generic requirement that storage developers file periodic updates to their market-based rate approvals, concluding that existing reporting requirements and market-monitoring programs provide the agency with sufficient information to know whether storage markets remain competitive. However, FERC cautions that it will monitor the implementation of its new rule to be sure that gas storage developers do not exert market power in under-served areas, which could result in unwarranted high storage costs for consumers.
FERC Refuses to Mandate Nationwide Gas Quality and Interchangeability Standards
On June 15, 2006, FERC issued a policy statement that established ground rules for addressing gas quality or interchangeability issues, and which endorsed the existing practice of allowing pipelines, suppliers, and customers to address most gas quality/interchangeability disputes on a case-by-case and pipeline-specific basis. Consistent with this decision, the FERC simultaneously issued an order denying a petition by the Natural Gas Supply Association seeking a single uniform set of standards to be applied to all pipelines nationwide, on the grounds that “it is not apparent that natural gas quality and interchangeability is a national problem that lends itself to a national solution.”
FERC’s policy statement articulated two primary goals. First, Chairman Kelliher explained, the FERC must “meet the essential needs of consumers by accommodating the greatest economic mix of gas supply with minimum barriers to new supply sources.” Second, FERC “must assure the safe and reliable operation of interstate natural gas pipelines.”
FERC’s “go slow” approach on mandating gas quality/interchangeability standards was based fundamentally on the recognition that substantial additional research is still needed to develop such standards and that FERC does not want to stifle such additional research by prematurely issuing prescriptive rules. The policy statement relies heavily on the February 2005 interim reports and recommendations on gas quality and interchangeability authored by the Natural Gas Council, an organization made up of the trade associations of different sectors of the natural gas industry, and referred to as the “NGC +Task Group.”
The policy statement adopts five key principles: (1) only gas quality and interchangeability specifications contained in a FERC-approved gas tariff may be enforced; (2) pipeline tariff provisions must be flexible to allow pipelines to balance safety and reliability concerns with the need to maximize gas supply, as well as recognizing the evolving nature of the science of underlying gas quality and interchangeability specifications; (3) pipelines and customers should develop standards based on technical requirements; (4) negotiators are strongly encouraged to use the interim guidelines in white papers prepared by the NGC+ Task Group as starting points; and (5) to the extent parties cannot resolve disputes, those can be brought to FERC to be resolved on a case-by-case basis.
This new policy statement applies not only to interstate pipelines but also to intrastate pipelines transporting under section 311 of the Natural Gas Policy Act of 1978, and local distribution companies and Hinshaw pipelines transporting gas under related authorities. FERC also makes clear that this policy is to apply to all new gas certificate applications under NGA section 7, as well as applications to be filed under NGA section 3 to construct and operate new facilities for the importation of natural gas.
To Spur Gas Infrastructure Development, FERC Proposes to Expand Its Blanket Certificate Rules
Granting a November 2005 request by the pipeline and producer trade associations, (as reported in the January 2006 issue of “Gas Developments at FERC”), FERC on June 16, 2006 issued a proposed rule which would significantly expand its “blanket certificate” program, thereby providing streamlined regulatory review of applications to construct certain interstate natural gas facilities not previously eligible for such expedited reviews.
Pursuant to the blanket certificate program, pipelines may improve and upgrade existing natural gas facilities which meet certain criteria without case-specific NGA section 7 authorizations. Proceeding under blanket certificate authority is preferred by pipelines because it is a much faster and less expensive application process than the traditional NGA section 7 process.
Facilities proposed to be newly eligible for blanket certificate approval include: (1) mainline facilities; (2) certain storage field facility modifications; and (3) facilities that transport gas from LNG and synthetic gas plants. FERC also proposes to: raise the blanket certificate project cost limits for a self-implementing (automatic authorization) project from $8.2 million to $9.6 million, and raise the cost limit for a prior-notice (authorization if no one objects during a limited time period) project from $22.7 million to $27.4 million.
Certain of these proposed changes, particularly the inclusion of mainline facilities in the category of eligible facilities, are likely to prove controversial. Customers may have concerns that new mainline capacity is not being equitably allocated and believe that the blanket process does not provide sufficient scrutiny of the proposal. Further, cost sensitive shippers may be concerned that these rule changes will give pipelines a blank check up to the higher cost limits to construct additional facilities, regardless of need, at customer expense. FERC presumes that costs incurred by pipelines in constructing blanket certificate projects will qualify for rolled-in pricing in future rate proceedings. If rolled-in to the pipeline’s rate base, such costs will increase rates systemwide to all shippers.
Finally, FERC separately proposes to clarify that a natural gas company is not necessarily engaged in an unduly discriminatory practice if it charges different shippers different rates for the same service based on the date the customers commit to the service, provided that all potential shippers have a fair opportunity to sign up for the service from the outset. This change is intended to provide an economic incentive to encourage commitment by the critical mass of “foundation shippers” deemed necessary to provide the financial support for a project before project sponsors will commit to proceed with project construction.
Comments on the proposed rule must be submitted to FERC by August 25, 2006.