[Federal Register: December 29, 2005 (Volume 70, Number 249)]
[Proposed Rules]
[Page 77079-77089]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de05-19]
[[Page 77079]]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 284
[Docket Nos. RM05-23-000 and AD04-11-000]
Rate Regulation of Certain Underground Storage Facilities
December 22, 2005.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
proposing to amend its regulations to establish criteria for obtaining
market-based rates for storage services offered under part 284. First,
the Commission is proposing to modify its market-power analysis to
better reflect the competitive alternatives to storage. Second,
pursuant to Title III, Subtitle B, section 312 of the Energy Policy Act
of 2005, the Commission is proposing rules to implement new section
4(f) of the Natural Gas Act, to permit underground natural gas storage
service providers that are unable to show that they lack market power
to negotiate market-based rates in circumstances where 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 that customers are adequately protected. These revisions
are intended to facilitate the development of new natural gas storage
capacity while protecting customers.
DATES: Comments are due February 27, 2006.
ADDRESSES: Comments may be filed electronically via the eFiling link on
the Commission's Web site at http://www.ferc.gov. Commenters unable to
file comments electronically must send an original and 14 copies of
their comments to: Federal Energy Regulatory Commission, Office of the
Secretary, 888 First Street, NE., Washington, DC, 20426. Refer to the
Comment Procedures section of the preamble for additional information
on how to file comments.
FOR FURTHER INFORMATION CONTACT:
Sandra Delude, Office of the General Counsel, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8583.
Michael Henry, Office of General Counsel, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8532.
Ed Murrell, Office of Markets, Tariffs, and Rates, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
(202) 502-8703.
Berne Mosley, Office of Energy Projects, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8625.
SUPPLEMENTARY INFORMATION:
I. Introduction
1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005 or
the Act) \1\ was signed into law. Section 312 of EPAct 2005, adding a
new section 4(f) to the Natural Gas Act (NGA),\2\ permits the
Commission to allow a natural gas storage service provider placing new
facilities in service to negotiate market-based rates even if it is
unable to show that it lacks market power if the Commission determines
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 that customers are adequately protected.\3\
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\1\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594
(2005).
\2\ 15 U.S.C. 717, et seq. (2000).
\3\ Energy Policy Act of 2005, Pub. L. 109-58, Sec. 312, 119
Stat. 594, 688 (2005).
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2. The enactment of EPAct 2005 adds momentum to efforts already
underway at the Commission to adopt policy reforms that would encourage
the development of new natural gas storage facilities while continuing
to protect consumers from the exercise of market power. On September
30, 2004, the Commission issued a staff report that examined
underground natural gas storage.\4\ On October 21, 2004, the Commission
held a public conference with representatives of the industry to
discuss the Staff Storage Report and issues relevant to underground
storage.\5\ The Commission received oral and written comments in
connection with the Staff Storage Report and conference.
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\4\ Current State of and Issues Concerning Underground Natural
Gas Storage, FERC Staff Report, Docket No. AD04-11-000 (Sept. 30,
2004) (Staff Storage Report).
\5\ State of the Natural Gas Industry Conference, Docket No.
PL04-17-000, October 21, 2004; see State of Natural Gas Industry
Conference; Staff Report on Natural Gas Storage; Notice of Public
Conference, 69 FR 59917 (Oct. 6, 2004) (summarizing the issues to be
discussed at the conference).
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3. After considering the conference comments, the current
characteristics of the storage market, the nation's existing and
projected storage capacity needs, and the new legislation, the
Commission concludes that reform of its current pricing policies may be
appropriate. The purpose of this reform is to ensure access to storage
services on a nondiscriminatory basis at just and reasonable rates and
ensure that sufficient storage capacity will be available to meet
anticipated increases in market demand. To achieve these goals, the
Commission is adopting a two-prong approach. First, this notice of
proposed rulemaking (NOPR) proposes modifications to the Commission's
market power analysis to permit the consideration of close substitutes
to storage in defining the relevant product market. This will ensure
that market-based rates are not denied because of an overly narrow
definition of the relevant market. Second, the Commission is proposing
regulations to implement section 312 of EPAct 2005, which permits
qualifying storage providers to charge market-based rates for a new
facility even when they cannot (or do not) demonstrate that they lack
market power. The Commission seeks comment, among other things, on
whether there are certain generic safeguards that will provide adequate
customer protections for entities applying for market-based rates under
new NGA section 4(f). It should be noted, however, that these two
policy reforms do not require a ``sequential'' approach for a potential
storage developer. Instead, where a prospective applicant believes that
it can make a showing sufficient to satisfy the requirements of new NGA
section 4(f), it need not submit a traditional market power analysis in
support of its request for market rates. In reviewing the applicant's
request for market-based rates under section 4(f), the Commission will
presume that the applicant has market power for the purposes of
ensuring that customers are adequately protected. Taken together, the
intent of these reforms is to facilitate the expansion of gas storage
capacity to, among other things, mitigate natural gas price volatility,
while continuing to protect consumers from the exercise of market
power.
II. Background
A. Changing Nature of Storage Services
4. In Order No. 636, the Commission found that pipelines held a
competitive advantage over other gas sellers, in part
[[Page 77080]]
because of the lack of access to storage services.\6\ Therefore, the
Commission amended Sec. 284.1(a) of its regulations to define
transportation to include storage. This required pipelines to offer
their customers firm and interruptible storage on an open-access,
contract basis. Since the 1992 issuance of Order No. 636, much has
changed. Storage is now being used to support new services made
possible by the unbundling of storage from transportation and by new
market conditions arising from the Commission's restructuring efforts.
In addition, traditional interstate natural gas pipelines are
experiencing competition for contract storage customers from
independent storage providers. Many new entities provide myriad service
options, and natural gas customers are able to choose among competing
sellers, often as supplements or alternatives to ``backstop'' long-
term, firm transportation and storage services contracted at
Commission-regulated rates.
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\6\ Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation of
Natural Gas Pipelines After Partial Wellhead Decontrol, 57 FR 13267
(Apr. 16, 1992), III FERC Stats. & Regs. ] 30,939 at 30,425-427
(Apr. 8, 1992), order on reh'g, Order No. 636-A, 57 FR 36128 (Aug.
12, 1992), III FERC Stats. & Regs. ] 30,950 (Aug. 3, 1992), order on
reh'g, Order No. 636-B, 57 FR 57911 (Dec. 8, 1992), 61 FERC ] 61,272
(1992), notice of denial of reh'g, 62 FERC ] 61,007 (1993), aff'd in
part and vacated and remanded in part, United Dist. Companies v.
FERC, 88 F.3d 1105 (D.C. Cir. 1996), order on remand, Order No. 636-
C, 78 FERC ] 61,186 (1997).
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5. The nature of the gas storage marketplace also has changed
significantly over the last decade. Traditionally, local distribution
companies (LDCs) contracted for firm storage service on a long-term
basis, principally to meet peak winter heating needs. Thus, underground
storage fields were typically designed to inject gas during the spring,
summer, and fall, and then draw on the accumulated underground
inventory to meet winter heating demands. This model is changing.
Instead of relying primarily on firm, long-term gas supply or
transportation service contracts, wholesale customers are increasingly
relying on a portfolio of both long-term and short-term contracts to
purchase, store and transport natural gas.\7\ There is a growing use of
storage volumes not only to meet traditional winter heating demand, but
also to supply gas to meet daily, or even hourly, demand for gas-fired
electric generation plants. Storage is also being used to ensure
liquidity at market centers to help market participants capture short-
term changes in the value of natural gas.
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\7\ The development of a short-term market for gas services was
addressed by the Commission in 2000, in its Regulation of Short-Term
Natural Gas Transportation Services and Regulation of Interstate
Natural Gas Transportation Services, Order No. 637, FERC Stats. &
Regs. Regulations Preambles (July 1996--December 2000) ] 31,091
(Feb. 9, 2000), order on reh'g, Order No. 637-A, FERC Stats. & Regs.
Regulations Preambles (July 1996-December 2000) ] 31,099 (May 19,
2000), reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd
in part and denied in part, Interstate Natural Gas Association of
America v. FERC, 285 F.3d 18 (D.C. Cir. 2002). In that proceeding,
the Commission considered the consequences of the restructuring of
the gas industry following Order No. 636, and found ``a short-term
gas market that is robust, functioning, efficient, and effective.''
FERC Stats. & Regs. Regulations Preambles (July 1996-December 2000)
] 31,091 at 31,255 (Feb. 9, 2000) (quoting comments submitted by the
New York Mercantile Exchange).
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6. This fundamental shift in contract terms and load profile
challenges longstanding operational and financial presumptions
regarding storage service. Whereas a storage facility designed for one
annual injection-withdrawal cycle is well suited to supply gas to meet
winter heating demands, such a facility may be less than ideal in
meeting the intermittent summer demand spikes associated with supplying
gas to fuel electric generation plants. A storage facility capable of
cycling working gas repeatedly throughout the year, using high
deliverability and injection to fulfill daily, even hourly, swings in
demand, such as salt cavern storage, is able to satisfy such load
profiles.\8\ However, electric generators are much less likely to sign
traditional long-term firm contracts, but may be more interested in the
type of flexible pricing proposals offered uniquely under market-based
rates.\9\
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\8\ The Commission has authorized a number of salt cavern
storage facilities that have these operational characteristics. See,
e.g., Pine Prairie Energy Center, LLC, 109 FERC ] 61,215 (2004)
(authorizing the construction and operation of a high deliverability
salt-cavern storage facility capable of as many as 30 injection-
withdrawal cycles a year at maximum injection and withdrawal rates).
\9\ See, e.g., Energy Information Administration, The Challenge
of Electric Power Restructuring for Fuel Suppliers, at 54-56
(September 1998).
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B. Storage Capacity and Natural Gas Prices
7. Regardless of whether a storage facility is operated on a
traditional, annual injection-withdrawal cycle, or completes multiple
cycles throughout a year, the fact that gas can be injected into a
storage facility and then held in repose, to be called upon during
periods of high demand, has a moderating influence on gas prices. As a
physical hedge, customers can build up underground inventories during
times of lower demand, and then rely on these supply stores to avoid
paying high spot market gas prices. Among the key findings highlighted
by the Staff Storage Report is that the ``continued commodity price
volatility indicates that more storage may be appropriate'' and that
storage ``may be the best way of managing gas commodity price, so the
long-term adequacy of storage investment depends on how much price
volatility customers consider `acceptable.' '' \10\ The last several
years have seen a marked rise in the overall commodity cost of natural
gas and sharp swings in gas prices. In view of the resulting adverse
economic impacts, Commission policy should not discourage the
development of additional storage capacity through overly narrow
definitions of the relevant market. Furthermore, we should consider a
range of customer protections in implementing our new authority under
NGA section 4(f).
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\10\ Staff Storage Report, at 1 (Sept. 30, 2004).
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C. The Need for Additional Storage
8. Currently, there are approximately 200 storage facilities
subject to the Commission's jurisdiction, with an aggregate working gas
capacity of approximately 2.5 Tcf. Estimates of total domestic working
gas capacity (both subject to and exempt from NGA jurisdiction) range
up to 4.7 Tcf.\11\ Considering future storage needs of the United
States and Canada together, the National Petroleum Council (NPC)
estimates an additional 700 Bcf will be required by 2025.\12\ Although
current and projected storage development is keeping pace with
aggregate national storage demands, underground storage development in
some market areas, such as New England \13\ and the Southwest, is
not.\14\
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\11\ The Department of Energy's Energy Information
Administration (EIA) reports that in 2002 working gas storage
capacity varied between 4.4 and 4.7 Tcf, whereas the Department of
Energy's Office of Fossil Energy reports that in 2003 there were 415
underground storage facilities with a working gas capacity of 3.9
Tcf. The Staff Storage Report considered the range of estimated
aggregate existing working gas and concluded that the present
working gas capacity is 3.5 Tcf, of which 2.5 Tcf is subject to NGA
jurisdiction, and that by improving existing storage reservoirs
(i.e., by reengineering existing facilities to enhance efficiency,
rather than by expanding cavern capacity), there is the potential to
obtain another 200 to 500 Bcf. See Staff Storage Report at 7-10.
\12\ Balancing Natural Gas Policy--Fueling the Demands of a
Growing Economy, NPC, Volume II at 261 (2003).
\13\ New England appears to have little geologic potential for
the development of underground storage facilities.
\14\ See, e.g., Southwestern Gas Storage Technical Conference,
Docket No. AD03-11-000, Transcript at 23, lines 10-14 (Aug. 26,
2003).
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9. In large part, a storage facility's utility is a function of its
location. Gas-fired electric generation is anticipated to
[[Page 77081]]
drive a significant portion of the growth in gas consumption. Electric
demand is expected to grow along with population, and one region of
recent and forecasted population growth is the desert Southwest.\15\
Since electric generation requirements are more transient than steady-
state demand, base-load infrastructure facilities may not be an ideal
means to meet future electric needs. Storage projects, especially high-
deliverability salt cavern facilities, may prove more adaptable than
pipelines in supplying gas on an as-needed basis to match the
fluctuations in the demand profile of electric generation facilities.
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\15\ For example, Arizona's population is expected to increase
by 5.6 million by 2030. U.S. Census Bureau, Population Division,
Interim Projections (April 2005).
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10. Over the last several years, there has been a revival of
interest in expanding existing and building new marine terminal
facilities to import liquefied natural gas (LNG). New storage projects
are being developed to absorb the additional revaporized LNG imports.
To date, most such activity has been in the states along the arc of the
Gulf of Mexico. The natural gas production, gathering, processing,
transportation, and storage infrastructure in this region is extensive.
Storage project sponsors have been able to demonstrate that the
competitive nature of the gas market in this region ensures that new
storage entrants are unlikely to be able to exercise market power, and
hence merit market-based rates for new storage services.\16\ In
contrast, in the Southwest there is no equivalent infrastructure in
place. This is noteworthy because several new LNG terminals are planned
for the Mexican states of Baja California, Sonora, and Sinaloa, and a
significant portion of the LNG received in Mexico is expected to flow
north for consumption in the United States, with the Southwest as a
targeted market. Additional storage in the Southwest could facilitate
the receipt and distribution of these new natural gas supplies.
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\16\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ]
61,095 (2005) and Freebird Gas Storage, LLC, 111 FERC ] 61,054
(2005) (approving new storage projects in the Gulf of Mexico area
that qualified for market-based rates).
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11. The development of underground storage facilities is dictated
(1) by geology, which determines the physical properties of prospective
reservoirs, such as size and cushion gas requirements; (2) by access to
supply; (3) by access to consuming markets; and (4) by access to
pipelines capable of transporting additional volumes of stored gas.
Once a suitable site is identified, whether new storage capacity will
be built turns on matters of construction and operating costs, market
demand and the environment. Severe, adverse and unavoidable
environmental impacts may preclude construction in certain locations.
Investors also may be reluctant to fund a new project because of
unattractive risk/reward prospects due to regulatory pricing
constraints. This NOPR seeks to ensure that the Commission's regulatory
approach does not unnecessarily impede the development of needed
storage projects.
12. For storage services used on a short-term or spot basis, cost-
of-service rates designed on the basis of an annual working gas cycle
may not match up with the market value of storage service during
transient periods of peak demand. Cost-of-service rates are based on
projections of annual revenue requirements and relatively constant
levels of demand. However, in today's markets, wholesale customers are
not always willing to enter into long-term storage contracts sufficient
to assure the storage investors that their annual revenue requirements
will be met. Storage services used on a short-term or spot basis often
do not exhibit the level of demand assumed by cost-of-service rate
design. Permitting storage operators to earn higher revenues from
short-term services during peak demand periods or through other pricing
mechanisms may make an investment in the project economically feasible.
Therefore, the NOPR seeks to lead to increased storage capacity that
could benefit customers while continuing to protect them from the
exercise of market power.
III. Discussion
13. This NOPR is proposing changes to our regulations to permit
storage providers to secure market-based rates under certain
circumstances, while at the same time seeking to protect customers
against potential exercises of market power. First, we are proposing
regulations permitting all companies with storage facilities to seek
market-based rates through a showing that their storage operations do
not have significant market power. We have re-examined our approach to
analyzing market power so that our analysis of whether to permit
market-based rates for storage services better reflects the current
competitive realities of the storage market. Second, for new storage
capacity related to a specific facility placed into service after
August 8, 2005, we are proposing regulations under new NGA section 4(f)
that will authorize market-based rates under certain circumstances.
Under these regulations, storage operators will be required to propose
measures to protect customers from the potential exercise of market
power, and we solicit comment on various approaches that could be used
as generic safeguards in providing such protection. A storage service
provider may apply for market-based rates under either method by filing
appropriate supporting data when it files its certificate application,
or as part of its request for NGPA section 311 rate authorization, or
in a request for declaratory order for authority to charge market-based
rates, but in any case it cannot charge market-based rates until the
Commission concludes that the storage applicant has established that it
lacks significant market power \17\ or that it will adopt adequate
customer protections pursuant to new NGA section 4(f).
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\17\ See Alternatives to Traditional Cost-of-Service Ratemaking
for Natural Gas Pipelines, 74 FERC ] 61,076 at 61,236 (1996), reh'g
and clarification denied, 75 FERC ] 61,024 (1996), petitions denied
and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d
918 (D.C. Cir. 1998); see also Association of Oil Pipe Lines v.
FERC, 83 F.3d 1424, 1442-43 (D.C. Cir. 1996).
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14. The Commission recognizes that the measures proposed herein
will not guarantee the proliferation of new storage projects. For
example, despite a perceived need for new storage in the Southwest,
there have been proposals for new storage projects that have failed to
go forward for reasons unrelated to rate treatment.\18\ Nevertheless,
the flexibility proposed herein may induce the development of new
storage capacity that would otherwise not be built.
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\18\ See, for example, Desert Crossing Gas Storage and
Transportation System LLC, 98 FERC ] 61,277 (2002), a proposal that
has stalled, apparently due to shortfalls in contractual commitments
and environmental concerns, and Copper Eagle Gas Storage L.L.C., 97
FERC ] 62,193 (2001) and 99 FERC ] 61,270 (2002), a proposal delayed
due to expressions of concern by the State of Arizona legislature
raised as a result of security and safety issues associated with the
project's planned location near Luke Air Force Base.
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A. Market Power Analysis for Market-Based Rates
15. The Commission evaluates requests to charge market-based rates
for storage services under the analytical framework of its 1996
Alternative Rate Policy Statement (Policy Statement).\19\ The Policy
Statement establishes procedures for service providers to demonstrate
that they lack significant market power, using criteria recognized by
the courts and similar to those used
[[Page 77082]]
by the Department of Justice and the Federal Trade Commission. Under
the Policy Statement, an applicant seeking authority to charge market-
based rates must demonstrate that it lacks significant market power, or
has adopted conditions that sufficiently mitigate its market power.\20\
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\19\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines and Regulation of Negotiated Transportation
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996), reh'g
and clarification denied, 75 FERC ] 61,024 (1996), petitions denied
and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d
918 (D.C. Cir. 1998).
\20\ The Policy Statement describes significant market power as
the ability to withhold services in a relevant market in order to
produce a significant price increase for a significant period of
time. The Commission adopted 10 percent as its standard price change
threshold but did not preclude parties from arguing for the adoption
of a higher or lower threshold in individual cases. 74 FERC ] 61,076
at 61,232.
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16. The first step in analyzing whether an applicant has
significant market power involves defining the relevant market in terms
of both product market and geographic market. Such markets are defined
by identifying the specific products or services and the suppliers of
those products or services that provide good alternatives to the
applicant's products and services. A good alternative is one that is
available soon enough, has a price that is low enough, and has a
quality high enough to permit customers to substitute the alternative
for the applicant's services.
17. The Commission's initial screening tool for significant market
power is the Herfindahl-Hirschman Index (HHI), a formula that focuses
on the relevant market's concentration as an indicator of the potential
of an applicant to act together with other sellers to raise prices. In
general, an HHI below 1,800 suggests limited market concentration with
less potential for any participant to exercise significant market
power. However, an HHI above 1,800 suggests a higher level of
concentration, and will cause the Commission to increase its scrutiny
of other factors such as the applicant's market share, ease of entry
into the market, the relative size of the applicant's capacity, and/or
the sustainability of a potential attempt by the applicant to exercise
market power.\21\
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\21\ Id.
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18. Since 1996, over 40 storage service providers have sought
market-based rates pursuant to the criteria in the Policy Statement. In
the majority of these cases, the Commission found that the applicant
lacked significant market power and approved market-based rates. In
applying its market concentration and market share screens in these
cases to date, the Commission has looked only to the availability of
other storage alternatives (in the relevant geographic market), in
assessing whether a storage provider can exercise significant market
power. Using this analysis, the Commission has approved all requests
for market-based rates where the applicant was located in the
production area. Due to extensive storage infrastructure in these
regions, the Commission has been able to find a lack of significant
market power based on findings that HHIs in that geographic region are
well below 1,800, and without intense scrutiny of other factors.\22\
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\22\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ]
61, 095 (2005); Egan Hub Partners, L.P., 99 FERC ] 61,269 (2002);
Egan Hub Partners, L.P., 95 FERC ] 61,395 (2001).
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19. On the other hand, storage markets in consuming regions, such
as the Northeast portion of the United States, have fewer storage
providers, and have certain providers with large market shares,
resulting in HHI values sufficient to require a higher level of
Commission scrutiny of factors beyond market concentration.
Nevertheless, the Commission has approved requests in consuming areas
of the Northeast by considering factors other than market
concentration. For example, in Avoca Natural Gas Storage,\23\ the
Commission approved market-based rates despite an HHI for
deliverability of 4,100 in the relevant New York/Pennsylvania market,
specifically noting the small size of Avoca's market share and the
apparent ease of entry into the market as factors mitigating the market
concentration reflected in the HHI.\24\
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\23\ 68 FERC ] 61,045 (1994).
\24\ The Commission reached a similar result analyzing storage
services in Steuben Gas Storage Co., 72 FERC ] 61,102 (1994); New
York State Electric and Gas Corp., 81 FERC ] 61,020 (1997); N.E. Hub
Partners, L.P., 83 FERC ] 61,043 (1998); Seneca Lake Storage, Inc.,
98 FERC ] 61,163 (2002); and Wyckoff Gas Storage Co., LLC, 105 FERC
] 61,027 (2003).
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20. However, in areas where there are truly only a limited number
of storage service providers, the Commission's traditional analysis
will likely result in a storage provider having high HHI values as well
as relatively large market shares. For example, in 2002, Red Lake Gas
Storage, L.P. (Red Lake) proposed to construct a new underground
storage facility in Arizona, an area not currently served by
underground gas storage, and sought approval to charge market-based
rates. The Commission denied Red Lake's market-based rate request based
on its determination that, if built, the market Red Lake would operate
in would be extremely concentrated and it would have substantial market
power.\25\
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\25\ Red Lake Gas Storage, L.P., 102 FERC ] 61,077, reg'h
denied, 103 FERC ] 61,277 (2003).
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21. The Commission is concerned that its current approach to
analyzing market power may be too limiting in some circumstances
because it does not consider the fact that non-storage products and
services in a properly defined geographic market may be good
alternatives to storage services, and thus mitigate a storage
provider's ability to exercise market power. For example, in today's
natural gas markets, pipeline capacity that is unaffiliated with the
storage provider may be a good alternative to the storage service being
offered. A new entrant proposing to offer its storage services in an
area already fully served by existing pipelines would offer customers
in that market area new service options, which to some extent would
compete with existing service providers. Any new independent storage
capacity would be expected to lower the market concentration and
increase available alternatives in such a market.
22. The Commission therefore believes that it is not appropriate to
limit the relevant product market to services offered by competing
storage facilities. Such a narrow definition may incorrectly indicate
that the storage applicant can exercise significant market power when,
in fact, such ability could be constrained by sufficient pipeline
alternatives. The denial of market-based rate authority in these
circumstances could harm customers by providing a disincentive to
storage development, particularly in underserved areas, in situations
where significant market power does not exist.
1. Modifications to Market-Based Rate Test
23. The Commission proposes to reform its market-power test for
natural gas storage operators to more accurately reflect the
competitive conditions in the market for gas storage services. The
Commission believes it is appropriate to adopt a more expansive
definition of the relevant product market for storage to explicitly
include close substitutes for gas storage services. We will evaluate
potential substitutes, such as available pipeline capacity, and local
gas production or LNG terminals, on a case-by-case basis in the context
of individual applications for market-based rates \26\
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\26\ Historically, market area storage was often developed to
provide an economic alternative to more expensive pipeline
expansions. By design, market area storage service used available
off-peak pipeline capacity to inject gas into storage and expanded
pipeline capacity from the storage fields to markets to deliver
incremental supplies during market peaks. Thus, storage plus limited
pipeline expansions provided a good economical alternative to more
expensive production-area-to-market-area pipeline expansions.
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24. In order to show that a non-storage product or service such as
[[Page 77083]]
transportation is a good alternative, the storage applicant would need
to meet the criteria set forth in the Commission's Policy
Statement,\27\ including a showing that the service is available. In
addition, consistent with the Commission's current practice, capacity
on pipeline systems owned or controlled by the applicant's affiliates
should not be considered among the customers' alternatives. Rather,
affiliated capacity will be included in the market share calculated for
the applicant.\28\
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\27\ A good alternative is one that is available soon enough,
has a price that is low enough, and has a quality high enough to
permit customers to substitute the alternative for the applicant's
services.
\28\ See Policy Statement, 74 FERC ] 61,076 at 61,234 (1996).
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25. We provide the following guidance regarding the types of
products that may be close substitutes depending on the facts of a
given case. As a general matter, competition to a storage provider can
come from entities that have the ability to deliver gas in the same
market as the storage facility. In producing areas, storage may compete
with production or LNG supply, in addition to other storage facilities.
In market areas, there may also be local production or LNG available.
In addition, available pipeline capacity can function as a close
substitute by delivering gas at peak times to compete with a storage
provider. For these reasons, we will permit applicants to present
evidence that both available pipeline capacity and local production/LNG
supply in the geographic market area can reasonably be considered as
alternative products to storage services.
26. In addition, firm capacity available through capacity release
can be a good alternative in appropriate circumstances. Under the
Commission's capacity release regulations, holders of firm capacity are
free to release the capacity to other shippers, as well as to make
bundled sales at alternate delivery points. Because of this
flexibility, some portion of firm, contracted-for capacity may have a
sufficiently elastic demand (a willingness to re-sell firm capacity
when price rises) to serve as a good alternative to an applicant's
storage service.
27. A determination of whether capacity release provides a close
substitute will depend on the facts of a particular case. For example,
to the extent an LDC or similar entity holds pipeline capacity that is
needed to meet state-mandated service obligations for captive retail
customers, the capacity holder may have a relatively inelastic demand
that makes it unlikely that the LDC will release that capacity and
therefore that increment of transportation capacity may not be
considered a good alternative during peak periods. However, LDCs and
marketers also serve industrial and other customers under interruptible
contracts which might make that portion of the LDC's capacity a
reasonable alternative.
28. Moreover, in some circumstances, an applicant may be able to
show that even when firm capacity on a pipeline is reserved for captive
customers, e.g., residential and small commercial customers, potential
product or service substitution in downstream markets can result in
capacity becoming available to compete in upstream markets while still
serving captive customers. Under the Commission's open-access program,
competition in a downstream market may create competition in upstream
markets, particularly due to Order No. 636's requirement that pipelines
provide flexible receipt and delivery points and segmentation including
backhaul. Thus, an LDC's ability to buy capacity from another pipeline
or storage facility or to purchase gas in the downstream market may
free it to release upstream capacity, to compete with storage in the
upstream market. This ability to buy capacity from another pipeline or
storage facility or buy gas in the market area is present in the large
downstream markets in the United States including California, Chicago
and the Northeast.
29. Take, for example, the California downstream market. Capacity
held on Transwestern Pipeline Company, LLC (Transwestern) and El Paso
Natural Gas Company (El Paso) could compete with a storage project
located in a market upstream of California if California customers of
these pipelines can buy gas from other sources in the downstream
markets. This could free upstream capacity to compete with the upstream
storage project. For example, Pacific Gas & Electric Company (PG&E)
could buy gas from PG&E Gas Transmission, Northwest Corporation (PGT),
Kern River Gas Transmission Company, an electricity generator in the
California market, withdraw from its own storage, or purchase local
production or regasified LNG to serve its captive or core customers. As
a result, PG&E would be able to either release a portion of its firm
capacity on El Paso, or nominate a secondary delivery at an upstream
point to sell gas in the upstream market. As indicated above, whether
capacity release in a given market would qualify as a close substitute
under the Policy Statement would be determined on the facts of a given
case.
30. Thus, based upon a proper showing, the Commission believes it
would be appropriate for a storage applicant to include pipeline
capacity that is used to serve captive customers if it is demonstrated
that there are reasonable substitutes in the downstream market for
serving load that would free up capacity in the upstream market that
would compete with the storage project.
31. In summary, the Commission proposes to modify its current
approach to analyzing market power to explicitly permit a storage
applicant to propose to include other storage services, as well as non-
storage products and services, including pipeline capacity and local
production/LNG supply as described above, in its calculation of market
concentration using the HHI and in its analysis of market share. The
Commission believes that consideration of these alternative products
will ensure that the Commission's market power analysis accurately
reflects whether a storage applicant is able to exercise significant
market power. The Commission requests comments on this approach as well
as suggestions regarding other approaches for quantifying the amount of
pipeline capacity that would compete with an applicant's storage
services.
2. Filing Procedures and Periodic Review
32. Because most of the applications requesting market-based rates
have been filed by storage providers, the Commission believes it would
be beneficial to adopt specific procedures and filing requirements.
Therefore, the Commission proposes to add a new subpart M to part 284
that requires, among other things, that applications by storage
providers requesting market-based rates contain certain information.
The Commission will continue its practice of approving market-based
rate proposals on a prospective basis only.
33. Approval of blanket certificate authority to provide open
access storage services at market-based rates will subject the storage
service provider to the existing reporting requirements applicable to
open-access service providers under Sec. 284.13 of the Commission's
regulations. The public disclosure of this information will enable the
Commission and the industry to monitor the market-based storage
transactions.
34. In a recent case, the Commission also required an applicant to
file an updated market-power analysis within five years of the date of
the Commission
[[Page 77084]]
order granting authority to charge market-based rates, and every five
years thereafter.\29\ The Commission believes that imposition of a
periodic review is necessary to ensure that our grant of market-based
rates to an applicant remains just and reasonable. Accordingly, the
Commission proposes to add Sec. 284.504 to the regulations to require
storage applicants receiving market-based rates on the basis of a
market power analysis to file updated market-power analyses within five
years of the date of the Commission order granting authority to charge
market-based rates, and every five years thereafter.
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\29\ Liberty Gas Storage LLC, 113 FERC ] 61,247 (2005).
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B. Energy Policy Act of 2005
35. Section 312 of EPAct 2005 adds new NGA section 4(f), which
permits the Commission to authorize new natural gas storage projects
(i.e., projects placed in service after the passage of the Act) to
provide service at market-based rates notwithstanding the fact that the
applicant is unable to demonstrate that it lacks market power. New NGA
section 4(f) requires that, to authorize market-based rates, the
Commission must find 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 Act further requires that the Commission
``ensure that reasonable terms and conditions are in place to protect
consumers'' and that the Commission ``review periodically whether the
market-based rate is just, reasonable, and not unduly discriminatory or
preferential.'' Intrastate pipelines also provide storage services, and
new NGA section 4(f)(1) extends the market-based rate authority to
intrastate pipelines subject to Commission authority under the Natural
Gas Policy Act of 1978.\30\ We discuss below the relevant aspects of
new NGA section 4(f).
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\30\ 15 U.S.C. 3301-3432 (2000). We note that the Commission has
authorized Hinshaw pipelines to be treated the same as LDCs and we
intend the same here. See Certain Transportation, Sales and
Assignments by Pipeline Companies not Subject to Commission
Jurisdiction Under Section 1(c) of the Natural Gas Act, Order No.
63, FERC Stats. & Regs. Regulations Preambles (1997-1981) ] 30,118
(Jan. 9, 1980).
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1. Storage Capacity Eligible for Market-Based Rates
36. Under the new NGA section 4(f), the Commission may authorize
market-based rates ``for new storage capacity related to a specific
facility placed in service after the date of enactment.'' Interstate
natural gas pipelines asked the Commission at the October 12, 2005
Conference on State of Natural Gas Infrastructure to allow post-EPAct
2005 storage expansions of existing storage facilities to qualify under
this provision.\31\
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\31\ Comments of Scott Parker, President, Kinder Morgan Pipeline
Group, State of the Natural Gas Infrastructure Conference, Docket
No. AD05-14-000, Transcript at 120, lines 6-11 (Oct. 12, 2005).
---------------------------------------------------------------------------
37. We believe that the phrase ``placed in service after the date
of enactment'' modifies the term ``facility,'' not the term
``capacity,'' such that it is the facility which must be placed into
service after August 8, 2005, rather than the storage capacity. While
the statute does not define the term ``specific facility,'' the
Commission proposes to interpret that term to consider a new cavern,
reservoir or aquifer that is developed after August 8, 2005, as a
facility qualifying for market-based rates under the Act. We believe
that this interpretation is most consistent with the wording of new NGA
section 4(f). We invite comments on alternative constructions of the
Act. We also invite comments on how, if we construe the Act
differently, the Commission may adequately protect other customers
already receiving service under cost-based authorizations that pre-date
the Commission's new NGA section 4(f) authority.
2. Market-Based Rates Are in the Public Interest and Necessary To
Encourage the Construction of Storage Capacity in the Area Needing
Storage Services
38. Before authorizing market-based rates under new NGA section
4(f), the Commission is required to determine that such rates are in
the public interest and are necessary to encourage the construction of
storage capacity in the area needing storage services. As discussed in
the section below, applicants for authorization under section 4(f) will
be required to demonstrate that customers will be adequately protected
from any abuses of market power by the storage provider. Those customer
protections will serve to ensure that the market-based rates charged
are in the public interest.
39. The Commission proposes to require that the applicant bear the
burden of showing that in its specific circumstances, market-based
rates are necessary to encourage the construction of storage capacity
and that storage services are needed in the area. The Commission
invites comment on how a project applicant might make these showings.
One possible way would be for the applicant to present evidence that it
offered its capacity at cost-based rates through an open season and was
unable to obtain sufficient long-term commitments at those cost-based
rates.
3. Customer Protection
40. New NGA section 4(f) also requires that the Commission, as a
prerequisite for granting market-based rate authority, determine that
customers are adequately protected, and requires the Commission to
ensure that reasonable terms and conditions are in place to protect
them. The Commission proposes to allow the applicant to propose a
relevant method of protecting customers.
41. In general, the Commission believes that customers will be
better off if more storage infrastructure is built. Additional storage
will benefit customers by increasing customer alternatives in a market
and by mitigating price volatility.\32\ Therefore, just as the
Commission balances the benefits of proposed new construction against
residual adverse impacts in determining need under the Certificate
Policy Statement, the Commission proposes, in considering requests for
market-based rate authority under new NGA section 4(f), to balance the
obvious benefits of additional storage capacity in areas needing
storage services against any adverse impacts which might arise from the
potential exercise of market power by the storage provider. The
Commission is concerned that to the extent unnecessary conditions are
imposed, the additional storage infrastructure and the additional
service options they create would be lost to the detriment of potential
customers. Accordingly, the Commission seeks comment on methods of
customer protection which will allow it to achieve the desired balance.
---------------------------------------------------------------------------
\32\ See Pine Prairie Energy Center, LLC, 109 FERC ] 61,215 at P
21 (2004).
---------------------------------------------------------------------------
42. The appropriate method of customer protection may well vary
depending on the facts and circumstances of individual project
proposals. Thus, the Commission proposes to allow each applicant to
propose a method of protecting customers best suited to its project.
However, the Commission seeks comments on whether it would be
beneficial to identify in this rulemaking certain acceptable
approaches. Establishment of generic safeguards would facilitate the
application process for NGA section 4(f) market-based rate authority.
Each applicant, however, would retain the right to propose another
method of protecting customers that might better fit the circumstances
of
[[Page 77085]]
its project. The Commission seeks suggestions of possible generic
safeguards, as well as comments on the methods described below.
43. Entities with market power can exercise that power in two
general areas: (1) The withholding of capacity; and (2) the extraction
of monopoly rents. Thus, there are two approaches to protecting
customers against the exercise of market power: (i) Conditions that
limit the withholding of capacity and (ii) rate protections. We seek
comment on whether there are generic safeguards in either method that
would fairly balance the interests of consumers with the economic
considerations relevant to financing new storage projects. As a general
matter, we favor customer protections that are clear, easy to implement
and oversee, and provide certainty to an applicant that is sufficient
to support financing of a storage project.
44. One approach to customer protection is restrictions on
withholding capacity. Market power can be exercised in those
circumstances where a storage operator can withhold capacity from the
market and raise prices. As long as storage capacity has not been
withheld, ``the fact that shippers may at times bid up contract length
likely reflects not an exercise of [the pipeline's] market power, but
rather competition for scarce capacity.'' \33\ We seek comment whether
by ensuring that the storage operator has sold or made available to the
market all of its capacity (and thus it is not withholding capacity),
customers can be assured that market power is not being exercised by
the storage service provider and that any increase in price is due to
customers' demand for storage relative to the available supply.\34\
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\33\ Process Gas Consumers Group v. FERC, 292 F.3d 831, 837
(D.C. Cir. 2002).
\34\ Id. (affirming Commission determination that prices
determined through an uncapped bidding process were the product of
competitive forces, not the exercise of market power.)
---------------------------------------------------------------------------
45. A difficulty in applying this standard is in defining when
withholding should be found to be indicative of the exercise of market
power. The Commission requests comment on how to apply a prohibition
against withholding which balances the competing needs of the project
sponsor to secure revenues adequate to attract necessary investment in
new infrastructure and of the needs of customers to be protected from
the abuse of market power. For example, would allowing the storage
operator to set a reserve price provide an appropriate balance? Should
the withholding prohibition apply all the time, or only during periods
of peak demand for storage services? If the Commission were to allow
such conditions, how should terms such as ``reserve price'' (a minimum
price below which the storage operator is not required to sell
capacity) and ``period of peak demand'' be defined? \35\ Should a
formal auction process under which the applicant is obligated to sell
all capacity above a reserve price be considered?
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\35\ The Commission has long recognized that open access
pipelines are not required to sell capacity at rates below the
maximum cost-based rate. This form of withholding balances the
pipeline's right to compensatory rates against the customer
protections required by the Natural Gas Act. However, under market-
based rates there is no clear point at which these conflicting
interests may be easily balanced.
---------------------------------------------------------------------------
46. Market power can be exercised in those circumstances where a
storage operator can extract monopoly rents. Rate protections could
take several forms. For example, rate caps could be designed to provide
adequate customer protection while also supporting the financing of new
storage projects. We seek comment on whether there are certain
approaches to rate caps that could be adopted as a generic safeguard.
As another example, the Commission could allow an applicant to
establish a long-term (e.g., 5-10 years) recourse rate that was cost-
based and allow the applicant to negotiate contracts under market-based
rates for shorter-term transactions. Would this approach be sufficient
to protect customers without imposing an undue burden on the financing
of new storage projects? Are there other cost-based rate designs or
price cap methodologies that the Commission should consider to be
generally acceptable if proposed by an applicant under this program?
4. Periodic Review
47. New NGA section 4(f) also requires that, for those entities
granted market-based rates under this authority, the Commission
``review periodically whether the market-based rate is just,
reasonable, and not unduly discriminatory or preferential.''
48. The Commission believes that to encourage the construction of
new storage infrastructure, it must balance the benefits of the
additional options new storage will bring to wholesale customers
against the burdens of various forms of periodic review. Certain forms
of periodic reviews may deter applicants from pursuing projects by
introducing an unnecessary element of regulatory uncertainty. Should
this happen, additional storage infrastructure and the additional
service options it creates would be lost to the detriment of wholesale
customers.
49. For market-based rates approved under NGA section 4(f), the
Commission believes that the periodic review requirement should focus
on the consumer protection safeguards adopted and ensure that these
safeguards are working as intended and effectively preventing the
storage provider from exercising significant market power. In the
Commission's view, an effective approach of complying with the periodic
review requirement is through regular monitoring and taking appropriate
action under section 5 of the NGA either sua sponte or in response to a
complaint. In cases where the consumer protection requirements imposed
prohibit withholding, the Commission believes the existing Sec. 284.13
posting requirements and storage reports combined with publicly
available information regularly reviewed by Staff are sufficient for
this purpose. These require that interstate storage operators post
information about transactions and available capacity, and require the
submission of quarterly index of customers' reports, and submission of
semi-annual storage reports to the Commission. Those storage operators
providing service only under NGPA section 311 are subject to fewer
reporting requirements set forth in Sec. 284.126, which requires an
annual transaction report, and a semi-annual storage report.
50. Therefore, existing posting requirements on contractual
obligations, including prices charged, and levels of available capacity
should provide the information for monitoring whether storage operators
have been exercising market power by withholding. This information is
currently required of all open-access transporters and storage
operators. Should concerns be raised about the practices of any storage
provider charging market-based rates authorized by this Commission,
this information along with more specific information required during
the course of any necessary inquiry in a specific case will provide the
Commission with the information needed to ensure that rates conform to
the statutory requirement. Similarly, the Commission believes that the
lesser burden imposed on NGPA section 311 storage providers, which are
primarily regulated by state authorities, is also adequate for this
purpose. The Commission believes this monitoring approach adequately
complies with the periodic review requirement in NGA section 4(f).
51. The Commission requests comment on this approach and whether
this type of periodic review should be enhanced by other reporting or
transparency requirements. Comments
[[Page 77086]]
should discuss with specificity how other requirements might be imposed
without unduly deterring needed new storage infrastructure investment.
Moreover, the Commission seeks comment on whether the applicant should
be required to demonstrate the continued adequacy of its existing
customer protections every five years. Additionally, in cases where the
Commission adopts customer protection safeguards other than
withholding, the Commission intends to consider whether additional
reporting is necessary to effectively monitor and review whether the
market-based rate is just and reasonable.
52. The Commission, therefore, proposes to revise its part 284
regulations as follows. New subpart M will be added, which addresses
applications for market-based rates for storage. Within new subpart M,
Sec. 284.501, Applicability, explains which pipelines or storage
service providers are eligible to apply for market-based rates under
subpart M, Sec. 284.502, Procedures for applying for market-based
rates, explains what procedures must be followed for submitting an
application. Section 284.503, Market-power determination, explains what
must be submitted as part of an application for market-based rates,
including what information must be submitted related to an applicant's
market power. Section 284.504, Periodic review for market power
determinations, requires the filing of updated market-power analyses by
storage providers granted the authority to charge market-based rates
every five years. Section 284.505, Market-based rates for storage
providers without a market-power determination, explains what a storage
service provider that does not seek a market-power determination must
submit to the Commission in an application for market-based rates.
IV. Information Collection Statement
53. The Office of Management and Budget (OMB) regulations require
that OMB approve certain reporting, record keeping, and public
disclosure (collections of information) imposed by an agency.\36\
Accordingly, pursuant to OMB regulations, the Commission is providing
notice of its proposed information collections to OMB for review under
section 3507(d) of the Paperwork Reduction Act of 1995.\37\
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\36\ 5 CFR 1320.11 (2005).
\37\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------
54. The Commission identifies the information provided under Part
284 subpart M as contained in FERC-545, FERC-546 and FERC-549.
55. Comments are solicited on the Commission's need for this
information, whether the information will have practical utility, the
accuracy of the provided burden estimates, ways to enhance the quality,
utility, and clarity of the information to be collected, and any
suggested methods for minimizing respondent's burden, including the use
of automated information techniques.
56. The burden estimates for complying with additional filing
requirements of this rule pursuant to the procedures in proposed new
sections 284.503 and 284.505 are set forth below. For the most part,
the burden on applicants seeking market-based rates for open-access
storage services will not be changed by this proposed rule. Since 1996,
applications for authority to charge market-based rates have been filed
under the Commission's procedures applicable to NGA section 7 initial
rate determinations, NGA section 4 rate changes, or NGPA section 311
rate determinations under the Commission's existing data collection
authorities. This rule codifies application procedures and filing
requirements which are little changed from the process followed since
1996. Codification of filing requirements will allow applicants to know
what information must be filed with such an application and should
reduce the need for staff to send out follow-up data requests and
respondents to file data responses. To the extent respondents seek
market-based rate authority under the new NGA section 4(f)
authorization process, also codified in these regulations, the burdens
may be lower than if they had filed to seek authorization under the
Commission's 1996 Policy Statement. On average, we expect the burden of
making an application for authority to charge market-based rates under
this proposed rule to be 350 hours.
57. Applicants granted market-based rate approval after the
effective date of a final rule will also be required pursuant to
proposed new Sec. 284.504 to file an updated market power analysis
once every five years. The burden of this requirement will be imposed
on all who operate under market-based rate authorizations granted on
the basis of a market power determination. On average, we expect the
burden of filing an updated market power analysis under this proposed
rule to be 350 hours, imposed once every five years.
58. Over the past several years the Commission has approved market-
based rates for storage services at an average pace of about 4.5 per
year. The Commission is issuing this proposed rule in hopes that more
storage will be constructed and operated, especially in underserved
areas. In reflection of this policy goal, the Commission estimates that
up to 10 filings may be made in a typical year. While this estimate may
be high, in light of recent experience, at worst the Commission is
overestimating the burden.
----------------------------------------------------------------------------------------------------------------
Number of
Data collection Number of responses per Hours per Total annual
respondents respondent response hours
----------------------------------------------------------------------------------------------------------------
FERC-545, FERC-546, or FERC-549............. 10 1 350 3,500
----------------------------------------------------------------------------------------------------------------
Total Annual Hours for Collection: 3,500 hours.
59. Information Collection Costs: The Commission seeks comments on
the cost to comply with these requirements. It has projected the
average annualized cost for all respondents to be $280,000 (3,500 hours
x $80.00 per hour).
60. Title: Gas Pipeline Rates: Rate Change (FERC-545); Certificated
Rate Filings: Gas Pipeline Rates (FERC-546); and Gas Pipeline Rates:
NGPA Title III Transactions (FERC-549).
61. Action: Proposed Information Collection.
62. OMB Control Nos.: 1902-0154, 1902-0155 and 1902-0086
63. The applicant shall not be penalized for failure to respond to
these collections of information unless the collections of information
display valid OMB control numbers.
64. Respondents: Business or other for profit.
65. Frequency of Responses: On occasion.
66. Necessity of Information: On August 8, 2005, Congress enacted
EPAct 2005. Section 312 of EPAct 2005 amends the NGA to insert a new
section, 4(f), which allows the Commission to permit natural gas
storage service providers authority to
[[Page 77087]]
charge market-based rates, subject to conditions and requirements set
forth in the statute. The Commission considers the issuance of these
regulations necessary to implement this Congressional mandate and to
encourage the development of new natural gas storage facilities. The
proposed rule updates the Commission's market power analysis to better
reflect the competitive alternatives to storage available in today's
wholesale natural gas marketplace. These changes should ease the
applicant's burden in showing that a Commission grant of market-based
rate authority is appropriate, thus encouraging the construction and
operation of needed new storage infrastructure. While the new
requirement for respondents to file an update of its market power
analysis imposes a modest new burden, this will allow the Commission to
ensure that customers will be protected from abuse of market power. In
addition, the proposed rule in implementing EPAct 2005 creates
regulations that allow qualifying storage providers to seek authority
to charge market-based rates when the providers cannot or do not
demonstrate they lack market power. The proposed rule revises the
requirements contained in 18 CFR Part 284 to add a new subpart M to
require that applications by storage providers requesting market-based
rates contain certain information including a method for protecting
customers and a showing of why market-based rates are necessary to
encourage storage services.
67. Internal Review: The Commission has assured itself, by means of
internal review, that there is specific, objective support for the
burden estimates associated with the information requirements. The
Commission staff will review the data included in the application to
determine whether the proposed rates are in the public interest as well
as for general industry oversight. Evidence establishing that market-
based rates are necessary to encourage the construction of storage
capacity is sufficient to also demonstrate that market-based rates are
in the public interest. The Commission staff will review periodically
the transactional and operational information provided by those granted
authority to charge market-based rates pursuant to NGA section 4(f) to
determine ``whether the market-based rate is just, reasonable, and not
unduly discriminatory or preferential.'' These requirements conform to
the Commission's plan for efficient information collection,
communication and management within the natural gas industry.
68. Interested persons may obtain information on the reporting
requirements by contacting the following: Federal Energy Regulatory
Commission, 888 First Street, NE, Washington, DC 20426 (Attention:
Michael Miller, Office of the Executive Director, 202-502-8415, fax:
202-273-0873, e-mail: michael.miller@ferc.gov).
69. For submitting comments concerning the collection of
information and the associated burden estimate(s) including suggestions
for reducing this burden, please send your comments to the contact
listed above and to the Office of Management and Budget, Room 10202
NEOB, 725 17th Street, NW., Washington, DC 20503 (Attention: Desk
Officer for the Federal Energy Regulatory Commission, 202-395-4650,
fax: 202-395-7285).
V. Environmental Analysis
70. The Commission is required to prepare an Environmental
Assessment or an Environmental Impact Statement for any action that may
have a significant adverse effect on the human environment.\38\ The
Commission has categorically excluded certain actions from these
requirements as not having a significant effect on the human
environment.\39\ The actions proposed to be taken here fall within
categorical exclusions in the Commission's regulations for rules that
are clarifying, corrective, or procedural, for information gathering,
analysis, and dissemination, and for sales, exchange, and
transportation of natural gas that requires no construction of
facilities.\40\ Therefore, an environmental review is unnecessary and
has not been prepared in this rulemaking. We note that environmental
review will be prepared in each proceeding in which an applicant
requests authority to construct facilities that might become subject to
the rate-setting requirements of this rule.
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\38\ Order No. 486, Regulations Implementing the National
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. &
Regs. Preambles 1986-1990 ] 30,783 (1987).
\39\ 18 CFR 380.4 (2005).
\40\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27)
(2005).
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VI. Regulatory Flexibility Act Certification
71. The Regulatory Flexibility Act of 1980 (RFA) \41\ generally
requires a description and analysis of the impact the proposed rule
will have on small entities or a certification that the proposed rule
will not have significant economic impact on a substantial number of
small entities. However, the RFA does not define ``significant'' or
``substantial'' instead leaving it up to an agency to determine the
impacts of its regulations on small entities. In determining the
impacts, the RFA proposes that agencies consider alternatives that are
less burdensome to small entities and an explanation of why an
alternative was rejected. The RFA provides four examples of
alternatives including tiering, classification and simplification,
performance rather than design standards, and exemptions or waivers.
The Small Business size classification standard for natural gas storage
operators is that their revenues are not in excess of $6 million per
year.\42\ In the Commission's experience, it has found that the
smallest entity applying for a market-based storage application had
projected revenues that exceeded the SBA standard. Agencies are not
required to make such an analysis if a rule would not have a
significant adverse impact on a substantial number of small entities.
The Commission does not believe that this proposed rule would have such
an effect on small business entities, since the proposed amendments to
our regulations would apply only to natural gas companies, most of
which are not small businesses. However, should a small entity believe
that this rule will have a significant impact on them, they may apply
to the Commission for a waiver. Accordingly, pursuant to section 605(b)
of the RFA, the Commission proposes to certify that the regulations
proposed herein will not have a significant adverse impact on a
substantial number of small entities.
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\41\ 5 U.S.C. 601-612.
\42\ http://www.sba.gov/size/sizetable2002.html.
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VII. Comment Procedures
72. The Commission invites interested persons to submit comments on
the matters and issues proposed in this notice to be adopted, including
any related matters or alternative proposals that commenters may wish
to discuss. Comments are due February 27, 2006. Comments must refer to
Docket Nos. RM05-23-000 and AD04-11-000, and must include the
commenter's name, the organization they represent, if applicable, and
their address in their comments. Comments may be filed either in
electronic or paper format.
73. Comments may be filed electronically via the eFiling link on
the Commission's Web site at http://www.ferc.gov. The Commission
accepts most standard word processing formats and commenters may attach
additional files with supporting information in
[[Page 77088]]
certain other file formats. Commenters filing electronically do not
need to make a paper filing. Commenters that are not able to file
comments electronically must send an original and 14 copies of their
comments to: Federal Energy Regulatory Commission, Office of the
Secretary, 888 First Street, NE., Washington, DC 20426.
74. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters on this proposal are
not required to serve copies of their comments on other commenters.
VIII. Document Availability
75. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's
Public Reference Room during normal business hours (8:30 a.m. to 5 p.m.
Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426.
76. From FERC's Home Page on the Internet, this information is
available in the Commission's document management system, elibrary. The
full text of this document is available on elibrary in PDF and
Microsoft Word format for viewing, printing, and/or downloading. To
access this document in elibrary, type the docket number excluding the
last three digits of this document in the docket number field.
77. User assistance is available for elibrary and the FERC's
website during normal business hours. For assistance, please contact
FERC Online Support at 1-866-208-3676 (toll free) or 202-502-6652 (e-
mail at FERCOnlineSupport@ferc.gov), or the Public Reference Room at
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public.referenceroom@ferc.gov.
List of Subjects in 18 CFR Part 284
Continental shelf, Incorporation by reference, Natural gas,
Reporting and recordkeeping requirements.
By direction of the Commission.
Magalie R. Salas,
Secretary.
In consideration of the foregoing, the Commission proposes to amend
part 284, Chapter I, Title 18, Code of Federal Regulations, as set
forth below.
PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES
1. The authority citation for part 284 continues to read as
follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C. 7101-7352;
43 U.S.C 1331-1356.
2. New subpart M is added to read as follows:
Subpart M--Applications for Market-Based Rates for Storage
Sec.
284.501 Applicability.
284.502 Procedures for applying for market-based rates.
284.503 Market power determination.
284.504 Periodic review requirement for market power determinations.
284.505 Market-based rates for storage providers without a market-
power determination.
Sec. 284.501 Applicability.
Any pipeline or storage service provider that provides or will
provide service under subparts B, C, and G of this part, and that
wishes to provide storage and storage-related services at market-based
rates must conform to the requirements in subpart M.
Sec. 284.502 Procedures for applying for market-based rates.
(a) Applications for market-based rates may be filed with
certificate applications. Service, notice, intervention, and protest
procedures for such filings will conform with those applicable to the
certificate application.
(b) With respect to applications not filed as part of certificate
applications,
(1) Applicants providing service under subpart B or subpart G of
this part must file a request for declaratory order and comply with the
service and filing requirements of part 154 of this chapter.
Interventions and protest to applications for market-based rates must
be filed within 30 days of the application unless the notice issued by
the Commission provides otherwise.
(2) Applicants providing service under subpart C of this part must
file in accordance with the requirements of that subpart.
(c) An applicant cannot charge market-based rates under this
subpart of this part until its application has been accepted by the
Commission. Once accepted, the applicant can make the appropriate
filing necessary to set its market-based rates into effect.
Sec. 284.503 Market power determination.
An applicant may apply for market-based rates by filing a request
for a market power determination that complies with the following:
(a) The applicant must set forth its specific request and
adequately demonstrate that it lacks market power in the market to be
served, and must include an executive summary of its statement of
position and a statement of material facts in addition to its complete
statement of position. The statement of material facts must include
citation to the supporting statements, exhibits, affidavits, and
prepared testimony.
(b) The applicant must include with its application the following
information:
(1) Statement A--geographic market. This statement must describe
the geographic markets for storage services in which the applicant
seeks to establish that it lacks significant market power. It must
include the market related to the service for which it proposes to
charge market-based rates. The statement must explain why the
applicant's method for selecting the geographic markets is appropriate.
(2) Statement B--product market. This statement must identify the
product market or markets for which the applicant seeks to establish
that it lacks significant market power. The statement must explain why
the particular product definition is appropriate.
(3) Statement C--the applicant's facilities and services. This
statement must describe the applicant's own facilities and services,
and those of all parent, subsidiary, or affiliated companies, in the
relevant markets identified in Statements A and B in paragraphs (b) (1)
and (2) of this section. The statement must include all pertinent data
about the storage facilities and services.
(4) Statement D--competitive alternatives. This statement must
describe available alternatives in competition with the applicant in
the relevant markets and other competition constraining the applicant's
rates in those markets. Such proposed alternatives may include other
storage, local gas supply, LNG, and pipeline capacity. These
alternatives must be shown to be reasonably available as a substitute
in the area to be served soon enough, at a price low enough, and with a
quality high enough to be a reasonable alternative to the applicant's
services. Available capacity (transportation, storage, LNG,or
production) owned or controlled by affiliates of the applicant in the
relevant market shall be clearly and fully identified and may not be
considered as alternatives competing
[[Page 77089]]
with the applicant. Rather, the capacity of an applicant's affiliates
is to be included in the market share calculated for the applicant. To
the extent available, the statement must include all pertinent data
about storage or other alternatives and other constraining competition.
(5) Statement E--potential competition. This statement must
describe potential competition in the relevant markets. To the extent
available, the statement must include data about the potential
competitors, including their costs, and their distance in miles from
the applicant's facilities and major consuming markets. This statement
must also describe any relevant barriers to entry and the applicant's
assessment of whether ease of entry is an effective counter to attempts
to exercise market power in the relevant markets.
(6) Statement F--maps. This statement must consist of maps showing
the applicant's principal facilities, pipelines to which the applicant
intends to interconnect and other pipelines within the area to be
served, the direction of flow of each line, the location of the
alternatives to the applicant's service offerings, including their
distance in miles from the applicant's facility. The statement must
include a general system map and maps by geographic markets. The
information required by this statement may be on separate pages.
(7) Statement G--market power measures. This statement must set
forth the calculation of the market concentration of the relevant
markets using the Herfindahl-Hirschman Index. The statement must also
set forth the applicant's market share, inclusive of affiliated service
offerings, in the markets to be served. The statement must also set
forth the calculation of other market power measures relied on by the
applicant. The statement must include complete particulars about the
applicant's calculations.
(8) Statement H--other factors. This statement must describe any
other factors that bear on the issue of whether the applicant lacks
significant market power in the relevant markets. The description must
explain why those other factors are pertinent.
(9) Statement I--prepared testimony. This statement must include
the proposed testimony in support of the application and will serve as
the applicant's case-in-chief, if the Commission sets the application
for hearing. The proposed witness must subscribe to the testimony and
swear that all statements of fact contained in the proposed testimony
are true and correct to the best of his or her knowledge, information,
and belief.
Sec. 284.504 Periodic review requirement for market power
determinations.
Applicants granted the authority to charge market-based rates under
Sec. 284.503 are required to file an updated market-power analysis
within five years of the date of the Commission order granting
authority to charge market-based rates, and every five years
thereafter.
Sec. 284.505 Market-based rates for storage providers without a
market-power determination.
(a) Any storage service provider seeking market-based rates for
storage capacity, pursuant to the authority of Section 4(f) of the
Natural Gas Act, related to a specific facility put into service after
August 8, 2005, may apply for market-based rates by complying with the
following requirements:
(1) The storage service provider must demonstrate that market-based
rates are necessary to encourage the construction of the storage
capacity in the area needing storage services; and
(2) The storage service provider must provide a means of protecting
customers from the potential exercise of market power.
(b) Any storage service provider seeking market-based rates for
storage capacity pursuant to this section will be presumed by the
Commission to have market power.
[FR Doc. E5-8031 Filed 12-28-05; 8:45 am]
BILLING CODE 6717-01-P