Federal Energy Regulatory Commission

Tuesday,

June 27, 2006

Part II

Department of

Energy

Federal Energy Regulatory Commission

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18 CFR Part 284

Rate Regulation of Certain Natural Gas

Storage Facilities; Final Rule

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Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Rules and Regulations

Before Commissioners: Joseph T.

Kelliher, Chairman; Nora Mead

Brownell, and Suedeen G. Kelly

DEPARTMENT OF ENERGY

Federal Energy Regulatory

Commission

I. Introduction

18 CFR Part 284

[Docket Nos. RM05–23–000, AD04–11–000;

Order No. 678]

Rate Regulation of Certain Natural Gas

Storage Facilities

Issued June 19, 2006.

AGENCY: Federal Energy Regulatory

Commission, DOE.

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ACTION: Final rule.

SUMMARY: The Federal Energy

Regulatory Commission (Commission) is

amending its regulations to establish

criteria for obtaining market-based rates

for storage services offered under part

284. First, the Commission is modifying

its market-power analysis to better

reflect the competitive alternatives to

storage. Second, pursuant to the Energy

Policy Act of 2005, the Commission is

promulgating 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 where customers

are adequately protected. These

revisions are intended to facilitate the

development of new natural gas storage

capacity while protecting customers.

DATES: Effective Date: The rule will

become effective July 27, 2006.

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.

Robert McLean, Office of General

Counsel, Federal Energy Regulatory

Commission, 888 First Street, NE.,

Washington, DC 20426. (202) 502–

8156.

Ed Murrell, Office of Energy Markets

and Reliability, 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:

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1. The Final Rule reforms the

Commission’s current pricing policies to

ensure access to storage services on a

nondiscriminatory basis at just and

reasonable rates and to ensure that

sufficient storage capacity will be

available to meet anticipated increases

in market demand. To achieve these

goals, the Commission is modifying its

market-power analysis to permit the

consideration of close substitutes to

storage in defining the relevant product

market. This will ensure that marketbased rates are not denied because of an

overly narrow definition of the relevant

market. Second, the Commission is

adopting regulations implementing

section 312 of the Energy Policy Act of

2005 (EPAct 2005 or the Act),1 which

permits the Commission, in appropriate

circumstances, to authorize storage

providers to charge market-based rates

for service utilizing new capacity even

when the storage providers cannot (or

do not) demonstrate that they lack

market power. The revisions adopted in

the Final Rule are intended to facilitate

the development of new natural gas

storage capacity while protecting

customers.

II. Background

2. On August 8, 2005, EPAct 2005 was

signed into law. Section 312 of the Act,

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 marketbased rates even if it is unable to show

that it lacks market power if the

Commission determines that marketbased 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

3. The enactment of EPAct 2005

added 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

1 Energy Policy Act of 2005, Pub. L. 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,

section 312, 119 Stat. 594, 688 (2005).

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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.

4. On December 22, 2005, the

Commission issued a notice of proposed

rulemaking (NOPR) in which it

proposed a two-prong approach for

reforming its current storage pricing

policy.6 First, the Commission proposed

modifications to its traditional marketpower analysis to permit the

consideration of close substitutes to

storage in defining the relevant product

market. Second, the Commission

proposed regulations to implement

section 312 of EPAct 2005 that permits

the Commission, in appropriate

circumstances, to authorize storage

providers to charge market-based rates

for service utilizing new capacity even

when the storage providers cannot (or

do not) demonstrate that they lack

market power.

5. The Commission received

numerous comments from a variety of

entities.7 Based on careful consideration

of the comments submitted in response

to the NOPR, the Commission adopts a

Final Rule that generally follows the

approach of the NOPR with certain

exceptions.

6. First, the Final Rule modifies the

Commission’s market-power analysis to

better reflect the competitive

alternatives to storage. Specifically, we

adopt a more expansive definition of the

relevant product market for storage to

explicitly include close substitutes for

gas storage services, including pipeline

capacity, local production, and liquefied

natural gas (LNG) supplies. The

Commission will evaluate potential

substitutes in the context of individual

applications for market-based rates. The

Final Rule eliminates the NOPR’s

requirement that storage providers

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).

6 Rate Regulation of Certain Underground Storage

Facilities, Notice of Proposed Rulemaking, 70 FR

77079 (Dec. 22, 2005), FERC Stats. & Regs.,

Regulations Preambles ¶ 32,595 (Dec. 29, 2005).

7 A list of the commentors is included as an

appendix to this Final Rule. We have not

considered the supplemental reply comments filed

by INGAA on May 31, 2006, due to the lateness of

the filing.

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granted market-based rates on the basis

of a market power analysis file updated

market-power analyses every five years.

Instead, storage providers with market

shares of ten percent or less would

generally be exempt from such a

requirement. We will consider in

individual cases whether the specific

facts and circumstances presented

require additional reporting for other

storage providers.

7. Second, the Final Rule adopts

regulations implementing section 312 of

EPAct 2005, which permits the

Commission to authorize market-based

rates even if a lack of market power has

not been demonstrated, in

circumstances where market-based rates

are in the public interest and necessary

to encourage the construction of storage

capacity in the area needing storage

services and that customers are

adequately protected. Finding that the

definition of facilities eligible for

treatment under new NGA section 4(f) is

ambiguous, the Commission defines

‘‘facilities’’ as it traditionally has for

purposes of the certification

requirements of section 7(c). However,

to receive market-based rate

authorization, the storage provider will

still need to satisfy the other

requirements of section 4(f).

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III. Need and Purpose for the Rule

8. The underground storage of natural

gas is critical in assuring that overall

demands and specific requirements of

natural gas customers are met.

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.8

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 2025.9 Although current

8 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.

9 Balancing Natural Gas Policy—Fueling the

Demands of a Growing Economy, NPC, Volume II

at 261 (2003).

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and projected storage development is

keeping pace with aggregate national

storage demands, underground storage

development in some market areas, such

as New England 10 and the Southwest, is

not.11

9. Over the last several years, there

has been a marked increase in the cost

of natural gas and sharp swings in gas

prices. Storage can have 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.’ ’’ 12

10. In consideration of these factors,

the Commission is amending its

regulatory policies in the Final Rule in

order to facilitate the development of

new natural gas storage capacity to

ensure that adequate storage capacity

will be available to meet anticipated

market demand and to mitigate natural

gas price volatility, while continuing to

protect consumers from the exercise of

market power.

IV. Discussion

A. Market-Power Test

11. The Commission evaluates

requests to charge market-based rates for

storage services under the analytical

framework of its 1996 Policy Statement

on Alternatives to Traditional Cost-ofService Ratemaking for Natural Gas

Pipelines and Regulation of Negotiated

Transportation Services of Natural Gas

Pipelines (Policy Statement).13 In the

NOPR, the Commission observed that 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

10 New England appears to have little geologic

potential for the development of underground

storage facilities.

11 See, e.g., Southwestern Gas Storage Technical

Conference, Docket No. AD03–11–000, Transcript at

23, lines 10–14 (Aug. 26, 2003).

12 Staff Storage Report, at 1 (Sept. 30, 2004).

13 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).

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market), in assessing whether a storage

provider can exercise significant market

power. Noting that its current approach

to analyzing market power may be too

limiting in some circumstances in

today’s natural gas markets, the

Commission proposed 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

proposed to adopt a more expansive

definition of the relevant product

market for storage to explicitly include

close substitutes for gas storage service,

such as appropriate combinations of

available pipeline capacity, and local

gas production or LNG terminals, on a

case-by-case basis in the context of

individual applications for marketbased rates. We posited 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.

12. We explained that, 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 storage. For these reasons, we

suggested it would be appropriate to

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.

13. In addition, we suggested that 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. While pipeline capacity held by

a local distribution company (LDC) that

is needed to meet state-mandated

service obligations for captive retail

customers may not be considered a good

alternative during peak periods, LDCs

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and marketers also serve industrial and

other customers under interruptible

contracts. That portion of the LDC’s

capacity might constitute a reasonable

alternative.

14. Moreover, we stated that, 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 might result in

capacity becoming available in

upstream markets to compete with

storage while captive customers

continued to be served. 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 to

buy gas in the market area is present in

the large downstream markets in the

United States including California,

Chicago and the Northeast.

15. The Commission requested

comments on these alternatives, as well

as suggestions regarding other

approaches for quantifying the amount

of pipeline capacity that might be

available to compete with an applicant’s

storage services.

1. Expansion of the Product Market

Definition

Comments

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16. A number of commentors

generally support the Commission’s

proposal to liberalize the Commission’s

market-power test for market-based rate

authorization by expanding the kinds of

storage alternatives that it will consider

in analyzing an applicant’s market

power with certain proposed changes

discussed below.14 They agree with the

Commission that available pipeline

capacity, capacity release, local gas

production and LNG terminals all may

serve as adequate substitutes for gas

storage in appropriate circumstances.

These commentors also state that they

14 Comments of INGAA, Northern Natural, Duke,

Williston Basin, the NiSource Pipelines, Dominion,

Sempra, DTE, NYPSC, Falcon, EnCana, Bridgeline,

Unocal, Enstor and Jefferson Storage. The full

names of commentors and the abbreviations used in

this document are shown in the appendix.

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believe that the Commission’s proposal

should provide further incentives for

the development of new natural gas

storage capacity that will improve gas

service reliability and promote price

stability in the future. The NYPSC

agrees with the Commission that local

gas production, pipeline capacity and

LNG potentially can be offered as

alternatives to storage service but

requests the Commission to adhere to

the case-by-case approach and to allow

for consideration of whether there are

realistic alternatives available on a firm

and long-term basis.

17. On the other hand, several

commentors oppose changes to the

current market-power standards on

grounds that liberalizing these standards

is unnecessary and potentially harmful

to customers. AGA, APGA, NGSA, SGR

and UET all question whether the

proposed changes would actually

encourage meaningful development of

new storage facilities. APGA questions

the NOPR’s assumption that a storage

capacity shortage exists. APGA states

that while the NOPR discusses the

upcoming need for an additional 700

Bcf of storage capacity by 2025, the

NOPR does not suggest, much less

demonstrate, that the need will not be

fulfilled. NGSA submits that there is

little evidence to suggest that the

Commission’s current pricing policies

have had a major influence on

developers’ decisions to move forward

with potential storage projects. Rather,

NGSA contends that there are

multitudes of technical and commercial

factors that influence a potential storage

developer’s decision to build storage

that are equal or paramount to the

Commission’s regulatory pricing

policies including geological

limitations, environmental requirements

and NIMBY issues.

18. AGA and SGR assert that the

proposed changes would simply

provide existing storage providers the

opportunity to charge higher prices for

services already available to the market

and create opportunities for crosssubsidies between storage and

transportation services. AGA also fears

that liberalizing the market-power

standards would vastly increase the

scope and complexity of the marketpower determination, while APGA

submits that the NOPR’s proposal to

expand the definition of the relevant

product market for storage would

diminish substantially the showing

required to obtain market-based rates.

19. APGA also argues that the

proposal is inconsistent with the Policy

Statement that defines a ‘‘good

alternative’’ as one that must have the

same qualities of timeliness, price and

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quality of the storage service it would

replace. Specifically, APGA submits

that pipeline capacity (and local

production/LNG and released capacity)

are not good alternatives, much less

‘‘close substitutes’’ in terms of quality of

service to the high deliverability storage

service that the NOPR seeks to promote.

Similarly, APGA argues that in terms of

price, pipeline capacity is not a good

alternative or close substitute to storage

service, because pipeline capacity is

more expensive than storage capacity.

20. NGSA submits that the expansion

of the relevant product market will not

provide customers with the equivalent

services uniquely offered by new storage

facilities and examining market

elasticity to determine whether product

substitution can occur in downstream

markets, as suggested in the NOPR, is

simply not realistic. NGSA and PGC

stress that the criteria and framework

that the Commission utilizes to review

market-based rate applications have

proven to be effective and flexible,

resulting in the approval of marketbased rates for the majority of

applicants. Moreover, NGSA points out

there are flexible cost-based rates

available to promote new storage

capacity without making wholesale

changes to the Commission’s exiting

market-power analysis. NGSA urges the

Commission to consider whether it

would be more appropriate instead to

adopt changes that will rectify the

unique problems identified in specific

regions by undertaking a generic

proceeding to: (1) Identify where new

storage capacity is needed; (2) document

known proposals in these regions; (3)

determine what specific obstacles may

exist; and (4) establish regulatory

policies to encourage additional storage

construction in those areas.

21. IPAA expresses concern with the

Commission’s proposal to adopt a more

expansive definition of the relevant

product market for storage to explicitly

include close substitutes for gas storage

services. IPAA urges the Commission to

carefully consider the potential impact

of this expanded definition of relevant

product market for storage on other costbased services regulated by the

Commission. (e.g., the regulation of

interstate pipeline transportation rates).

For example, IPAA states that if

pipeline capacity and released capacity

can serve as possible substitutes for

competing storage, then the potential

exists for storage to serve as a substitute

for the availability of competing

pipeline capacity in evaluating

applications for market-based

transportation rates. IPAA states it most

likely would have concern with efforts

to expand the acceptance of market-

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based transportation rates. Thus, IPAA

strongly encourages the Commission to

consider the effect the expanded

definition of relevant product market

could have on all services under the

Commission’s jurisdiction, not just

within the confines of an individual

application by a storage operator. NGSA

requests that the Commission clarify

that these changes will not be used for

the future evaluation of market power

for interstate transportation services but

only for new storage facilities as it has

proposed for the EPAct 2005 provisions.

22. UET asserts that the Commission

has not demonstrated that the proposed

change in the market-power analysis is

needed to reduce natural gas price

volatility because price volatility is

mitigated on a national, as opposed to

a regional basis, and storage

development is keeping pace with

national demands. UET also argues the

proposed change is not necessary to

solve regional storage capacity shortages

in underserved markets such as New

England and the Southwest, because

proposals for new storage in these areas

have failed for reasons other than rate

treatment. Finally, UET asserts that the

proposed rule is not necessary to cater

to power generation load because the

Commission is able to meet the needs of

power generation customers by

developing rate designs that would

permit storage operators to earn higher

revenues from short-term services

during peak periods.

23. UET also maintains that changing

the market-power analysis as proposed

could discourage rather than encourage

expansion of existing storage facilities.

It asserts that cost-based rates treat the

storage company fairly and also enable

storage customers to participate

sufficiently in the natural gas value

chain that runs from the wellhead to the

burner tip. UET alleges that marketbased rates may disrupt the value chain

to such an extent that potential storage

customers, particularly marketers, will

simply choose to exit the market rather

than serve as the vehicle for funneling

market-based rate revenues to storage

providers. Thus, UET maintains that

storage projects, for which there is a

demand at cost-based rates, may not be

built because the demand is not there

for a project that would qualify for

market-based rates under the relaxed

proposed standards. In addition, noting

that price volatility has increased as the

number of major marketers has

decreased, UET urges the Commission

to exercise care in embracing marketbased rates to encourage new storage in

the name of price volatility mitigation

when those rates may actually increase

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price volatility by further decreasing the

number of marketers.

24. Finally, AGA, NGSA and Process

Consumers argue that the NOPR is

unnecessary given the alternative of

section 4(f) of the NGA. For example,

AGA asserts that the proposed

regulations pursuant to new NGA

section 4(f) fully address the need to

provide incentives for new storage

services and there is no need to provide

more latitude for qualifying for marketbased rates for existing storage facilities.

At most, AGA asserts the Commission

should considering broadening the

market-power test only after it has had

an opportunity to assess the impact and

outcome of the new rules under section

4(f), a minimum of two years after

implementing regulations under section

4(f). Similarly, NGSA while supporting

the Commission’s goal of maximizing

storage believes that liberalizing the

traditional market-power test is

unsupported and unnecessary. Given

that Congress enacted EPAct 2005 as the

primary vehicle to encourage the

development of new storage facilities,

NGSA urges the Commission to focus its

attention in this proceeding on properly

implementing EPAct 2005, and not

engaging in an unnecessary effort to

provide incentives for new storage by

revising the existing market-power test.

At a minimum, NGSA urges the

Commission to take an incremental

approach and maintain the existing

market-power procedures, at least until

it can assess whether its implementation

of the EPAct 2005 provisions can

provide a sufficient and workable

program that provides a valid incentive

to potential new storage developers.

Commission Determination

25. The Commission finds 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,

including pipeline capacity and local

production/LNG supplies. As explained

below, this modification to our marketpower analysis better reflects the

competitive alternatives to storage and

is supported by changes in the natural

gas markets that have occurred since the

mid 1990s. In today’s markets, these

non-storage products may well serve as

adequate substitutes for gas storage in

appropriate circumstances.

26. As we explained in Order No. 637,

the deregulation of wellhead natural gas

prices, the advent of open-access

transportation and the requirement that

interstate pipelines offer unbundled

open-access transportation service, has

increased competition and efficiency in

both the gas commodity and

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transportation market.15 Market centers

have developed both upstream in the

production area and downstream in the

market area, providing shippers with

greater gas and capacity choices. The

wholesale market has grown with new

participants that have the ability to

deliver gas into many markets. The

expansion of the product market

definition to include close substitutes

simply recognizes that buyers and

sellers have a greater number of

alternatives from which to choose in

order to obtain and deliver gas supplies.

From an end-use customer’s

perspective, gas is fungible, whether it

comes from storage, local production or

more distant supplies transported by

pipelines. Competition with storage can

come from any of these sources that can

deliver gas in the same market as the

storage facility. For these reasons, we

will permit a storage applicant to

include non-storage products and

services, including pipeline capacity

and local production/LNG supply in the

calculation of its market concentration

and market share.

27. The Commission recognizes,

however, that local production, LNG

and pipeline capacity may not be good

alternatives to an applicant’s storage

services in all circumstances. For a nonstorage product to be a good alternative

it must be available soon enough, have

a price low enough and have a quality

high enough to permit customers to

substitute the alternative for the

applicant’s services. For this reason, we

will evaluate potential substitutes in the

context of individual applications for

market-based rates. In those

proceedings, the applicant will have the

burden to demonstrate that the nonstorage products and services, as well as

the other storage services, used in its

calculation of market concentration and

market share are good substitutes. Any

party to the proceeding can challenge

the inclusion of a particular product on

the grounds that it does not meet the

qualifications for a good alternative.

Based on the record in the proceeding,

the Commission will determine if the

proposed product is in fact a good

alternative that will limit the exercise of

significant market power by the

applicant.

28. In the NOPR, we noted that

although current and projected storage

development is keeping pace with

aggregate demands, underground

storage development in some market

15 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 at

31,249–63 (Feb. 9, 2000).

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areas, such as New England and the

Southwest, is not.16 We also

acknowledged that our rate policies will

not guarantee the proliferation of new

storage projects because storage projects

fail to for reasons other than rate

treatment.17 A few commentors claim

that the proposed expansion of the

product market is not supported

because we have not shown that a

storage capacity shortage exists or that

market-based rates will ensure that

storage gets built. We disagree that such

findings are necessary to support the

proposed change to our market-power

analysis. The courts have permitted the

Commission to institute flexible pricing

to improve market efficiency so long as

the overall regulatory scheme protects

against the exercise of market power

and protects and results in just and

reasonable rates.18 Where the

Commission determines that an

applicant lacks market power, the

Commission may depart from a strictly

cost-based determination of rates, and

approve rates reached as the result of

competition. The Commission’s

authority to approve market-based rates

has been approved by the courts when

the Commission has found sufficient

protection against the exercise of market

power.19

29. The Commission finds that its

proposed regulatory change will protect

against the exercise of market power. In

analyzing market-based rate storage

proposals, the Commission will

continue to addresses whether the

applicant has market power; that is, can

the applicant: (1) Withhold or restrict

services to increase price a significant

amount for a significant period of time,

or (2) discriminate unduly in terms of

price or conditions. Before the

Commission can conclude that a seller

cannot exercise market power it must

either: (1) Find that there is a lack of

market power because customers have

sufficient ‘‘good alternatives,’’ or (2)

mitigate the market power (i.e. permit

market-based pricing only if specified

conditions are met that prevent the

exercise of market power). The only

change the Commission is adopting in

this Final Rule is to recognize that in

today’s market, a storage applicant’s

ability to exercise market power can be

16 NOPR at P 8.

jlentini on PROD1PC65 with RULES2

17 Id. at P 14.

18 Environmental Action v. FERC, 996 F.2d 401,

410 (D.C. Cir. 1993).

19 Elizabethtown Gas Co. v. FERC, 10 F.3d 866,

870–71 (D.C. 1993) (Elizabethtown); Louisiana

Energy and Power Authority v. FERC, 141 F.3d 364,

369–370 (D.C. Cir. 1998); Interstate Natural Gas

Association of America v. FERC, 285 F.3d 18, 31–

34 ((D.C. Cir.) 2002); California ex rel. Lockyer v.

FERC, 383 F.3d 1006, 1013–1014 (9th Cir. 2004).

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constrained not only by other storage

services but also by some combination

of pipeline and other gas supply

alternatives.

30. Similarly, we do not share

commentors’ views that we should not

adopt the proposed revisions to the

product market definition because it

may result in more complex

proceedings or that there are flexible

cost-based rates available to storage

providers. The Commission’s proposal

is justified because it better reflects the

competitive alternatives to storage.

31. We also find that commentors’

assertion that our action here will

inappropriately raise rates ignores the

connection recognized by the courts

between competition and just and

reasonable rates. In Elizabethtown, the

court concluded that because of the

competition in the pipeline’s sales

market it appeared that the pipeline

would not be able to raise its price

above the competitive level without

losing substantial business to other

sellers. ‘‘Such market discipline

provides strong reason to believe that

Transco will be able to charge only a

price that is ‘just and reasonable’ within

the meaning of section 4 of the NGA.’’ 20

Granting market-based rates in

situations where there are sufficient

alternatives prevents the exercise of

significant market power. A new entrant

found to lack market power offers

another choice to existing customers,

and in the Commission’s experience,

more choice frequently leads to lower,

not higher, rates.

32. We also reject commentors’ claim

that Congress’ enactment of section 312

of EPAct 2005 bars the Commission

from expanding the product market

definition for storage applicants seeking

a finding that the applicant does not

possess market power. These

commentors fail to cite to any provision

in section 312 of the Act that suggests

Congress intended to limit in any way

the Commission’s ability to revise or

modify its traditional market-power

analysis. Rather in section 312, Congress

established an alternative procedure to

permit storage service providers that are

unable to show that they lack market

power to negotiate market-based rates if

the Commission determines that marketbased rates are in the public interest, are

necessary to encourage needed storage

infrastructure and that customers are

adequately protected. The Commission

finds it is reasonable to proceed under

both prongs.

33. As to IPAA’s and NGSA’s concern

that our actions here not prejudge the

issue of whether storage can serve as a

20 10 F.3d 866, at 871 (D.C. Cir. 1993).

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substitute for the availability of

competing pipeline capacity in

evaluating applications for market-based

transportation rates, we clarify that it is

not our intent. Our actions here only

address what non-storage products may

be considered a good alternative to

storage services, and should not be

construed to address what products may

be considered a good alternative to

transportation services.

34. Finally, we do not share UET’s

views that our action here will

negatively impact the number of

marketers. Marketers, too, will have

choices in contracting for service from

a newly authorized storage service

provider authorized to charge marketbased rates and, as discussed above, the

price will remain just and reasonable

within the meaning of section 4 of the

NGA due to the absence of significant

market power.

2. Scope of Applicability of Expanded

Product Market Definition

Comments

35. Bay Gas requests that the

Commission revise proposed § 284.501,

Applicability, to clarify that the newly

proposed subpart M requirements do

not apply automatically to previouslyordered market-based rate

authorizations. Specifically, Bay Gas

requests that the Commission add the

following language to the end of that

section: ‘‘provided, if such pipeline or

storage service provider was authorized

to charge market-based rates before

subpart M effective date, it need not

conform under that authorization to

subpart M.’’

36. Should the Commission decide to

adopt its proposal to expand the

product market, AGA and NGSA urge

the Commission to expressly limit the

application of any revised market-power

regulations to new storage capacity

rather than to existing storage capacity

that is currently subject to cost-based

rates.

37. NiSource Pipelines request that

the Commission clarify whether existing

storage providers are permitted to seek

market-based rate authority using the

proposed modified market-power

analysis.

Commission Determination

38. As requested by Bay Gas, we

clarify that applicants previously

granted market-based rates need not

resubmit an application under the

broader definition of product market we

are adopting in the Final Rule. If an

applicant has demonstrated a lack of

market power under the traditional

definition of product market, it follows

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that the applicant would qualify for

market-based rates using an expanded

definition of product market that

includes additional substitutes.

However, we do not agree that a

revision to the regulatory text is

necessary.

39. We find that NGSA and AGA have

provided no support for their request to

limit the applicability of the expanded

product market definition to only new

storage capacity. Pursuant to the Policy

Statement, an entity can file an

application for market-based rates for

storage services if it can demonstrate

that it does not have significant market

power or has sufficiently mitigated that

market power. Where a company can

show a lack of market power, then

competition in the market will ensure

that the company’s rates will be just and

reasonable and the purpose of the NGA

is met. Accordingly, existing storage

providers are permitted to seek marketbased rate authority using the proposed

modified market-power analysis.

However, the Commission will consider

in the case of existing storage all

relevant facts of the applicant’s

potential to exercise market power,

including for example, impacts on

existing customers and the applicant’s

relationship with transmission service

providers in the relevant market.

jlentini on PROD1PC65 with RULES2

3. Determination and Quantification of

a Good Alternative

40. In order to show that a non-storage

product or service such as

transportation is a good alternative, the

Commission stated that the storage

applicant would need to meet the

criteria set forth in the Commission’s

Policy Statement. 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.

Comments

41. SCE stresses that the Commission

needs to adopt an analysis that is as

robust as its analysis of the electric

markets and takes into consideration the

interdependence of gas and electric

markets’ competitiveness. SCE urges the

Commission to seriously examine the

limits on ‘‘substitutability’’ among the

various products in each market, noting

the complex dynamic relationships

involved in determining this. SCE states

that storage serves three basic functions:

price arbitrage, balancing and peak

reliability, and customers consider

different kinds of storage and

transportation products to perform each

function. Thus, each alternate product

must be examined in the context of its

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ability to provide competitive discipline

on the operation of an applicant’s

storage facility. Depending on the

market structure, SCE asserts that some

facilities or products may only be able

to perform one of the three storage

functions while others might serve all of

these functions. In addition, SCE

stresses that the Commission also must

be willing to examine whether, and the

extent to which, an exercise of market

power in the storage market may

ultimately result in supracompetitive

prices elsewhere in the gas markets, i.e.,

other geographic markets or other

products.

42. Enstor urges the Commission to

provide more clarity as to what is, and

is not, a good alternative, and how a

market-based rate applicant can

demonstrate the same. In addition,

Enstor seeks further Commission

amplification on whether an alternative

is ‘‘available.’’ For example, Enstor asks

in regards to LNG terminals in service,

will availability depend on the

terminals’ capacity or their

deliverability?

43. EEI supports the Commission’s

proposal to include alternatives to

storage in its market-power analysis. EEI

submits that this analysis is fact specific

and should be applied in the context of

the region of the country and the users

that would be supplied by the proposed

storage services. With regard to released

capacity as a competitive alternative to

storage, EEI asserts that the applicant

should be required to demonstrate that

there is a viable market in released

capacity. In making this determination,

EEI urges the Commission to rely on

historic information on the extent of

trading in released capacity on a

relevant pipeline because such

information is a better indicator of

substitutes for storage service than a

theoretical analysis of possible releases

in the future.

44. With respect to quantifying firm

transportation capacity that could be

available to compete with an applicant’s

storage service, DTE recommends that

all firm transportation capacity on all

pipeline systems that serve the

applicant’s geographic market that is not

committed to meeting the statemandated obligation of LDCs to serve

captive customers be considered as

available to compete with the

applicant’s storage services, particularly

during swing periods when

deliverability is most critical. DTE

explains that capacity not under LDC

contract is generally held by marketers,

end users, and producers who are in a

position to divert gas on short notice

from contractual primary delivery

points to higher-valued markets in

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36617

response to rapidly changing market

conditions.

45. Given that non-LDC shippers are

in the best position to respond to swings

in the market and control where gas is

delivered, DTE recommends that firm

transportation capacity be quantified on

a shipper-by-shipper basis for the

purpose of calculating swing period

deliverability market shares and a

Herfindahl-Hirschman Index (HHI).

Under this approach, each pipeline

shipper would be considered a potential

competitor to the applicant. On the

other hand, DTE claims that marketpower studies should not assume that

pipelines control deliverability and can

use shipper deliverability to respond to

market swings in a manner and time

period that is competitive with storage.

That is, pipeline deliverability should

not be quantified and assigned to each

individual pipeline for the purpose of

calculating market shares and HHIs.

Pipelines are purely transporters and are

not in a position to divert gas on short

notice to higher valued markets in

response to changes in market

conditions.

46. DTE agrees with the Commission’s

statement in the NOPR that to the extent

an LDC holds pipeline capacity in order

to meet state-mandated service

obligations to captive customers, it is

not likely that such pipeline capacity

would be available to respond to market

needs nor would it be a good substitute

for storage capacity and deliverability.

Similarly, DTE urges the Commission to

exclude storage capacity and

deliverability associated with storage

fields owned by LDCs and used to meet

state-mandated service obligations to

captive customers from market share

and HHI calculations contained in

market-power studies submitted by

applicants seeking market-based rates.

DTE states that like firm transportation

used to meet LDC market needs, firm

storage capacity and deliverability

associated with storage fields owned by

LDCs are committed to meet captive

retail customer needs and should not be

considered available to the market to

meet changing economic conditions.

Commission Determination

47. As we have stated above, we

intend to continue to evaluate requests

for market-based rates for storage on a

case-by-case basis. An applicant is

required to identify ‘‘the specific

products or services and the suppliers of

those products and services that provide

good alternatives to the applicant’s

ability to exercise market power.21 A

21 Policy Statement at 61,230–231.

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good alternative has been defined as 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 service. The burden is on the

applicant to ‘‘show how each of the

substitute services in the product

market are adequate substitutes to the

applicant’s service in terms of quality,

price, and availability.’’ 22 Therefore, we

will not endorse any particular method

for determining the substitutability of a

product here, but rather base our

determination on the record developed

in individual proceedings. Regarding

Enstor’s request that we clarify whether

the availability of LNG terminal service

will depend on the terminal’s capacity

or deliverability, we find that both

elements would be relevant in analyzing

the availability of LNG supply.

48. In order for an applicant to show

that non-storage products are a good

alternative to storage, they must

demonstrate that for peak demand

periods customers will be able to choose

the non-storage product as a comparable

substitute for storage services offered by

the applicant. This demonstration must

show that in terms of quality,

timeliness, and price that non-storage

products will be able to serve

customers’ needs as well as storage

service. For example, an applicant may

be able to demonstrate that pipeline

capacity in combination with spot

market purchases and appropriate

financial market instruments, such as

futures contracts, can reasonably be

expected to be available at prices

competitive with storage service so that

it can act as a substitute for storage gas

purchased, stored and/or redelivered

when needed. Applicants may also be

able to show that available park and

loan services or liquid market-center

spot markets provide sufficient liquidity

during peak periods to constitute an

adequate substitute to storage for

balancing purposes or to serve peak

demand.

4. Additional Revisions to MarketPower Test

jlentini on PROD1PC65 with RULES2

a. Inclusion of Other Gas Supply

Alternatives in the Product Market

Comments

49. In addition to the pipeline

capacity and LNG supply identified by

the Commission in its NOPR, Duke

urges the Commission to recognize that

other gas supply alternatives may be

available in a given market, such as

financial instruments, that can compete

with storage. Duke explains that storage

22 Id.

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allows a consumer of natural gas to

manage price risk by allowing the

consumer to choose a price at which to

buy natural gas, store it, and then

withdraw that gas as needed. According

to Duke, there are an increasing number

of financial instruments that can be

used to manage this same natural gas

price risk. Williston Basin claims that

other types of alternatives may exist as

well, and accordingly market-based rate

applications should be looked at

individually, to determine what types of

alternatives are available.

Commission Determination

50. As discussed above, we will

continue to evaluate requests for

market-based rates on a case-by-case

basis. An applicant may propose to

include other non-storage products as

alternatives to storage services to the

extent it can demonstrate the proposed

alternatives can be delivered into the

relevant geographic market and

otherwise meet the criteria of a good

alternative.

b. Modification to HHI Threshold

51. Under the Policy Statement, the

Commission’s initial screening tool for

significant market power is the 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.23 The Commission uses an HHI

of 1,800 as an indicator of the level of

scrutiny to be given to an applicant for

market-based rates. An HHI at this level

indicates that there are four to five good

alternatives to the applicant’s service in

the relevant market. 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.24

Comments

52. INGAA and KM urge the

Commission to adopt an HHI level of

2,500 rather than the 1,800 that it

23 The HHI is the sum of the squared market

shares. For example, in a market with five equal

size firms, each would have a 20 percent market

share. For that market, HHI = (20)2 + (20)2 + (20)2

+ (20)2 + (20)2 = 400 + 400 + 400 + 400 + 400 =

2,000.

24 Policy Statement at 61,235–36.

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currently employs as a benchmark for

measuring market concentration.

INGAA asserts the current level is far

too conservative and is inconsistent

with standards recommended by the

Antitrust Division of the Department of

Justice (DOJ) for analogous oil pipeline

cases.

53. KM asserts that the Commission’s

reliance on the 1,800 HHI level

inappropriately relies on the DOJ’s and

the Federal Trade Commission’s (FTC)

Horizontal Merger Guidelines (Merger

Guidelines) which apply to merger cases

where two companies are merging and

the number of competitors is reduced.

KM argues that the 1,800 threshold is

too conservative as applied to potential

new storage entrants seeking marketbased rates because, in this situation,

the number of competitors will be

increasing and the Commission will

exercise regulatory oversight. KM also

points out that the Commission applies

the 2,500 threshold to oil pipelines

where there is no merger issue and the

adoption of that threshold was

supported by DOJ in filed comments.

Similarly, KM argues the Commission

should adopt a 2,500 HHI threshold for

applicants seeking market-based rate

authority for gas pipelines where

continued regulation of an industry

rather than a merger is at issue. KM also

asserts that adherence to the 1,800 HHI

threshold is at odds with the actual DOJ

and FTC enforcement decisions

regarding horizontal merger review,

where it states that out of 11,263

challenges initiated by the agencies,

only 175 involved markets with HHIs

under 2,500.25

54. Finally, KM asserts that in today’s

markets, purchasers of storage capacity

are generally large LDCs or even larger

and more powerful marketing arms of

large producers and the presence of this

buyer power is not accounted for in the

Commission’s HHI analysis. According

to KM, use of a higher initial screen

would partially take into account other

factors such as buying power.

Commission Determination

55. We are not persuaded by the

commentors’ arguments that there is a

need to change the HHI threshold level.

Significantly, as recognized by KM and

INGAA, the 1,800 HHI level is not a

bright-line test below which an

applicant would automatically qualify

for market-based rates, or above which

an applicant would be excluded from

market-based rates. Rather, the

Commission uses the 1,800 HHI level as

25 Citing Federal Trade Commission and the U.S.

Department of Justice, Merger Challenges Data,

Fiscal years 1999–2003, December 18, 2003.

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an indicator of the level of scrutiny to

be given to the applicant. As explained

in the Policy Statement, if the HHI is

above 1,800 the Commission will give

the applicant closer scrutiny because

the index indicates that the market is

more concentrated and the applicant

may have significant market power.

Conversely, an HHI below 1,800 would

result in less scrutiny of the applicant’s

potential to exercise significant market

power because it would indicate that

the market is less concentrated.26 The

Commission has applied this policy in

its analysis of individual cases and has

approved market-based rates for several

applicants with HHIs above 1,800 after

examining other competitive factors. For

example, in Avoca Natural Gas Storage

(Avoca),27 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.28

56. We disagree with INGAA’s and

KM’s assertion that the 1,800 HHI level

is too conservative. First of all, it is not

true that applicants seeking marketbased rates will always increase the

number of competitors in a market. For

example, a storage provider may apply

for market-based rates for existing costbased service. More importantly, we

believe that use of the more

conservative approach will ensure that

the impact of other competitive factors

will be given careful scrutiny when the

market is relatively concentrated (less

than four or five good alternatives). In

addition, contrary to KM’s assertion, we

have not adopted a generic 2,500 HHI

level in analyzing whether an oil

pipeline has market power.29 Moreover,

the use of HHI levels in determining

whether an oil pipeline has market

power in individual cases reflects the

specific competitive circumstances

affecting oil pipelines. Specifically, oil

pipelines face competition not only

26 Policy Statement at 61,235.

jlentini on PROD1PC65 with RULES2

27 68 FERC ¶ 61,045 (1994).

28 The Commission reached a similar result

analyzing storage services in Steuben Gas Storage

Co., 72 FERC ¶ 61,102 (1995); 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 Honeoye Storage Corp., 91 FERC ¶ 62,165

(2000).

29 Market-Based Ratemaking for Oil Pipelines,

Order No. 572, FERC Stats. & Regs. ¶ 31,007 at

31,192 (Oct. 28, 1994) (‘‘[T]he Commission is not

proposing any particular HHI level, such as 1,800

or 2,500, as a screen or presumption, rebuttable or

otherwise. All factors must be considered in

determining whether an oil pipeline lacks

significant market power.’’).

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from other oil pipeline providers but

also from other modes of delivering oil

such as rail, barges and trucks.30 In

general, there are not similar alternative

modes of delivering or storing natural

gas. Further, as common carriers, oil

pipelines operate in a different

regulatory context.

57. Additionally, we do not agree

with KM that a higher initial screen is

appropriate to take into account the fact

that purchasers of storage capacity are

generally large LDCs or marketing arms

of large producers. First of all, the

purchasers of storage services are not

always large LDCs and marketers and to

implement an analysis premised on the

assumption that they are is not

appropriate. Under the Policy Statement

we consider issues related to buyer

power separately (outside the context of

the HHI threshold) which permits the

Commissions to consider the specific

facts presented in a case. We find this

approach superior to the approach

advocated by KM.

c. Entry and Other Competitive Factors

Comments

58. Duke asserts that while the

inclusion of currently available

competitive alternatives in the

definition of the market for the purposes

of calculating market concentration and

market share values, as advocated

above, is a good starting point, such a

revision alone, while necessary, will not

address the barriers to development

faced by markets with little existing gas

supply infrastructure. To promote the

development of additional storage

infrastructure in these areas, Duke urges

the Commission to shift the overall

focus of its market-based rate analysis

away from requiring evidence of an

existing market to an analysis of the

extent to which a new entrant increases

the potential gas supply options

available to market participants. Duke

states the Commission’s market-based

rate policy should focus on: (1) Whether

the new entrant adds new storage

options to the market, and (2) whether

there are further opportunities for

additional entrants to take similar risks

and develop competitive storage. Duke

urges the Commission to adjust its

existing approach to focus less on the

status of existing competition and more

upon the potential benefits of adding

additional storage by: (1) Making it clear

that applicants may rely upon evidence

of potential developments of storage in

circumstances where there is little or no

existing competition, or (2) by making a

generic determinations concerning the

30 Id. at 31,191.

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36619

potential competitiveness of particular

areas of the country.

Commission Determination

59. The Commission believes that the

analytical framework for establishing

market-based rates set forth in the Policy

Statement already adequately

accommodates other competitive factors

such as the ability of other entities to

enter the market. In the Policy

Statement, the Commission specifically

recognized that having a large market

share in a concentrated market does not

constitute market power if ease of entry

and other competitive factors can

prevent the applicant from exercising

significant market power.31 In a recent

order in Rendevous Gas Services, L.L.C.,

the Commission granted market-based

rates for hub transportation service

based on the ease of entry into the

market center and the fact that the

proposed pipeline was a new entrant

with no captive customers.32 Similarly,

when requesting market-based rates for

storage services, an applicant is

permitted to establish that it lacks

market power by demonstrating that if

it increases its price, ease of entry by

other providers into the market will

make such a price increase unprofitable.

Moreover, in response to Duke’s

assertion that we should focus more on

the benefits of new entry than market

concentration statistics, we recognize

that there are significant benefits to

competition and customers from new

storage and note that, under our policy,

HHI calculations of market

concentration are used as a screening

tool and are not dispositive of whether

we will grant a request for market-based

rates. Instead, we will consider all

relevant factors, including the benefits

of new entry, in determining whether to

approve market based rates. The

Commission will evaluate such

proposals on a case-by-case basis.

d. Definition of Geographic Market

Comments

60. DTE states that while the

Commission’s NOPR takes the

important step of presenting an

expanded definition for storage

substitutes, the NOPR does not clarify

how an applicant seeking to

demonstrate a lack of market power

31 Policy Statement at 61,235.

32 Rendevous Gas Services, L.L.C., order issuing

certificates, 112 FERC ¶ 61,141; reh’g. denied, 113

FERC ¶ 61,169 (2005). See also Avoca, 68 FERC

¶ 61,045 (1994); Steuben Gas Storage Co., 72 FERC

¶ 61,102 (1995); 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 Honeoye Storage

Corp., 91 FERC ¶ 62,165 (2000).

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should define its geographic market.

DTE seeks Commission guidance as to

how to define the relevant geographic

storage market in order to provide more

certainty to an applicant seeking

market-based rates for new storage

capacity in more competitive markets

needing new capacity or improved

service flexibility. DTE recommends

that, in developing a geographic market

definition for a market power study, the

Commission should base its geographic

market definition on the ability of

storage customers to access storage

providers in various regions. In

addition, DTE argues that customer

access to alternative storage providers

can be confirmed by reviewing the

applicant’s potential shippers or

shippers accessed by comparably

located and situated storage providers,

for example, as shown in a shipper

index.

Commission Determination

61. In the Policy Statement, the

Commission provided guidance on

defining the geographic market. In

general, the relevant geographic is the

geographic area containing those

suppliers that can affect any attempt by

the applicant to exercise market power.

Since we are not changing the

geographic definition in the Final Rule,

the Policy Statement’s guidance

regarding the geographic market is still

applicable.

e. Treatment of Affiliate Capacity

62. In § 284.503(b)(4) we proposed to

codify our current practice 33 that

capacity on pipeline systems owned or

controlled by the applicant’s affiliates

should not be considered among the

customers’ alternatives and should be

included in the market share calculated

for the applicant.

Comments

jlentini on PROD1PC65 with RULES2

63. A number of commentors request

that the Commission amend its

proposed regulations in § 284.503(b) to

eliminate the requirement that the

capacity of a market-based rate

applicant’s affiliates is automatically to

be included in the market share

calculated for the applicant.34 They

argue that this requirement is

unnecessary in light of the

Commission’s Standards of Conduct for

Transmission Providers promulgated in

Order No. 2004 which requires

interstate pipelines to function

33 See Policy Statement, 74 FERC ¶ 61,076 at

61,234 (1996).

34 Comments of INGAA, Dominion, Duke,

NiSource Pipelines, Dominion LDCs and Jefferson

Storage.

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independently from their affiliates.35

For example, Dominion submits that

Order No. 2004 is a comprehensive and

effective regulatory regime governing

the relationship between a pipeline and

its energy affiliates such that there is no

realistic possibility for an interstate

pipeline with storage and its affiliates

with storage assets to collude to exercise

market power in the provision of storage

services. Additionally, INGAA states the

Commission’s rules regarding price

transparency, and the requirement that

an open-access pipeline must make all

capacity publicly available, under the

terms, conditions, and rates specified in

the tariff, provide further assurances

that a storage applicant cannot control

or manipulate the capacity of its

affiliated companies.

64. Several commentors also maintain

that the notion that capacity held by an

affiliated company cannot provide a

competitive alternative is inconsistent

with the Commission’s open-access

policies.36 Specifically, they assert that

under the Commission’s open-access

regime, an interstate pipeline cannot

control storage capacity that is

subscribed. Rather, they submit it is the

shipper with the contractual rights who

determines when or if the capacity is

used and if, when and to whom it is

released. The Dominion LDCs assert that

the Commission itself has concluded

that current regulatory controls

minimize the ability of pipelines to use

market power to force captive customers

to enter into longer term contracts than

would be required in a competitive

market.37 Thus, the Dominion LDCs

assert the Commission should find that

a pipeline has neither the legal ability

to withhold existing capacity nor an

incentive to refuse to build new

capacity, and that this, together with the

fact that pipeline activity to act with an

affiliated LDC to exercise market power

by withholding capacity would violate

other Commission rules and be

actionable, leads to the conclusion that

a pipeline and its affiliated LDC are

unlikely to be able to jointly exercise

market power.

65. These commentors conclude that

there is not sufficient justification for

35 Standards of Conduct for Transmission

Providers, Order No. 2004, 105 FERC Stats. & Regs.,

Regulation Preambles ¶ 31,155 (2003), order on

reh’g, Order No. 2004–A, FERC Stats. & Regs.

¶ 31,161 (2004), order on reh’g and clarification,

Order No. 2004–B, FERC Stats. & Regs. ¶ 31,166

(2004), order on reh’g and clarification, Order No.

2004–C, FERC Stats. and Regs. ¶ 31,172 (2004),

order on reh’g., Order No 2004–D, 110 FERC

¶ 61,320 (2005).

36 Comments of INGAA, Duke, Dominion and

Dominion LDCs.

37 Citing Order No. 637, 101 FERC ¶ 61,127 at

61,522.

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requiring a pipeline to include the

capacity of its affiliates when

calculating market share. In recognition

of the effect of shipper control over

contracted pipeline capacity, INGAA

urges the Commission to establish a

rebuttable presumption that such

capacity is properly considered as a

substitute for the storage service at issue

in a market-based storage rate

application, assuming the capacity

otherwise meets the ‘‘substitutability’’

criteria. Duke states that only storage

and transportation capacity controlled

by the affiliates of a storage applicant

should be aggregated with the capacity

of the applicant’s proposed storage

facility for the purposes of the market

concentration measure and the market

share calculated for the applicant. At a

minimum, these commentors urge the

Commission to eliminate the per se rule,

and evaluate on a case-by-case basis

whether affiliated capacity presents a

competitive alternative. Several

commentors claim that adoption of the

proposed rule will discourage otherwise

meritorious storage applicants and

undermine the Commission’s goal of

stimulating the construction of vital

new storage infrastructure.38

66. To the extent the Commission

does not delete this requirement,

INGAA requests that the Commission

clarify proposed § 284.503(b)(4) that

reads in pertinent part, that ‘‘[a]vailable

capacity * * * owned or controlled by

affiliates of the applicant in the relevant

market shall be clearly identified and

may not be considered as alternatives

competing with the applicant’’, to

clarify that while the pipeline affiliate’s

capacity is to be included in the market

share calculated for the applicant, it

should also be reflected in the total

market share for the geographic area.

67. On the other hand, Falcon urges

the Commission to recognize that the

storage services being evaluated for

market power may well be affiliated

with the ‘‘storage surrogate’’ services

permitted to be considered in the

evaluation. Falcon maintains that the

Commission should provide for

additional safeguards to prevent the

affiliated storage providers from

exercising market power in such a

situation and/or avoid, through separate

treatment and analysis of the affiliated

services, the actual market power or

market share associated with the

alternative affiliated services and

providers.

38 Comments of INGAA, Dominion and the

NiSource Pipelines.

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Commission Determination

68. The requirement that the capacity

of a market-based rate applicant’s

affiliates is to be included in the market

share calculated for the applicant is

consistent with our established practice

and is supported as discussed below.

69. We disagree with commentors’

claim that the fact that the Commission

has adopted Standards of Conduct for

Transmission Providers which require

interstate pipelines to function

independently from affiliates removes

the necessity of requiring that the

capacity of the applicant and its

affiliates be combined. While affiliates

are required to act independently under

the Commission’s rules, this does not

mean that affiliates will compete for the

same service or product in a given

market. As recognized by the Supreme

Court in Copperweld Corporation v.

Independence Tube Corporation, ‘‘[a]

parent and its wholly-owned subsidiary

have a complete unity of interest. Their

objectives are common, not disparate;

their general corporate actions are

guided or determined not by two

separate corporate consciousnesses, but

one. * * * With or without a formal

‘agreement,’ the subsidiary acts for the

benefit of the parent, its sole

shareholder.’’ 39

70. We are also not persuaded by

commentors arguments that only

affiliate capacity that is not held under

firm contracts should be attributable to

the applicant. This proposal ignores the

fact that pipelines control the

conditions under which transportation

and storage services are provided

through the operation of their systems.

We are not willing to create situations

in which the pipeline, the dominant

owner of capacity, does not have an

incentive to build new capacity because

it or an affiliate can benefit from an

artificial shortage of capacity. As noted

in Order No. 637, the Commission has

carefully tailored its regulations so that

pipelines will not have an incentive to

use their monopoly power to create

scarcity.40 We see no compelling reason

to deviate from that policy here. For

these reasons, we find it is appropriate

to attribute affiliate capacity to the

storage provider even though the

capacity is contracted for by a shipper

under a firm contract. We have made

39 467 U.S. 752, 771 (1984) (holding that a parent

and its wholly-owned subsidiary were incapable o

conspiring with each other for purposes of section

1of the Sherman Act).

40 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–Dec. 2000) ¶ 31,091 at

31,270–71 (Feb. 9, 2000).

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revisions to § 284.503(b)(4) of the

regulations to clarify our intent.

71. As requested by INGAA, we

clarify that the applicant’s affiliate’s

capacity that is included in the market

share calculated for the applicant

should also be reflected in the total

market share for the relevant geographic

area.

72. Finally, we find that Falcons’s

concerns over affiliate capacity are

adequately addressed by the

requirement that the capacity of a

market-based rate applicant’s affiliates

is to be included in the market share

calculated for the applicant.

f. Filing Procedures

73. The Commission proposed 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

stated it would continue its practice of

approving market-based rate proposals

on a prospective basis only. We also

noted that 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 § 284.13 of the

Commission’s regulations.

Comments

74. Sempra asserts that it is

unnecessary to impose on market-based

rate storage providers the full panoply

of 18 CFR § 284.13 reporting

requirements applicable to pipelines

operating under cost-based regulation,

given that the requisite showing of

absence of, or mitigation of, market

power has already been made. Instead,

Sempra urges the Commission to utilize

a lighter-handed reporting regime

modeled after the electronic quarterly

reports applicable to holders of electric

market-based rate authority. Sempra

asserts that these are sound

requirements for the Commission to

require of entities holding market-based

rate authority.

75. Enstor submits that the

Commission’s statement that storage

operators cannot charge market-based

rates until the Commission determines

that they lack market power or have

established adequate customer

protections conflicts with our current

policies implementing section 311 of

the NGPA. Enstor states that under the

Commission’s current regulations,

section 311 service providers may begin

charging (subject to refund) their

proposed rates, including market-based

rates, upon the filing of a petition for

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36621

rate approval with the Commission.

Enstor urges the Commission to

reconcile this discrepancy and to leave

intact the current rate filing regime that

governs section 311 service providers in

§ 284.123(b)(2)(i). Enstor also seeks

express clarification that nothing in the

NOPR is intended to upset the current

150-day window within which the

Commission must act on rate petitions

filed by section 311 service providers, or

otherwise the proposed rates are

deemed fair and equitable.

76. Enstor further requests that the

Commission allow flexibility in its

proposed requirements for market-based

rate filings under new § 284.503. While

Enstor agrees that such information may

be necessary in certain circumstances,

Enstor urges clarification in the Final

Rule that some or all of these procedural

requirements may be waived for good

cause when an applicant files for

market-based rates.

77. Finally, Enstor urges the

Commission to incorporate some sort of

time limitation for its review of rate

filings in the Final Rule. For example,

Enstor states the Commission can adopt

a five-month review period, beginning

from the date on which a complete rate

application is filed under proposed Rule

503, during which it could evaluate the

application and any responsive protests.

At the end of the five-month period, the

proposed rates would be deemed

approved in the absence of a formal

Commission ruling.

Commission Determination

78. Regarding the applicability of

§ 284.13 reporting requirements, we

disagree with Sempra that we should

not impose these requirements on

storage providers granted market-based

rates, but rather impose a reporting

regime modeled after the electric

quarterly reports. Under the

Commission’s Part 284 program, all

open-access transporters and storage

providers are required to post or file

with the Commission transaction

reports, quarterly index of customer

reports, and semi-annual storage

reports. These reports are required of all

open-access service providers and

provide crucial transparency. This

information allows both the

Commission and market participants to

monitor the market and detect undue

discrimination. Sempra has provided no

reasonable basis to exempt market-based

storage service providers from the

§ 284.13 reporting requirements.

79. As requested by Enstor, we clarify

that section 311 service providers may

begin charging (subject to refund) their

proposed rates, including market-based

rates, upon the filing of a petition for

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rate approval with the Commission

pursuant to § 284.123(b)(2)(i) and that

the 150-day time frame in that section

is applicable to such requests. In

§ 284.502, we are adopting regulations

that provide that applicants providing

service under subpart C (transportation

by intrastate pipelines under section

311) of part 284 must file in accordance

with that section.

80. However, we reject Enstor’s

additional request that we impose a

time limitation on our review of marketbased rate filings by interstate storage

providers, after which time the

proposed rate would be deemed

approved. It would be unreasonable to

approve a market-based rate proposal

without a specific finding that the

applicant lacks market power. However,

the Commission intends to process any

request for market-based rates as

expeditiously as possible.

81. Finally, the Commission clarifies,

as requested by Enstor, that it may file

to waive the procedural requirements in

§ 284.503 for good cause shown.

g. Periodic Review

82. Proposed § 284.504 of the

regulations requires 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. The Commission stated that

imposition of a periodic review is

necessary to ensure that our grant of

market-based rates to an applicant

remains just and reasonable.

jlentini on PROD1PC65 with RULES2

Comments

83. Several commentors including the

majority of interstate pipelines and

independent storage providers urge the

Commission to eliminate its proposal

for an automatic five-year market-power

review under § 284.504 for storage

operators that have demonstrated they

lack market power. These commentors

assert that this requirement is unduly

burdensome, not necessary to protect

customers and will deter new storage

development.41 Specifically, the

commentors submit that the current

requirement that market-based rate

grantees report any changes in

circumstances that are pertinent to their

original absence-of-market-power

showing, along with ongoing reporting

obligations under existing regulations,

are adequate to protect consumers. DTE

also notes that it is unaware of any

41 Comments of INGAA, Dominion, KM, DTE,

Duke, SGR, Honeoye, Bridgeline, Unicol, Falcon,

SGR and Jefferson Storage.

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abuse complaints submitted by

customers of storage companies granted

market-based rate authority in the past

that would necessitate the imposition of

a five-year market-power review

requirement.

84. A number of these commentors

assert that an automatic review is

unnecessarily burdensome in this

context for the same reasons proffered

by the Commission in support of

reliance on regular monitoring of posted

information and the NGA section 5

complaint processes for market-based

storage rates under new NGA section

4(f). For example, Duke submits that if

regular monitoring and the section 5

complaint provisions are sufficient to

protect consumers in instances where

the Commission presumes that a storage

provider has market power under new

NGA section 4(f), these same provisions

in addition to the Commission’s existing

policy of conditioning its certificate

authorization with a notice of changed

circumstance requirement are more than

sufficient to protect consumers in

circumstances where the Commission

has found the applicant not to possess

market power.

85. If the Commission adopts an

automatic review requirement, several

commentors urge the Commission to

make clear that the new requirement

does not apply to projects that have

previously received market-based rate

approval,42 arguing that any required

periodic review must be prospective

only and not affect existing contractual

terms and conditions agreed upon in

light of the Commission’s initial grant of

market-based rate authority to a service

provider.43 Duke argues that placing a

new periodic-review condition on

existing market-based rate

authorizations would constitute an

impermissible retroactive revision of the

certificate authorizations for the

underlying facilities, frustrate the

investment expectations of the owners

of those facilities, and undermine

investor confidence in the storage

market.

86. INGAA submits that the threat of

revocation of market-based rate

authority in the middle of a contract

term may present an unacceptable level

of risk to potential storage developers.

In order to minimize the uncertainty

that would be created by a new periodic

review requirement, SGR argues the

42 Comments of Bay Gas, INGAA, EnCana,

Bridgeline, and Unocal.

43 Comments of INGAA, KM, and Haddington

Ventures. SGR argues that such a modification must

be made in accordance with the Mobile-Sierra

doctrine, with the Commission determining, on the

basis of substantial record evidence, that the public

interest requires such modification.

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Commission must make it clear that any

review of a storage provider’s marketbased rate authorization will be

conducted under NGA section 5, with

the Commission bearing the burden of

showing that the market-based rate

authorization and the rates it permits a

storage provider to charge have become

unjust and unreasonable, and the

further burden of establishing

prospectively the ratemaking

methodology that would yield just and

reasonable rates.

87. If the periodic review is adopted,

Honeoye and SGR propose that the first

such update should not be due until the

later of 5 years after the effective date of

proposed § 284.504 or the date the

relevant storage facilities are placed in

commercial operation. Honeoye also

seeks confirmation that an existing

holder of market-base rate authority can

comply with this requirement by

demonstrating that the facts that

permitted the Commission to authorize

market-base rates in the first instance

are still true.

88. On the other hand, NGSA, EEI and

PGC support the Commission’s proposal

to require storage applicants granted

market-based rates to file an updated

market-power analysis every five years.

PGC asserts that without such periodic

reviews, the Commission is unable to

perform the regulatory oversight

necessary to prevent unjust and

unreasonable rates against captive gas

customers. EEI notes that there is a

similar requirement for electric utilities

that sell at market-based rates, and

suggests this requirement is necessary to

protect customers from changes in the

marketplace that may no longer justify

market-based rate authority.

89. SCE also supports the

Commission’s five-year periodic report

requirement in § 284.504 and submits

that this review should also consider

any cost-of-service facilities and

interconnected facilities that could

serve as substitutes for one another and

should assess the competitive

functioning of the market and impose

remedial measures such as adjustments

to mitigation measures or the complete

withdrawal of market-based rate

authority as necessary to ensure just and

reasonable rates.

Commission Determination

90. We will not impose a generic fiveyear reporting requirement on storage

providers granted market-base rates

although we reserve the option of

imposing a reporting requirement in any

individual case. We have carefully

considered the comments and have

concluded that any benefits that would

be achieved by a generic requirement

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are outweighed by the additional costs

that such a generic requirement would

create. The Commission believes that

existing reporting requirements and its

ongoing market monitoring programs

generally give us sufficient information

to know whether storage markets where

applicants have been authorized to

charge market-based rates remain

competitive, and the Commission has

the ability to take appropriate action if

market-power issues arise.

91. A central factor in the

Commission’s decision is the fact that in

the majority of cases where we have

authorized market-based rates for

storage services, the applicant has not

had a large presence in the market. For

example, the Commission has approved

all requests for market-based rates

where the applicant was located in the

production area based on findings that

HHIs in that geographic region are well

below 1,800 and the market shares of

the applicants were small.44 In

consuming regions, such as the

Northeast portion of the United States,

where there are fewer providers, some

with large market shares whose services

are regulated, the Commission has

approved requests to implement marketbased rates by considering factors other

than market concentration including the

small size of the applicant’s market

share.45 In these situations, we find that

market-power concerns are low.

Additionally, in individual cases the

Commission has imposed on applicants

permitted to charge market-based rates

for storage services the requirement to

notify the Commission when there have

been changes of circumstances that

affect the applicant’s ability to exercise

market power,46 and we will codify this

requirement in § 284.504(b). For storage

providers with market shares of ten

44 See, e.g., Caledonia Energy Partners, L.L.C., 111

FERC ¶ 61,095 (2005) (market share of working gas

capacity and deliverability each approximately two

percent); Copiah County Storage Co. 99 FERC

¶ 61,316 (2002) (market share of working gas

capacity and deliverability each less than two

percent).

45 See, e.g., Avoca Natural Gas Storage, 68 FERC

¶ 61,045 (19940. Steuben Gas Storage Co., 72 FERC

¶ 61,102 (1995) (market share of working gas

capacity and deliverability each less than four

percent); New York State Electric and Gas Corp., 81

FERC ¶ 61,020 (1997) (working gas capacity and

deliverability each less than one percent); N.E. Hub

Partners, L.P., 83 FERC ¶ 61,043 (1998) (working gas

capacity and deliverability each less than five

percent); Seneca Lake Storage, Inc., 98 FERC

¶ 61,163 (2002) (working gas capacity and

deliverability each less than two percent); and

Honeoye Storage Corp., 91 FERC ¶ 62,165 (2000)

(working gas capacity and deliverability each less

than two percent).

46 See, e.g., Caledonia Energy Partners, L.L.C., 111

FERC ¶ 61,095 (2005) (requiring that Caledonia

notify the Commission of future circumstances

affecting its present market power status within ten

days of acquiring knowledge of any such changes).

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percent or less, we believe that the

notice of change of circumstance

requirement, together with the

transparency provided by the existing

reporting requirements in § 284.13, are

adequate to permit the effective

monitoring of market-power concerns

related to storage providers charging

market-based rates and enable the

Commission to initiate section 5

proceedings where appropriate.47 For

storage providers with a market share

greater than ten percent, we intend to

consider in individual cases whether

the specific facts and circumstances

presented require additional reporting.

We believe that this approach achieves

an appropriate balance between the

need to monitor for market power and

the goal of creating a regulatory

environment that will promote

infrastructure.

92. However, the Commission wishes

to emphasize that the failure to timely

file a change in circumstance report or

failure to comply with reporting

requirements as required by the

regulations would constitute a violation

of the Commission’s regulations. A

storage provider would be subject to

disgorgement of profits and/or civil

penalties from the date on which the

violation occurred. Such storage

provider may also be subject to

suspension or revocation of its authority

to sell at market-based rates (or other

appropriate non-monetary remedies).

Additionally, if subsequent experience

with the changes enacted here

demonstrates a need for a generic fiveyear market-power analysis

requirement, we reserve the right to

initiate such a change.

h. Cross Subsidies and Customer

Protection Comments

93. Xcel states that it is concerned

that the proposed rule does not

sufficiently protect storage customers

served by a storage provider under costbased rates from bearing costs

associated with storage services

provided by the same provider at

market-based rates. Xcel explains that

the temptation to increase revenues by

misallocating costs will be difficult to

resist and difficult for customers and the

Commission to detect in a rate

proceeding. Therefore, Xcel requests

that the Commission protect customers

by modifying the regulations to require

47 This approach is similar to the Commission’s

proposal to exempt sellers of wholesale electric

power who own or control 500 MW or less of

generating capacity in aggregate from filing triennial

reviews. Market-Based Rates for Wholesale Sales of

Electric Energy, Capacity and Ancillary Services by

Public Utilities, Notice of Proposed Rulemaking,

FERC Stats. & Regs. ¶ 32,602 at P 152 (2006).

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36623

storage service providers to account for

costs incurred in providing marketbased rate storage services separately

from cost-based storage services. Xcel

maintains this requirement is similar to

the Commission’s policy of requiring

pipelines to account separately for the

revenues received under negotiated rate

agreements.

94. Falcon asserts that pipeline and

utility affiliated storage providers

(collectively, ‘‘Affiliated Storage

Providers’’) have a natural advantage

over independents because of their

ability to provide a rate subsidy,

bundling, or other preference, enabling

them to charge lower rates for their

storage services and placing

independent storage providers at a

distinct competitive disadvantage.

Accordingly, Falcon requests that the

Commission take steps to minimize any

subsidization or preference afforded

Affiliated Storage Providers by requiring

Affiliated Storage Providers to: (1)

Unbundle storage and transportation

services, and (2) allocate the appropriate

level of fixed and variable costs to

storage and transportation services.

Absent such actions, Falcon alleges that

independent storage providers will

never be able to effectively compete on

a ‘‘level playing field’’ with Affiliated

Storage Providers, to the detriment of

the ultimate consumer.

95. Similarly, SGR submits that the

broader availability of market-based rate

authority proposed in the NOPR could

increase the possibility that pipelineowned storage could take advantage of

a liberalized market-power test to gain

an unfair competitive advantage over

independent storage developers/

operators. It argues that pipeline-owned

storage enjoys considerable advantages

in the marketplace; given the ability

pipeline-owned storage has to share a

customer base with the pipeline, to

benefit from operational integration

with the pipeline and to enjoy revenue

support offered by pipeline

transportation services. If left

unchecked, SGR submits that these

advantages could present

insurmountable barriers to entry for

independent storage developers.

96. UET asserts that moving from

cost-based rates to market-based rates

for existing storage facilities and

expansions of existing storage facilities

would be unfair to existing storage

customers. For example, UET submits

that in many cases cost-based rates have

paid for facilities with the potential for

cheap expansibility. If, as the result of

the proposed change in market-power

analysis, the expansion capacity is

offered only at market-based rates, UET

alleges that the storage provider will

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reap the benefits of the cheap

expansibility for which the customers

have paid.

97. Finally, APS requests that the

Commission take all available steps to

encourage the development of

independent storage facilities in the

southwest including eliminating

barriers to entry such as the ‘‘bundled’’

pipeline storage and transmission

services being offered by El Paso.

Commission Determination

98. In granting market-based rates for

pipelines that provide cost-based

services, the Commission intends to

ensure that no subsidization by existing

cost-based shippers takes place. To date,

when granting market-based rates in

these circumstances, the Commission

has required that the applicant

separately account for all costs and

revenues associated with facilities used

to provide the market-based services.48

We intend to continue this practice and

will codify in new § 284.504 of the

regulations the requirement that

pipelines that provide cost-based

services must separately account for all

costs and revenues associated with

facilities used to provide the marketbased services. This will ensure that

market-based services are not

subsidized by cost-based services, as

well as ensure that pipeline-owned

storage is not afforded an unfair rate

advantage over independent storage

providers.

99. Regarding Falcon’s request to

require unbundling, we note that our

regulations already require that

pipelines offer their customers firm and

interruptible storage on an open-access

contract basis.49 Issues regarding

whether a pipeline has sufficiently

unbundled its services in compliance

with our policies should be raised in

individual pipeline proceedings.50

i. Additional Incentives

Comments

100. As an alternate to market-based

rates, Dominion urges the Commission

to consider offering incentives to

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48 See, e.g., Gulf South Pipeline Co., 101 FERC

¶ 61,204 (2002); Koch Gateway Pipeline Co., 66

FERC ¶ 61,385 (1994).

49 See 18 CFR 284.1(a) of the Commission’s

regulations that defines transportation as including

storage. Thus, storage is included within the

nondiscriminatory access and other requirements of

Part 284 for interstate pipelines.

50 APS’ request that the Commission take steps to

encourage the development of independent storage

facilities in the southwest including eliminating the

bundled pipeline storage and transmission services

being offered by El Paso is outside the scope of this

proceeding. This issue has been raised in El Paso’s

rate proceeding in Docket No. RP05–422–000 and

will be addressed there.

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promote the development of new

storage facilities reflecting the increased

investment risk of these projects,

including: (1) Authorizing higher rates

of return on equity for new cost-ofservice storage projects as compared to

new pipeline projects to reflect the

increasingly riskier nature of identifying

new geologic structures and the shorterterm contracts that customers are

entering into; (2) allowing the

authorized rate of return for a new costof-service project to remain unchanged

over the duration of the initial shipper

contract as revenue certainty is

necessary to provide good incentives for

new investment; (3) offering regulatory

incentives to compensate for the

enormous cost of purchasing base gas

for a new facility, particularly reservoir

and aquifer types of storage facilities,

such as permitting the roll in of the

costs of base gas associated with a new

incrementally-priced storage facility

into its system-wide rates in its next rate

case with a five percent cap placed on

the increase to system rates from this

roll-in; and (4) permitting interstate

pipelines to recover the prudently

incurred development cost of storage

facilities that are cancelled or

abandoned prior to being placed into

service, similar to the initiative being

considered in the rulemaking to

promote the construction of new

transmission facilities in the electric

utility industry.

Commission Determination

101. The Commission agrees with

Dominion that there may be alternatives

to market-based rates that would

appropriately address the risk faced by

storage applicants. We note that the

Commission’s policies already

incorporate considerable flexibility in

deriving cost-based pricing options that

are responsive to the market pressures

faced by jurisdictional companies. For

example, in Order No. 637 the

Commission revised its regulatory

policies to enable pipelines to file for

peak/off peak and term differentiated

rates.51 In addition, rates for storage

services can be negotiated between the

storage provider and a shipper under

the Commission’s negotiated rate

policies.52 The Commission is willing to

51 See Regulation of Short-Term Natural Gas

Transportation Services, and Regulation of

Interstate Natural Gas Transportation Services,

Order No. 637, FERC Stats. & Regs., Regulation

Preambles July 1996–Dec. 2000 ¶ 31,091 (Feb. 9,

2000).

52 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), reh’g denied, 75 FERC ¶ 61,066 (1996);

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entertain requests to implement other

cost-based pricing proposals that may

serve to add flexibility and efficiency to

storage services on a case-by-case

basis.53

B. Energy Policy Act of 2005

102. 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 marketbased 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 1978.54 We discuss

below the relevant aspects of new NGA

section 4(f).

1. Storage Capacity Eligible for MarketBased Rates

103. New NGA section 4(f) states that

the Commission may authorize ‘‘marketbased rates for new storage capacity

related to a specific facility placed in

service after the date of enactment of the

Energy Policy Act of 2005.’’ In the

NOPR, the Commission posited 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,

petition for review denied, Burlington Resources Oil

& Gas Co. v. FERC, 172 F.3d (D.C. Cir. 1998);

Modification of Negotiated Rate Policy, 104 FERC

¶ 61,134 (2003), order on reh’g and clarification,

114 FERC ¶ 61,042 (1996).

53 See, e.g., Saltville Gas Storage Company L.L.C.,

109 FERC ¶ 61,200 (2004) (approving a modified

Equitable method for designing firm storage rates).

54 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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rather than the storage capacity. Noting

that the statute does not define the term

‘‘specific facility,’’ the Commission

proposed to interpret that term to

consider a new cavern, reservoir or

aquifer that is developed after August 8,

2005, as a facility potentially qualifying

for market-based rates under the Act.

However, the Commission requested

comments on alternative constructions

of the Act. Moreover, the Commission

also invited comments concerning how,

if the Act is construed 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.

Comments

104. A number of commentors argue

that the statutory language concerning

the capacity eligible for market-based

rates under section 4(f) is ambiguous

and open to alternative interpretation.

Thus, they assert the Commission has

discretion in implementing the

language.

105. INGAA argues that the

Commission interprets new NGA

section 4(f) too narrowly, so as to

exclude new storage capacity resulting

from the expansion of existing fields or

reservoirs. INGAA submits interstate

pipelines and pipeline affiliates, which

own substantial amounts of existing

storage capacity, should be allowed to

apply for market-based rates to develop

either new or expanded storage fields.

Northern concurs with INGAA and

argues that a broader statutory

interpretation is necessary. DTE

maintains that there is no reason to treat

expansion facilities any differently than

entirely new storage fields. Duke adds

that the best assurance against the

exercise of market power is the creation

of a competitive marketplace and that

granting market-based rate treatment to

only entirely new storage facilities may

place existing storage at a significant

disadvantage and discourage the

expansion of existing storage.

106. Williston Basin argues that there

is no material distinction between

expanding existing storage facilities and

developing a new, separate storage

facility, and that the Commission’s

interpretation might unnecessarily

influence companies to choose

construction of a new facility over

expansion of an existing facility.

Northern asserts that the risks involved

in developing new storage capacity,

whether at a new or existing facility, are

greater than those involved in

constructing new pipeline capacity and

justify the use of market-based rates. It

states that a broader interpretation of the

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subject provision will recognize the risk

of storage expansions and provide a

proper incentive for developers.

107. Northern maintains that existing

storage customers served by a pipeline

will not be harmed by including

expansions of existing capacity because

customers’ existing storage service will

not be affected by the expansion. In this

vein, Williston Basin asserts that, in the

case of an expansion of existing storage

facilities, existing customers under costbased authorizations can be adequately

protected if the incremental capacity

and associated costs are accounted for

separately and addressed in each storage

service provider’s next rate proceeding.

108. KM states that granting marketbased rates to expansions of capacity

will remove economic distortions

associated with limiting this provision

to new storage fields. KM asserts that it

is faster and more cost-effective to

expand existing storage facilities rather

than to construct new storage facilities

and that such expansions should be

placed on equal footing with greenfield

projects.

109. Other commentors support the

interpretation of the Act proposed in the

NOPR.55 AGA argues that broadening

the definition of ‘‘facility’’ would largely

benefit interstate pipelines, and

potentially harm existing customers of

cost-based storage service. AGA asserts

that the Commission’s policies should

not encourage storage owners to invest

in reshaping the operations of existing

storage facilities in order to maximize

the scope of market-based services.

APGA agrees, and contends that the

NOPR’s interpretation is required by the

language in the statute and is reasonable

because there is no reason to provide

financial incentives to a storage

provider for an expansion of a facility

that has already been constructed. PGC

agrees arguing that interpreting section

4(f) to apply only to new facilities is

most consistent with the goal of

increasing storage capacity.

110. Falcon requests that the

Commission ensure that new gas storage

projects that are developed by Affiliated

Storage Providers do not receive any

direct or indirect subsidy from their

affiliated companies. NGSA and EnCana

assert that if the provision is interpreted

to permit storage services made possible

by incremental capacity at an existing,

cost-based facility to be priced on a

market basis, there would be no set of

conditions that would adequately

protect customers against the risk of

abuse.

55 AGA, Falcon, EnCana, Enstor, NGSA, PGC, and

SCE.

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36625

111. Beyond the risk of cross-subsidy,

EnCana is also concerned that there is

nothing to prevent a storage service

provider with both cost-based rate

facilities and market-based rate facilities

from placing its marketing emphasis on

the market-based rate side in order to

ensure that those storage services are

fully subscribed at the highest possible

rate, while, at the same time,

deemphasizing the sale of their

regulated cost-based services, which are

theoretically underwritten by the

regulated ratepayers. ESGI asserts that,

in order to provide safeguards against

such practices, the Commission would

need to vigilantly review the provider’s

marketing efforts in section 4 rate cases.

112. Enstor contends that allowing

expansion capacity at existing storage

facilities to qualify for market-based rate

treatment under section 4(f) would

place new storage projects (many of

which are developed by independent

operators) at a competitive disadvantage

relative to market incumbents such as

interstate pipelines. Enstor argues that

allowing virtually all new capacity to

fall within the scope of section 4(f)

would enable interstate pipelines to use

their cost-based transportation

monopoly to subsidize new services

offered under this authority.

113. The NiSource Pipelines assert

that the Commission’s interpretation of

the phrase ‘‘specific facility placed in

service after the date of enactment to

mean ‘‘a new cavern, reservoir or

aquifer that is developed after August 8,

2005’’ is not consistent with the gas

industry’s or the Commission’s own

definition of that term, which defines

‘‘in service’’ to mean when the facilities

are actually placed into service.

NiSource advocates that the

Commission revise its interpretation to

incorporate the more appropriate

definition of ‘‘in service.’’

Commission Determination

114. The meaning of new NGA

section 4(f) is ambiguous. Early drafts of

bills stated that the Commission could

authorize a natural gas company ‘‘to

provide storage and storage-related

services at market-based rates for new

storage capacity placed in service after

the date of enactment of the Energy

Policy Act of 2005, notwithstanding the

fact that the company is unable to

demonstrate that it lacks market power

* * *.’’ 56 Under these early versions of

the Act, it was clear that all new storage

capacity would have been eligible for

56 S. 10, 109th Cong. sec. 382 (2005).See also,

H.R. 6, 109th Cong. sec 382 (with engrossed

amendment as agreed to by the Senate, June 28,

2005); H.R. 6, 109th Cong. sec. 382 (as passed and

ordered to be printed by the Senate, July 14, 2005).

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market-based rates. However, in the

final bill, the phrase, ‘‘related to a

specific facility’’ was added so that the

subject language read, ‘‘to provide

storage and storage-related services at

market-based rates for new storage

capacity related to a specific facility

placed in service after the date of

enactment of the Energy Policy Act of

2005 * * *’’ 57 The addition of the

specific facility language indicates that

it is the facility, not the storage capacity,

that must be placed in service after the

date of the Act.58

115. Congress, however, provided no

definition of the term facility. Upon

review of the comments and further

consideration, the Commission

concludes that a more traditional

interpretation of ‘‘facility’’ than that

posited in the NOPR may be more

consistent with Congressional intent

and existing precedent, and better serve

to further the Commission’s goal of

facilitating the development of new

natural gas storage capacity. The

Commission recognizes that significant

and substantial enhancements to storage

capacity can be achieved at existing

fields and finds that it is unnecessary to

exclude service from such expansions

from consideration for market-based

rates by narrowly interpreting the term

‘‘facility’’ in the context of section 4(f).

For purposes of implementing the

certification requirements of section 7(c)

of the NGA, the Commission defined

‘‘facilities’’ broadly, in exclusionary

terms—everything except ‘‘auxiliary

installations’’ and certain facilities

constituting replacement facilities are

‘‘facilities’’ for which a natural gas

company must obtain a certificate.59

Applying that same definition here, in

the context of section 4(f), would be

consistent with our longstanding

practice in applying that term under the

NGA and therefore consistent with the

rule that Congress is deemed to be

aware of existing administrative

interpretations when amending a

particular statute that contains such

interpretations.60 This definition would

57 H.R. Rep. No. 109–190, at 97 (2005) (Conf.

Rep.).

58 See Jama v. Immigration & Customs

Enforcement, 543 U.S. 335, 343 (2005) (noting the

‘‘ ‘grammatical ‘rule of the last antecedent,’

according to which a limiting clause or phrase

* * * should ordinarily be read as modifying only

the noun or phrase that it immediately follows.’’ ’

(quoting Barnhart v. Thomas, 540 U.S. 20, 26

(2003)).

59 See 18 CFR 2.55 (2005).

60 See Bragdon v. Abbott, 524 U.S. 624, 645

(1998) (when administrative and judicial

interpretations have settled the meaning of an

existing statutory provision, repetition of the same

language in a new statute indicates, as a general

matter, the intent to incorporate its administrative

and judicial interpretations as well).

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enable storage providers to seek marketbased rates for service associated with

capacity related to any ‘‘specific

facility’’ requiring certification placed in

service after the date of the Act, be it a

new storage cavern or a facility which

expands capacity at an existing cavern

or reservoir. However, to receive such

authorization, the storage provider will

still need to satisfy the other

requirements of section 4(f) discussed

below. In addition, such rates will only

be found to be in the public interest if

the storage provider demonstrates that

the market-based services will not be

subsidized by existing customers and

that customers receiving cost-based

service from expanded facilities will be

adequately protected.

116. Regarding the NiSource

Pipelines’ concern over the

Commission’s definition of ‘‘in service,’’

we clarify that our intent is to define ‘‘in

service’’ to mean when the facilities are

actually placed into service.

2. Market-Based Rates Are in the Public

Interest and Necessary to Encourage the

Construction of Storage Capacity in the

Area Needing Storage Services

117. Section 4(f) of the NGA states

that in order to allow a company to

charge market-based rates under this

section, the Commission must

determine 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.’’ 61 In the NOPR, the

Commission stated that applicants for

authorization under section 4(f) will

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.

To make this showing, the Commission

suggested that the applicant could

present evidence that it had 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. However, the

Commission invited comments

concerning other ways a project

applicant might make these showings.

Comments

118. AGA supports the suggestion that

an applicant under this section might

demonstrate the need for market-based

storage rates by showing that the market

failed to subscribe under long-term

contracts at cost-based rates offered

through an open season. INGAA also

61 Energy Policy Act of 2005, Pub. L. 109–58,

section 312, 119 Stat. 594, 688 (2005) (to be codified

at 15 U.S.C. 717c(f)(1)(A)).

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supports the Commission’s suggestion,

but suggests such a showing should not

be required. Rather, the Commission

should allow the applicant substantial

discretion as to how to make the

requisite showing based on the facts of

its project. EEI agrees that the applicant

should have the burden to show that

market-based rates are necessary to

encourage construction of storage

capacity; specifically, EEI urges the

Commission to require an applicant to

show why such capacity cannot be

developed under cost-based rates. SCE

asserts that in the event an applicant

relies on a failed open season as

evidence of need, other parties must

have the opportunity to contest the open

season’s reasonableness.

119. The NYPSC expresses concern

that the NOPR did not discuss ‘‘public

interest’’ as a standard separate and

apart from ‘‘need,’’ as the language of

section 4(f) treats these as separate

standards. The APGA also states that the

Commission must revise § 284.505 to

require a specific public interest

demonstration.

120. NYPSC acknowledges that the

‘‘public interest’’ standard could

encompass a broad range of factors. It

argues, however, that while the

Commission may find it is in the

‘‘public interest’’ to authorize marketbased rates to encourage the entrance of

independent, third party storage

providers into the market, it may not be

in the public interest to encourage the

construction of new storage facilities by

a pipeline with a dominant market

share.

121. Haddington Ventures asserts that

the Commission should recognize three

distinct categories of new storage

projects and treat each differently under

its section 4(f) policy. The three

categories are: (1) Independent storage

projects owned by entities unaffiliated

with existing natural gas infrastructure

subject to cost-based rate regulation; (2)

storage projects owned by entities

affiliated with existing natural gas

infrastructure subject to cost-based rate

regulation, but which are not physically

connected to such existing

infrastructure; and (3) storage projects

owned by entities affiliated with

existing natural gas infrastructure

subject to traditional cost-based rate

regulation to which such storage

projects are connected or upon which

such storage projects otherwise rely.

122. Haddington Ventures submits

that the Commission’s proposal

adequately addresses Category 2

projects, but should be adjusted to better

account for Category 1 and Category 3

projects. With regard to Category 1

projects, Haddington Ventures asserts

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that the consumer protection required

will be satisfied by: (a) The

Commission’s rate regulation of existing

infrastructure, which establishes a

ceiling on the price that the facility

owner can command for storage, and (b)

the relative ease of entry by potential

competitors.

123. Haddington Ventures asserts that

a Category 3 project should be granted

market-based rates only after the project

has met the burden of demonstrating

that (a) no mechanisms remain that

could be exploited to unfairly advantage

such projects, and (b) any safeguards

imposed are administrable. Category 3

projects should be required to

demonstrate annually and whenever

material changes in the market or of the

project may undermine customer

protections. In addition, Haddington

Ventures maintains that Category 3

projects that do not achieve the desired

level of return at market-based rates

should not be allowed to fold the costs

of the project back into a regulated rate

structure, except where (a) a bona fide

change of circumstances has occurred

that eliminates the original grounds for

granting the market-based rate authority,

and (b) the Commission is satisfied that

the regulated rate would be lower than

the market rate.

124. Enstor takes a different approach,

asserting that those that oppose marketbased rates should have the burden of

showing that such rates are not

‘‘necessary to encourage the

construction of the storage capacity in

the area needing storage services.’’

Enstor proposes that the Commission

establish a presumption that storage

capacity will not be built in the absence

of market-based rate authorization.

Enstor asserts that, in the alternative, if

the Commission does not adopt such a

presumption, the objective financial

criteria that the applicant’s lenders are

requiring for the development of the

particular project should be the basis for

the required determination of need.

Commission Determination

125. In order to authorize marketbased rates under section 4(f), the

Commission must determine that: (1)

Market-based rates are in the public

interest; (2) market-based rates are

necessary to encourage the construction

of the storage capacity; and (3) the area

in which the storage project is proposed

needs storage services. We agree with

the NYPSC and APGA that the public

interest requirement is a separate

standard under the Act and we have

revised § 284.505 accordingly. The

Commission will expect each applicant

to address each of these requirements in

its applications explaining and

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Jkt 208001

supporting its contentions with respect

to each element.

126. In determining whether marketbased rates for a particular project are in

the public interest, the Commission will

consider, among other things, the risk of

the project, and the investment required

to fund it. Generally, the Commission

would expect that for market-based rates

to be in the public interest for services

proposed under section 4(f), marketbased rates would be necessary for the

project sponsor to secure financing and

move forward with the project. In the

Commission’s view, it is unlikely that

market-based rate authorization would

be necessary, or in the public interest,

to encourage relatively risk-free

expansions of storage.

127. We also agree with the NYPSC

and Haddington that another factor to

consider in determining whether

market-based rates are in the public

interest is whether the applicant is a

new independent storage provider or an

existing pipeline in the relevant market.

In general, we believe that an existing

pipeline will face fewer difficulties in

securing financing for incremental

expansions of existing storage facilities.

As a going concern with existing

customers and financial relationships,

the risk associated with acquiring

financing is lower for incremental

expansions than the risk associated with

a greenfield project undertaken by a

new entrant in the market. Therefore,

we believe it may be more difficult for

an existing pipeline to meet the public

interest standard than it will be for a

new independent storage provider.

128. Ultimately, the Commission’s

finding that market-based rates are in

the public interest will reflect its

consideration of all aspects of 4(f)

proposals, including, but not limited to,

the risk faced by the project sponsors,

the extent to which additional capacity

is needed in the area of the project, and

the strength of the applicant’s showing

that the facilities would not be built but

for market-based rate treatment.

129. In order to receive authorization

to charge market-based rates under

section 4(f), each applicant must make

a showing as to why market-based rates

are necessary to encourage the

construction of the storage capacity. As

the Commission stated in the NOPR,

one way that the applicant could make

such a showing is 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.

On the basis of the record, we believe

such an open season is the best means

of demonstrating that cost-based rates

will not be sufficient. However we are

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36627

open to applicants making another type

of showing. Applicants may also cite to

other marketing factors to explain why

market-based rates are necessary. As

suggested by SCE, parties will have an

opportunity to comment upon this

evidence.

130. The Commission will not

establish a presumption that storage

capacity will not be built in the absence

of market-based rate authorization, as

suggested by Enstor. The statute

requires that the Commission make an

affirmative finding that market-based

rates are necessary to encourage the

construction of storage. Also, in the

Commission’s experience, storage has

been built in the absence of marketbased rate authorization. Regarding

Enstor’s assertion that the objective

financial criteria that the applicant’s

lenders are requiring for the

development of the particular project

should be the basis for the

determination of the necessity of the

project, the Commission will afford

applicants significant discretion in

demonstrating that market-based rates

are necessary to encourage the

development of additional storage.

Enstor can cite to requirements imposed

by its lenders if it believes that such

requirements justify the authorization of

market-based rates. The Commission

cannot make a generic determination on

such issues, but must look at the

positions of the parties in individual

cases.

131. Applicants will also have to

show that storage services are needed in

the area in which they are proposing a

project. An applicant can demonstrate

need by including evidence of a general

lack of storage in the area or that

existing storage capacity is fully

utilized, pipeline constraints leading

into the area, projected increased

demand for natural gas in the area to be

served, customer interest, high natural

gas prices and/or volatility and other

information the applicant believes

supports its determination that

additional storage is needed. As noted

above, the Commission will balance the

strength of an applicant’s showing of

need with the other requirements of the

Act in determining whether to approve

a request for market-based rates under

NGA section 4(f).

132. The Commission notes that the

subject of this rule is whether and in

what circumstances authorization of

market-based rates would be

appropriate pursuant to NGA section

4(f). To the extent an applicant is also

requesting authority to construct and

operate new storage facilities pursuant

to NGA section 7(c), the applicant will

be subject to the full range of

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requirements of the Commission’s

certificate process.62

3. Customer Protection

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133. New NGA section 4(f) 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.

In the NOPR, the Commission proposed

to allow the applicant to propose a

relevant method of protecting

customers.

134. The Commission stated that in

general, customers will be better off if

more storage infrastructure is

constructed. Therefore, the Commission

sought a balance in considering requests

for market-based rate authority under

new NGA section 4(f), between the

obvious benefits of additional storage

capacity in areas needing storage

services against adverse impacts which

might arise from the potential exercise

of market power by the storage provider.

In doing so, the Commission stated that

it remained mindful of the fact that to

the extent unnecessary conditions are

imposed, the additional storage

infrastructure and the additional service

options would be lost to potential

customers. Accordingly, the

Commission sought comments

concerning how to achieve this balance.

135. The Commission stated that the

appropriate method of customer

protection may vary according to the

facts and circumstances of the

individual project proposals and

therefore, the Commission proposed to

allow each applicant to propose a

method of protecting customers best

suited to its project. However, the

Commission sought comments on

whether it would be beneficial to

identify certain acceptable approaches

to protect customers. The Commission

reasoned that the establishment of

generic safeguards would facilitate the

application process for NGA section 4(f)

market-based rate authority, but stated

that each applicant would retain the

right to propose other methods of

protecting customers that might better

fit the circumstances of its project.

62 Pursuant to § 157.20(b) of the Commission’s

regulations, any authorization granted for the

construction of a proposed project will establish a

time within which construction of the facility must

be completed and made available for service. We

have in the past granted extensions of time within

which to complete construction of proposed

projects. With regard to projects for which NGA

section 4(f) authorization is sought, we note that we

would not anticipate granting an extension of time

to complete construction based on an argument that

market demand for the project has not materialized.

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136. Therefore, in addition to seeking

suggestions for possible generic

safeguards, the Commission outlined

two generic safeguards for comment.

The Commission reasoned that entities

with market power can exercise that

power in two general areas: (1) The

withholding of capacity; and (2) the

extraction of monopoly rents. Therefore,

the Commission set forth two

approaches to protecting customers

against the exercise of market power.

The first approach would involve

conditions that limit the withholding of

capacity and the second approach

would involve rate protections.

137. The Commission reasoned that

market power can be exercised in

circumstances where a storage operator

can withhold capacity from the market

and thereby raise prices. The

Commission stated that 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.’’ 63 The Commission requested

that comments address 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.64

138. The Commission recognized that

one difficulty in applying this standard

is defining when withholding should be

found to be indicative of the exercise of

market power. Therefore, the

Commission requested 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.65

63 Process Gas Consumers Group v. FERC, 292

F.3d 831, 837 (D.C. Cir. 2002).

64 Id. (affirming Commission determination that

prices determined through an uncapped bidding

process were the product of competitive forces, not

the exercise of market power).

65 The Commission sought comment on several

consumer protection questions including: (1)

whether allowing the storage operator to set a

reserve price would provide an appropriate balance;

and (2) whether a withholding prohibition should

apply all the time, or only during periods of peak

demand for storage services? The Commission also

request comment on how terms such as ‘‘reserve

price’’ and ‘‘period of peak demand’’ should be

defined, if such conditions were to be adopted. The

Commission also requested comment on whether a

formal auction process under which the applicant

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139. The Commission also pointed

out that market power can be exercised

in those circumstances where a storage

operator can extract monopoly rents and

stated that rate protections could take

several forms. The Commission stated

that rate caps could be designed to

provide adequate customer protection

while also supporting the financing of

new storage projects. The Commission

sought comment on whether there are

certain approaches to rate caps that

could be adopted as a generic safeguard.

The Commission also proposed that it

allow an applicant to establish a longterm (e.g., 5–10 years) recourse rate that

was cost-based and allow the applicant

to negotiate contracts under marketbased rates for shorter-term transactions

and requested comment on this

approach or whether there were other

cost-based rate designs or price cap

methodologies that the Commission

should consider.

Comments

140. With respect to the ‘‘customer

protection’’ findings required under

section 4(f)(1)(B), INGAA and Williston

Basin submit that the Commission can

rely on the same reporting requirements

and NGA section 5 complaint process

that it proposes with respect to

compliance with the statutory periodic

review requirement. INGAA and

Williston Basin also support the

Commission’s suggestion that it may

rely on a showing that a storage operator

has sold or made available all of its

capacity.

141. INGAA asserts that the focus of

customer protection should be those

customers receiving storage service at

cost-based rates. Other commenters,

including AGA, APGA, and NGSA,

place the focus on storage customers

seeking service under market-based

rates authorized pursuant to section 4(f).

EGSI requests the Commission to also

ensure protection for competitors.

142. Williston maintains that the

applicant should be allowed to propose

an adequate method of protecting

customers and the Commission should

address each application individually.

Duke also asserts that the Commission

should not adopt any generic safeguards

that will be the equivalent of price

controls. Duke argues that imposing on

storage participants an obligation to sell

available capacity is unworkable and, if

adopted, would eliminate any of the

potential advantages that would result

from market-based rates. Duke explains

that for an obligation to sell to be

meaningful, that obligation must be

is obligated to sell all capacity above a reserve price

should be considered?

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Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Rules and Regulations

imposed with respect to some price,

which inevitably leads to the imposition

of price controls.

143. Northern, Sempra, INGAA and

Enstor state that the circumstances of a

project should determine the

appropriateness of any given customer

protection. Northern maintains there are

some additional protections that should

apply, including an open season

bidding process with or without a

minimum reserve price, known terms

and conditions of service defined in the

storage provider’s tariff, a restriction on

the storage provider requesting during a

contract term that the market-based

rates it agreed to be increased, a

commitment by the pipeline to existing

customers that it will not allocate

incremental costs associated with a

market-based storage expansion to

existing shippers receiving storage

services under cost-based rates in a

general rate case proceeding, and a

requirement that market-based rates

should be subject to the Commission’s

reporting and posting requirements. SCE

urges the Commission to perform a

contemporaneous market-wide analysis

in determining whether to grant marketbased rate authority as well as

considering mitigation methods tailored

to the specifics of each application.

144. Dominion supports both the

case-specific approach to reviewing the

adequacy of customer protections, and

establishing generic protections that

will expedite the process. Dominion

submits that customers will be protected

from the exercise of market power if

they are offered long-term, cost-based

storage rates as a recourse service

option. Dominion asserts that this will

prevent a storage provider from

extracting monopoly rents because a

customer can always opt for the longterm recourse service. Withholding of

capacity is therefore not possible,

Dominion stresses, because the services

will be offered under open-access, nondiscriminatory FERC-approved tariffs.

145. PGC states it is appropriate to

establish a general rule requiring the use

of certain pre-established safeguards

where market-based rate authority is

granted. However, because some

concerns may be case-specific, PGC

supports requiring individual applicants

to carry the burden of demonstrating

that consumers are adequately

protected, separate and apart from their

compliance with any universally

established safeguards. PGC supports

the requirement that all capacity be

offered for sale and made available to

customers on a non-discriminatory

basis.

146. NYPSC supports the

establishment of generic safeguards.

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Specifically, the NYPSC maintains that

a condition prohibiting the withholding

of capacity would serve to protect

consumers. It states that the

Commission could address the pricing

issues associated with this condition by

allowing applicants to propose and

support a reasonable recourse rate on a

case-by-case basis. The NYPSC also

supports allowing intervenors to

propose other protective conditions on

a case-by-case basis. NASUCA asserts

that restrictions on withholding of

capacity would limit the ability of a

storage operator to exercise market

power. NASUCA urges the Commission

to require the storage applicant to post,

both continuously and on a real-time

basis, the amount of contracted storage

service and storage capability for each

storage service offered, the identified

differences being considered an offer to

sell.

147. AGA urges the Commission to

lift the cap on capacity releases in order

to permit greater competition with

storage operators to place downward

pressure on prices.

148. APGA maintains that the NOPR

errs in its assumption that the consumer

will be protected by requiring that a

market-based-rate storage service

provider sell all of its existing capacity.

APGA contends that the Commission’s

reliance on Process Gas is misplaced

because that decision relied on the fact

that the rates for the capacity in

question were regulated and thus the

pipeline would have no incentive for

refusing to build additional capacity.

This is not the situation the Commission

faces in the instant case. APGA also

contends that the NOPR erred in

fashioning customer and consumer

protections that disregard the statutory

requirement that rates and services

cannot be unduly discriminatory or

preferential.

149. To prevent the imposition of

either excessive or unduly

discriminatory rates, APGA proposes

that: (1) The Commission cap the price

of long-term storage service (i.e.

contracts with a term of one year or

more) and require tariff terms and

conditions for this service; (2) these

long-term contracts be subject to the

right-of-first-refusal; (3) storage

operators be allowed to sell any excess

capacity as short-term storage service;

(4) an auction be used to award storage

capacity where the storage operator

must make all capacity available at or

above a reserve price (a rate no higher

than the cost-based rate for short-term

capacity); (5) storage operators be

required to continually provide timely

information on storage capacity

availability and to initiate an auction

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36629

upon a prospective customer request; (6)

storage providers be required to

maintain a record for three years of the

quantities, rates, terms and conditions

and date of each market storage

purchase; (7) the Commission review,

every three years, whether the

availability and rates offered are just

and reasonable and not unduly

discriminatory or preferential; (8) the

Commission be allowed to proceed sua

sponte or based on a complaint to

determine whether the rates, terms and

conditions were or are just and

reasonable; (9) the Commission be

granted the authority to require the

disgorgement of unjust profits, invoke

civil fines, and suspend or revoke the

certificate or market-based rate authority

where it determines that the availability

or rates charged for market-based rates

were or are not just and reasonable or

are unduly preferential or

discriminatory; and (10) the costs of the

storage capacity for which market based

rates are sought be prohibited from

inclusion in recourse rates.

150. EGSI urges the Commission to be

sensitive to the need to protect

competitors as well as customers,

because a storage provider that has

market power and market-based rates

could use that market power in anticompetitive ways. EGSI agrees that one

way of guarding against such an abuse

of market power is the establishment of

a minimum ‘‘reserve’’ rate or rate floor.

EGSI suggests that such rate floor be set

at or above the facility’s short-term

marginal costs.

151. Enstor does not support the

adoption of the Commission’s suggested

generic consumer safeguards. Enstor

asserts that the Commission’s proposed

prohibition on the withholding of

capacity, and its suggested rate

protections, would upset the balance

between the customer and the storage

provider such that new storage projects

would never get built. INGAA also

rejects the ‘‘rate cap’’ protections

suggested by the Commission as simply

incompatible with market-based rates.

Enstor would support an approach

where the rate applicant would state

upfront whether it would be willing to

submit to an annual reporting

requirement detailing the agreements

and rates that it negotiated during the

preceding 12 months, similar to those

that section 311 service providers

submit. Enstor advocates that the

Commission adopt a 60-day ‘‘safe

harbor’’ review period during which the

market-based rate arrangements could

be evaluated. If the Commission took no

action during this time frame, the

arrangements would be left intact.

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Commission Determination

153. As a prerequisite for granting

market-based rate authority, new NGA

section 4(f) requires that the

Commission, 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

will require an applicant for this

authorization to show that granting its

application can be done consistent with

the requirement of section 4(f)(1)(B).66

This may be done in different ways, and

as the NOPR proposed, we will leave

applicants with the discretion to fashion

proposals that will operate effectively

given the unique situations involved.

However, we will also describe methods

that an applicant might employ to

satisfy the Commission that the

customer protection requirement has

been met.

154. Customer protection starts with

potential storage customers having a fair

and open opportunity to contract for

proposed new capacity. One way for an

applicant requesting section 4(f)

authority to demonstrate that interested

customers were given nondiscriminatory access to new storage

capacity would be to show that it had

conducted a fair and transparent open

season. The industry has conducted

open seasons for quite a few years, and

the Commission has provided guidance

in individual cases on issues that have

arisen.67 A properly conducted open

season will allow a project sponsor to

test the market, attempt to negotiate

mutually agreeable rates which support

the project financially, and provide a

means to give the market fair notice of

and open access to potential new

services. Allegations that the process

offered by an applicant failed to provide

such fair notice and access can be raised

by potential customers in individual

proceedings.

155. APGA argues that the NOPR

erred in disregarding the statutory

requirement that rates and services

cannot be unduly discriminatory or

preferential. The Commission disagrees.

With respect to rates, nothing in this

Final Rule transgresses the statutory

requirement that they be ‘‘just,

reasonable and not unduly

discriminatory or preferential.’’ With

respect to services, every part 284

transporter, which includes storage

service providers, must comply with the

non-discriminatory access requirements

of those regulations.68 This rule deals

with the setting of rates and does not

disturb nor set aside other provisions of

the Commission’s open-access

requirements.

156. Another necessary component of

customer protection is ensuring that

existing customers are not subject to

additional costs, risks, or degradation of

service resulting from new services

provided under section 4(f). Potentially,

existing storage service providers,

including interstate pipelines and

intrastate pipelines, may request

authority to charge market-based rates

66 In its comments, NYPSC requests the

Commission allow interveners to propose other

protective conditions on a case-by-case basis. While

the burden rests with the applicant, interveners

may also propose protective conditions. The

Commission will give full consideration to such

proposals when it considers an individual case.

67 See, e.g., Ouachita River Gas Storage Co.,

L.L.C., 68 FERC Õ 61,402 (1994); Avoca Natural Gas

Storage, 68 FERC Õ 61,045 (1994); Northwest

Pipeline Corp., order denying reh’g, 61 FERC

Õ 61,047 (1992); Pacific Gas Transmission Co., 54

FERC Õ 61,291 (1991).

68 18 CFR 284.7(b), 284.7(c) and 284.9(b) (2005).

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152. NGSA suggests that the

Commission take the following steps to

ensure consumer protection: (1) Assess

whether the applicant has provided

sufficient evidence that its rates will be

just and reasonable by examining

whether the proposed rates are ‘‘in line’’

with other storage rates within the

region that are charging market-based

rates; (2) assess other specific safeguards

as proposed by the applicant that

indicate that the applicant is willing to

mitigate market power, including

whether the applicant has negotiated

contracts that permit customers to

ratchet down levels or permit

mandatory ‘‘out’’ clauses or contracts

that include indexed-based rates where

the risk is shared by the applicant and

the customer; (3) require the applicant

to hold an open season, which if

structured correctly, will provide

transparency and enhance the

Commission’s ability to analyze and

review the conduct of the storage

operator; (4) apply generic customer

safeguards which would include a no

withholding requirement requiring that

all storage capacity be available at all

times with a ‘‘reserve price’’ based on

the range of rates charged for storage

area facilities with market-based rates;

(5) reaffirm existing policies including

the filing of a tariff that contains all

terms and conditions of service, as well

as standard forms of service agreements,

and the ability of customers to release

capacity and application of the affiliate

rules under Order No. 2004; and (6)

employ several prospective generic

actions for all applications which would

include the monitoring of an applicant’s

compliance with the implementation of

the safeguards and acting swiftly upon

receiving a customer complaint.

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pursuant to section 4(f). Any applicant

which already serves customers under

prior authorization must ensure that

existing customers will not be subject to

additional costs, risks, or degradation of

service as a result of a section 4(f)

authorization, and must explain how its

application is consistent with this

requirement.

157. In addition, successful applicants

will be required to separately account

for the costs, services, and commitments

provided pursuant to section 4(f)

authorizations, and to retain these

records for as long as they may be

required under the Commission’s

existing practices for pipelines

operating under the Uniform System of

Accounts.69

158. A third fundamental protection

is an open-access tariff stating the terms

and conditions of service offered. While

the rates would be left to individual

negotiation, within the customer

protections offered by that provider and

accepted by the Commission, the terms

and conditions of service must be

provided in a generally-applicable tariff.

As acknowledged and supported in the

comments of Northern and NGSA, a

tariff provides essential transparency

and basic knowledge about the nature

and quality of service to be provided. It

is also a touchstone by which all

customers may be assured that the

quality of service provided is

comparable for all customers.70

Although the NOPR did not refer to

tariff-filing requirements, we note that

the context of these authorizations is the

provision of open-access storage and

storage-related services offered under

Part 284 of the Commission’s

regulations. While parts of these

regulations are routinely waived in

market-based rate authorizations upon

applicant’s request and for good cause

shown, the Commission has

consistently required generally

applicable tariffs for these services and

intends to continue this practice for

authorizations pursuant to section 4(f).

This will also allow the Commission to

‘‘ensure that reasonable terms and

conditions are in place to protect

consumers’’ as required by new section

4(f).

159. EGSI asks the Commission to

expand customer protection to require

that competitors also be protected.

While the Commission does not

generally require that competitors be

protected, and does not read the

69 18 CFR part 225 (2005).

70 For transporters offering service pursuant to

NGPA section 311, their statement of operating

conditions will provide similar transparency and

consistency of service for all customers.

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Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Rules and Regulations

customer protection requirement of new

section 4(f) to require such protection,

the Commission agrees that as a general

matter, storage service providers, like

other natural gas companies, should not

charge rates less than their marginal

costs.71 However, the Commission is not

here requiring that a storage service

provider authorized to collect marketbased rates under section 4(f) state a

minimum average variable cost rate

below which it would not be allowed to

charge. Rather, in the event of a

complaint, the Commission will require

the storage service provider to

demonstrate that marginal costs were

recovered under every rate charged.

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i. Withholding

160. In the NOPR, the Commission

requested comment on whether

customers can be assured that market

power is not being exercised if all

capacity is made available to the market,

and how to apply a prohibition against

withholding. NiSource Pipelines assert

that the Commission’s Part 284

regulations already contain a generic

safeguard against withholding of

capacity.72 INGAA states that an auction

process with an appropriate reserve

price would be an appropriate means of

complying with a no-withholding rule.

However, INGAA urges the Commission

not to attempt to establish generic

requirements for how such a reserve

price should be established. Northern

believes that an open season with or

without a reserve price (and with other

stated conditions) would be an

appropriate method of compliance.

161. PGC, NYPSC and NASUCA all

support the concept of prohibiting

withholding. PGC and NYPSC would

leave the method for achieving this

result to be worked out in individual

cases. NASUCA would impose

continuous and real-time posting

requirements on capacity, contracted

capacity and available capacity. APGA

would also require more capacity

postings, and would require the storage

operator to initiate an auction upon

customer request.

162. Williston and Duke, on the other

hand, argue that a formal auction

requirement with a reserve price would

reduce or eliminate the incentive for

71 See Regulations of Natural Gas Pipelines After

Partial Wellhead Decontrol, Order No. 436, FERC

Stats. and Regulations, Regulations Preambles

1982–1985 ¶ 30,665, at 31,543–45 (1985)

(permitting the discounting of transportation rates

between the maximum and minimum approved

rates with the minimum rate based on average

variable costs).

72 Citing, Process Gas Consumers Group v. FERC,

292 F.3d 831, 837 (D.C. Cir. 2002) (Process Gas) and

Natural Gas Pipeline Negotiated Rate Policies and

Practices, 114 FERC ¶ 61,042 at P 10 (2006).

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storage service providers and customers

to enter into market-based rates

contracts and they urge the Commission

to allow the applicant to propose an

adequate method of customer

protection. They argue that any

mandated reserve price would

constitute de facto cost-based rate

regulation and would nullify any

benefits offered by market-based rates

under these circumstances. Enstor

objects to any generic requirements or

prohibitions.

163. The Commission believes that an

applicant’s proposal that adequately

prevents withholding is one good way

to meet the customer protection

requirement. The Commission’s existing

part 284 open access regulations require

interstate pipelines to provide service

on a non-discriminatory basis to the

extent capacity is available and a

qualified shipper is willing to pay the

maximum tariff rate. In the absence of

proof that the service provider lacks

market power and a just and reasonable

rate, the Commission has no reason to

believe (and no basis for reasonably

deciding) that an applicant for section

4(f) market-based rates does not have

the potential to exercise market power.

In this context, a proposal that acts to

prevent withholding as a method of

exercising substantial market power,

tempered with a reasonable reserve

price which would allow a section 4(f)

applicant to recover its investment

appears to be the best way to satisfy the

test.

164. Several commenters have

suggested specific methods for setting

reserve prices. For example, NGSA

suggests use of the range of rates

charged for other area storage facilities

with market-based rates. APGA would

require a cost-based rate to be used.

However, the Commission

acknowledges the objections of

Williston and Enstor that a mandatory

reserve price is tantamount to indirect

cost-based ratemaking. Many other

commenters advocate leaving it to the

individual applicant to establish a

reasonable method of compliance. The

Commission believes that the most

reasonable course is to allow the

individual applicant to propose a

method that balances adequate customer

protections against withholding as a tool

for exercising significant market power

against the applicant’s need for revenue

sufficiency.

165. In its application for section 4(f)

authority to charge market-based rates,

the applicant must demonstrate how it

intends to comply with the nowithholding requirement, and must also

specify whether, and if so, how it will

establish a reserve price. The

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36631

Commission will entertain reserve

prices which represent a reasonable

price in the market to be served. A few

examples of how this price may be set

include: prices offered by competing

storage sellers in the same market, as

suggested by NGSA; applicant’s total

costs; applicant’s other already agreed

upon rates (e.g., the highest initial rate

agreed to at arms-length with a nonaffiliate in the initial open season); or

another type of reserve price for which

the applicant can provide a just and

reasonable basis convincing to the

Commission based on the facts of a

specific case. Applicants proposing a

method of forestalling attempts to

withhold capacity in an effort to exert

market power which does not include a

reserve price must convincingly

demonstrate how the proposal will

prevent the withholding of capacity.

ii. Other Rate and Service Protections

166. In the NOPR, the Commission

also sought comments on rate caps that

might provide protection against the

extraction of monopoly rents. In

response, Dominion advocates that the

offer of a long-term cost-based storage

service as a recourse service offering,

would satisfy the customer protection

requirement. APGA proposes a twoprong approach where long-term storage

services are first offered at price-capped

rates, with unbooked capacity available

to be auctioned for short-term services;

the short-term auction would be subject

to a reserve price no higher than the

cost-based rate for short-term capacity.

Many of the pipelines and storage

operators oppose any cost-based pricing

restraints as nullifying the incentives to

build new storage infrastructure.

167. The Commission will not

mandate cost-based price controls as a

method for ensuring customer

protection. On balance, we agree with

the comments that a mandated price cap

would undermine and perhaps nullify

the incentive to build new storage

infrastructure, which is the

Commission’s primary goal here, and is

otherwise tantamount to imposing a

cost-based rate, rather than granting

authority to sell at market-based rates.

However, the Commission views the

suggestion of a long-term cost-based

recourse storage service as a viable

approach that an applicant may

propose. In addition, some of the

concepts discussed above on the reserve

price issue may offer other methods of

capping prices which an applicant may

use in its proposal. For example, a price

cap based on the range of prices offered

by competing sellers in the same market

could be adopted without an auction

process.

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4. Periodic Review

168. In the NOPR, we suggested that

regular Commission monitoring of

market-based storage operators based on

existing forms and data postings,

supplemented as necessary with more

specific information, would satisfy the

periodic review requirement of the new

NGA section 4(f). Appropriate action

under section 5 of the NGA would be

available should the Commission

determine, based on its own review or

in response to a complaint, that rates

charged by the storage operator were not

just and reasonable.

169. The Commission requested

comments on this approach, whether

further reporting or transparency

requirements should be imposed, and

whether the applicant’s proposed

customer protection requirements

should be reviewed every five years.

Comments

170. Several commentors generally

agreed with the approach described in

the proposed rule to rely on existing

reporting requirements, and NGA

section 5, to comply with the periodic

review requirement.73 INGAA submits

that the information currently reported,

along with the public information

regularly reviewed by Commission staff

and the information provided in

response to any specific complaint, as

well as the existing compliance

regulations, are sufficient to ensure

compliance with the statute. Williston

Basin and Enstor state that a more

formal review process, such as every

five years, would add unnecessary

expense and is unlikely to present any

additional information than is already

publicly distributed on a regular basis.

Sempra states that the reporting

requirements should be designed to

provide information that updates the

information that was initially relied

upon by the Commission in concluding

that market-based rates were

appropriate and to assure that such rates

remain just and reasonable.

171. AGA, on the other hand,

supports a periodic review of marketbased rates every five years in addition

to the proposed Commission monitoring

of public postings by storage operators.

AGA suggests that the Commission

provide an opportunity every five years

for customers and interested parties to

submit comments regarding storage

rates and consumer protection

measures. Similarly, NGSA also

suggests that the Commission institute a

periodic review at least every five years

or earlier if potential issues are detected

73 Comments of INGAA, Williston Basin, Enstor,

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as a result of the Commission’s

monitoring or a filed complaint. APGA

disagrees with the Commission’s

suggestion that a section 5 complaint

complies with the section 4(f) mandate

that the Commission periodically

review whether the market-based rate is

just and reasonable and not unduly

discriminatory or preferential.

According to APGA, a section 5

complaint procedure suggests that the

Commission can impose only a

prospective remedy, which would fall

short of the consumer and customer

protections mandated by section 4(f).

Commission Determination

172. We find that the regular

Commission staff monitoring based on

existing forms and data postings,

supplemented as necessary with more

specific information required during the

course of any necessary inquiry,

coupled with our authority under NGA

section 5 will satisfy the periodic review

requirement of the new NGA section

4(f). Ongoing review of storage

operations, capacity subscription, and

transaction details would provide a

greater degree of customer protection

than would a formal review on a multiyear periodic cycle. Ongoing review, as

part of the Commission’s regular market

oversight and enforcement efforts,

would identify potentially problematic

situations faster and initiate solutions

sooner than a formal periodic

proceeding.

173. Existing reporting requirements

provide a wide range of information

regarding storage service operations and

rates. The Index of Customers filing

under § 284.13(c) reports contract

entitlements quarterly. The semi-annual

storage report under § 284.13(e) filed at

the end of the in

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