# Federal Energy Regulatory Commission

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URL: https://www.frixlaw.com/law-library/documents/agency%3Aferc%3Aeb4d90577310e0ce

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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.

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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.

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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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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

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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.

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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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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

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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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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.

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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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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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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 r

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Aferc%3Aeb4d90577310e0ce. Public record. Not legal advice.