Underground Storage INGAA Comments 2-27-06

It is widely recognized that the demand for additional natural gas storage capacity is increasing. Enactment of section 312 of the Energy Policy Act of 2005 (“EPAct”), 15 U.S.C. § 717c(f), permitting the Commission to approve storage projects at market-based rates even without a no-market-power showing, clearly demonstrates Congressional recognition of the problem and an intent to encourage development of more capacity. In addition to the development of new storage fields, substantial capacity can be produced through the expansion of existing fields. In fact, this generally is the most cost-effective, quickest and least environmentally disruptive way to create additional storage capacity. Therefore, the Commission should exercise its discretion to adopt rules that embrace and encourage expansion of storage capacity through both construction of new storage fields and expansion of existing fields. The Commission should take care to ensure that interstate pipelines and pipeline affiliates, which own substantial amounts of that existing storage capacity, are not arbitrarily excluded from applying for market-based rates to develop either new or expanded storage fields. In that regard, it is important to recognize that pipeline ownership of existing transportation and storage capacity is in large part nominal, given actual control by shippers and others who have contractual rights to the use of that capacity.

A. Market Power Analysis for Market-based Rates. INGAA supports the Commission’s proposal to liberalize FERC’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. The Commission should adopt three additional reforms to its proposed market power analysis.

1. The Commission should amend its proposed regulations 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. See § 284.503(b)(4). This unexamined per se rule could produce skewed results that will unfairly handicap and discourage otherwise meritorious storage applicants. The notion that capacity owned by an affiliated company cannot provide a competitive alternative is undermined by the fact that contracted pipeline capacity is actually controlled not by the affiliate but by the pipeline’s customers. At a minimum, the Commission should eliminate the per se rule, and evaluate on a case-by-case basis whether affiliated capacity presents a competitive alternative.

2. The Commission should adopt a Herfindahl-Hirschman Index (“HHI”) level of 2500 rather than the 1800 that it currently employs as a benchmark for measuring market concentration. 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.

3. The Commission should eliminate its proposal for an automatic five-year market power review under § 284.504 for storage operators that have demonstrated they lack market power. For the same reasons proffered by the Commission in support of reliance on regular monitoring of posted information and the NGA section 5 complaint process for market-based storage rates under EPAct § 312 (see NOPR at PP 49-50), an automatic review is unnecessarily burdensome in this context as well. Instead, a requirement that market-based rate grantees report any changes in circumstances that are pertinent to their original absence-of-market-power showing would be adequate. If the Commission nevertheless adheres to an automatic review requirement, it should make clear that the new requirement does not have retroactive effect, that it does not apply to projects that have received market-based rate approval, and that the enforceability of market-based rate contracts arising out of such projects is not affected.

B. Section 312 of EPAct 2005. For the most part, INGAA supports the Commission’s proposed implementation of § 312 of EPAct 2005 (new NGA § 4(f), 15 U.S.C. § 717d(f)), which permits FERC to authorize new storage capacity at market-based rates without a showing that the company lacks market power. That support is subject to the following qualifications and recommendations.

1. The Commission has given § 312 an unnecessarily restrictive interpretation that would exclude new storage capacity that results from the expansion of existing fields or reservoirs. By equating the term “specific facility” with “a new cavern, reservoir or aquifer,” the Commission appears to be foreclosing market-based rates for new storage capacity in existing fields that results from adding new wellhead, compression, or other facilities. In general, such expansions of existing fields have the least environmental impact, and are the quickest and most economical way to bring new storage capacity to the market..

Even if the Commission adheres to a narrow reading of “facility,” the statute also may be read to cover “new storage capacity . . . placed in service after” enactment of EPAct 2005, provided that it is “related to a specific facility.” The phrase “related to a specific facility” ensures that there is some actual investment in physical facilities involved in creating the new storage capacity when the new capacity goes in service after EPAct 2005.

An interpretation of § 312 that permits market-based storage rates for new capacity produced from existing fields is permissible and consistent with the Congressional intent to encourage development of needed storage capacity. In the absence of any indication that Congress sought to exclude new storage capacity that results from new development of existing facilities, the Commission should adopt an interpretation that is consistent with the Congressional goal.

2. INGAA supports the Commission’s suggestion that, as a means of complying with the “public interest” and “necessary to encourage construction” findings under new NGA § 4(f)(1)(A), an applicant could present evidence that it offered its capacity at cost-based rates and was unable to obtain the necessary long-term commitments at those rates. While such direct evidence should be accepted, such a showing should not be imposed as a standard requirement, since there might be other more efficient means to demonstrate that the statutory criteria would be met in particular cases. An applicant should have the discretion to make the requisite showings based on the particular circumstances surrounding its market and its project.

3. With respect to the “customer protection” findings required under § 4(f)(1)(B), in general, the Commission can rely on the same reporting requirements and NGA § 5 complaint process that it proposes with respect to compliance with the statutory periodic review requirement. See NOPR at PP 49-50. INGAA also supports the Commission’s suggestion that it may rely on a showing that a storage operator has sold or made available all of its capacity.

4. INGAA supports the Commission’s proposal to rely on existing reporting requirements, and NGA § 5, to comply with the periodic review requirement under new NGA § 4(f)(3).

5. Finally, the Commission should eliminate the proposed regulation (§ 284.505(b)) that establishes a presumption that an applicant has market power. Such a presumption is not required by § 312. Moreover, since the ramifications of such a presumption are unexplored and uncertain, it is likely to operate as a disincentive for otherwise meritorious applicants, contrary to Congressional intent.