Rate Regulation of Certain Underground Storage Facilities, 77079-77089 [E5-8031]

Download as PDF Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules DEPARTMENT OF ENERGY Federal Energy Regulatory Commission 18 CFR Part 284 [Docket Nos. RM05–23–000 and AD04–11– 000] Rate Regulation of Certain Underground Storage Facilities December 22, 2005. Federal Energy Regulatory Commission, DOE. ACTION: Notice of proposed rulemaking. AGENCY: The Federal Energy Regulatory Commission (Commission) is proposing to amend its regulations to establish criteria for obtaining marketbased rates for storage services offered under part 284. First, the Commission is proposing to modify its market-power analysis to better reflect the competitive alternatives to storage. Second, pursuant to Title III, Subtitle B, section 312 of the Energy Policy Act of 2005, the Commission is proposing rules to implement new section 4(f) of the Natural Gas Act, to permit underground natural gas storage service providers that are unable to show that they lack market power to negotiate market-based rates in circumstances where 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. These revisions are intended to facilitate the development of new natural gas storage capacity while protecting customers. SUMMARY: DATES: Comments are due February 27, 2006. Comments may be filed electronically via the eFiling link on the Commission’s Web site at http:// www.ferc.gov. Commenters unable to file comments electronically must send an original and 14 copies of their comments to: Federal Energy Regulatory Commission, Office of the Secretary, 888 First Street, NE., Washington, DC, 20426. Refer to the Comment Procedures section of the preamble for additional information on how to file comments. ADDRESSES: wwhite on PROD1PC65 with PROPOSAL FOR FURTHER INFORMATION CONTACT: Sandra Delude, Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502– 8583. Michael Henry, Office of General Counsel, Federal Energy Regulatory VerDate Aug<31>2005 17:50 Dec 28, 2005 Jkt 208001 Commission, 888 First Street, NE., Washington, DC 20426, (202) 502– 8532. Ed Murrell, Office of Markets, Tariffs, and Rates, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502– 8703. Berne Mosley, Office of Energy Projects, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502– 8625. SUPPLEMENTARY INFORMATION: I. Introduction 1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005 or the Act) 1 was signed into law. Section 312 of EPAct 2005, adding a new section 4(f) to the Natural Gas Act (NGA),2 permits the Commission to allow a natural gas storage service provider placing new facilities in service to negotiate 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 2. The enactment of EPAct 2005 adds momentum to efforts already underway at the Commission to adopt policy reforms that would encourage the development of new natural gas storage facilities while continuing to protect consumers from the exercise of market power. On September 30, 2004, the Commission issued a staff report that examined underground natural gas storage.4 On October 21, 2004, the Commission held a public conference with representatives of the industry to discuss the Staff Storage Report and issues relevant to underground storage.5 The Commission received oral and written comments in connection with the Staff Storage Report and conference. 3. After considering the conference comments, the current characteristics of the storage market, the nation’s existing 1 Energy Policy Act of 2005, Pub. L. No. 109–58, 119 Stat. 594 (2005). 2 15 U.S.C. 717, et seq. (2000). 3 Energy Policy Act of 2005, Pub. L. 109–58, § 312, 119 Stat. 594, 688 (2005). 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). PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 77079 and projected storage capacity needs, and the new legislation, the Commission concludes that reform of its current pricing policies may be appropriate. The purpose of this reform is to ensure access to storage services on a nondiscriminatory basis at just and reasonable rates and ensure that sufficient storage capacity will be available to meet anticipated increases in market demand. To achieve these goals, the Commission is adopting a two-prong approach. First, this notice of proposed rulemaking (NOPR) proposes modifications to the Commission’s market power analysis to permit the consideration of close substitutes to storage in defining the relevant product market. This will ensure that marketbased rates are not denied because of an overly narrow definition of the relevant market. Second, the Commission is proposing regulations to implement section 312 of EPAct 2005, which permits qualifying storage providers to charge market-based rates for a new facility even when they cannot (or do not) demonstrate that they lack market power. The Commission seeks comment, among other things, on whether there are certain generic safeguards that will provide adequate customer protections for entities applying for market-based rates under new NGA section 4(f). It should be noted, however, that these two policy reforms do not require a ‘‘sequential’’ approach for a potential storage developer. Instead, where a prospective applicant believes that it can make a showing sufficient to satisfy the requirements of new NGA section 4(f), it need not submit a traditional market power analysis in support of its request for market rates. In reviewing the applicant’s request for market-based rates under section 4(f), the Commission will presume that the applicant has market power for the purposes of ensuring that customers are adequately protected. Taken together, the intent of these reforms is to facilitate the expansion of gas storage capacity to, among other things, mitigate natural gas price volatility, while continuing to protect consumers from the exercise of market power. II. Background A. Changing Nature of Storage Services 4. In Order No. 636, the Commission found that pipelines held a competitive advantage over other gas sellers, in part E:\FR\FM\29DEP1.SGM 29DEP1 77080 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules wwhite on PROD1PC65 with PROPOSAL because of the lack of access to storage services.6 Therefore, the Commission amended § 284.1(a) of its regulations to define transportation to include storage. This required pipelines to offer their customers firm and interruptible storage on an open-access, contract basis. Since the 1992 issuance of Order No. 636, much has changed. Storage is now being used to support new services made possible by the unbundling of storage from transportation and by new market conditions arising from the Commission’s restructuring efforts. In addition, traditional interstate natural gas pipelines are experiencing competition for contract storage customers from independent storage providers. Many new entities provide myriad service options, and natural gas customers are able to choose among competing sellers, often as supplements or alternatives to ‘‘backstop’’ long-term, firm transportation and storage services contracted at Commission-regulated rates. 5. The nature of the gas storage marketplace also has changed significantly over the last decade. Traditionally, local distribution companies (LDCs) contracted for firm storage service on a long-term basis, principally to meet peak winter heating needs. Thus, underground storage fields were typically designed to inject gas during the spring, summer, and fall, and then draw on the accumulated underground inventory to meet winter heating demands. This model is changing. Instead of relying primarily on firm, long-term gas supply or transportation service contracts, wholesale customers are increasingly relying on a portfolio of both long-term and short-term contracts to purchase, store and transport natural gas.7 There 6 Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 57 FR 13267 (Apr. 16, 1992), III FERC Stats. & Regs. ¶ 30,939 at 30,425–427 (Apr. 8, 1992), order on reh’g, Order No. 636–A, 57 FR 36128 (Aug. 12, 1992), III FERC Stats. & Regs. ¶ 30,950 (Aug. 3, 1992), order on reh’g, Order No. 636–B, 57 FR 57911 (Dec. 8, 1992), 61 FERC ¶ 61,272 (1992), notice of denial of reh’g, 62 FERC ¶ 61,007 (1993), aff’d in part and vacated and remanded in part, United Dist. Companies v. FERC, 88 F.3d 1105 (D.C. Cir. 1996), order on remand, Order No. 636–C, 78 FERC ¶ 61,186 (1997). 7 The development of a short-term market for gas services was addressed by the Commission in 2000, in its Regulation of Short-Term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Transportation Services, Order No. 637, FERC Stats. & Regs. Regulations Preambles (July 1996—December 2000) ¶ 31,091 (Feb. 9, 2000), order on reh’g, Order No. 637–A, FERC Stats. & Regs. Regulations Preambles (July 1996–December 2000) ¶ 31,099 (May 19, 2000), reh’g denied, Order No. 637–B, 92 FERC ¶ 61,062 (2000), aff’d in part and denied in part, Interstate VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 is a growing use of storage volumes not only to meet traditional winter heating demand, but also to supply gas to meet daily, or even hourly, demand for gasfired electric generation plants. Storage is also being used to ensure liquidity at market centers to help market participants capture short-term changes in the value of natural gas. 6. This fundamental shift in contract terms and load profile challenges longstanding operational and financial presumptions regarding storage service. Whereas a storage facility designed for one annual injection-withdrawal cycle is well suited to supply gas to meet winter heating demands, such a facility may be less than ideal in meeting the intermittent summer demand spikes associated with supplying gas to fuel electric generation plants. A storage facility capable of cycling working gas repeatedly throughout the year, using high deliverability and injection to fulfill daily, even hourly, swings in demand, such as salt cavern storage, is able to satisfy such load profiles.8 However, electric generators are much less likely to sign traditional long-term firm contracts, but may be more interested in the type of flexible pricing proposals offered uniquely under market-based rates.9 B. Storage Capacity and Natural Gas Prices 7. Regardless of whether a storage facility is operated on a traditional, annual injection-withdrawal cycle, or completes multiple cycles throughout a year, the fact that gas can be injected into a storage facility and then held in repose, to be called upon during periods of high demand, has a moderating influence on gas prices. As a physical hedge, customers can build up underground inventories during times of lower demand, and then rely on these supply stores to avoid paying high spot market gas prices. Among the key Natural Gas Association of America v. FERC, 285 F.3d 18 (D.C. Cir. 2002). In that proceeding, the Commission considered the consequences of the restructuring of the gas industry following Order No. 636, and found ‘‘a short-term gas market that is robust, functioning, efficient, and effective.’’ FERC Stats. & Regs. Regulations Preambles (July 1996–December 2000) ¶ 31,091 at 31,255 (Feb. 9, 2000) (quoting comments submitted by the New York Mercantile Exchange). 8 The Commission has authorized a number of salt cavern storage facilities that have these operational characteristics. See, e.g., Pine Prairie Energy Center, LLC, 109 FERC ¶ 61,215 (2004) (authorizing the construction and operation of a high deliverability salt-cavern storage facility capable of as many as 30 injection-withdrawal cycles a year at maximum injection and withdrawal rates). 9 See, e.g., Energy Information Administration, The Challenge of Electric Power Restructuring for Fuel Suppliers, at 54–56 (September 1998). PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 findings highlighted by the Staff Storage Report is that the ‘‘continued commodity price volatility indicates that more storage may be appropriate’’ and that storage ‘‘may be the best way of managing gas commodity price, so the long-term adequacy of storage investment depends on how much price volatility customers consider ‘acceptable.’ ’’ 10 The last several years have seen a marked rise in the overall commodity cost of natural gas and sharp swings in gas prices. In view of the resulting adverse economic impacts, Commission policy should not discourage the development of additional storage capacity through overly narrow definitions of the relevant market. Furthermore, we should consider a range of customer protections in implementing our new authority under NGA section 4(f). C. The Need for Additional Storage 8. Currently, there are approximately 200 storage facilities subject to the Commission’s jurisdiction, with an aggregate working gas capacity of approximately 2.5 Tcf. Estimates of total domestic working gas capacity (both subject to and exempt from NGA jurisdiction) range up to 4.7 Tcf.11 Considering future storage needs of the United States and Canada together, the National Petroleum Council (NPC) estimates an additional 700 Bcf will be required by 2025.12 Although current and projected storage development is keeping pace with aggregate national storage demands, underground storage development in some market areas, such as New England 13 and the Southwest, is not.14 9. In large part, a storage facility’s utility is a function of its location. Gasfired electric generation is anticipated to 10 Staff Storage Report, at 1 (Sept. 30, 2004). Department of Energy’s Energy Information Administration (EIA) reports that in 2002 working gas storage capacity varied between 4.4 and 4.7 Tcf, whereas the Department of Energy’s Office of Fossil Energy reports that in 2003 there were 415 underground storage facilities with a working gas capacity of 3.9 Tcf. The Staff Storage Report considered the range of estimated aggregate existing working gas and concluded that the present working gas capacity is 3.5 Tcf, of which 2.5 Tcf is subject to NGA jurisdiction, and that by improving existing storage reservoirs (i.e., by reengineering existing facilities to enhance efficiency, rather than by expanding cavern capacity), there is the potential to obtain another 200 to 500 Bcf. See Staff Storage Report at 7–10. 12 Balancing Natural Gas Policy—Fueling the Demands of a Growing Economy, NPC, Volume II at 261 (2003). 13 New England appears to have little geologic potential for the development of underground storage facilities. 14 See, e.g., Southwestern Gas Storage Technical Conference, Docket No. AD03–11–000, Transcript at 23, lines 10–14 (Aug. 26, 2003). 11 The E:\FR\FM\29DEP1.SGM 29DEP1 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules wwhite on PROD1PC65 with PROPOSAL drive a significant portion of the growth in gas consumption. Electric demand is expected to grow along with population, and one region of recent and forecasted population growth is the desert Southwest.15 Since electric generation requirements are more transient than steady-state demand, base-load infrastructure facilities may not be an ideal means to meet future electric needs. Storage projects, especially highdeliverability salt cavern facilities, may prove more adaptable than pipelines in supplying gas on an as-needed basis to match the fluctuations in the demand profile of electric generation facilities. 10. Over the last several years, there has been a revival of interest in expanding existing and building new marine terminal facilities to import liquefied natural gas (LNG). New storage projects are being developed to absorb the additional revaporized LNG imports. To date, most such activity has been in the states along the arc of the Gulf of Mexico. The natural gas production, gathering, processing, transportation, and storage infrastructure in this region is extensive. Storage project sponsors have been able to demonstrate that the competitive nature of the gas market in this region ensures that new storage entrants are unlikely to be able to exercise market power, and hence merit market-based rates for new storage services.16 In contrast, in the Southwest there is no equivalent infrastructure in place. This is noteworthy because several new LNG terminals are planned for the Mexican states of Baja California, Sonora, and Sinaloa, and a significant portion of the LNG received in Mexico is expected to flow north for consumption in the United States, with the Southwest as a targeted market. Additional storage in the Southwest could facilitate the receipt and distribution of these new natural gas supplies. 11. The development of underground storage facilities is dictated (1) by geology, which determines the physical properties of prospective reservoirs, such as size and cushion gas requirements; (2) by access to supply; (3) by access to consuming markets; and (4) by access to pipelines capable of transporting additional volumes of stored gas. Once a suitable site is identified, whether new storage capacity 15 For example, Arizona’s population is expected to increase by 5.6 million by 2030. U.S. Census Bureau, Population Division, Interim Projections (April 2005). 16 See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ¶ 61,095 (2005) and Freebird Gas Storage, LLC, 111 FERC ¶ 61,054 (2005) (approving new storage projects in the Gulf of Mexico area that qualified for market-based rates). VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 will be built turns on matters of construction and operating costs, market demand and the environment. Severe, adverse and unavoidable environmental impacts may preclude construction in certain locations. Investors also may be reluctant to fund a new project because of unattractive risk/reward prospects due to regulatory pricing constraints. This NOPR seeks to ensure that the Commission’s regulatory approach does not unnecessarily impede the development of needed storage projects. 12. For storage services used on a short-term or spot basis, cost-of-service rates designed on the basis of an annual working gas cycle may not match up with the market value of storage service during transient periods of peak demand. Cost-of-service rates are based on projections of annual revenue requirements and relatively constant levels of demand. However, in today’s markets, wholesale customers are not always willing to enter into long-term storage contracts sufficient to assure the storage investors that their annual revenue requirements will be met. Storage services used on a short-term or spot basis often do not exhibit the level of demand assumed by cost-of-service rate design. Permitting storage operators to earn higher revenues from short-term services during peak demand periods or through other pricing mechanisms may make an investment in the project economically feasible. Therefore, the NOPR seeks to lead to increased storage capacity that could benefit customers while continuing to protect them from the exercise of market power. III. Discussion 13. This NOPR is proposing changes to our regulations to permit storage providers to secure market-based rates under certain circumstances, while at the same time seeking to protect customers against potential exercises of market power. First, we are proposing regulations permitting all companies with storage facilities to seek marketbased rates through a showing that their storage operations do not have significant market power. We have reexamined our approach to analyzing market power so that our analysis of whether to permit market-based rates for storage services better reflects the current competitive realities of the storage market. Second, for new storage capacity related to a specific facility placed into service after August 8, 2005, we are proposing regulations under new NGA section 4(f) that will authorize market-based rates under certain circumstances. Under these regulations, storage operators will be required to propose measures to protect customers PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 77081 from the potential exercise of market power, and we solicit comment on various approaches that could be used as generic safeguards in providing such protection. A storage service provider may apply for market-based rates under either method by filing appropriate supporting data when it files its certificate application, or as part of its request for NGPA section 311 rate authorization, or in a request for declaratory order for authority to charge market-based rates, but in any case it cannot charge market-based rates until the Commission concludes that the storage applicant has established that it lacks significant market power 17 or that it will adopt adequate customer protections pursuant to new NGA section 4(f). 14. The Commission recognizes that the measures proposed herein will not guarantee the proliferation of new storage projects. For example, despite a perceived need for new storage in the Southwest, there have been proposals for new storage projects that have failed to go forward for reasons unrelated to rate treatment.18 Nevertheless, the flexibility proposed herein may induce the development of new storage capacity that would otherwise not be built. A. Market Power Analysis for MarketBased Rates 15. The Commission evaluates requests to charge market-based rates for storage services under the analytical framework of its 1996 Alternative Rate Policy Statement (Policy Statement).19 The Policy Statement establishes procedures for service providers to demonstrate that they lack significant market power, using criteria recognized by the courts and similar to those used 17 See Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61,076 at 61,236 (1996), reh’g and clarification denied, 75 FERC ¶ 61,024 (1996), petitions denied and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (D.C. Cir. 1998); see also Association of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1442–43 (D.C. Cir. 1996). 18 See, for example, Desert Crossing Gas Storage and Transportation System LLC, 98 FERC ¶ 61,277 (2002), a proposal that has stalled, apparently due to shortfalls in contractual commitments and environmental concerns, and Copper Eagle Gas Storage L.L.C., 97 FERC ¶ 62,193 (2001) and 99 FERC ¶ 61,270 (2002), a proposal delayed due to expressions of concern by the State of Arizona legislature raised as a result of security and safety issues associated with the project’s planned location near Luke Air Force Base. 19 Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines and Regulation of Negotiated Transportation Services of Natural Gas Pipelines, 74 FERC ¶ 61,076 (1996), reh’g and clarification denied, 75 FERC ¶ 61,024 (1996), petitions denied and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 918 (D.C. Cir. 1998). E:\FR\FM\29DEP1.SGM 29DEP1 77082 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules by the Department of Justice and the Federal Trade Commission. Under the Policy Statement, an applicant seeking authority to charge market-based rates must demonstrate that it lacks significant market power, or has adopted conditions that sufficiently mitigate its market power.20 16. The first step in analyzing whether an applicant has significant market power involves defining the relevant market in terms of both product market and geographic market. Such markets are defined by identifying the specific products or services and the suppliers of those products or services that provide good alternatives to the applicant’s products and services. A good alternative is one that is available soon enough, has a price that is low enough, and has a quality high enough to permit customers to substitute the alternative for the applicant’s services. 17. The Commission’s initial screening tool for significant market power is the Herfindahl-Hirschman Index (HHI), a formula that focuses on the relevant market’s concentration as an indicator of the potential of an applicant to act together with other sellers to raise prices. In general, an HHI below 1,800 suggests limited market concentration with less potential for any participant to exercise significant market power. However, an HHI above 1,800 suggests a higher level of concentration, and will cause the Commission to increase its scrutiny of other factors such as the applicant’s market share, ease of entry into the market, the relative size of the applicant’s capacity, and/or the sustainability of a potential attempt by the applicant to exercise market power.21 18. Since 1996, over 40 storage service providers have sought market-based rates pursuant to the criteria in the Policy Statement. In the majority of these cases, the Commission found that the applicant lacked significant market power and approved market-based rates. In applying its market concentration and market share screens in these cases to date, the Commission has looked only to the availability of other storage alternatives (in the relevant geographic market), in assessing whether a storage provider can exercise significant market wwhite on PROD1PC65 with PROPOSAL 20 The Policy Statement describes significant market power as the ability to withhold services in a relevant market in order to produce a significant price increase for a significant period of time. The Commission adopted 10 percent as its standard price change threshold but did not preclude parties from arguing for the adoption of a higher or lower threshold in individual cases. 74 FERC ¶ 61,076 at 61,232. 21 Id. VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 power. Using this analysis, the Commission has approved all requests for market-based rates where the applicant was located in the production area. Due to extensive storage infrastructure in these regions, the Commission has been able to find a lack of significant market power based on findings that HHIs in that geographic region are well below 1,800, and without intense scrutiny of other factors.22 19. On the other hand, storage markets in consuming regions, such as the Northeast portion of the United States, have fewer storage providers, and have certain providers with large market shares, resulting in HHI values sufficient to require a higher level of Commission scrutiny of factors beyond market concentration. Nevertheless, the Commission has approved requests in consuming areas of the Northeast by considering factors other than market concentration. For example, in Avoca Natural Gas Storage,23 the Commission approved market-based rates despite an HHI for deliverability of 4,100 in the relevant New York/Pennsylvania market, specifically noting the small size of Avoca’s market share and the apparent ease of entry into the market as factors mitigating the market concentration reflected in the HHI.24 20. However, in areas where there are truly only a limited number of storage service providers, the Commission’s traditional analysis will likely result in a storage provider having high HHI values as well as relatively large market shares. For example, in 2002, Red Lake Gas Storage, L.P. (Red Lake) proposed to construct a new underground storage facility in Arizona, an area not currently served by underground gas storage, and sought approval to charge market-based rates. The Commission denied Red Lake’s market-based rate request based on its determination that, if built, the market Red Lake would operate in would be extremely concentrated and it would have substantial market power.25 21. The Commission is concerned that its current approach to analyzing market power may be too limiting in some 22 See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ¶ 61, 095 (2005); Egan Hub Partners, L.P., 99 FERC ¶ 61,269 (2002); Egan Hub Partners, L.P., 95 FERC ¶ 61,395 (2001). 23 68 FERC ¶ 61,045 (1994). 24 The Commission reached a similar result analyzing storage services in Steuben Gas Storage Co., 72 FERC ¶ 61,102 (1994); New York State Electric and Gas Corp., 81 FERC ¶ 61,020 (1997); N.E. Hub Partners, L.P., 83 FERC ¶ 61,043 (1998); Seneca Lake Storage, Inc., 98 FERC ¶ 61,163 (2002); and Wyckoff Gas Storage Co., LLC, 105 FERC ¶ 61,027 (2003). 25 Red Lake Gas Storage, L.P., 102 FERC ¶ 61,077, reg’h denied, 103 FERC ¶ 61,277 (2003). PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 circumstances because it does not consider the fact that non-storage products and services in a properly defined geographic market may be good alternatives to storage services, and thus mitigate a storage provider’s ability to exercise market power. For example, in today’s natural gas markets, pipeline capacity that is unaffiliated with the storage provider may be a good alternative to the storage service being offered. A new entrant proposing to offer its storage services in an area already fully served by existing pipelines would offer customers in that market area new service options, which to some extent would compete with existing service providers. Any new independent storage capacity would be expected to lower the market concentration and increase available alternatives in such a market. 22. The Commission therefore believes that it is not appropriate to limit the relevant product market to services offered by competing storage facilities. Such a narrow definition may incorrectly indicate that the storage applicant can exercise significant market power when, in fact, such ability could be constrained by sufficient pipeline alternatives. The denial of market-based rate authority in these circumstances could harm customers by providing a disincentive to storage development, particularly in underserved areas, in situations where significant market power does not exist. 1. Modifications to Market-Based Rate Test 23. The Commission proposes to reform its market-power test for natural gas storage operators to more accurately reflect the competitive conditions in the market for gas storage services. The Commission believes it is appropriate to adopt a more expansive definition of the relevant product market for storage to explicitly include close substitutes for gas storage services. We will evaluate potential substitutes, such as available pipeline capacity, and local gas production or LNG terminals, on a caseby-case basis in the context of individual applications for marketbased rates 26 24. In order to show that a non-storage product or service such as 26 Historically, market area storage was often developed to provide an economic alternative to more expensive pipeline expansions. By design, market area storage service used available off-peak pipeline capacity to inject gas into storage and expanded pipeline capacity from the storage fields to markets to deliver incremental supplies during market peaks. Thus, storage plus limited pipeline expansions provided a good economical alternative to more expensive production-area-to-market-area pipeline expansions. E:\FR\FM\29DEP1.SGM 29DEP1 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules wwhite on PROD1PC65 with PROPOSAL transportation is a good alternative, the storage applicant would need to meet the criteria set forth in the Commission’s Policy Statement,27 including a showing that the service is available. In addition, consistent with the Commission’s current practice, capacity on pipeline systems owned or controlled by the applicant’s affiliates should not be considered among the customers’ alternatives. Rather, affiliated capacity will be included in the market share calculated for the applicant.28 25. We provide the following guidance regarding the types of products that may be close substitutes depending on the facts of a given case. As a general matter, competition to a storage provider can come from entities that have the ability to deliver gas in the same market as the storage facility. In producing areas, storage may compete with production or LNG supply, in addition to other storage facilities. In market areas, there may also be local production or LNG available. In addition, available pipeline capacity can function as a close substitute by delivering gas at peak times to compete with a storage provider. For these reasons, we will permit applicants to present evidence that both available pipeline capacity and local production/ LNG supply in the geographic market area can reasonably be considered as alternative products to storage services. 26. In addition, firm capacity available through capacity release can be a good alternative in appropriate circumstances. Under the Commission’s capacity release regulations, holders of firm capacity are free to release the capacity to other shippers, as well as to make bundled sales at alternate delivery points. Because of this flexibility, some portion of firm, contracted-for capacity may have a sufficiently elastic demand (a willingness to re-sell firm capacity when price rises) to serve as a good alternative to an applicant’s storage service. 27. A determination of whether capacity release provides a close substitute will depend on the facts of a particular case. For example, to the extent an LDC or similar entity holds pipeline capacity that is needed to meet state-mandated service obligations for captive retail customers, the capacity holder may have a relatively inelastic demand that makes it unlikely that the 27 A good alternative is one that is available soon enough, has a price that is low enough, and has a quality high enough to permit customers to substitute the alternative for the applicant’s services. 28 See Policy Statement, 74 FERC ¶ 61,076 at 61,234 (1996). VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 LDC will release that capacity and therefore that increment of transportation capacity may not be considered a good alternative during peak periods. However, LDCs and marketers also serve industrial and other customers under interruptible contracts which might make that portion of the LDC’s capacity a reasonable alternative. 28. Moreover, in some circumstances, an applicant may be able to show that even when firm capacity on a pipeline is reserved for captive customers, e.g., residential and small commercial customers, potential product or service substitution in downstream markets can result in capacity becoming available to compete in upstream markets while still serving captive customers. Under the Commission’s open-access program, competition in a downstream market may create competition in upstream markets, particularly due to Order No. 636’s requirement that pipelines provide flexible receipt and delivery points and segmentation including backhaul. Thus, an LDC’s ability to buy capacity from another pipeline or storage facility or to purchase gas in the downstream market may free it to release upstream capacity, to compete with storage in the upstream market. This ability to buy capacity from another pipeline or storage facility or buy gas in the market area is present in the large downstream markets in the United States including California, Chicago and the Northeast. 29. Take, for example, the California downstream market. Capacity held on Transwestern Pipeline Company, LLC (Transwestern) and El Paso Natural Gas Company (El Paso) could compete with a storage project located in a market upstream of California if California customers of these pipelines can buy gas from other sources in the downstream markets. This could free upstream capacity to compete with the upstream storage project. For example, Pacific Gas & Electric Company (PG&E) could buy gas from PG&E Gas Transmission, Northwest Corporation (PGT), Kern River Gas Transmission Company, an electricity generator in the California market, withdraw from its own storage, or purchase local production or regasified LNG to serve its captive or core customers. As a result, PG&E would be able to either release a portion of its firm capacity on El Paso, or nominate a secondary delivery at an upstream point to sell gas in the upstream market. As indicated above, whether capacity release in a given market would qualify as a close substitute under the Policy Statement PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 77083 would be determined on the facts of a given case. 30. Thus, based upon a proper showing, the Commission believes it would be appropriate for a storage applicant to include pipeline capacity that is used to serve captive customers if it is demonstrated that there are reasonable substitutes in the downstream market for serving load that would free up capacity in the upstream market that would compete with the storage project. 31. In summary, the Commission proposes to modify its current approach to analyzing market power to explicitly permit a storage applicant to propose to include other storage services, as well as non-storage products and services, including pipeline capacity and local production/LNG supply as described above, in its calculation of market concentration using the HHI and in its analysis of market share. The Commission believes that consideration of these alternative products will ensure that the Commission’s market power analysis accurately reflects whether a storage applicant is able to exercise significant market power. The Commission requests comments on this approach as well as suggestions regarding other approaches for quantifying the amount of pipeline capacity that would compete with an applicant’s storage services. 2. Filing Procedures and Periodic Review 32. Because most of the applications requesting market-based rates have been filed by storage providers, the Commission believes it would be beneficial to adopt specific procedures and filing requirements. Therefore, the Commission proposes to add a new subpart M to part 284 that requires, among other things, that applications by storage providers requesting marketbased rates contain certain information. The Commission will continue its practice of approving market-based rate proposals on a prospective basis only. 33. Approval of blanket certificate authority to provide open access storage services at market-based rates will subject the storage service provider to the existing reporting requirements applicable to open-access service providers under § 284.13 of the Commission’s regulations. The public disclosure of this information will enable the Commission and the industry to monitor the market-based storage transactions. 34. In a recent case, the Commission also required an applicant to file an updated market-power analysis within five years of the date of the Commission E:\FR\FM\29DEP1.SGM 29DEP1 77084 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules order granting authority to charge market-based rates, and every five years thereafter.29 The Commission believes that imposition of a periodic review is necessary to ensure that our grant of market-based rates to an applicant remains just and reasonable. Accordingly, the Commission proposes to add § 284.504 to the regulations to require storage applicants receiving market-based rates on the basis of a market power analysis to file updated market-power analyses within five years of the date of the Commission order granting authority to charge marketbased rates, and every five years thereafter. B. Energy Policy Act of 2005 35. Section 312 of EPAct 2005 adds new NGA section 4(f), which permits the Commission to authorize new natural gas storage projects (i.e., projects placed in service after the passage of the Act) to provide service at market-based rates notwithstanding the fact that the applicant is unable to demonstrate that it lacks market power. New NGA section 4(f) requires that, to authorize 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 1978.30 We discuss below the relevant aspects of new NGA section 4(f). wwhite on PROD1PC65 with PROPOSAL 1. Storage Capacity Eligible for MarketBased Rates 36. Under the new NGA section 4(f), the Commission may authorize marketbased rates ‘‘for new storage capacity related to a specific facility placed in service after the date of enactment.’’ 29 Liberty Gas Storage LLC, 113 FERC ¶ 61,247 (2005). 30 15 U.S.C. 3301–3432 (2000). We note that the Commission has authorized Hinshaw pipelines to be treated the same as LDCs and we intend the same here. See Certain Transportation, Sales and Assignments by Pipeline Companies not Subject to Commission Jurisdiction Under Section 1(c) of the Natural Gas Act, Order No. 63, FERC Stats. & Regs. Regulations Preambles (1997–1981) ¶ 30,118 (Jan. 9, 1980). VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 Interstate natural gas pipelines asked the Commission at the October 12, 2005 Conference on State of Natural Gas Infrastructure to allow post-EPAct 2005 storage expansions of existing storage facilities to qualify under this provision.31 37. We believe that the phrase ‘‘placed in service after the date of enactment’’ modifies the term ‘‘facility,’’ not the term ‘‘capacity,’’ such that it is the facility which must be placed into service after August 8, 2005, rather than the storage capacity. While the statute does not define the term ‘‘specific facility,’’ the Commission proposes to interpret that term to consider a new cavern, reservoir or aquifer that is developed after August 8, 2005, as a facility qualifying for market-based rates under the Act. We believe that this interpretation is most consistent with the wording of new NGA section 4(f). We invite comments on alternative constructions of the Act. We also invite comments on how, if we construe the Act differently, the Commission may adequately protect other customers already receiving service under costbased authorizations that pre-date the Commission’s new NGA section 4(f) authority. 2. Market-Based Rates Are in the Public Interest and Necessary To Encourage the Construction of Storage Capacity in the Area Needing Storage Services 38. Before authorizing market-based rates under new NGA section 4(f), the Commission is required to determine that such rates are in the public interest and are necessary to encourage the construction of storage capacity in the area needing storage services. As discussed in the section below, applicants for authorization under section 4(f) will be required to demonstrate that customers will be adequately protected from any abuses of market power by the storage provider. Those customer protections will serve to ensure that the market-based rates charged are in the public interest. 39. The Commission proposes to require that the applicant bear the burden of showing that in its specific circumstances, market-based rates are necessary to encourage the construction of storage capacity and that storage services are needed in the area. The Commission invites comment on how a project applicant might make these showings. One possible way would be for the applicant to present evidence 31 Comments of Scott Parker, President, Kinder Morgan Pipeline Group, State of the Natural Gas Infrastructure Conference, Docket No. AD05–14– 000, Transcript at 120, lines 6–11 (Oct. 12, 2005). PO 00000 Frm 00016 Fmt 4702 Sfmt 4702 that it offered its capacity at cost-based rates through an open season and was unable to obtain sufficient long-term commitments at those cost-based rates. 3. Customer Protection 40. New NGA section 4(f) also requires that the Commission, as a prerequisite for granting market-based rate authority, determine that customers are adequately protected, and requires the Commission to ensure that reasonable terms and conditions are in place to protect them. The Commission proposes to allow the applicant to propose a relevant method of protecting customers. 41. In general, the Commission believes that customers will be better off if more storage infrastructure is built. Additional storage will benefit customers by increasing customer alternatives in a market and by mitigating price volatility.32 Therefore, just as the Commission balances the benefits of proposed new construction against residual adverse impacts in determining need under the Certificate Policy Statement, the Commission proposes, in considering requests for market-based rate authority under new NGA section 4(f), to balance the obvious benefits of additional storage capacity in areas needing storage services against any adverse impacts which might arise from the potential exercise of market power by the storage provider. The Commission is concerned that to the extent unnecessary conditions are imposed, the additional storage infrastructure and the additional service options they create would be lost to the detriment of potential customers. Accordingly, the Commission seeks comment on methods of customer protection which will allow it to achieve the desired balance. 42. The appropriate method of customer protection may well vary depending on the facts and circumstances of individual project proposals. Thus, the Commission proposes to allow each applicant to propose a method of protecting customers best suited to its project. However, the Commission seeks comments on whether it would be beneficial to identify in this rulemaking certain acceptable approaches. Establishment of generic safeguards would facilitate the application process for NGA section 4(f) market-based rate authority. Each applicant, however, would retain the right to propose another method of protecting customers that might better fit the circumstances of 32 See Pine Prairie Energy Center, LLC, 109 FERC ¶ 61,215 at P 21 (2004). E:\FR\FM\29DEP1.SGM 29DEP1 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules wwhite on PROD1PC65 with PROPOSAL its project. The Commission seeks suggestions of possible generic safeguards, as well as comments on the methods described below. 43. Entities with market power can exercise that power in two general areas: (1) The withholding of capacity; and (2) the extraction of monopoly rents. Thus, there are two approaches to protecting customers against the exercise of market power: (i) Conditions that limit the withholding of capacity and (ii) rate protections. We seek comment on whether there are generic safeguards in either method that would fairly balance the interests of consumers with the economic considerations relevant to financing new storage projects. As a general matter, we favor customer protections that are clear, easy to implement and oversee, and provide certainty to an applicant that is sufficient to support financing of a storage project. 44. One approach to customer protection is restrictions on withholding capacity. Market power can be exercised in those circumstances where a storage operator can withhold capacity from the market and raise prices. As long as storage capacity has not been withheld, ‘‘the fact that shippers may at times bid up contract length likely reflects not an exercise of [the pipeline’s] market power, but rather competition for scarce capacity.’’ 33 We seek comment whether by ensuring that the storage operator has sold or made available to the market all of its capacity (and thus it is not withholding capacity), customers can be assured that market power is not being exercised by the storage service provider and that any increase in price is due to customers’ demand for storage relative to the available supply.34 45. A difficulty in applying this standard is in defining when withholding should be found to be indicative of the exercise of market power. The Commission requests comment on how to apply a prohibition against withholding which balances the competing needs of the project sponsor to secure revenues adequate to attract necessary investment in new infrastructure and of the needs of customers to be protected from the abuse of market power. For example, would allowing the storage operator to set a reserve price provide an appropriate balance? Should the withholding prohibition apply all the time, or only during periods of peak 33 Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 (D.C. Cir. 2002). 34 Id. (affirming Commission determination that prices determined through an uncapped bidding process were the product of competitive forces, not the exercise of market power.) VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 demand for storage services? If the Commission were to allow such conditions, how should terms such as ‘‘reserve price’’ (a minimum price below which the storage operator is not required to sell capacity) and ‘‘period of peak demand’’ be defined? 35 Should a formal auction process under which the applicant is obligated to sell all capacity above a reserve price be considered? 46. Market power can be exercised in those circumstances where a storage operator can extract monopoly rents. Rate protections could take several forms. For example, rate caps could be designed to provide adequate customer protection while also supporting the financing of new storage projects. We seek comment on whether there are certain approaches to rate caps that could be adopted as a generic safeguard. As another example, the Commission could allow an applicant to establish a long-term (e.g., 5–10 years) recourse rate that was cost-based and allow the applicant to negotiate contracts under market-based rates for shorter-term transactions. Would this approach be sufficient to protect customers without imposing an undue burden on the financing of new storage projects? Are there other cost-based rate designs or price cap methodologies that the Commission should consider to be generally acceptable if proposed by an applicant under this program? 4. Periodic Review 47. New NGA section 4(f) also requires that, for those entities granted market-based rates under this authority, the Commission ‘‘review periodically whether the market-based rate is just, reasonable, and not unduly discriminatory or preferential.’’ 48. The Commission believes that to encourage the construction of new storage infrastructure, it must balance the benefits of the additional options new storage will bring to wholesale customers against the burdens of various forms of periodic review. Certain forms of periodic reviews may deter applicants from pursuing projects by introducing an unnecessary element of regulatory uncertainty. Should this happen, additional storage infrastructure and the additional service options it creates would be lost to the detriment of wholesale customers. 35 The Commission has long recognized that open access pipelines are not required to sell capacity at rates below the maximum cost-based rate. This form of withholding balances the pipeline’s right to compensatory rates against the customer protections required by the Natural Gas Act. However, under market-based rates there is no clear point at which these conflicting interests may be easily balanced. PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 77085 49. For market-based rates approved under NGA section 4(f), the Commission believes that the periodic review requirement should focus on the consumer protection safeguards adopted and ensure that these safeguards are working as intended and effectively preventing the storage provider from exercising significant market power. In the Commission’s view, an effective approach of complying with the periodic review requirement is through regular monitoring and taking appropriate action under section 5 of the NGA either sua sponte or in response to a complaint. In cases where the consumer protection requirements imposed prohibit withholding, the Commission believes the existing § 284.13 posting requirements and storage reports combined with publicly available information regularly reviewed by Staff are sufficient for this purpose. These require that interstate storage operators post information about transactions and available capacity, and require the submission of quarterly index of customers’ reports, and submission of semi-annual storage reports to the Commission. Those storage operators providing service only under NGPA section 311 are subject to fewer reporting requirements set forth in § 284.126, which requires an annual transaction report, and a semi-annual storage report. 50. Therefore, existing posting requirements on contractual obligations, including prices charged, and levels of available capacity should provide the information for monitoring whether storage operators have been exercising market power by withholding. This information is currently required of all open-access transporters and storage operators. Should concerns be raised about the practices of any storage provider charging market-based rates authorized by this Commission, this information along with more specific information required during the course of any necessary inquiry in a specific case will provide the Commission with the information needed to ensure that rates conform to the statutory requirement. Similarly, the Commission believes that the lesser burden imposed on NGPA section 311 storage providers, which are primarily regulated by state authorities, is also adequate for this purpose. The Commission believes this monitoring approach adequately complies with the periodic review requirement in NGA section 4(f). 51. The Commission requests comment on this approach and whether this type of periodic review should be enhanced by other reporting or transparency requirements. Comments E:\FR\FM\29DEP1.SGM 29DEP1 77086 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules should discuss with specificity how other requirements might be imposed without unduly deterring needed new storage infrastructure investment. Moreover, the Commission seeks comment on whether the applicant should be required to demonstrate the continued adequacy of its existing customer protections every five years. Additionally, in cases where the Commission adopts customer protection safeguards other than withholding, the Commission intends to consider whether additional reporting is necessary to effectively monitor and review whether the market-based rate is just and reasonable. 52. The Commission, therefore, proposes to revise its part 284 regulations as follows. New subpart M will be added, which addresses applications for market-based rates for storage. Within new subpart M, § 284.501, Applicability, explains which pipelines or storage service providers are eligible to apply for market-based rates under subpart M, § 284.502, Procedures for applying for marketbased rates, explains what procedures must be followed for submitting an application. Section 284.503, Marketpower determination, explains what must be submitted as part of an application for market-based rates, including what information must be submitted related to an applicant’s market power. Section 284.504, Periodic review for market power determinations, requires the filing of updated market-power analyses by storage providers granted the authority to charge market-based rates every five years. Section 284.505, Market-based rates for storage providers without a market-power determination, explains what a storage service provider that does not seek a market-power determination must submit to the Commission in an application for market-based rates. IV. Information Collection Statement 53. The Office of Management and Budget (OMB) regulations require that OMB approve certain reporting, record keeping, and public disclosure (collections of information) imposed by an agency.36 Accordingly, pursuant to OMB regulations, the Commission is providing notice of its proposed information collections to OMB for review under section 3507(d) of the Paperwork Reduction Act of 1995.37 54. The Commission identifies the information provided under Part 284 subpart M as contained in FERC–545, FERC–546 and FERC–549. 55. Comments are solicited on the Commission’s need for this information, whether the information will have practical utility, the accuracy of the provided burden estimates, ways to enhance the quality, utility, and clarity of the information to be collected, and any suggested methods for minimizing respondent’s burden, including the use of automated information techniques. 56. The burden estimates for complying with additional filing requirements of this rule pursuant to the procedures in proposed new sections 284.503 and 284.505 are set forth below. For the most part, the burden on applicants seeking market-based rates for open-access storage services will not be changed by this proposed rule. Since 1996, applications for authority to charge market-based rates have been filed under the Commission’s procedures applicable to NGA section 7 initial rate determinations, NGA section 4 rate changes, or NGPA section 311 rate determinations under the Commission’s existing data collection authorities. This rule codifies application procedures and filing requirements which are little changed from the process followed since 1996. Codification of filing requirements will allow applicants to know what information must be filed with such an application and should reduce the need for staff to send out follow-up data requests and respondents to file data responses. To the extent respondents seek market-based rate authority under the new NGA section 4(f) authorization process, also codified in these regulations, the burdens may be lower than if they had filed to seek authorization under the Commission’s 1996 Policy Statement. On average, we expect the burden of making an application for authority to charge market-based rates under this proposed rule to be 350 hours. 57. Applicants granted market-based rate approval after the effective date of a final rule will also be required pursuant to proposed new § 284.504 to file an updated market power analysis once every five years. The burden of this requirement will be imposed on all who operate under market-based rate authorizations granted on the basis of a market power determination. On average, we expect the burden of filing an updated market power analysis under this proposed rule to be 350 hours, imposed once every five years. 58. Over the past several years the Commission has approved market-based rates for storage services at an average pace of about 4.5 per year. The Commission is issuing this proposed rule in hopes that more storage will be constructed and operated, especially in underserved areas. In reflection of this policy goal, the Commission estimates that up to 10 filings may be made in a typical year. While this estimate may be high, in light of recent experience, at worst the Commission is overestimating the burden. Number of respondents Number of responses per respondent Hours per response Total annual hours FERC–545, FERC–546, or FERC–549 ........................................................... wwhite on PROD1PC65 with PROPOSAL Data collection 10 1 350 3,500 Total Annual Hours for Collection: 3,500 hours. 59. Information Collection Costs: The Commission seeks comments on the cost to comply with these requirements. It has projected the average annualized cost for all respondents to be $280,000 (3,500 hours x $80.00 per hour). 60. Title: Gas Pipeline Rates: Rate Change (FERC–545); Certificated Rate Filings: Gas Pipeline Rates (FERC–546); 36 5 CFR 1320.11 (2005). VerDate Aug<31>2005 16:10 Dec 28, 2005 and Gas Pipeline Rates: NGPA Title III Transactions (FERC–549). 61. Action: Proposed Information Collection. 62. OMB Control Nos.: 1902–0154, 1902–0155 and 1902–0086 63. The applicant shall not be penalized for failure to respond to these collections of information unless the collections of information display valid OMB control numbers. 37 44 Jkt 208001 PO 00000 64. Respondents: Business or other for profit. 65. Frequency of Responses: On occasion. 66. Necessity of Information: On August 8, 2005, Congress enacted EPAct 2005. Section 312 of EPAct 2005 amends the NGA to insert a new section, 4(f), which allows the Commission to permit natural gas storage service providers authority to U.S.C. 3507(d) (2000). Frm 00018 Fmt 4702 Sfmt 4702 E:\FR\FM\29DEP1.SGM 29DEP1 wwhite on PROD1PC65 with PROPOSAL Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules charge market-based rates, subject to conditions and requirements set forth in the statute. The Commission considers the issuance of these regulations necessary to implement this Congressional mandate and to encourage the development of new natural gas storage facilities. The proposed rule updates the Commission’s market power analysis to better reflect the competitive alternatives to storage available in today’s wholesale natural gas marketplace. These changes should ease the applicant’s burden in showing that a Commission grant of market-based rate authority is appropriate, thus encouraging the construction and operation of needed new storage infrastructure. While the new requirement for respondents to file an update of its market power analysis imposes a modest new burden, this will allow the Commission to ensure that customers will be protected from abuse of market power. In addition, the proposed rule in implementing EPAct 2005 creates regulations that allow qualifying storage providers to seek authority to charge market-based rates when the providers cannot or do not demonstrate they lack market power. The proposed rule revises the requirements contained in 18 CFR Part 284 to add a new subpart M to require that applications by storage providers requesting market-based rates contain certain information including a method for protecting customers and a showing of why market-based rates are necessary to encourage storage services. 67. Internal Review: The Commission has assured itself, by means of internal review, that there is specific, objective support for the burden estimates associated with the information requirements. The Commission staff will review the data included in the application to determine whether the proposed rates are in the public interest as well as for general industry oversight. Evidence establishing that market-based rates are necessary to encourage the construction of storage capacity is sufficient to also demonstrate that market-based rates are in the public interest. The Commission staff will review periodically the transactional and operational information provided by those granted authority to charge market-based rates pursuant to NGA section 4(f) to determine ‘‘whether the market-based rate is just, reasonable, and not unduly discriminatory or preferential.’’ These requirements conform to the Commission’s plan for efficient information collection, VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 communication and management within the natural gas industry. 68. Interested persons may obtain information on the reporting requirements by contacting the following: Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426 (Attention: Michael Miller, Office of the Executive Director, 202–502–8415, fax: 202–273– 0873, e-mail: michael.miller@ferc.gov). 69. For submitting comments concerning the collection of information and the associated burden estimate(s) including suggestions for reducing this burden, please send your comments to the contact listed above and to the Office of Management and Budget, Room 10202 NEOB, 725 17th Street, NW., Washington, DC 20503 (Attention: Desk Officer for the Federal Energy Regulatory Commission, 202–395–4650, fax: 202–395–7285). V. Environmental Analysis 70. The Commission is required to prepare an Environmental Assessment or an Environmental Impact Statement for any action that may have a significant adverse effect on the human environment.38 The Commission has categorically excluded certain actions from these requirements as not having a significant effect on the human environment.39 The actions proposed to be taken here fall within categorical exclusions in the Commission’s regulations for rules that are clarifying, corrective, or procedural, for information gathering, analysis, and dissemination, and for sales, exchange, and transportation of natural gas that requires no construction of facilities.40 Therefore, an environmental review is unnecessary and has not been prepared in this rulemaking. We note that environmental review will be prepared in each proceeding in which an applicant requests authority to construct facilities that might become subject to the rate-setting requirements of this rule. VI. Regulatory Flexibility Act Certification 71. The Regulatory Flexibility Act of 1980 (RFA) 41 generally requires a description and analysis of the impact the proposed rule will have on small entities or a certification that the proposed rule will not have significant 38 Order No. 486, Regulations Implementing the National Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs. Preambles 1986–1990 ¶ 30,783 (1987). 39 18 CFR 380.4 (2005). 40 See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27) (2005). 41 5 U.S.C. 601–612. PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 77087 economic impact on a substantial number of small entities. However, the RFA does not define ‘‘significant’’ or ‘‘substantial’’ instead leaving it up to an agency to determine the impacts of its regulations on small entities. In determining the impacts, the RFA proposes that agencies consider alternatives that are less burdensome to small entities and an explanation of why an alternative was rejected. The RFA provides four examples of alternatives including tiering, classification and simplification, performance rather than design standards, and exemptions or waivers. The Small Business size classification standard for natural gas storage operators is that their revenues are not in excess of $6 million per year.42 In the Commission’s experience, it has found that the smallest entity applying for a market-based storage application had projected revenues that exceeded the SBA standard. Agencies are not required to make such an analysis if a rule would not have a significant adverse impact on a substantial number of small entities. The Commission does not believe that this proposed rule would have such an effect on small business entities, since the proposed amendments to our regulations would apply only to natural gas companies, most of which are not small businesses. However, should a small entity believe that this rule will have a significant impact on them, they may apply to the Commission for a waiver. Accordingly, pursuant to section 605(b) of the RFA, the Commission proposes to certify that the regulations proposed herein will not have a significant adverse impact on a substantial number of small entities. VII. Comment Procedures 72. The Commission invites interested persons to submit comments on the matters and issues proposed in this notice to be adopted, including any related matters or alternative proposals that commenters may wish to discuss. Comments are due February 27, 2006. Comments must refer to Docket Nos. RM05–23–000 and AD04–11–000, and must include the commenter’s name, the organization they represent, if applicable, and their address in their comments. Comments may be filed either in electronic or paper format. 73. Comments may be filed electronically via the eFiling link on the Commission’s Web site at http:// www.ferc.gov. The Commission accepts most standard word processing formats and commenters may attach additional files with supporting information in 42 http://www.sba.gov/size/sizetable2002.html. E:\FR\FM\29DEP1.SGM 29DEP1 77088 Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules certain other file formats. Commenters filing electronically do not need to make a paper filing. Commenters that are not able to file comments electronically must send an original and 14 copies of their comments to: Federal Energy Regulatory Commission, Office of the Secretary, 888 First Street, NE., Washington, DC 20426. 74. All comments will be placed in the Commission’s public files and may be viewed, printed, or downloaded remotely as described in the Document Availability section below. Commenters on this proposal are not required to serve copies of their comments on other commenters. VIII. Document Availability 75. In addition to publishing the full text of this document in the Federal Register, the Commission provides all interested persons an opportunity to view and/or print the contents of this document via the Internet through FERC’s Home Page (http://www.ferc.gov) and in FERC’s Public Reference Room during normal business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington DC 20426. 76. From FERC’s Home Page on the Internet, this information is available in the Commission’s document management system, elibrary. The full text of this document is available on elibrary in PDF and Microsoft Word format for viewing, printing, and/or downloading. To access this document in elibrary, type the docket number excluding the last three digits of this document in the docket number field. 77. User assistance is available for elibrary and the FERC’s website during normal business hours. For assistance, please contact FERC Online Support at 1–866–208–3676 (toll free) or 202–502– 6652 (e-mail at FERCOnlineSupport@ferc.gov), or the Public Reference Room at 202–502– 8371, TTY 202–502–8659 (e-mail at public.referenceroom@ferc.gov. List of Subjects in 18 CFR Part 284 wwhite on PROD1PC65 with PROPOSAL Continental shelf, Incorporation by reference, Natural gas, Reporting and recordkeeping requirements. By direction of the Commission. Magalie R. Salas, Secretary. In consideration of the foregoing, the Commission proposes to amend part 284, Chapter I, Title 18, Code of Federal Regulations, as set forth below. VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 PART 284—CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES 1. The authority citation for part 284 continues to read as follows: Authority: 15 U.S.C. 717–717w, 3301– 3432; 42 U.S.C. 7101–7352; 43 U.S.C 1331– 1356. 2. New subpart M is added to read as follows: Subpart M—Applications for MarketBased Rates for Storage Sec. 284.501 Applicability. 284.502 Procedures for applying for marketbased rates. 284.503 Market power determination. 284.504 Periodic review requirement for market power determinations. 284.505 Market-based rates for storage providers without a market-power determination. § 284.501 Applicability. Any pipeline or storage service provider that provides or will provide service under subparts B, C, and G of this part, and that wishes to provide storage and storage-related services at market-based rates must conform to the requirements in subpart M. § 284.502 Procedures for applying for market-based rates. (a) Applications for market-based rates may be filed with certificate applications. Service, notice, intervention, and protest procedures for such filings will conform with those applicable to the certificate application. (b) With respect to applications not filed as part of certificate applications, (1) Applicants providing service under subpart B or subpart G of this part must file a request for declaratory order and comply with the service and filing requirements of part 154 of this chapter. Interventions and protest to applications for market-based rates must be filed within 30 days of the application unless the notice issued by the Commission provides otherwise. (2) Applicants providing service under subpart C of this part must file in accordance with the requirements of that subpart. (c) An applicant cannot charge market-based rates under this subpart of this part until its application has been accepted by the Commission. Once accepted, the applicant can make the appropriate filing necessary to set its market-based rates into effect. PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 § 284.503 Market power determination. An applicant may apply for marketbased rates by filing a request for a market power determination that complies with the following: (a) The applicant must set forth its specific request and adequately demonstrate that it lacks market power in the market to be served, and must include an executive summary of its statement of position and a statement of material facts in addition to its complete statement of position. The statement of material facts must include citation to the supporting statements, exhibits, affidavits, and prepared testimony. (b) The applicant must include with its application the following information: (1) Statement A—geographic market. This statement must describe the geographic markets for storage services in which the applicant seeks to establish that it lacks significant market power. It must include the market related to the service for which it proposes to charge market-based rates. The statement must explain why the applicant’s method for selecting the geographic markets is appropriate. (2) Statement B—product market. This statement must identify the product market or markets for which the applicant seeks to establish that it lacks significant market power. The statement must explain why the particular product definition is appropriate. (3) Statement C—the applicant’s facilities and services. This statement must describe the applicant’s own facilities and services, and those of all parent, subsidiary, or affiliated companies, in the relevant markets identified in Statements A and B in paragraphs (b) (1) and (2) of this section. The statement must include all pertinent data about the storage facilities and services. (4) Statement D—competitive alternatives. This statement must describe available alternatives in competition with the applicant in the relevant markets and other competition constraining the applicant’s rates in those markets. Such proposed alternatives may include other storage, local gas supply, LNG, and pipeline capacity. These alternatives must be shown to be reasonably available as a substitute in the area to be served soon enough, at a price low enough, and with a quality high enough to be a reasonable alternative to the applicant’s services. Available capacity (transportation, storage, LNG,or production) owned or controlled by affiliates of the applicant in the relevant market shall be clearly and fully identified and may not be considered as alternatives competing E:\FR\FM\29DEP1.SGM 29DEP1 wwhite on PROD1PC65 with PROPOSAL Federal Register / Vol. 70, No. 249 / Thursday, December 29, 2005 / Proposed Rules with the applicant. Rather, the capacity of an applicant’s affiliates is to be included in the market share calculated for the applicant. To the extent available, the statement must include all pertinent data about storage or other alternatives and other constraining competition. (5) Statement E—potential competition. This statement must describe potential competition in the relevant markets. To the extent available, the statement must include data about the potential competitors, including their costs, and their distance in miles from the applicant’s facilities and major consuming markets. This statement must also describe any relevant barriers to entry and the applicant’s assessment of whether ease of entry is an effective counter to attempts to exercise market power in the relevant markets. (6) Statement F—maps. This statement must consist of maps showing the applicant’s principal facilities, pipelines to which the applicant intends to interconnect and other pipelines within the area to be served, the direction of flow of each line, the location of the alternatives to the applicant’s service offerings, including their distance in miles from the applicant’s facility. The statement must include a general system map and maps by geographic markets. The information required by this statement may be on separate pages. (7) Statement G—market power measures. This statement must set forth the calculation of the market concentration of the relevant markets using the Herfindahl-Hirschman Index. The statement must also set forth the applicant’s market share, inclusive of affiliated service offerings, in the markets to be served. The statement must also set forth the calculation of other market power measures relied on by the applicant. The statement must include complete particulars about the applicant’s calculations. (8) Statement H—other factors. This statement must describe any other factors that bear on the issue of whether the applicant lacks significant market power in the relevant markets. The description must explain why those other factors are pertinent. (9) Statement I—prepared testimony. This statement must include the proposed testimony in support of the application and will serve as the applicant’s case-in-chief, if the Commission sets the application for hearing. The proposed witness must subscribe to the testimony and swear that all statements of fact contained in the proposed testimony are true and VerDate Aug<31>2005 16:10 Dec 28, 2005 Jkt 208001 correct to the best of his or her knowledge, information, and belief. § 284.504 Periodic review requirement for market power determinations. Applicants granted the authority to charge market-based rates under § 284.503 are required to file an updated market-power analysis within five years of the date of the Commission order granting authority to charge marketbased rates, and every five years thereafter. § 284.505 Market-based rates for storage providers without a market-power determination. (a) Any storage service provider seeking market-based rates for storage capacity, pursuant to the authority of Section 4(f) of the Natural Gas Act, related to a specific facility put into service after August 8, 2005, may apply for market-based rates by complying with the following requirements: (1) The storage service provider must demonstrate that market-based rates are necessary to encourage the construction of the storage capacity in the area needing storage services; and (2) The storage service provider must provide a means of protecting customers from the potential exercise of market power. (b) Any storage service provider seeking market-based rates for storage capacity pursuant to this section will be presumed by the Commission to have market power. [FR Doc. E5–8031 Filed 12–28–05; 8:45 am] BILLING CODE 6717–01–P DEPARTMENT OF THE INTERIOR National Park Service 36 CFR Part 7 RIN 1024–AD44 Cape Lookout National Seashore, Personal Watercraft Use National Park Service, Interior. Proposed rule. AGENCY: ACTION: SUMMARY: The National Park Service (NPS) is proposing to designate areas where personal watercraft (PWC) may be used in Cape Lookout National Seashore, North Carolina. This proposed rule implements the provisions of the NPS general regulations authorizing park areas to allow the use of PWC by promulgating a special regulation. The NPS Management Policies 2001 directs individual parks to determine whether PWC use is appropriate for a specific park area based on an evaluation of that PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 77089 area’s enabling legislation, resources and values, other visitor uses, and overall management objectives. DATES: Comments must be received by February 27, 2006. ADDRESSES: You may submit comments, identified by the number RIN 1024– AD44, by any of the following methods: • Federal rulemaking portal: http:// www.regulations.gov Follow the instructions for submitting comments. • Mail or hand delivery to: Superintendent, Cape Lookout National Seashore, 131 Charles Street, Harkers Island, NC 28531. • For additional information see ‘‘Public Participation’’ under SUPPLEMENTARY INFORMATION below. FOR FURTHER INFORMATION CONTACT: Jerry Case, Regulations Program Manager, National Park Service, 1849 C Street, NW., Room 7241, Washington, DC 20240. Phone: (202) 208–4206. E-mail: jerry_case@nps.gov. SUPPLEMENTARY INFORMATION: Background Additional Alternatives The information contained in this proposed rule supports implementation of portions of the preferred alternative in the Environmental Assessment (EA) published January 2005. The public should be aware that two other alternatives were presented in the EA, including a no-PWC alternative, and those alternatives should also be reviewed and considered when making comments on this proposed rule. Personal Watercraft Regulation On March 21, 2000, the NPS published a regulation (36 CFR 3.24) on the management of PWC use within all units of the national park system (65 FR 15077). This regulation prohibits PWC use in all national park units unless the NPS determines that this type of waterbased recreational activity is appropriate for the specific park unit based on the legislation establishing that park, the park’s resources and values, other visitor uses of the area, and overall management objectives. The regulation banned PWC use in all park units effective April 20, 2000, except for 21 parks, lakeshores, seashores, and recreation areas. The regulation established a 2-year grace period following the final rule publication to provide these 21 park units time to consider whether PWC use should be permitted to continue. Description of Cape Lookout National Seashore Cape Lookout National Seashore was established by Congress in 1966 to E:\FR\FM\29DEP1.SGM 29DEP1

Agencies

[Federal Register Volume 70, Number 249 (Thursday, December 29, 2005)]
[Proposed Rules]
[Pages 77079-77089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-8031]



[[Page 77079]]

=======================================================================
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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket Nos. RM05-23-000 and AD04-11-000]


Rate Regulation of Certain Underground Storage Facilities

December 22, 2005.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is 
proposing to amend its regulations to establish criteria for obtaining 
market-based rates for storage services offered under part 284. First, 
the Commission is proposing to modify its market-power analysis to 
better reflect the competitive alternatives to storage. Second, 
pursuant to Title III, Subtitle B, section 312 of the Energy Policy Act 
of 2005, the Commission is proposing rules to implement new section 
4(f) of the Natural Gas Act, to permit underground natural gas storage 
service providers that are unable to show that they lack market power 
to negotiate market-based rates in circumstances where market-based 
rates are in the public interest and necessary to encourage the 
construction of the storage capacity in the area needing storage 
services, and that customers are adequately protected. These revisions 
are intended to facilitate the development of new natural gas storage 
capacity while protecting customers.

DATES: Comments are due February 27, 2006.

ADDRESSES: Comments may be filed electronically via the eFiling link on 
the Commission's Web site at http://www.ferc.gov. Commenters unable to 
file comments electronically must send an original and 14 copies of 
their comments to: Federal Energy Regulatory Commission, Office of the 
Secretary, 888 First Street, NE., Washington, DC, 20426. Refer to the 
Comment Procedures section of the preamble for additional information 
on how to file comments.

FOR FURTHER INFORMATION CONTACT: 

Sandra Delude, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8583.
Michael Henry, Office of General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8532.
Ed Murrell, Office of Markets, Tariffs, and Rates, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202) 502-8703.
Berne Mosley, Office of Energy Projects, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8625.

SUPPLEMENTARY INFORMATION:

I. Introduction

    1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005 or 
the Act) \1\ was signed into law. Section 312 of EPAct 2005, adding a 
new section 4(f) to the Natural Gas Act (NGA),\2\ permits the 
Commission to allow a natural gas storage service provider placing new 
facilities in service to negotiate market-based rates even if it is 
unable to show that it lacks market power if the Commission determines 
that market-based rates are in the public interest and necessary to 
encourage the construction of the storage capacity in the area needing 
storage services, and that customers are adequately protected.\3\
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    \1\ Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 
(2005).
    \2\ 15 U.S.C. 717, et seq. (2000).
    \3\ Energy Policy Act of 2005, Pub. L. 109-58, Sec.  312, 119 
Stat. 594, 688 (2005).
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    2. The enactment of EPAct 2005 adds momentum to efforts already 
underway at the Commission to adopt policy reforms that would encourage 
the development of new natural gas storage facilities while continuing 
to protect consumers from the exercise of market power. On September 
30, 2004, the Commission issued a staff report that examined 
underground natural gas storage.\4\ On October 21, 2004, the Commission 
held a public conference with representatives of the industry to 
discuss the Staff Storage Report and issues relevant to underground 
storage.\5\ The Commission received oral and written comments in 
connection with the Staff Storage Report and conference.
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    \4\ Current State of and Issues Concerning Underground Natural 
Gas Storage, FERC Staff Report, Docket No. AD04-11-000 (Sept. 30, 
2004) (Staff Storage Report).
    \5\ State of the Natural Gas Industry Conference, Docket No. 
PL04-17-000, October 21, 2004; see State of Natural Gas Industry 
Conference; Staff Report on Natural Gas Storage; Notice of Public 
Conference, 69 FR 59917 (Oct. 6, 2004) (summarizing the issues to be 
discussed at the conference).
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    3. After considering the conference comments, the current 
characteristics of the storage market, the nation's existing and 
projected storage capacity needs, and the new legislation, the 
Commission concludes that reform of its current pricing policies may be 
appropriate. The purpose of this reform is to ensure access to storage 
services on a nondiscriminatory basis at just and reasonable rates and 
ensure that sufficient storage capacity will be available to meet 
anticipated increases in market demand. To achieve these goals, the 
Commission is adopting a two-prong approach. First, this notice of 
proposed rulemaking (NOPR) proposes modifications to the Commission's 
market power analysis to permit the consideration of close substitutes 
to storage in defining the relevant product market. This will ensure 
that market-based rates are not denied because of an overly narrow 
definition of the relevant market. Second, the Commission is proposing 
regulations to implement section 312 of EPAct 2005, which permits 
qualifying storage providers to charge market-based rates for a new 
facility even when they cannot (or do not) demonstrate that they lack 
market power. The Commission seeks comment, among other things, on 
whether there are certain generic safeguards that will provide adequate 
customer protections for entities applying for market-based rates under 
new NGA section 4(f). It should be noted, however, that these two 
policy reforms do not require a ``sequential'' approach for a potential 
storage developer. Instead, where a prospective applicant believes that 
it can make a showing sufficient to satisfy the requirements of new NGA 
section 4(f), it need not submit a traditional market power analysis in 
support of its request for market rates. In reviewing the applicant's 
request for market-based rates under section 4(f), the Commission will 
presume that the applicant has market power for the purposes of 
ensuring that customers are adequately protected. Taken together, the 
intent of these reforms is to facilitate the expansion of gas storage 
capacity to, among other things, mitigate natural gas price volatility, 
while continuing to protect consumers from the exercise of market 
power.

II. Background

A. Changing Nature of Storage Services

    4. In Order No. 636, the Commission found that pipelines held a 
competitive advantage over other gas sellers, in part

[[Page 77080]]

because of the lack of access to storage services.\6\ Therefore, the 
Commission amended Sec.  284.1(a) of its regulations to define 
transportation to include storage. This required pipelines to offer 
their customers firm and interruptible storage on an open-access, 
contract basis. Since the 1992 issuance of Order No. 636, much has 
changed. Storage is now being used to support new services made 
possible by the unbundling of storage from transportation and by new 
market conditions arising from the Commission's restructuring efforts. 
In addition, traditional interstate natural gas pipelines are 
experiencing competition for contract storage customers from 
independent storage providers. Many new entities provide myriad service 
options, and natural gas customers are able to choose among competing 
sellers, often as supplements or alternatives to ``backstop'' long-
term, firm transportation and storage services contracted at 
Commission-regulated rates.
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    \6\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, 57 FR 13267 
(Apr. 16, 1992), III FERC Stats. & Regs. ] 30,939 at 30,425-427 
(Apr. 8, 1992), order on reh'g, Order No. 636-A, 57 FR 36128 (Aug. 
12, 1992), III FERC Stats. & Regs. ] 30,950 (Aug. 3, 1992), order on 
reh'g, Order No. 636-B, 57 FR 57911 (Dec. 8, 1992), 61 FERC ] 61,272 
(1992), notice of denial of reh'g, 62 FERC ] 61,007 (1993), aff'd in 
part and vacated and remanded in part, United Dist. Companies v. 
FERC, 88 F.3d 1105 (D.C. Cir. 1996), order on remand, Order No. 636-
C, 78 FERC ] 61,186 (1997).
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    5. The nature of the gas storage marketplace also has changed 
significantly over the last decade. Traditionally, local distribution 
companies (LDCs) contracted for firm storage service on a long-term 
basis, principally to meet peak winter heating needs. Thus, underground 
storage fields were typically designed to inject gas during the spring, 
summer, and fall, and then draw on the accumulated underground 
inventory to meet winter heating demands. This model is changing. 
Instead of relying primarily on firm, long-term gas supply or 
transportation service contracts, wholesale customers are increasingly 
relying on a portfolio of both long-term and short-term contracts to 
purchase, store and transport natural gas.\7\ There is a growing use of 
storage volumes not only to meet traditional winter heating demand, but 
also to supply gas to meet daily, or even hourly, demand for gas-fired 
electric generation plants. Storage is also being used to ensure 
liquidity at market centers to help market participants capture short-
term changes in the value of natural gas.
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    \7\ The development of a short-term market for gas services was 
addressed by the Commission in 2000, in its Regulation of Short-Term 
Natural Gas Transportation Services and Regulation of Interstate 
Natural Gas Transportation Services, Order No. 637, FERC Stats. & 
Regs. Regulations Preambles (July 1996--December 2000) ] 31,091 
(Feb. 9, 2000), order on reh'g, Order No. 637-A, FERC Stats. & Regs. 
Regulations Preambles (July 1996-December 2000) ] 31,099 (May 19, 
2000), reh'g denied, Order No. 637-B, 92 FERC ] 61,062 (2000), aff'd 
in part and denied in part, Interstate Natural Gas Association of 
America v. FERC, 285 F.3d 18 (D.C. Cir. 2002). In that proceeding, 
the Commission considered the consequences of the restructuring of 
the gas industry following Order No. 636, and found ``a short-term 
gas market that is robust, functioning, efficient, and effective.'' 
FERC Stats. & Regs. Regulations Preambles (July 1996-December 2000) 
] 31,091 at 31,255 (Feb. 9, 2000) (quoting comments submitted by the 
New York Mercantile Exchange).
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    6. This fundamental shift in contract terms and load profile 
challenges longstanding operational and financial presumptions 
regarding storage service. Whereas a storage facility designed for one 
annual injection-withdrawal cycle is well suited to supply gas to meet 
winter heating demands, such a facility may be less than ideal in 
meeting the intermittent summer demand spikes associated with supplying 
gas to fuel electric generation plants. A storage facility capable of 
cycling working gas repeatedly throughout the year, using high 
deliverability and injection to fulfill daily, even hourly, swings in 
demand, such as salt cavern storage, is able to satisfy such load 
profiles.\8\ However, electric generators are much less likely to sign 
traditional long-term firm contracts, but may be more interested in the 
type of flexible pricing proposals offered uniquely under market-based 
rates.\9\
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    \8\ The Commission has authorized a number of salt cavern 
storage facilities that have these operational characteristics. See, 
e.g., Pine Prairie Energy Center, LLC, 109 FERC ] 61,215 (2004) 
(authorizing the construction and operation of a high deliverability 
salt-cavern storage facility capable of as many as 30 injection-
withdrawal cycles a year at maximum injection and withdrawal rates).
    \9\ See, e.g., Energy Information Administration, The Challenge 
of Electric Power Restructuring for Fuel Suppliers, at 54-56 
(September 1998).
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B. Storage Capacity and Natural Gas Prices

    7. Regardless of whether a storage facility is operated on a 
traditional, annual injection-withdrawal cycle, or completes multiple 
cycles throughout a year, the fact that gas can be injected into a 
storage facility and then held in repose, to be called upon during 
periods of high demand, has a moderating influence on gas prices. As a 
physical hedge, customers can build up underground inventories during 
times of lower demand, and then rely on these supply stores to avoid 
paying high spot market gas prices. Among the key findings highlighted 
by the Staff Storage Report is that the ``continued commodity price 
volatility indicates that more storage may be appropriate'' and that 
storage ``may be the best way of managing gas commodity price, so the 
long-term adequacy of storage investment depends on how much price 
volatility customers consider `acceptable.' '' \10\ The last several 
years have seen a marked rise in the overall commodity cost of natural 
gas and sharp swings in gas prices. In view of the resulting adverse 
economic impacts, Commission policy should not discourage the 
development of additional storage capacity through overly narrow 
definitions of the relevant market. Furthermore, we should consider a 
range of customer protections in implementing our new authority under 
NGA section 4(f).
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    \10\ Staff Storage Report, at 1 (Sept. 30, 2004).
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C. The Need for Additional Storage

    8. Currently, there are approximately 200 storage facilities 
subject to the Commission's jurisdiction, with an aggregate working gas 
capacity of approximately 2.5 Tcf. Estimates of total domestic working 
gas capacity (both subject to and exempt from NGA jurisdiction) range 
up to 4.7 Tcf.\11\ Considering future storage needs of the United 
States and Canada together, the National Petroleum Council (NPC) 
estimates an additional 700 Bcf will be required by 2025.\12\ Although 
current and projected storage development is keeping pace with 
aggregate national storage demands, underground storage development in 
some market areas, such as New England \13\ and the Southwest, is 
not.\14\
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    \11\ The Department of Energy's Energy Information 
Administration (EIA) reports that in 2002 working gas storage 
capacity varied between 4.4 and 4.7 Tcf, whereas the Department of 
Energy's Office of Fossil Energy reports that in 2003 there were 415 
underground storage facilities with a working gas capacity of 3.9 
Tcf. The Staff Storage Report considered the range of estimated 
aggregate existing working gas and concluded that the present 
working gas capacity is 3.5 Tcf, of which 2.5 Tcf is subject to NGA 
jurisdiction, and that by improving existing storage reservoirs 
(i.e., by reengineering existing facilities to enhance efficiency, 
rather than by expanding cavern capacity), there is the potential to 
obtain another 200 to 500 Bcf. See Staff Storage Report at 7-10.
    \12\ Balancing Natural Gas Policy--Fueling the Demands of a 
Growing Economy, NPC, Volume II at 261 (2003).
    \13\ New England appears to have little geologic potential for 
the development of underground storage facilities.
    \14\ See, e.g., Southwestern Gas Storage Technical Conference, 
Docket No. AD03-11-000, Transcript at 23, lines 10-14 (Aug. 26, 
2003).
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    9. In large part, a storage facility's utility is a function of its 
location. Gas-fired electric generation is anticipated to

[[Page 77081]]

drive a significant portion of the growth in gas consumption. Electric 
demand is expected to grow along with population, and one region of 
recent and forecasted population growth is the desert Southwest.\15\ 
Since electric generation requirements are more transient than steady-
state demand, base-load infrastructure facilities may not be an ideal 
means to meet future electric needs. Storage projects, especially high-
deliverability salt cavern facilities, may prove more adaptable than 
pipelines in supplying gas on an as-needed basis to match the 
fluctuations in the demand profile of electric generation facilities.
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    \15\ For example, Arizona's population is expected to increase 
by 5.6 million by 2030. U.S. Census Bureau, Population Division, 
Interim Projections (April 2005).
---------------------------------------------------------------------------

    10. Over the last several years, there has been a revival of 
interest in expanding existing and building new marine terminal 
facilities to import liquefied natural gas (LNG). New storage projects 
are being developed to absorb the additional revaporized LNG imports. 
To date, most such activity has been in the states along the arc of the 
Gulf of Mexico. The natural gas production, gathering, processing, 
transportation, and storage infrastructure in this region is extensive. 
Storage project sponsors have been able to demonstrate that the 
competitive nature of the gas market in this region ensures that new 
storage entrants are unlikely to be able to exercise market power, and 
hence merit market-based rates for new storage services.\16\ In 
contrast, in the Southwest there is no equivalent infrastructure in 
place. This is noteworthy because several new LNG terminals are planned 
for the Mexican states of Baja California, Sonora, and Sinaloa, and a 
significant portion of the LNG received in Mexico is expected to flow 
north for consumption in the United States, with the Southwest as a 
targeted market. Additional storage in the Southwest could facilitate 
the receipt and distribution of these new natural gas supplies.
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    \16\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ] 
61,095 (2005) and Freebird Gas Storage, LLC, 111 FERC ] 61,054 
(2005) (approving new storage projects in the Gulf of Mexico area 
that qualified for market-based rates).
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    11. The development of underground storage facilities is dictated 
(1) by geology, which determines the physical properties of prospective 
reservoirs, such as size and cushion gas requirements; (2) by access to 
supply; (3) by access to consuming markets; and (4) by access to 
pipelines capable of transporting additional volumes of stored gas. 
Once a suitable site is identified, whether new storage capacity will 
be built turns on matters of construction and operating costs, market 
demand and the environment. Severe, adverse and unavoidable 
environmental impacts may preclude construction in certain locations. 
Investors also may be reluctant to fund a new project because of 
unattractive risk/reward prospects due to regulatory pricing 
constraints. This NOPR seeks to ensure that the Commission's regulatory 
approach does not unnecessarily impede the development of needed 
storage projects.
    12. For storage services used on a short-term or spot basis, cost-
of-service rates designed on the basis of an annual working gas cycle 
may not match up with the market value of storage service during 
transient periods of peak demand. Cost-of-service rates are based on 
projections of annual revenue requirements and relatively constant 
levels of demand. However, in today's markets, wholesale customers are 
not always willing to enter into long-term storage contracts sufficient 
to assure the storage investors that their annual revenue requirements 
will be met. Storage services used on a short-term or spot basis often 
do not exhibit the level of demand assumed by cost-of-service rate 
design. Permitting storage operators to earn higher revenues from 
short-term services during peak demand periods or through other pricing 
mechanisms may make an investment in the project economically feasible. 
Therefore, the NOPR seeks to lead to increased storage capacity that 
could benefit customers while continuing to protect them from the 
exercise of market power.

III. Discussion

    13. This NOPR is proposing changes to our regulations to permit 
storage providers to secure market-based rates under certain 
circumstances, while at the same time seeking to protect customers 
against potential exercises of market power. First, we are proposing 
regulations permitting all companies with storage facilities to seek 
market-based rates through a showing that their storage operations do 
not have significant market power. We have re-examined our approach to 
analyzing market power so that our analysis of whether to permit 
market-based rates for storage services better reflects the current 
competitive realities of the storage market. Second, for new storage 
capacity related to a specific facility placed into service after 
August 8, 2005, we are proposing regulations under new NGA section 4(f) 
that will authorize market-based rates under certain circumstances. 
Under these regulations, storage operators will be required to propose 
measures to protect customers from the potential exercise of market 
power, and we solicit comment on various approaches that could be used 
as generic safeguards in providing such protection. A storage service 
provider may apply for market-based rates under either method by filing 
appropriate supporting data when it files its certificate application, 
or as part of its request for NGPA section 311 rate authorization, or 
in a request for declaratory order for authority to charge market-based 
rates, but in any case it cannot charge market-based rates until the 
Commission concludes that the storage applicant has established that it 
lacks significant market power \17\ or that it will adopt adequate 
customer protections pursuant to new NGA section 4(f).
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    \17\ See Alternatives to Traditional Cost-of-Service Ratemaking 
for Natural Gas Pipelines, 74 FERC ] 61,076 at 61,236 (1996), reh'g 
and clarification denied, 75 FERC ] 61,024 (1996), petitions denied 
and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 
918 (D.C. Cir. 1998); see also Association of Oil Pipe Lines v. 
FERC, 83 F.3d 1424, 1442-43 (D.C. Cir. 1996).
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    14. The Commission recognizes that the measures proposed herein 
will not guarantee the proliferation of new storage projects. For 
example, despite a perceived need for new storage in the Southwest, 
there have been proposals for new storage projects that have failed to 
go forward for reasons unrelated to rate treatment.\18\ Nevertheless, 
the flexibility proposed herein may induce the development of new 
storage capacity that would otherwise not be built.
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    \18\ See, for example, Desert Crossing Gas Storage and 
Transportation System LLC, 98 FERC ] 61,277 (2002), a proposal that 
has stalled, apparently due to shortfalls in contractual commitments 
and environmental concerns, and Copper Eagle Gas Storage L.L.C., 97 
FERC ] 62,193 (2001) and 99 FERC ] 61,270 (2002), a proposal delayed 
due to expressions of concern by the State of Arizona legislature 
raised as a result of security and safety issues associated with the 
project's planned location near Luke Air Force Base.
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A. Market Power Analysis for Market-Based Rates

    15. The Commission evaluates requests to charge market-based rates 
for storage services under the analytical framework of its 1996 
Alternative Rate Policy Statement (Policy Statement).\19\ The Policy 
Statement establishes procedures for service providers to demonstrate 
that they lack significant market power, using criteria recognized by 
the courts and similar to those used

[[Page 77082]]

by the Department of Justice and the Federal Trade Commission. Under 
the Policy Statement, an applicant seeking authority to charge market-
based rates must demonstrate that it lacks significant market power, or 
has adopted conditions that sufficiently mitigate its market power.\20\
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    \19\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996), reh'g 
and clarification denied, 75 FERC ] 61,024 (1996), petitions denied 
and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 
918 (D.C. Cir. 1998).
    \20\ The Policy Statement describes significant market power as 
the ability to withhold services in a relevant market in order to 
produce a significant price increase for a significant period of 
time. The Commission adopted 10 percent as its standard price change 
threshold but did not preclude parties from arguing for the adoption 
of a higher or lower threshold in individual cases. 74 FERC ] 61,076 
at 61,232.
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    16. The first step in analyzing whether an applicant has 
significant market power involves defining the relevant market in terms 
of both product market and geographic market. Such markets are defined 
by identifying the specific products or services and the suppliers of 
those products or services that provide good alternatives to the 
applicant's products and services. A good alternative is one that is 
available soon enough, has a price that is low enough, and has a 
quality high enough to permit customers to substitute the alternative 
for the applicant's services.
    17. The Commission's initial screening tool for significant market 
power is the Herfindahl-Hirschman Index (HHI), a formula that focuses 
on the relevant market's concentration as an indicator of the potential 
of an applicant to act together with other sellers to raise prices. In 
general, an HHI below 1,800 suggests limited market concentration with 
less potential for any participant to exercise significant market 
power. However, an HHI above 1,800 suggests a higher level of 
concentration, and will cause the Commission to increase its scrutiny 
of other factors such as the applicant's market share, ease of entry 
into the market, the relative size of the applicant's capacity, and/or 
the sustainability of a potential attempt by the applicant to exercise 
market power.\21\
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    \21\ Id.
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    18. Since 1996, over 40 storage service providers have sought 
market-based rates pursuant to the criteria in the Policy Statement. In 
the majority of these cases, the Commission found that the applicant 
lacked significant market power and approved market-based rates. In 
applying its market concentration and market share screens in these 
cases to date, the Commission has looked only to the availability of 
other storage alternatives (in the relevant geographic market), in 
assessing whether a storage provider can exercise significant market 
power. Using this analysis, the Commission has approved all requests 
for market-based rates where the applicant was located in the 
production area. Due to extensive storage infrastructure in these 
regions, the Commission has been able to find a lack of significant 
market power based on findings that HHIs in that geographic region are 
well below 1,800, and without intense scrutiny of other factors.\22\
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    \22\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ] 
61, 095 (2005); Egan Hub Partners, L.P., 99 FERC ] 61,269 (2002); 
Egan Hub Partners, L.P., 95 FERC ] 61,395 (2001).
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    19. On the other hand, storage markets in consuming regions, such 
as the Northeast portion of the United States, have fewer storage 
providers, and have certain providers with large market shares, 
resulting in HHI values sufficient to require a higher level of 
Commission scrutiny of factors beyond market concentration. 
Nevertheless, the Commission has approved requests in consuming areas 
of the Northeast by considering factors other than market 
concentration. For example, in Avoca Natural Gas Storage,\23\ the 
Commission approved market-based rates despite an HHI for 
deliverability of 4,100 in the relevant New York/Pennsylvania market, 
specifically noting the small size of Avoca's market share and the 
apparent ease of entry into the market as factors mitigating the market 
concentration reflected in the HHI.\24\
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    \23\ 68 FERC ] 61,045 (1994).
    \24\ The Commission reached a similar result analyzing storage 
services in Steuben Gas Storage Co., 72 FERC ] 61,102 (1994); New 
York State Electric and Gas Corp., 81 FERC ] 61,020 (1997); N.E. Hub 
Partners, L.P., 83 FERC ] 61,043 (1998); Seneca Lake Storage, Inc., 
98 FERC ] 61,163 (2002); and Wyckoff Gas Storage Co., LLC, 105 FERC 
] 61,027 (2003).
---------------------------------------------------------------------------

    20. However, in areas where there are truly only a limited number 
of storage service providers, the Commission's traditional analysis 
will likely result in a storage provider having high HHI values as well 
as relatively large market shares. For example, in 2002, Red Lake Gas 
Storage, L.P. (Red Lake) proposed to construct a new underground 
storage facility in Arizona, an area not currently served by 
underground gas storage, and sought approval to charge market-based 
rates. The Commission denied Red Lake's market-based rate request based 
on its determination that, if built, the market Red Lake would operate 
in would be extremely concentrated and it would have substantial market 
power.\25\
---------------------------------------------------------------------------

    \25\ Red Lake Gas Storage, L.P., 102 FERC ] 61,077, reg'h 
denied, 103 FERC ] 61,277 (2003).
---------------------------------------------------------------------------

    21. The Commission is concerned that its current approach to 
analyzing market power may be too limiting in some circumstances 
because it does not consider the fact that non-storage products and 
services in a properly defined geographic market may be good 
alternatives to storage services, and thus mitigate a storage 
provider's ability to exercise market power. For example, in today's 
natural gas markets, pipeline capacity that is unaffiliated with the 
storage provider may be a good alternative to the storage service being 
offered. A new entrant proposing to offer its storage services in an 
area already fully served by existing pipelines would offer customers 
in that market area new service options, which to some extent would 
compete with existing service providers. Any new independent storage 
capacity would be expected to lower the market concentration and 
increase available alternatives in such a market.
    22. The Commission therefore believes that it is not appropriate to 
limit the relevant product market to services offered by competing 
storage facilities. Such a narrow definition may incorrectly indicate 
that the storage applicant can exercise significant market power when, 
in fact, such ability could be constrained by sufficient pipeline 
alternatives. The denial of market-based rate authority in these 
circumstances could harm customers by providing a disincentive to 
storage development, particularly in underserved areas, in situations 
where significant market power does not exist.
1. Modifications to Market-Based Rate Test
    23. The Commission proposes to reform its market-power test for 
natural gas storage operators to more accurately reflect the 
competitive conditions in the market for gas storage services. The 
Commission believes it is appropriate to adopt a more expansive 
definition of the relevant product market for storage to explicitly 
include close substitutes for gas storage services. We will evaluate 
potential substitutes, such as available pipeline capacity, and local 
gas production or LNG terminals, on a case-by-case basis in the context 
of individual applications for market-based rates \26\
---------------------------------------------------------------------------

    \26\ Historically, market area storage was often developed to 
provide an economic alternative to more expensive pipeline 
expansions. By design, market area storage service used available 
off-peak pipeline capacity to inject gas into storage and expanded 
pipeline capacity from the storage fields to markets to deliver 
incremental supplies during market peaks. Thus, storage plus limited 
pipeline expansions provided a good economical alternative to more 
expensive production-area-to-market-area pipeline expansions.
---------------------------------------------------------------------------

    24. In order to show that a non-storage product or service such as

[[Page 77083]]

transportation is a good alternative, the storage applicant would need 
to meet the criteria set forth in the Commission's Policy 
Statement,\27\ including a showing that the service is available. In 
addition, consistent with the Commission's current practice, capacity 
on pipeline systems owned or controlled by the applicant's affiliates 
should not be considered among the customers' alternatives. Rather, 
affiliated capacity will be included in the market share calculated for 
the applicant.\28\
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    \27\ A good alternative is one that is available soon enough, 
has a price that is low enough, and has a quality high enough to 
permit customers to substitute the alternative for the applicant's 
services.
    \28\ See Policy Statement, 74 FERC ] 61,076 at 61,234 (1996).
---------------------------------------------------------------------------

    25. We provide the following guidance regarding the types of 
products that may be close substitutes depending on the facts of a 
given case. As a general matter, competition to a storage provider can 
come from entities that have the ability to deliver gas in the same 
market as the storage facility. In producing areas, storage may compete 
with production or LNG supply, in addition to other storage facilities. 
In market areas, there may also be local production or LNG available. 
In addition, available pipeline capacity can function as a close 
substitute by delivering gas at peak times to compete with a storage 
provider. For these reasons, we will permit applicants to present 
evidence that both available pipeline capacity and local production/LNG 
supply in the geographic market area can reasonably be considered as 
alternative products to storage services.
    26. In addition, firm capacity available through capacity release 
can be a good alternative in appropriate circumstances. Under the 
Commission's capacity release regulations, holders of firm capacity are 
free to release the capacity to other shippers, as well as to make 
bundled sales at alternate delivery points. Because of this 
flexibility, some portion of firm, contracted-for capacity may have a 
sufficiently elastic demand (a willingness to re-sell firm capacity 
when price rises) to serve as a good alternative to an applicant's 
storage service.
    27. A determination of whether capacity release provides a close 
substitute will depend on the facts of a particular case. For example, 
to the extent an LDC or similar entity holds pipeline capacity that is 
needed to meet state-mandated service obligations for captive retail 
customers, the capacity holder may have a relatively inelastic demand 
that makes it unlikely that the LDC will release that capacity and 
therefore that increment of transportation capacity may not be 
considered a good alternative during peak periods. However, LDCs and 
marketers also serve industrial and other customers under interruptible 
contracts which might make that portion of the LDC's capacity a 
reasonable alternative.
    28. Moreover, in some circumstances, an applicant may be able to 
show that even when firm capacity on a pipeline is reserved for captive 
customers, e.g., residential and small commercial customers, potential 
product or service substitution in downstream markets can result in 
capacity becoming available to compete in upstream markets while still 
serving captive customers. Under the Commission's open-access program, 
competition in a downstream market may create competition in upstream 
markets, particularly due to Order No. 636's requirement that pipelines 
provide flexible receipt and delivery points and segmentation including 
backhaul. Thus, an LDC's ability to buy capacity from another pipeline 
or storage facility or to purchase gas in the downstream market may 
free it to release upstream capacity, to compete with storage in the 
upstream market. This ability to buy capacity from another pipeline or 
storage facility or buy gas in the market area is present in the large 
downstream markets in the United States including California, Chicago 
and the Northeast.
    29. Take, for example, the California downstream market. Capacity 
held on Transwestern Pipeline Company, LLC (Transwestern) and El Paso 
Natural Gas Company (El Paso) could compete with a storage project 
located in a market upstream of California if California customers of 
these pipelines can buy gas from other sources in the downstream 
markets. This could free upstream capacity to compete with the upstream 
storage project. For example, Pacific Gas & Electric Company (PG&E) 
could buy gas from PG&E Gas Transmission, Northwest Corporation (PGT), 
Kern River Gas Transmission Company, an electricity generator in the 
California market, withdraw from its own storage, or purchase local 
production or regasified LNG to serve its captive or core customers. As 
a result, PG&E would be able to either release a portion of its firm 
capacity on El Paso, or nominate a secondary delivery at an upstream 
point to sell gas in the upstream market. As indicated above, whether 
capacity release in a given market would qualify as a close substitute 
under the Policy Statement would be determined on the facts of a given 
case.
    30. Thus, based upon a proper showing, the Commission believes it 
would be appropriate for a storage applicant to include pipeline 
capacity that is used to serve captive customers if it is demonstrated 
that there are reasonable substitutes in the downstream market for 
serving load that would free up capacity in the upstream market that 
would compete with the storage project.
    31. In summary, the Commission proposes to modify its current 
approach to analyzing market power to explicitly permit a storage 
applicant to propose to include other storage services, as well as non-
storage products and services, including pipeline capacity and local 
production/LNG supply as described above, in its calculation of market 
concentration using the HHI and in its analysis of market share. The 
Commission believes that consideration of these alternative products 
will ensure that the Commission's market power analysis accurately 
reflects whether a storage applicant is able to exercise significant 
market power. The Commission requests comments on this approach as well 
as suggestions regarding other approaches for quantifying the amount of 
pipeline capacity that would compete with an applicant's storage 
services.
2. Filing Procedures and Periodic Review
    32. Because most of the applications requesting market-based rates 
have been filed by storage providers, the Commission believes it would 
be beneficial to adopt specific procedures and filing requirements. 
Therefore, the Commission proposes to add a new subpart M to part 284 
that requires, among other things, that applications by storage 
providers requesting market-based rates contain certain information. 
The Commission will continue its practice of approving market-based 
rate proposals on a prospective basis only.
    33. Approval of blanket certificate authority to provide open 
access storage services at market-based rates will subject the storage 
service provider to the existing reporting requirements applicable to 
open-access service providers under Sec.  284.13 of the Commission's 
regulations. The public disclosure of this information will enable the 
Commission and the industry to monitor the market-based storage 
transactions.
    34. In a recent case, the Commission also required an applicant to 
file an updated market-power analysis within five years of the date of 
the Commission

[[Page 77084]]

order granting authority to charge market-based rates, and every five 
years thereafter.\29\ The Commission believes that imposition of a 
periodic review is necessary to ensure that our grant of market-based 
rates to an applicant remains just and reasonable. Accordingly, the 
Commission proposes to add Sec.  284.504 to the regulations to require 
storage applicants receiving market-based rates on the basis of a 
market power analysis to file updated market-power analyses within five 
years of the date of the Commission order granting authority to charge 
market-based rates, and every five years thereafter.
---------------------------------------------------------------------------

    \29\ Liberty Gas Storage LLC, 113 FERC ] 61,247 (2005).
---------------------------------------------------------------------------

B. Energy Policy Act of 2005

    35. Section 312 of EPAct 2005 adds new NGA section 4(f), which 
permits the Commission to authorize new natural gas storage projects 
(i.e., projects placed in service after the passage of the Act) to 
provide service at market-based rates notwithstanding the fact that the 
applicant is unable to demonstrate that it lacks market power. New NGA 
section 4(f) requires that, to authorize market-based rates, the 
Commission must find that ``market-based rates are in the public 
interest and necessary to encourage the construction of the storage 
capacity in the area needing storage services'' and ``customers are 
adequately protected.'' The Act further requires that the Commission 
``ensure that reasonable terms and conditions are in place to protect 
consumers'' and that the Commission ``review periodically whether the 
market-based rate is just, reasonable, and not unduly discriminatory or 
preferential.'' Intrastate pipelines also provide storage services, and 
new NGA section 4(f)(1) extends the market-based rate authority to 
intrastate pipelines subject to Commission authority under the Natural 
Gas Policy Act of 1978.\30\ We discuss below the relevant aspects of 
new NGA section 4(f).
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 3301-3432 (2000). We note that the Commission has 
authorized Hinshaw pipelines to be treated the same as LDCs and we 
intend the same here. See Certain Transportation, Sales and 
Assignments by Pipeline Companies not Subject to Commission 
Jurisdiction Under Section 1(c) of the Natural Gas Act, Order No. 
63, FERC Stats. & Regs. Regulations Preambles (1997-1981) ] 30,118 
(Jan. 9, 1980).
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1. Storage Capacity Eligible for Market-Based Rates
    36. Under the new NGA section 4(f), the Commission may authorize 
market-based rates ``for new storage capacity related to a specific 
facility placed in service after the date of enactment.'' Interstate 
natural gas pipelines asked the Commission at the October 12, 2005 
Conference on State of Natural Gas Infrastructure to allow post-EPAct 
2005 storage expansions of existing storage facilities to qualify under 
this provision.\31\
---------------------------------------------------------------------------

    \31\ Comments of Scott Parker, President, Kinder Morgan Pipeline 
Group, State of the Natural Gas Infrastructure Conference, Docket 
No. AD05-14-000, Transcript at 120, lines 6-11 (Oct. 12, 2005).
---------------------------------------------------------------------------

    37. We believe that the phrase ``placed in service after the date 
of enactment'' modifies the term ``facility,'' not the term 
``capacity,'' such that it is the facility which must be placed into 
service after August 8, 2005, rather than the storage capacity. While 
the statute does not define the term ``specific facility,'' the 
Commission proposes to interpret that term to consider a new cavern, 
reservoir or aquifer that is developed after August 8, 2005, as a 
facility qualifying for market-based rates under the Act. We believe 
that this interpretation is most consistent with the wording of new NGA 
section 4(f). We invite comments on alternative constructions of the 
Act. We also invite comments on how, if we construe the Act 
differently, the Commission may adequately protect other customers 
already receiving service under cost-based authorizations that pre-date 
the Commission's new NGA section 4(f) authority.
2. Market-Based Rates Are in the Public Interest and Necessary To 
Encourage the Construction of Storage Capacity in the Area Needing 
Storage Services
    38. Before authorizing market-based rates under new NGA section 
4(f), the Commission is required to determine that such rates are in 
the public interest and are necessary to encourage the construction of 
storage capacity in the area needing storage services. As discussed in 
the section below, applicants for authorization under section 4(f) will 
be required to demonstrate that customers will be adequately protected 
from any abuses of market power by the storage provider. Those customer 
protections will serve to ensure that the market-based rates charged 
are in the public interest.
    39. The Commission proposes to require that the applicant bear the 
burden of showing that in its specific circumstances, market-based 
rates are necessary to encourage the construction of storage capacity 
and that storage services are needed in the area. The Commission 
invites comment on how a project applicant might make these showings. 
One possible way would be for the applicant to present evidence that it 
offered its capacity at cost-based rates through an open season and was 
unable to obtain sufficient long-term commitments at those cost-based 
rates.
3. Customer Protection
    40. New NGA section 4(f) also requires that the Commission, as a 
prerequisite for granting market-based rate authority, determine that 
customers are adequately protected, and requires the Commission to 
ensure that reasonable terms and conditions are in place to protect 
them. The Commission proposes to allow the applicant to propose a 
relevant method of protecting customers.
    41. In general, the Commission believes that customers will be 
better off if more storage infrastructure is built. Additional storage 
will benefit customers by increasing customer alternatives in a market 
and by mitigating price volatility.\32\ Therefore, just as the 
Commission balances the benefits of proposed new construction against 
residual adverse impacts in determining need under the Certificate 
Policy Statement, the Commission proposes, in considering requests for 
market-based rate authority under new NGA section 4(f), to balance the 
obvious benefits of additional storage capacity in areas needing 
storage services against any adverse impacts which might arise from the 
potential exercise of market power by the storage provider. The 
Commission is concerned that to the extent unnecessary conditions are 
imposed, the additional storage infrastructure and the additional 
service options they create would be lost to the detriment of potential 
customers. Accordingly, the Commission seeks comment on methods of 
customer protection which will allow it to achieve the desired balance.
---------------------------------------------------------------------------

    \32\ See Pine Prairie Energy Center, LLC, 109 FERC ] 61,215 at P 
21 (2004).
---------------------------------------------------------------------------

    42. The appropriate method of customer protection may well vary 
depending on the facts and circumstances of individual project 
proposals. Thus, the Commission proposes to allow each applicant to 
propose a method of protecting customers best suited to its project. 
However, the Commission seeks comments on whether it would be 
beneficial to identify in this rulemaking certain acceptable 
approaches. Establishment of generic safeguards would facilitate the 
application process for NGA section 4(f) market-based rate authority. 
Each applicant, however, would retain the right to propose another 
method of protecting customers that might better fit the circumstances 
of

[[Page 77085]]

its project. The Commission seeks suggestions of possible generic 
safeguards, as well as comments on the methods described below.
    43. Entities with market power can exercise that power in two 
general areas: (1) The withholding of capacity; and (2) the extraction 
of monopoly rents. Thus, there are two approaches to protecting 
customers against the exercise of market power: (i) Conditions that 
limit the withholding of capacity and (ii) rate protections. We seek 
comment on whether there are generic safeguards in either method that 
would fairly balance the interests of consumers with the economic 
considerations relevant to financing new storage projects. As a general 
matter, we favor customer protections that are clear, easy to implement 
and oversee, and provide certainty to an applicant that is sufficient 
to support financing of a storage project.
    44. One approach to customer protection is restrictions on 
withholding capacity. Market power can be exercised in those 
circumstances where a storage operator can withhold capacity from the 
market and raise prices. As long as storage capacity has not been 
withheld, ``the fact that shippers may at times bid up contract length 
likely reflects not an exercise of [the pipeline's] market power, but 
rather competition for scarce capacity.'' \33\ We seek comment whether 
by ensuring that the storage operator has sold or made available to the 
market all of its capacity (and thus it is not withholding capacity), 
customers can be assured that market power is not being exercised by 
the storage service provider and that any increase in price is due to 
customers' demand for storage relative to the available supply.\34\
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    \33\ Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 
(D.C. Cir. 2002).
    \34\ Id. (affirming Commission determination that prices 
determined through an uncapped bidding process were the product of 
competitive forces, not the exercise of market power.)
---------------------------------------------------------------------------

    45. A difficulty in applying this standard is in defining when 
withholding should be found to be indicative of the exercise of market 
power. The Commission requests comment on how to apply a prohibition 
against withholding which balances the competing needs of the project 
sponsor to secure revenues adequate to attract necessary investment in 
new infrastructure and of the needs of customers to be protected from 
the abuse of market power. For example, would allowing the storage 
operator to set a reserve price provide an appropriate balance? Should 
the withholding prohibition apply all the time, or only during periods 
of peak demand for storage services? If the Commission were to allow 
such conditions, how should terms such as ``reserve price'' (a minimum 
price below which the storage operator is not required to sell 
capacity) and ``period of peak demand'' be defined? \35\ Should a 
formal auction process under which the applicant is obligated to sell 
all capacity above a reserve price be considered?
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    \35\ The Commission has long recognized that open access 
pipelines are not required to sell capacity at rates below the 
maximum cost-based rate. This form of withholding balances the 
pipeline's right to compensatory rates against the customer 
protections required by the Natural Gas Act. However, under market-
based rates there is no clear point at which these conflicting 
interests may be easily balanced.
---------------------------------------------------------------------------

    46. Market power can be exercised in those circumstances where a 
storage operator can extract monopoly rents. Rate protections could 
take several forms. For example, rate caps could be designed to provide 
adequate customer protection while also supporting the financing of new 
storage projects. We seek comment on whether there are certain 
approaches to rate caps that could be adopted as a generic safeguard. 
As another example, the Commission could allow an applicant to 
establish a long-term (e.g., 5-10 years) recourse rate that was cost-
based and allow the applicant to negotiate contracts under market-based 
rates for shorter-term transactions. Would this approach be sufficient 
to protect customers without imposing an undue burden on the financing 
of new storage projects? Are there other cost-based rate designs or 
price cap methodologies that the Commission should consider to be 
generally acceptable if proposed by an applicant under this program?
4. Periodic Review
    47. New NGA section 4(f) also requires that, for those entities 
granted market-based rates under this authority, the Commission 
``review periodically whether the market-based rate is just, 
reasonable, and not unduly discriminatory or preferential.''
    48. The Commission believes that to encourage the construction of 
new storage infrastructure, it must balance the benefits of the 
additional options new storage will bring to wholesale customers 
against the burdens of various forms of periodic review. Certain forms 
of periodic reviews may deter applicants from pursuing projects by 
introducing an unnecessary element of regulatory uncertainty. Should 
this happen, additional storage infrastructure and the additional 
service options it creates would be lost to the detriment of wholesale 
customers.
    49. For market-based rates approved under NGA section 4(f), the 
Commission believes that the periodic review requirement should focus 
on the consumer protection safeguards adopted and ensure that these 
safeguards are working as intended and effectively preventing the 
storage provider from exercising significant market power. In the 
Commission's view, an effective approach of complying with the periodic 
review requirement is through regular monitoring and taking appropriate 
action under section 5 of the NGA either sua sponte or in response to a 
complaint. In cases where the consumer protection requirements imposed 
prohibit withholding, the Commission believes the existing Sec.  284.13 
posting requirements and storage reports combined with publicly 
available information regularly reviewed by Staff are sufficient for 
this purpose. These require that interstate storage operators post 
information about transactions and available capacity, and require the 
submission of quarterly index of customers' reports, and submission of 
semi-annual storage reports to the Commission. Those storage operators 
providing service only under NGPA section 311 are subject to fewer 
reporting requirements set forth in Sec.  284.126, which requires an 
annual transaction report, and a semi-annual storage report.
    50. Therefore, existing posting requirements on contractual 
obligations, including prices charged, and levels of available capacity 
should provide the information for monitoring whether storage operators 
have been exercising market power by withholding. This information is 
currently required of all open-access transporters and storage 
operators. Should concerns be raised about the practices of any storage 
provider charging market-based rates authorized by this Commission, 
this information along with more specific information required during 
the course of any necessary inquiry in a specific case will provide the 
Commission with the information needed to ensure that rates conform to 
the statutory requirement. Similarly, the Commission believes that the 
lesser burden imposed on NGPA section 311 storage providers, which are 
primarily regulated by state authorities, is also adequate for this 
purpose. The Commission believes this monitoring approach adequately 
complies with the periodic review requirement in NGA section 4(f).
    51. The Commission requests comment on this approach and whether 
this type of periodic review should be enhanced by other reporting or 
transparency requirements. Comments

[[Page 77086]]

should discuss with specificity how other requirements might be imposed 
without unduly deterring needed new storage infrastructure investment. 
Moreover, the Commission seeks comment on whether the applicant should 
be required to demonstrate the continued adequacy of its existing 
customer protections every five years. Additionally, in cases where the 
Commission adopts customer protection safeguards other than 
withholding, the Commission intends to consider whether additional 
reporting is necessary to effectively monitor and review whether the 
market-based rate is just and reasonable.
    52. The Commission, therefore, proposes to revise its part 284 
regulations as follows. New subpart M will be added, which addresses 
applications for market-based rates for storage. Within new subpart M, 
Sec.  284.501, Applicability, explains which pipelines or storage 
service providers are eligible to apply for market-based rates under 
subpart M, Sec.  284.502, Procedures for applying for market-based 
rates, explains what procedures must be followed for submitting an 
application. Section 284.503, Market-power determination, explains what 
must be submitted as part of an application for market-based rates, 
including what information must be submitted related to an applicant's 
market power. Section 284.504, Periodic review for market power 
determinations, requires the filing of updated market-power analyses by 
storage providers granted the authority to charge market-based rates 
every five years. Section 284.505, Market-based rates for storage 
providers without a market-power determination, explains what a storage 
service provider that does not seek a market-power determination must 
submit to the Commission in an application for market-based rates.

IV. Information Collection Statement

    53. The Office of Management and Budget (OMB) regulations require 
that OMB approve certain reporting, record keeping, and public 
disclosure (collections of information) imposed by an agency.\36\ 
Accordingly, pursuant to OMB regulations, the Commission is providing 
notice of its proposed information collections to OMB for review under 
section 3507(d) of the Paperwork Reduction Act of 1995.\37\
---------------------------------------------------------------------------

    \36\ 5 CFR 1320.11 (2005).
    \37\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------

    54. The Commission identifies the information provided under Part 
284 subpart M as contained in FERC-545, FERC-546 and FERC-549.
    55. Comments are solicited on the Commission's need for this 
information, whether the information will have practical utility, the 
accuracy of the provided burden estimates, ways to enhance the quality, 
utility, and clarity of the information to be collected, and any 
suggested methods for minimizing respondent's burden, including the use 
of automated information techniques.
    56. The burden estimates for complying with additional filing 
requirements of this rule pursuant to the procedures in proposed new 
sections 284.503 and 284.505 are set forth below. For the most part, 
the burden on applicants seeking market-based rates for open-access 
storage services will not be changed by this proposed rule. Since 1996, 
applications for authority to charge market-based rates have been filed 
under the Commission's procedures applicable to NGA section 7 initial 
rate determinations, NGA section 4 rate changes, or NGPA section 311 
rate determinations under the Commission's existing data collection 
authorities. This rule codifies application procedures and filing 
requirements which are little changed from the process followed since 
1996. Codification of filing requirements will allow applicants to know 
what information must be filed with such an application and should 
reduce the need for staff to send out follow-up data requests and 
respondents to file data responses. To the extent respondents seek 
market-based rate authority under the new NGA section 4(f) 
authorization process, also codified in these regulations, the burdens 
may be lower than if they had filed to seek authorization under the 
Commission's 1996 Policy Statement. On average, we expect the burden of 
making an application for authority to charge market-based rates under 
this proposed rule to be 350 hours.
    57. Applicants granted market-based rate approval after the 
effective date of a final rule will also be required pursuant to 
proposed new Sec.  284.504 to file an updated market power analysis 
once every five years. The burden of this requirement will be imposed 
on all who operate under market-based rate authorizations granted on 
the basis of a market power determination. On average, we expect the 
burden of filing an updated market power analysis under this proposed 
rule to be 350 hours, imposed once every five years.
    58. Over the past several years the Commission has approved market-
based rates for storage services at an average pace of about 4.5 per 
year. The Commission is issuing this proposed rule in hopes that more 
storage will be constructed and operated, especially in underserved 
areas. In reflection of this policy goal, the Commission estimates that 
up to 10 filings may be made in a typical year. While this estimate may 
be high, in light of recent experience, at worst the Commission is 
overestimating the burden.

----------------------------------------------------------------------------------------------------------------
                                                                  Number of
               Data collection                   Number of      responses per      Hours per       Total annual
                                                respondents       respondent        response          hours
----------------------------------------------------------------------------------------------------------------
FERC-545, FERC-546, or FERC-549.............              10                1              350            3,500
----------------------------------------------------------------------------------------------------------------

Total Annual Hours for Collection: 3,500 hours.
    59. Information Collection Costs: The