Market-based Pricing for Gas Storage: Two Steps Forward, One Back

A new Federal Energy Regulatory Commission (FERC) rule allows new underground natural gas storage facilities to charge market-based rates under expanded circumstances. In CERA's view the rule, which has the difficult challenge of striking a balance between encouraging storage development and protecting consumers, represents two steps forward in providing more incentives for additional storage development, but in fact only a modest boost to developers, taking one step back:

* Market-based rates will be allowed under certain circumstances, even if the storage developer is unable to show that it does not have local market power.
* For developers seeking market-based rates under the existing format, which requires that the developer demonstrate a lack of market power, the FERC will now consider close substitutes to gas storage services for the market power analysis.
* Applicants not filing a market power analysis must demonstrate that their projects would not proceed unless granted market-based rates. Yet the test devised by the FERC may only serve to screen out projects that are viable with market-based rates. Successful applicants will be subject to more reporting requirements than those filing a market power analysis.
* For successful applicants that file a market power analysis, if their market share exceeds 10 percent, they may be subject to additional reporting requirements.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.