ACCOMMODATIVE APPROACH TO MARKET-BASED RATES FOR GAS STORAGE

The Federal Energy Regulatory Commission (FERC) is taking an accommodative approach to storage projects seeking market-based rates. This is intended to spur new projects that need this pricing structure. Two events demonstrate the FERC approach. For the first time, on November 16, 2006, the FERC approved market-based rates for an expansion of an existing regulated underground storage field without requiring the applicant to show a lack of market power. On the same day the FERC upheld all substantive provisions of Order No. 678, issued in June 2006, which provides a framework for developers seeking market-based rates. Owners of existing or proposed natural gas storage and users of storage should be aware of the following issues:

* FERC actions confirm its intention to allow higher returns to investors for the development and expansion of US storage fields.
* Although the FERC is clearly trying to spur more storage development with its approach, and these orders give storage developers more flexibility with respect to pricing, the real stimulus to storage development remains having sufficient long-term contracts from creditworthy customers to support storage project economics.
* Expansion of existing market-area storage by dominant storage providers, primarily pipelines, is encouraged.

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