[Federal Register Volume 71, Number 123 (Tuesday, June 27, 2006)]
[Rules and Regulations]
[Pages 36612-36638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5642]



[[Page 36611]]

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Part II





Department of Energy





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Federal Energy Regulatory Commission



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18 CFR Part 284



Rate Regulation of Certain Natural Gas Storage Facilities; Final Rule

  Federal Register / Vol. 71, No. 123 / Tuesday, June 27, 2006 / Rules 
and Regulations  

[[Page 36612]]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket Nos. RM05-23-000, AD04-11-000; Order No. 678]


Rate Regulation of Certain Natural Gas Storage Facilities

Issued June 19, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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

DATES: Effective Date: The rule will become effective July 27, 2006.

FOR FURTHER INFORMATION CONTACT:
Sandra Delude, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426. (202) 502-
8583.
Robert McLean, Office of General Counsel, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426. (202) 502-
8156.
Ed Murrell, Office of Energy Markets and Reliability, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. 
(202) 502-8703.
Berne Mosley, Office of Energy Projects, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426. (202) 502-
8625.

SUPPLEMENTARY INFORMATION: 

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead Brownell, 
and Suedeen G. Kelly

I. Introduction

    1. The Final Rule reforms the Commission's current pricing policies 
to ensure access to storage services on a nondiscriminatory basis at 
just and reasonable rates and to ensure that sufficient storage 
capacity will be available to meet anticipated increases in market 
demand. To achieve these goals, the Commission is modifying its market-
power analysis to permit the consideration of close substitutes to 
storage in defining the relevant product market. This will ensure that 
market-based rates are not denied because of an overly narrow 
definition of the relevant market. Second, the Commission is adopting 
regulations implementing section 312 of the Energy Policy Act of 2005 
(EPAct 2005 or the Act),\1\ which permits the Commission, in 
appropriate circumstances, to authorize storage providers to charge 
market-based rates for service utilizing new capacity even when the 
storage providers cannot (or do not) demonstrate that they lack market 
power. The revisions adopted in the Final Rule are intended to 
facilitate the development of new natural gas storage capacity while 
protecting customers.
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    \1\ Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594 
(2005).(2005).
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II. Background

    2. On August 8, 2005, EPAct 2005 was signed into law. Section 312 
of the Act, adding a new section 4(f) to the Natural Gas Act (NGA),\2\ 
permits the Commission to allow a natural gas storage service provider 
placing new facilities in service to negotiate 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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    \2\ 15 U.S.C. 717, et seq. (2000).
    \3\ Energy Policy Act of 2005, Pub. L. 109-58, section 312, 119 
Stat. 594, 688 (2005).
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    3. The enactment of EPAct 2005 added momentum to efforts already 
underway at the Commission to adopt policy reforms that would encourage 
the development of new natural gas storage facilities while continuing 
to protect consumers from the exercise of market power. On September 
30, 2004, the Commission issued a staff report that examined 
underground natural gas 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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    4. On December 22, 2005, the Commission issued a notice of proposed 
rulemaking (NOPR) in which it proposed a two-prong approach for 
reforming its current storage pricing policy.\6\ First, the Commission 
proposed modifications to its traditional market-power analysis to 
permit the consideration of close substitutes to storage in defining 
the relevant product market. Second, the Commission proposed 
regulations to implement section 312 of EPAct 2005 that permits the 
Commission, in appropriate circumstances, to authorize storage 
providers to charge market-based rates for service utilizing new 
capacity even when the storage providers cannot (or do not) demonstrate 
that they lack market power.
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    \6\ Rate Regulation of Certain Underground Storage Facilities, 
Notice of Proposed Rulemaking, 70 FR 77079 (Dec. 22, 2005), FERC 
Stats. & Regs., Regulations Preambles ] 32,595 (Dec. 29, 2005).
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    5. The Commission received numerous comments from a variety of 
entities.\7\ Based on careful consideration of the comments submitted 
in response to the NOPR, the Commission adopts a Final Rule that 
generally follows the approach of the NOPR with certain exceptions.
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    \7\ A list of the commentors is included as an appendix to this 
Final Rule. We have not considered the supplemental reply comments 
filed by INGAA on May 31, 2006, due to the lateness of the filing.
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    6. First, the Final Rule modifies the Commission's market-power 
analysis to better reflect the competitive alternatives to storage. 
Specifically, we adopt a more expansive definition of the relevant 
product market for storage to explicitly include close substitutes for 
gas storage services, including pipeline capacity, local production, 
and liquefied natural gas (LNG) supplies. The Commission will evaluate 
potential substitutes in the context of individual applications for 
market-based rates. The Final Rule eliminates the NOPR's requirement 
that storage providers

[[Page 36613]]

granted market-based rates on the basis of a market power analysis file 
updated market-power analyses every five years. Instead, storage 
providers with market shares of ten percent or less would generally be 
exempt from such a requirement. We will consider in individual cases 
whether the specific facts and circumstances presented require 
additional reporting for other storage providers.
    7. Second, the Final Rule adopts regulations implementing section 
312 of EPAct 2005, which permits the Commission to authorize market-
based rates even if a lack of market power has not been demonstrated, 
in circumstances where market-based rates are in the public interest 
and necessary to encourage the construction of storage capacity in the 
area needing storage services and that customers are adequately 
protected. Finding that the definition of facilities eligible for 
treatment under new NGA section 4(f) is ambiguous, the Commission 
defines ``facilities'' as it traditionally has for purposes of the 
certification requirements of section 7(c). However, to receive market-
based rate authorization, the storage provider will still need to 
satisfy the other requirements of section 4(f).

III. Need and Purpose for the Rule

    8. The underground storage of natural gas is critical in assuring 
that overall demands and specific requirements of natural gas customers 
are met. Currently, there are approximately 200 storage facilities 
subject to the Commission's jurisdiction, with an aggregate working gas 
capacity of approximately 2.5 Tcf. Estimates of total domestic working 
gas capacity (both subject to and exempt from NGA jurisdiction) range 
up to 4.7 Tcf.\8\ Considering future storage needs of the United States 
and Canada together, the National Petroleum Council (NPC) estimates an 
additional 700 Bcf will be required by 2025.\9\ Although current and 
projected storage development is keeping pace with aggregate national 
storage demands, underground storage development in some market areas, 
such as New England \10\ and the Southwest, is not.\11\
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    \8\ The Department of Energy's Energy Information Administration 
(EIA) reports that in 2002 working gas storage capacity varied 
between 4.4 and 4.7 Tcf, whereas the Department of Energy's Office 
of Fossil Energy reports that in 2003 there were 415 underground 
storage facilities with a working gas capacity of 3.9 Tcf. The Staff 
Storage Report considered the range of estimated aggregate existing 
working gas and concluded that the present working gas capacity is 
3.5 Tcf, of which 2.5 Tcf is subject to NGA jurisdiction, and that 
by improving existing storage reservoirs (i.e., by reengineering 
existing facilities to enhance efficiency, rather than by expanding 
cavern capacity), there is the potential to obtain another 200 to 
500 Bcf. See Staff Storage Report at 7-10.
    \9\ Balancing Natural Gas Policy--Fueling the Demands of a 
Growing Economy, NPC, Volume II at 261 (2003).
    \10\ New England appears to have little geologic potential for 
the development of underground storage facilities.
    \11\ See, e.g., Southwestern Gas Storage Technical Conference, 
Docket No. AD03-11-000, Transcript at 23, lines 10-14 (Aug. 26, 
2003).
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    9. Over the last several years, there has been a marked increase in 
the cost of natural gas and sharp swings in gas prices. Storage can 
have a moderating influence on gas prices. As a physical hedge, 
customers can build up underground inventories during times of lower 
demand, and then rely on these supply stores to avoid paying high spot 
market gas prices. Among the key findings highlighted by the Staff 
Storage Report is that the ``continued commodity price volatility 
indicates that more storage may be appropriate'' and that storage ``may 
be the best way of managing gas commodity price, so the long-term 
adequacy of storage investment depends on how much price volatility 
customers consider `acceptable.' '' \12\
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    \12\ Staff Storage Report, at 1 (Sept. 30, 2004).
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    10. In consideration of these factors, the Commission is amending 
its regulatory policies in the Final Rule in order to facilitate the 
development of new natural gas storage capacity to ensure that adequate 
storage capacity will be available to meet anticipated market demand 
and to mitigate natural gas price volatility, while continuing to 
protect consumers from the exercise of market power.

IV. Discussion

A. Market-Power Test

    11. The Commission evaluates requests to charge market-based rates 
for storage services under the analytical framework of its 1996 Policy 
Statement on Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines (Policy Statement).\13\ In the NOPR, 
the Commission observed that in applying its market-concentration and 
market-share screens in these cases to date, the Commission has looked 
only to the availability of other storage alternatives (in the relevant 
geographic market), in assessing whether a storage provider can 
exercise significant market power. Noting that its current approach to 
analyzing market power may be too limiting in some circumstances in 
today's natural gas markets, the Commission proposed to reform its 
market-power test for natural gas storage operators to more accurately 
reflect the competitive conditions in the market for gas storage 
services. The Commission proposed to adopt a more expansive definition 
of the relevant product market for storage to explicitly include close 
substitutes for gas storage service, such as appropriate combinations 
of available pipeline capacity, and local gas production or LNG 
terminals, on a case-by-case basis in the context of individual 
applications for market-based rates. We posited that consideration of 
these alternative products will ensure that the Commission's market-
power analysis accurately reflects whether a storage applicant is able 
to exercise significant market power.
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    \13\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996), reh'g 
and clarification denied, 75 FERC ] 61,024 (1996), petitions denied 
and dismissed, Burlington Resources Oil & Gas Co. v. FERC, 172 F.3d 
918 (D.C. Cir. 1998).
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    12. We explained that, as a general matter, competition to a 
storage provider can come from entities that have the ability to 
deliver gas in the same market as the storage facility. In producing 
areas, storage may compete with production or LNG supply, in addition 
to other storage facilities. In market areas, there may also be local 
production or LNG available. In addition, available pipeline capacity 
can function as a close substitute by delivering gas at peak times to 
compete with storage. For these reasons, we suggested it would be 
appropriate to permit applicants to present evidence that both 
available pipeline capacity and local production/LNG supply in the 
geographic market area can reasonably be considered as alternative 
products to storage services.
    13. In addition, we suggested that firm capacity available through 
capacity release can be a good alternative in appropriate 
circumstances. Under the Commission's capacity release regulations, 
holders of firm capacity are free to release the capacity to other 
shippers, as well as to make bundled sales at alternate delivery 
points. Because of this flexibility, some portion of firm, contracted-
for capacity may have a sufficiently elastic demand (a willingness to 
re-sell firm capacity when price rises) to serve as a good alternative 
to an applicant's storage service. While pipeline capacity held by a 
local distribution company (LDC) that is needed to meet state-mandated 
service obligations for captive retail customers may not be considered 
a good alternative during peak periods, LDCs

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and marketers also serve industrial and other customers under 
interruptible contracts. That portion of the LDC's capacity might 
constitute a reasonable alternative.
    14. Moreover, we stated that, in some circumstances, an applicant 
may be able to show that even when firm capacity on a pipeline is 
reserved for captive customers, e.g., residential and small commercial 
customers, potential product or service substitution in downstream 
markets might result in capacity becoming available in upstream markets 
to compete with storage while captive customers continued to be served. 
Under the Commission's open-access program, competition in a downstream 
market may create competition in upstream markets, particularly due to 
Order No. 636's requirement that pipelines provide flexible receipt and 
delivery points and segmentation including backhaul. Thus, an LDC's 
ability to buy capacity from another pipeline or storage facility or to 
purchase gas in the downstream market may free it to release upstream 
capacity to compete with storage in the upstream market. This ability 
to buy capacity from another pipeline or storage facility or to buy gas 
in the market area is present in the large downstream markets in the 
United States including California, Chicago and the Northeast.
    15. The Commission requested comments on these alternatives, as 
well as suggestions regarding other approaches for quantifying the 
amount of pipeline capacity that might be available to compete with an 
applicant's storage services.
1. Expansion of the Product Market Definition
Comments
    16. A number of commentors generally support the Commission's 
proposal to liberalize the Commission's market-power test for market-
based rate authorization by expanding the kinds of storage alternatives 
that it will consider in analyzing an applicant's market power with 
certain proposed changes discussed below.\14\ They agree with the 
Commission that available pipeline capacity, capacity release, local 
gas production and LNG terminals all may serve as adequate substitutes 
for gas storage in appropriate circumstances. These commentors also 
state that they believe that the Commission's proposal should provide 
further incentives for the development of new natural gas storage 
capacity that will improve gas service reliability and promote price 
stability in the future. The NYPSC agrees with the Commission that 
local gas production, pipeline capacity and LNG potentially can be 
offered as alternatives to storage service but requests the Commission 
to adhere to the case-by-case approach and to allow for consideration 
of whether there are realistic alternatives available on a firm and 
long-term basis.
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    \14\ Comments of INGAA, Northern Natural, Duke, Williston Basin, 
the NiSource Pipelines, Dominion, Sempra, DTE, NYPSC, Falcon, 
EnCana, Bridgeline, Unocal, Enstor and Jefferson Storage. The full 
names of commentors and the abbreviations used in this document are 
shown in the appendix.
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    17. On the other hand, several commentors oppose changes to the 
current market-power standards on grounds that liberalizing these 
standards is unnecessary and potentially harmful to customers. AGA, 
APGA, NGSA, SGR and UET all question whether the proposed changes would 
actually encourage meaningful development of new storage facilities. 
APGA questions the NOPR's assumption that a storage capacity shortage 
exists. APGA states that while the NOPR discusses the upcoming need for 
an additional 700 Bcf of storage capacity by 2025, the NOPR does not 
suggest, much less demonstrate, that the need will not be fulfilled. 
NGSA submits that there is little evidence to suggest that the 
Commission's current pricing policies have had a major influence on 
developers' decisions to move forward with potential storage projects. 
Rather, NGSA contends that there are multitudes of technical and 
commercial factors that influence a potential storage developer's 
decision to build storage that are equal or paramount to the 
Commission's regulatory pricing policies including geological 
limitations, environmental requirements and NIMBY issues.
    18. AGA and SGR assert that the proposed changes would simply 
provide existing storage providers the opportunity to charge higher 
prices for services already available to the market and create 
opportunities for cross-subsidies between storage and transportation 
services. AGA also fears that liberalizing the market-power standards 
would vastly increase the scope and complexity of the market-power 
determination, while APGA submits that the NOPR's proposal to expand 
the definition of the relevant product market for storage would 
diminish substantially the showing required to obtain market-based 
rates.
    19. APGA also argues that the proposal is inconsistent with the 
Policy Statement that defines a ``good alternative'' as one that must 
have the same qualities of timeliness, price and quality of the storage 
service it would replace. Specifically, APGA submits that pipeline 
capacity (and local production/LNG and released capacity) are not good 
alternatives, much less ``close substitutes'' in terms of quality of 
service to the high deliverability storage service that the NOPR seeks 
to promote. Similarly, APGA argues that in terms of price, pipeline 
capacity is not a good alternative or close substitute to storage 
service, because pipeline capacity is more expensive than storage 
capacity.
    20. NGSA submits that the expansion of the relevant product market 
will not provide customers with the equivalent services uniquely 
offered by new storage facilities and examining market elasticity to 
determine whether product substitution can occur in downstream markets, 
as suggested in the NOPR, is simply not realistic. NGSA and PGC stress 
that the criteria and framework that the Commission utilizes to review 
market-based rate applications have proven to be effective and 
flexible, resulting in the approval of market-based rates for the 
majority of applicants. Moreover, NGSA points out there are flexible 
cost-based rates available to promote new storage capacity without 
making wholesale changes to the Commission's exiting market-power 
analysis. NGSA urges the Commission to consider whether it would be 
more appropriate instead to adopt changes that will rectify the unique 
problems identified in specific regions by undertaking a generic 
proceeding to: (1) Identify where new storage capacity is needed; (2) 
document known proposals in these regions; (3) determine what specific 
obstacles may exist; and (4) establish regulatory policies to encourage 
additional storage construction in those areas.
    21. IPAA expresses concern with the Commission's proposal to adopt 
a more expansive definition of the relevant product market for storage 
to explicitly include close substitutes for gas storage services. IPAA 
urges the Commission to carefully consider the potential impact of this 
expanded definition of relevant product market for storage on other 
cost-based services regulated by the Commission. (e.g., the regulation 
of interstate pipeline transportation rates). For example, IPAA states 
that if pipeline capacity and released capacity can serve as possible 
substitutes for competing storage, then the potential exists for 
storage to serve as a substitute for the availability of competing 
pipeline capacity in evaluating applications for market-based 
transportation rates. IPAA states it most likely would have concern 
with efforts to expand the acceptance of market-

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based transportation rates. Thus, IPAA strongly encourages the 
Commission to consider the effect the expanded definition of relevant 
product market could have on all services under the Commission's 
jurisdiction, not just within the confines of an individual application 
by a storage operator. NGSA requests that the Commission clarify that 
these changes will not be used for the future evaluation of market 
power for interstate transportation services but only for new storage 
facilities as it has proposed for the EPAct 2005 provisions.
    22. UET asserts that the Commission has not demonstrated that the 
proposed change in the market-power analysis is needed to reduce 
natural gas price volatility because price volatility is mitigated on a 
national, as opposed to a regional basis, and storage development is 
keeping pace with national demands. UET also argues the proposed change 
is not necessary to solve regional storage capacity shortages in 
underserved markets such as New England and the Southwest, because 
proposals for new storage in these areas have failed for reasons other 
than rate treatment. Finally, UET asserts that the proposed rule is not 
necessary to cater to power generation load because the Commission is 
able to meet the needs of power generation customers by developing rate 
designs that would permit storage operators to earn higher revenues 
from short-term services during peak periods.
    23. UET also maintains that changing the market-power analysis as 
proposed could discourage rather than encourage expansion of existing 
storage facilities. It asserts that cost-based rates treat the storage 
company fairly and also enable storage customers to participate 
sufficiently in the natural gas value chain that runs from the wellhead 
to the burner tip. UET alleges that market-based rates may disrupt the 
value chain to such an extent that potential storage customers, 
particularly marketers, will simply choose to exit the market rather 
than serve as the vehicle for funneling market-based rate revenues to 
storage providers. Thus, UET maintains that storage projects, for which 
there is a demand at cost-based rates, may not be built because the 
demand is not there for a project that would qualify for market-based 
rates under the relaxed proposed standards. In addition, noting that 
price volatility has increased as the number of major marketers has 
decreased, UET urges the Commission to exercise care in embracing 
market-based rates to encourage new storage in the name of price 
volatility mitigation when those rates may actually increase price 
volatility by further decreasing the number of marketers.
    24. Finally, AGA, NGSA and Process Consumers argue that the NOPR is 
unnecessary given the alternative of section 4(f) of the NGA. For 
example, AGA asserts that the proposed regulations pursuant to new NGA 
section 4(f) fully address the need to provide incentives for new 
storage services and there is no need to provide more latitude for 
qualifying for market-based rates for existing storage facilities. At 
most, AGA asserts the Commission should considering broadening the 
market-power test only after it has had an opportunity to assess the 
impact and outcome of the new rules under section 4(f), a minimum of 
two years after implementing regulations under section 4(f). Similarly, 
NGSA while supporting the Commission's goal of maximizing storage 
believes that liberalizing the traditional market-power test is 
unsupported and unnecessary. Given that Congress enacted EPAct 2005 as 
the primary vehicle to encourage the development of new storage 
facilities, NGSA urges the Commission to focus its attention in this 
proceeding on properly implementing EPAct 2005, and not engaging in an 
unnecessary effort to provide incentives for new storage by revising 
the existing market-power test. At a minimum, NGSA urges the Commission 
to take an incremental approach and maintain the existing market-power 
procedures, at least until it can assess whether its implementation of 
the EPAct 2005 provisions can provide a sufficient and workable program 
that provides a valid incentive to potential new storage developers.
Commission Determination
    25. The Commission finds it is appropriate to adopt a more 
expansive definition of the relevant product market for storage to 
explicitly include close substitutes for gas storage services, 
including pipeline capacity and local production/LNG supplies. As 
explained below, this modification to our market-power analysis better 
reflects the competitive alternatives to storage and is supported by 
changes in the natural gas markets that have occurred since the mid 
1990s. In today's markets, these non-storage products may well serve as 
adequate substitutes for gas storage in appropriate circumstances.
    26. As we explained in Order No. 637, the deregulation of wellhead 
natural gas prices, the advent of open-access transportation and the 
requirement that interstate pipelines offer unbundled open-access 
transportation service, has increased competition and efficiency in 
both the gas commodity and transportation market.\15\ Market centers 
have developed both upstream in the production area and downstream in 
the market area, providing shippers with greater gas and capacity 
choices. The wholesale market has grown with new participants that have 
the ability to deliver gas into many markets. The expansion of the 
product market definition to include close substitutes simply 
recognizes that buyers and sellers have a greater number of 
alternatives from which to choose in order to obtain and deliver gas 
supplies. From an end-use customer's perspective, gas is fungible, 
whether it comes from storage, local production or more distant 
supplies transported by pipelines. Competition with storage can come 
from any of these sources that can deliver gas in the same market as 
the storage facility. For these reasons, we will permit a storage 
applicant to include non-storage products and services, including 
pipeline capacity and local production/LNG supply in the calculation of 
its market concentration and market share.
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    \15\ Regulation of Short-Term Natural Gas Transportation 
Services and Regulation of Interstate Natural Gas Transportation 
Services, Order No. 637, FERC Stats. & Regs., Regulations Preambles 
(July 1996-December 2000) ] 31,091 at 31,249-63 (Feb. 9, 2000).
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    27. The Commission recognizes, however, that local production, LNG 
and pipeline capacity may not be good alternatives to an applicant's 
storage services in all circumstances. For a non-storage product to be 
a good alternative it must be available soon enough, have a price low 
enough and have a quality high enough to permit customers to substitute 
the alternative for the applicant's services. For this reason, we will 
evaluate potential substitutes in the context of individual 
applications for market-based rates. In those proceedings, the 
applicant will have the burden to demonstrate that the non-storage 
products and services, as well as the other storage services, used in 
its calculation of market concentration and market share are good 
substitutes. Any party to the proceeding can challenge the inclusion of 
a particular product on the grounds that it does not meet the 
qualifications for a good alternative. Based on the record in the 
proceeding, the Commission will determine if the proposed product is in 
fact a good alternative that will limit the exercise of significant 
market power by the applicant.
    28. In the NOPR, we noted that although current and projected 
storage development is keeping pace with aggregate demands, underground 
storage development in some market

[[Page 36616]]

areas, such as New England and the Southwest, is not.\16\ We also 
acknowledged that our rate policies will not guarantee the 
proliferation of new storage projects because storage projects fail to 
for reasons other than rate treatment.\17\ A few commentors claim that 
the proposed expansion of the product market is not supported because 
we have not shown that a storage capacity shortage exists or that 
market-based rates will ensure that storage gets built. We disagree 
that such findings are necessary to support the proposed change to our 
market-power analysis. The courts have permitted the Commission to 
institute flexible pricing to improve market efficiency so long as the 
overall regulatory scheme protects against the exercise of market power 
and protects and results in just and reasonable rates.\18\ Where the 
Commission determines that an applicant lacks market power, the 
Commission may depart from a strictly cost-based determination of 
rates, and approve rates reached as the result of competition. The 
Commission's authority to approve market-based rates has been approved 
by the courts when the Commission has found sufficient protection 
against the exercise of market power.\19\
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    \16\ NOPR at P 8.
    \17\ Id. at P 14.
    \18\ Environmental Action v. FERC, 996 F.2d 401, 410 (D.C. Cir. 
1993).
    \19\ Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870-71 (D.C. 
1993) (Elizabethtown); Louisiana Energy and Power Authority v. FERC, 
141 F.3d 364, 369-370 (D.C. Cir. 1998); Interstate Natural Gas 
Association of America v. FERC, 285 F.3d 18, 31-34 ((D.C. Cir.) 
2002); California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1013-1014 
(9th Cir. 2004).
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    29. The Commission finds that its proposed regulatory change will 
protect against the exercise of market power. In analyzing market-based 
rate storage proposals, the Commission will continue to addresses 
whether the applicant has market power; that is, can the applicant: (1) 
Withhold or restrict services to increase price a significant amount 
for a significant period of time, or (2) discriminate unduly in terms 
of price or conditions. Before the Commission can conclude that a 
seller cannot exercise market power it must either: (1) Find that there 
is a lack of market power because customers have sufficient ``good 
alternatives,'' or (2) mitigate the market power (i.e. permit market-
based pricing only if specified conditions are met that prevent the 
exercise of market power). The only change the Commission is adopting 
in this Final Rule is to recognize that in today's market, a storage 
applicant's ability to exercise market power can be constrained not 
only by other storage services but also by some combination of pipeline 
and other gas supply alternatives.
    30. Similarly, we do not share commentors' views that we should not 
adopt the proposed revisions to the product market definition because 
it may result in more complex proceedings or that there are flexible 
cost-based rates available to storage providers. The Commission's 
proposal is justified because it better reflects the competitive 
alternatives to storage.
    31. We also find that commentors' assertion that our action here 
will inappropriately raise rates ignores the connection recognized by 
the courts between competition and just and reasonable rates. In 
Elizabethtown, the court concluded that because of the competition in 
the pipeline's sales market it appeared that the pipeline would not be 
able to raise its price above the competitive level without losing 
substantial business to other sellers. ``Such market discipline 
provides strong reason to believe that Transco will be able to charge 
only a price that is `just and reasonable' within the meaning of 
section 4 of the NGA.'' \20\ Granting market-based rates in situations 
where there are sufficient alternatives prevents the exercise of 
significant market power. A new entrant found to lack market power 
offers another choice to existing customers, and in the Commission's 
experience, more choice frequently leads to lower, not higher, rates.
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    \20\ 10 F.3d 866, at 871 (D.C. Cir. 1993).
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    32. We also reject commentors' claim that Congress' enactment of 
section 312 of EPAct 2005 bars the Commission from expanding the 
product market definition for storage applicants seeking a finding that 
the applicant does not possess market power. These commentors fail to 
cite to any provision in section 312 of the Act that suggests Congress 
intended to limit in any way the Commission's ability to revise or 
modify its traditional market-power analysis. Rather in section 312, 
Congress established an alternative procedure to permit storage service 
providers that are unable to show that they lack market power to 
negotiate market-based rates if the Commission determines that market-
based rates are in the public interest, are necessary to encourage 
needed storage infrastructure and that customers are adequately 
protected. The Commission finds it is reasonable to proceed under both 
prongs.
    33. As to IPAA's and NGSA's concern that our actions here not 
prejudge the issue of whether storage can serve as a substitute for the 
availability of competing pipeline capacity in evaluating applications 
for market-based transportation rates, we clarify that it is not our 
intent. Our actions here only address what non-storage products may be 
considered a good alternative to storage services, and should not be 
construed to address what products may be considered a good alternative 
to transportation services.
    34. Finally, we do not share UET's views that our action here will 
negatively impact the number of marketers. Marketers, too, will have 
choices in contracting for service from a newly authorized storage 
service provider authorized to charge market-based rates and, as 
discussed above, the price will remain just and reasonable within the 
meaning of section 4 of the NGA due to the absence of significant 
market power.
2. Scope of Applicability of Expanded Product Market Definition
Comments
    35. Bay Gas requests that the Commission revise proposed Sec.  
284.501, Applicability, to clarify that the newly proposed subpart M 
requirements do not apply automatically to previously-ordered market-
based rate authorizations. Specifically, Bay Gas requests that the 
Commission add the following language to the end of that section: 
``provided, if such pipeline or storage service provider was authorized 
to charge market-based rates before subpart M effective date, it need 
not conform under that authorization to subpart M.''
    36. Should the Commission decide to adopt its proposal to expand 
the product market, AGA and NGSA urge the Commission to expressly limit 
the application of any revised market-power regulations to new storage 
capacity rather than to existing storage capacity that is currently 
subject to cost-based rates.
    37. NiSource Pipelines request that the Commission clarify whether 
existing storage providers are permitted to seek market-based rate 
authority using the proposed modified market-power analysis.
Commission Determination
    38. As requested by Bay Gas, we clarify that applicants previously 
granted market-based rates need not resubmit an application under the 
broader definition of product market we are adopting in the Final Rule. 
If an applicant has demonstrated a lack of market power under the 
traditional definition of product market, it follows

[[Page 36617]]

that the applicant would qualify for market-based rates using an 
expanded definition of product market that includes additional 
substitutes. However, we do not agree that a revision to the regulatory 
text is necessary.
    39. We find that NGSA and AGA have provided no support for their 
request to limit the applicability of the expanded product market 
definition to only new storage capacity. Pursuant to the Policy 
Statement, an entity can file an application for market-based rates for 
storage services if it can demonstrate that it does not have 
significant market power or has sufficiently mitigated that market 
power. Where a company can show a lack of market power, then 
competition in the market will ensure that the company's rates will be 
just and reasonable and the purpose of the NGA is met. Accordingly, 
existing storage providers are permitted to seek market-based rate 
authority using the proposed modified market-power analysis. However, 
the Commission will consider in the case of existing storage all 
relevant facts of the applicant's potential to exercise market power, 
including for example, impacts on existing customers and the 
applicant's relationship with transmission service providers in the 
relevant market.
3. Determination and Quantification of a Good Alternative
    40. In order to show that a non-storage product or service such as 
transportation is a good alternative, the Commission stated that the 
storage applicant would need to meet the criteria set forth in the 
Commission's Policy Statement. A good alternative is one that is 
available soon enough, has a price that is low enough, and has a 
quality high enough to permit customers to substitute the alternative 
for the applicant's services.
Comments
    41. SCE stresses that the Commission needs to adopt an analysis 
that is as robust as its analysis of the electric markets and takes 
into consideration the interdependence of gas and electric markets' 
competitiveness. SCE urges the Commission to seriously examine the 
limits on ``substitutability'' among the various products in each 
market, noting the complex dynamic relationships involved in 
determining this. SCE states that storage serves three basic functions: 
price arbitrage, balancing and peak reliability, and customers consider 
different kinds of storage and transportation products to perform each 
function. Thus, each alternate product must be examined in the context 
of its ability to provide competitive discipline on the operation of an 
applicant's storage facility. Depending on the market structure, SCE 
asserts that some facilities or products may only be able to perform 
one of the three storage functions while others might serve all of 
these functions. In addition, SCE stresses that the Commission also 
must be willing to examine whether, and the extent to which, an 
exercise of market power in the storage market may ultimately result in 
supracompetitive prices elsewhere in the gas markets, i.e., other 
geographic markets or other products.
    42. Enstor urges the Commission to provide more clarity as to what 
is, and is not, a good alternative, and how a market-based rate 
applicant can demonstrate the same. In addition, Enstor seeks further 
Commission amplification on whether an alternative is ``available.'' 
For example, Enstor asks in regards to LNG terminals in service, will 
availability depend on the terminals' capacity or their deliverability?
    43. EEI supports the Commission's proposal to include alternatives 
to storage in its market-power analysis. EEI submits that this analysis 
is fact specific and should be applied in the context of the region of 
the country and the users that would be supplied by the proposed 
storage services. With regard to released capacity as a competitive 
alternative to storage, EEI asserts that the applicant should be 
required to demonstrate that there is a viable market in released 
capacity. In making this determination, EEI urges the Commission to 
rely on historic information on the extent of trading in released 
capacity on a relevant pipeline because such information is a better 
indicator of substitutes for storage service than a theoretical 
analysis of possible releases in the future.
    44. With respect to quantifying firm transportation capacity that 
could be available to compete with an applicant's storage service, DTE 
recommends that all firm transportation capacity on all pipeline 
systems that serve the applicant's geographic market that is not 
committed to meeting the state-mandated obligation of LDCs to serve 
captive customers be considered as available to compete with the 
applicant's storage services, particularly during swing periods when 
deliverability is most critical. DTE explains that capacity not under 
LDC contract is generally held by marketers, end users, and producers 
who are in a position to divert gas on short notice from contractual 
primary delivery points to higher-valued markets in response to rapidly 
changing market conditions.
    45. Given that non-LDC shippers are in the best position to respond 
to swings in the market and control where gas is delivered, DTE 
recommends that firm transportation capacity be quantified on a 
shipper-by-shipper basis for the purpose of calculating swing period 
deliverability market shares and a Herfindahl-Hirschman Index (HHI). 
Under this approach, each pipeline shipper would be considered a 
potential competitor to the applicant. On the other hand, DTE claims 
that market-power studies should not assume that pipelines control 
deliverability and can use shipper deliverability to respond to market 
swings in a manner and time period that is competitive with storage. 
That is, pipeline deliverability should not be quantified and assigned 
to each individual pipeline for the purpose of calculating market 
shares and HHIs. Pipelines are purely transporters and are not in a 
position to divert gas on short notice to higher valued markets in 
response to changes in market conditions.
    46. DTE agrees with the Commission's statement in the NOPR that to 
the extent an LDC holds pipeline capacity in order to meet state-
mandated service obligations to captive customers, it is not likely 
that such pipeline capacity would be available to respond to market 
needs nor would it be a good substitute for storage capacity and 
deliverability. Similarly, DTE urges the Commission to exclude storage 
capacity and deliverability associated with storage fields owned by 
LDCs and used to meet state-mandated service obligations to captive 
customers from market share and HHI calculations contained in market-
power studies submitted by applicants seeking market-based rates. DTE 
states that like firm transportation used to meet LDC market needs, 
firm storage capacity and deliverability associated with storage fields 
owned by LDCs are committed to meet captive retail customer needs and 
should not be considered available to the market to meet changing 
economic conditions.
Commission Determination
    47. As we have stated above, we intend to continue to evaluate 
requests for market-based rates for storage on a case-by-case basis. An 
applicant is required to identify ``the specific products or services 
and the suppliers of those products and services that provide good 
alternatives to the applicant's ability to exercise market power.\21\ A

[[Page 36618]]

good alternative has been defined as one that is available soon enough, 
has a price that is low enough, and has a quality high enough to permit 
customers to substitute the alternative for the applicant's service. 
The burden is on the applicant to ``show how each of the substitute 
services in the product market are adequate substitutes to the 
applicant's service in terms of quality, price, and availability.'' 
\22\ Therefore, we will not endorse any particular method for 
determining the substitutability of a product here, but rather base our 
determination on the record developed in individual proceedings. 
Regarding Enstor's request that we clarify whether the availability of 
LNG terminal service will depend on the terminal's capacity or 
deliverability, we find that both elements would be relevant in 
analyzing the availability of LNG supply.
---------------------------------------------------------------------------

    \21\ Policy Statement at 61,230-231.
    \22\ Id.
---------------------------------------------------------------------------

    48. In order for an applicant to show that non-storage products are 
a good alternative to storage, they must demonstrate that for peak 
demand periods customers will be able to choose the non-storage product 
as a comparable substitute for storage services offered by the 
applicant. This demonstration must show that in terms of quality, 
timeliness, and price that non-storage products will be able to serve 
customers' needs as well as storage service. For example, an applicant 
may be able to demonstrate that pipeline capacity in combination with 
spot market purchases and appropriate financial market instruments, 
such as futures contracts, can reasonably be expected to be available 
at prices competitive with storage service so that it can act as a 
substitute for storage gas purchased, stored and/or redelivered when 
needed. Applicants may also be able to show that available park and 
loan services or liquid market-center spot markets provide sufficient 
liquidity during peak periods to constitute an adequate substitute to 
storage for balancing purposes or to serve peak demand.
4. Additional Revisions to Market-Power Test
a. Inclusion of Other Gas Supply Alternatives in the Product Market
Comments
    49. In addition to the pipeline capacity and LNG supply identified 
by the Commission in its NOPR, Duke urges the Commission to recognize 
that other gas supply alternatives may be available in a given market, 
such as financial instruments, that can compete with storage. Duke 
explains that storage allows a consumer of natural gas to manage price 
risk by allowing the consumer to choose a price at which to buy natural 
gas, store it, and then withdraw that gas as needed. According to Duke, 
there are an increasing number of financial instruments that can be 
used to manage this same natural gas price risk. Williston Basin claims 
that other types of alternatives may exist as well, and accordingly 
market-based rate applications should be looked at individually, to 
determine what types of alternatives are available.
Commission Determination
    50. As discussed above, we will continue to evaluate requests for 
market-based rates on a case-by-case basis. An applicant may propose to 
include other non-storage products as alternatives to storage services 
to the extent it can demonstrate the proposed alternatives can be 
delivered into the relevant geographic market and otherwise meet the 
criteria of a good alternative.
b. Modification to HHI Threshold
    51. Under the Policy Statement, the Commission's initial screening 
tool for significant market power is the HHI, a formula that focuses on 
the relevant market's concentration as an indicator of the potential of 
an applicant to act together with other sellers to raise prices.\23\ 
The Commission uses an HHI of 1,800 as an indicator of the level of 
scrutiny to be given to an applicant for market-based rates. An HHI at 
this level indicates that there are four to five good alternatives to 
the applicant's service in the relevant market. An HHI below 1,800 
suggests limited market concentration with less potential for any 
participant to exercise significant market power. However, an HHI above 
1,800 suggests a higher level of concentration, and will cause the 
Commission to increase its scrutiny of other factors such as the 
applicant's market share, ease of entry into the market, the relative 
size of the applicant's capacity, and/or the sustainability of a 
potential attempt by the applicant to exercise market power.\24\
---------------------------------------------------------------------------

    \23\ The HHI is the sum of the squared market shares. For 
example, in a market with five equal size firms, each would have a 
20 percent market share. For that market, HHI = (20)2 + 
(20)2 + (20)2 + (20)2 + 
(20)2 = 400 + 400 + 400 + 400 + 400 = 2,000.
    \24\ Policy Statement at 61,235-36.
---------------------------------------------------------------------------

Comments
    52. INGAA and KM urge the Commission to adopt an HHI level of 2,500 
rather than the 1,800 that it currently employs as a benchmark for 
measuring market concentration. INGAA asserts the current level is far 
too conservative and is inconsistent with standards recommended by the 
Antitrust Division of the Department of Justice (DOJ) for analogous oil 
pipeline cases.
    53. KM asserts that the Commission's reliance on the 1,800 HHI 
level inappropriately relies on the DOJ's and the Federal Trade 
Commission's (FTC) Horizontal Merger Guidelines (Merger Guidelines) 
which apply to merger cases where two companies are merging and the 
number of competitors is reduced. KM argues that the 1,800 threshold is 
too conservative as applied to potential new storage entrants seeking 
market-based rates because, in this situation, the number of 
competitors will be increasing and the Commission will exercise 
regulatory oversight. KM also points out that the Commission applies 
the 2,500 threshold to oil pipelines where there is no merger issue and 
the adoption of that threshold was supported by DOJ in filed comments. 
Similarly, KM argues the Commission should adopt a 2,500 HHI threshold 
for applicants seeking market-based rate authority for gas pipelines 
where continued regulation of an industry rather than a merger is at 
issue. KM also asserts that adherence to the 1,800 HHI threshold is at 
odds with the actual DOJ and FTC enforcement decisions regarding 
horizontal merger review, where it states that out of 11,263 challenges 
initiated by the agencies, only 175 involved markets with HHIs under 
2,500.\25\
---------------------------------------------------------------------------

    \25\ Citing Federal Trade Commission and the U.S. Department of 
Justice, Merger Challenges Data, Fiscal years 1999-2003, December 
18, 2003.
---------------------------------------------------------------------------

    54. Finally, KM asserts that in today's markets, purchasers of 
storage capacity are generally large LDCs or even larger and more 
powerful marketing arms of large producers and the presence of this 
buyer power is not accounted for in the Commission's HHI analysis. 
According to KM, use of a higher initial screen would partially take 
into account other factors such as buying power.
Commission Determination
    55. We are not persuaded by the commentors' arguments that there is 
a need to change the HHI threshold level. Significantly, as recognized 
by KM and INGAA, the 1,800 HHI level is not a bright-line test below 
which an applicant would automatically qualify for market-based rates, 
or above which an applicant would be excluded from market-based rates. 
Rather, the Commission uses the 1,800 HHI level as

[[Page 36619]]

an indicator of the level of scrutiny to be given to the applicant. As 
explained in the Policy Statement, if the HHI is above 1,800 the 
Commission will give the applicant closer scrutiny because the index 
indicates that the market is more concentrated and the applicant may 
have significant market power. Conversely, an HHI below 1,800 would 
result in less scrutiny of the applicant's potential to exercise 
significant market power because it would indicate that the market is 
less concentrated.\26\ The Commission has applied this policy in its 
analysis of individual cases and has approved market-based rates for 
several applicants with HHIs above 1,800 after examining other 
competitive factors. For example, in Avoca Natural Gas Storage 
(Avoca),\27\ the Commission approved market-based rates despite an HHI 
for deliverability of 4,100 in the relevant New York/Pennsylvania 
market, specifically noting the small size of Avoca's market share and 
the apparent ease of entry into the market as factors mitigating the 
market concentration reflected in the HHI.\28\
---------------------------------------------------------------------------

    \26\ Policy Statement at 61,235.
    \27\ 68 FERC ] 61,045 (1994).
    \28\ The Commission reached a similar result analyzing storage 
services in Steuben Gas Storage Co., 72 FERC ] 61,102 (1995); New 
York State Electric and Gas Corp., 81 FERC ] 61,020 (1997); N.E. Hub 
Partners, L.P., 83 FERC ] 61,043 (1998); Seneca Lake Storage, Inc., 
98 FERC ] 61,163 (2002); and Honeoye Storage Corp., 91 FERC ] 62,165 
(2000).
---------------------------------------------------------------------------

    56. We disagree with INGAA's and KM's assertion that the 1,800 HHI 
level is too conservative. First of all, it is not true that applicants 
seeking market-based rates will always increase the number of 
competitors in a market. For example, a storage provider may apply for 
market-based rates for existing cost-based service. More importantly, 
we believe that use of the more conservative approach will ensure that 
the impact of other competitive factors will be given careful scrutiny 
when the market is relatively concentrated (less than four or five good 
alternatives). In addition, contrary to KM's assertion, we have not 
adopted a generic 2,500 HHI level in analyzing whether an oil pipeline 
has market power.\29\ Moreover, the use of HHI levels in determining 
whether an oil pipeline has market power in individual cases reflects 
the specific competitive circumstances affecting oil pipelines. 
Specifically, oil pipelines face competition not only from other oil 
pipeline providers but also from other modes of delivering oil such as 
rail, barges and trucks.\30\ In general, there are not similar 
alternative modes of delivering or storing natural gas. Further, as 
common carriers, oil pipelines operate in a different regulatory 
context.
---------------------------------------------------------------------------

    \29\ Market-Based Ratemaking for Oil Pipelines, Order No. 572, 
FERC Stats. & Regs. ] 31,007 at 31,192 (Oct. 28, 1994) (``[T]he 
Commission is not proposing any particular HHI level, such as 1,800 
or 2,500, as a screen or presumption, rebuttable or otherwise. All 
factors must be considered in determining whether an oil pipeline 
lacks significant market power.'').
    \30\ Id. at 31,191.
---------------------------------------------------------------------------

    57. Additionally, we do not agree with KM that a higher initial 
screen is appropriate to take into account the fact that purchasers of 
storage capacity are generally large LDCs or marketing arms of large 
producers. First of all, the purchasers of storage services are not 
always large LDCs and marketers and to implement an analysis premised 
on the assumption that they are is not appropriate. Under the Policy 
Statement we consider issues related to buyer power separately (outside 
the context of the HHI threshold) which permits the Commissions to 
consider the specific facts presented in a case. We find this approach 
superior to the approach advocated by KM.
c. Entry and Other Competitive Factors
Comments
    58. Duke asserts that while the inclusion of currently available 
competitive alternatives in the definition of the market for the 
purposes of calculating market concentration and market share values, 
as advocated above, is a good starting point, such a revision alone, 
while necessary, will not address the barriers to development faced by 
markets with little existing gas supply infrastructure. To promote the 
development of additional storage infrastructure in these areas, Duke 
urges the Commission to shift the overall focus of its market-based 
rate analysis away from requiring evidence of an existing market to an 
analysis of the extent to which a new entrant increases the potential 
gas supply options available to market participants. Duke states the 
Commission's market-based rate policy should focus on: (1) Whether the 
new entrant adds new storage options to the market, and (2) whether 
there are further opportunities for additional entrants to take similar 
risks and develop competitive storage. Duke urges the Commission to 
adjust its existing approach to focus less on the status of existing 
competition and more upon the potential benefits of adding additional 
storage by: (1) Making it clear that applicants may rely upon evidence 
of potential developments of storage in circumstances where there is 
little or no existing competition, or (2) by making a generic 
determinations concerning the potential competitiveness of particular 
areas of the country.
Commission Determination
    59. The Commission believes that the analytical framework for 
establishing market-based rates set forth in the Policy Statement 
already adequately accommodates other competitive factors such as the 
ability of other entities to enter the market. In the Policy Statement, 
the Commission specifically recognized that having a large market share 
in a concentrated market does not constitute market power if ease of 
entry and other competitive factors can prevent the applicant from 
exercising significant market power.\31\ In a recent order in Rendevous 
Gas Services, L.L.C., the Commission granted market-based rates for hub 
transportation service based on the ease of entry into the market 
center and the fact that the proposed pipeline was a new entrant with 
no captive customers.\32\ Similarly, when requesting market-based rates 
for storage services, an applicant is permitted to establish that it 
lacks market power by demonstrating that if it increases its price, 
ease of entry by other providers into the market will make such a price 
increase unprofitable. Moreover, in response to Duke's assertion that 
we should focus more on the benefits of new entry than market 
concentration statistics, we recognize that there are significant 
benefits to competition and customers from new storage and note that, 
under our policy, HHI calculations of market concentration are used as 
a screening tool and are not dispositive of whether we will grant a 
request for market-based rates. Instead, we will consider all relevant 
factors, including the benefits of new entry, in determining whether to 
approve market based rates. The Commission will evaluate such proposals 
on a case-by-case basis.
---------------------------------------------------------------------------

    \31\ Policy Statement at 61,235.
    \32\ Rendevous Gas Services, L.L.C., order issuing certificates, 
112 FERC ] 61,141; reh'g. denied, 113 FERC ] 61,169 (2005). See also 
Avoca, 68 FERC ] 61,045 (1994); Steuben Gas Storage Co., 72 FERC ] 
61,102 (1995); New York State Electric and Gas Corp., 81 FERC ] 
61,020 (1997); N.E. Hub Partners, L.P., 83 FERC ] 61,043 (1998); 
Seneca Lake Storage, Inc., 98 FERC ] 61,163 (2002); and Honeoye 
Storage Corp., 91 FERC ] 62,165 (2000).
---------------------------------------------------------------------------

d. Definition of Geographic Market
Comments
    60. DTE states that while the Commission's NOPR takes the important 
step of presenting an expanded definition for storage substitutes, the 
NOPR does not clarify how an applicant seeking to demonstrate a lack of 
market power

[[Page 36620]]

should define its geographic market. DTE seeks Commission guidance as 
to how to define the relevant geographic storage market in order to 
provide more certainty to an applicant seeking market-based rates for 
new storage capacity in more competitive markets needing new capacity 
or improved service flexibility. DTE recommends that, in developing a 
geographic market definition for a market power study, the Commission 
should base its geographic market definition on the ability of storage 
customers to access storage providers in various regions. In addition, 
DTE argues that customer access to alternative storage providers can be 
confirmed by reviewing the applicant's potential shippers or shippers 
accessed by comparably located and situated storage providers, for 
example, as shown in a shipper index.
Commission Determination
    61. In the Policy Statement, the Commission provided guidance on 
defining the geographic market. In general, the relevant geographic is 
the geographic area containing those suppliers that can affect any 
attempt by the applicant to exercise market power. Since we are not 
changing the geographic definition in the Final Rule, the Policy 
Statement's guidance regarding the geographic market is still 
applicable.
e. Treatment of Affiliate Capacity
    62. In Sec.  284.503(b)(4) we proposed to codify our current 
practice \33\ that capacity on pipeline systems owned or controlled by 
the applicant's affiliates should not be considered among the 
customers' alternatives and should be included in the market share 
calculated for the applicant.
---------------------------------------------------------------------------

    \33\ See Policy Statement, 74 FERC ] 61,076 at 61,234 (1996).
---------------------------------------------------------------------------

Comments
    63. A number of commentors request that the Commission amend its 
proposed regulations in Sec.  284.503(b) to eliminate the requirement 
that the capacity of a market-based rate applicant's affiliates is 
automatically to be included in the market share calculated for the 
applicant.\34\ They argue that this requirement is unnecessary in light 
of the Commission's Standards of Conduct for Transmission Providers 
promulgated in Order No. 2004 which requires interstate pipelines to 
function independently from their affiliates.\35\ For example, Dominion 
submits that Order No. 2004 is a comprehensive and effective regulatory 
regime governing the relationship between a pipeline and its energy 
affiliates such that there is no realistic possibility for an 
interstate pipeline with storage and its affiliates with storage assets 
to collude to exercise market power in the provision of storage 
services. Additionally, INGAA states the Commission's rules regarding 
price transparency, and the requirement that an open-access pipeline 
must make all capacity publicly available, under the terms, conditions, 
and rates specified in the tariff, provide further assurances that a 
storage applicant cannot control or manipulate the capacity of its 
affiliated companies.
---------------------------------------------------------------------------

    \34\ Comments of INGAA, Dominion, Duke, NiSource Pipelines, 
Dominion LDCs and Jefferson Storage.
    \35\ Standards of Conduct for Transmission Providers, Order No. 
2004, 105 FERC Stats. & Regs., Regulation Preambles ] 31,155 (2003), 
order on reh'g, Order No. 2004-A, FERC Stats. & Regs. ] 31,161 
(2004), order on reh'g and clarification, Order No. 2004-B, FERC 
Stats. & Regs. ] 31,166 (2004), order on reh'g and clarification, 
Order No. 2004-C, FERC Stats. and Regs. ] 31,172 (2004), order on 
reh'g., Order No 2004-D, 110 FERC ] 61,320 (2005).
---------------------------------------------------------------------------

    64. Several commentors also maintain that the notion that capacity 
held by an affiliated company cannot provide a competitive alternative 
is inconsistent with the Commission's open-access policies.\36\ 
Specifically, they assert that under the Commission's open-access 
regime, an interstate pipeline cannot control storage capacity that is 
subscribed. Rather, they submit it is the shipper with the contractual 
rights who determines when or if the capacity is used and if, when and 
to whom it is released. The Dominion LDCs assert that the Commission 
itself has concluded that current regulatory controls minimize the 
ability of pipelines to use market power to force captive customers to 
enter into longer term contracts than would be required in a 
competitive market.\37\ Thus, the Dominion LDCs assert the Commission 
should find that a pipeline has neither the legal ability to withhold 
existing capacity nor an incentive to refuse to build new capacity, and 
that this, together with the fact that pipeline activity to act with an 
affiliated LDC to exercise market power by withholding capacity would 
violate other Commission rules and be actionable, leads to the 
conclusion that a pipeline and its affiliated LDC are unlikely to be 
able to jointly exercise market power.
---------------------------------------------------------------------------

    \36\ Comments of INGAA, Duke, Dominion and Dominion LDCs.
    \37\ Citing Order No. 637, 101 FERC ] 61,127 at 61,522.
---------------------------------------------------------------------------

    65. These commentors conclude that there is not sufficient 
justification for requiring a pipeline to include the capacity of its 
affiliates when calculating market share. In recognition of the effect 
of shipper control over contracted pipeline capacity, INGAA urges the 
Commission to establish a rebuttable presumption that such capacity is 
properly considered as a substitute for the storage service at issue in 
a market-based storage rate application, assuming the capacity 
otherwise meets the ``substitutability'' criteria. Duke states that 
only storage and transportation capacity controlled by the affiliates 
of a storage applicant should be aggregated with the capacity of the 
applicant's proposed storage facility for the purposes of the market 
concentration measure and the market share calculated for the 
applicant. At a minimum, these commentors urge the Commission to 
eliminate the per se rule, and evaluate on a case-by-case basis whether 
affiliated capacity presents a competitive alternative. Several 
commentors claim that adoption of the proposed rule will discourage 
otherwise meritorious storage applicants and undermine the Commission's 
goal of stimulating the construction of vital new storage 
infrastructure.\38\
---------------------------------------------------------------------------

    \38\ Comments of INGAA, Dominion and the NiSource Pipelines.
---------------------------------------------------------------------------

    66. To the extent the Commission does not delete this requirement, 
INGAA requests that the Commission clarify proposed Sec.  284.503(b)(4) 
that reads in pertinent part, that ``[a]vailable capacity * * * owned 
or controlled by affiliates of the applicant in the relevant market 
shall be clearly identified and may not be considered as alternatives 
competing with the applicant'', to clarify that while the pipeline 
affiliate's capacity is to be included in the market share calculated 
for the applicant, it should also be reflected in the total market 
share for the geographic area.
    67. On the other hand, Falcon urges the Commission to recognize 
that the storage services being evaluated for market power may well be 
affiliated with the ``storage surrogate'' services permitted to be 
considered in the evaluation. Falcon maintains that the Commission 
should provide for additional safeguards to prevent the affiliated 
storage providers from exercising market power in such a situation and/
or avoid, through separate treatment and analysis of the affiliated 
services, the actual market power or market share associated with the 
alternative affiliated services and providers.

[[Page 36621]]

Commission Determination
    68. The requirement that the capacity of a market-based rate 
applicant's affiliates is to be included in the market share calculated 
for the applicant is consistent with our established practice and is 
supported as discussed below.
    69. We disagree with commentors' claim that the fact that the 
Commission has adopted Standards of Conduct for Transmission Providers 
which require interstate pipelines to function independently from 
affiliates removes the necessity of requiring that the capacity of the 
applicant and its affiliates be combined. While affiliates are required 
to act independently under the Commission's rules, this does not mean 
that affiliates will compete for the same service or product in a given 
market. As recognized by the Supreme Court in Copperweld Corporation v. 
Independence Tube Corporation, ``[a] parent and its wholly-owned 
subsidiary have a complete unity of interest. Their objectives are 
common, not disparate; their general corporate actions are guided or 
determined not by two separate corporate consciousnesses, but one. * * 
* With or without a formal `agreement,' the subsidiary acts for the 
benefit of the parent, its sole shareholder.'' \39\
---------------------------------------------------------------------------

    \39\ 467 U.S. 752, 771 (1984) (holding that a parent and its 
wholly-owned subsidiary were incapable o conspiring with each other 
for purposes of section 1of the Sherman Act).
---------------------------------------------------------------------------

    70. We are also not persuaded by commentors arguments that only 
affiliate capacity that is not held under firm contracts should be 
attributable to the applicant. This proposal ignores the fact that 
pipelines control the conditions under which transportation and storage 
services are provided through the operation of their systems. We are 
not willing to create situations in which the pipeline, the dominant 
owner of capacity, does not have an incentive to build new capacity 
because it or an affiliate can benefit from an artificial shortage of 
capacity. As noted in Order No. 637, the Commission has carefully 
tailored its regulations so that pipelines will not have an incentive 
to use their monopoly power to create scarcity.\40\ We see no 
compelling reason to deviate from that policy here. For these reasons, 
we find it is appropriate to attribute affiliate capacity to the 
storage provider even though the capacity is contracted for by a 
shipper under a firm contract. We have made revisions to Sec.  
284.503(b)(4) of the regulations to clarify our intent.
---------------------------------------------------------------------------

    \40\ Regulation of Short-Term Natural Gas Transportation 
Services and Regulation of Interstate Natural Gas Transportation 
Services, Order No. 637, FERC Stats. & Regs., Regulations Preambles 
(July 1996-Dec. 2000) ] 31,091 at 31,270-71 (Feb. 9, 2000).
---------------------------------------------------------------------------

    71. As requested by INGAA, we clarify that the applicant's 
affiliate's capacity that is included in the market share calculated 
for the applicant should also be reflected in the total market share 
for the relevant geographic area.
    72. Finally, we find that Falcons's concerns over affiliate 
capacity are adequately addressed by the requirement that the capacity 
of a market-based rate applicant's affiliates is to be included in the 
market share calculated for the applicant.
f. Filing Procedures
    73. The Commission proposed to add a new subpart M to part 284 that 
requires, among other things, that applications by storage providers 
requesting market-based rates contain certain information. The 
Commission stated it would continue its practice of approving market-
based rate proposals on a prospective basis only. We also noted that 
approval of blanket certificate authority to provide open-access 
storage services at market-based rates will subject the storage service 
provider to the existing reporting requirements applicable to open-
access service providers under Sec.  284.13 of the Commission's 
regulations.
Comments
    74. Sempra asserts that it is unnecessary to impose on market-based 
rate storage providers the full panoply of 18 CFR Sec.  284.13 
reporting requirements applicable to pipelines operating under cost-
based regulation, given that the requisite showing of absence of, or 
mitigation of, market power has already been made. Instead, Sempra 
urges the Commission to utilize a lighter-handed reporting regime 
modeled after the electronic quarterly reports applicable to holders of 
electric market-based rate authority. Sempra asserts that these are 
sound requirements for the Commission to require of entities holding 
market-based rate authority.
    75. Enstor submits that the Commission's statement that storage 
operators cannot charge market-based rates until the Commission 
determines that they lack market power or have established adequate 
customer protections conflicts with our current policies implementing 
section 311 of the NGPA. Enstor states that under the Commission's 
current regulations, section 311 service providers may begin charging 
(subject to refund) their proposed rates, including market-based rates, 
upon the filing of a petition for rate approval with the Commission. 
Enstor urges the Commission to reconcile this discrepancy and to leave 
intact the current rate filing regime that governs section 311 service 
providers in Sec.  284.123(b)(2)(i). Enstor also seeks express 
clarification that nothing in the NOPR is intended to upset the current 
150-day window within which the Commission must act on rate petitions 
filed by section 311 service providers, or otherwise the proposed rates 
are deemed fair and equitable.
    76. Enstor further requests that the Commission allow flexibility 
in its proposed requirements for market-based rate filings under new 
Sec.  284.503. While Enstor agrees that such information may be 
necessary in certain circumstances, Enstor urges clarification in the 
Final Rule that some or all of these procedural requirements may be 
waived for good cause when an applicant files for market-based rates.
    77. Finally, Enstor urges the Commission to incorporate some sort 
of time limitation for its review of rate filings in the Final Rule. 
For example, Enstor states the Commission can adopt a five-month review 
period, beginning from the date on which a complete rate application is 
filed under proposed Rule 503, during which it could evaluate the 
application and any responsive protests. At the end of the five-month 
period, the proposed rates would be deemed approved in the absence of a 
formal Commission ruling.
Commission Determination
    78. Regarding the applicability of Sec.  284.13 reporting 
requirements, we disagree with Sempra that we should not impose these 
requirements on storage providers granted market-based rates, but 
rather impose a reporting regime modeled after the electric quarterly 
reports. Under the Commission's Part 284 program, all open-access 
transporters and storage providers are required to post or file with 
the Commission transaction reports, quarterly index of customer 
reports, and semi-annual storage reports. These reports are required of 
all open-access service providers and provide crucial transparency. 
This information allows both the Commission and market participants to 
monitor the market and detect undue discrimination. Sempra has provided 
no reasonable basis to exempt market-based storage service providers 
from the Sec.  284.13 reporting requirements.
    79. As requested by Enstor, we clarify that section 311 service 
providers may begin charging (subject to refund) their proposed rates, 
including market-based rates, upon the filing of a petition for

[[Page 36622]]

rate approval with the Commission pursuant to Sec.  284.123(b)(2)(i) 
and that the 150-day time frame in that section is applicable to such 
requests. In Sec.  284.502, we are adopting regulations that provide 
that applicants providing service under subpart C (transportation by 
intrastate pipelines under section 311) of part 284 must file in 
accordance with that section.
    80. However, we reject Enstor's additional request that we impose a 
time limitation on our review of market-based rate filings by 
interstate storage providers, after which time the proposed rate would 
be deemed approved. It would be unreasonable to approve a market-based 
rate proposal without a specific finding that the applicant lacks 
market power. However, the Commission intends to process any request 
for market-based rates as expeditiously as possible.
    81. Finally, the Commission clarifies, as requested by Enstor, that 
it may file to waive the procedural requirements in Sec.  284.503 for 
good cause shown.
g. Periodic Review
    82. Proposed Sec.  284.504 of the regulations requires storage 
applicants receiving market-based rates on the basis of a market-power 
analysis to file updated market-power analyses within five years of the 
date of the Commission order granting authority to charge market-based 
rates, and every five years thereafter. The Commission stated that 
imposition of a periodic review is necessary to ensure that our grant 
of market-based rates to an applicant remains just and reasonable.
Comments
    83. Several commentors including the majority of interstate 
pipelines and independent storage providers urge the Commission to 
eliminate its proposal for an automatic five-year market-power review 
under Sec.  284.504 for storage operators that have demonstrated they 
lack market power. These commentors assert that this requirement is 
unduly burdensome, not necessary to protect customers and will deter 
new storage development.\41\ Specifically, the commentors submit that 
the current requirement that market-based rate grantees report any 
changes in circumstances that are pertinent to their original absence-
of-market-power showing, along with ongoing reporting obligations under 
existing regulations, are adequate to protect consumers. DTE also notes 
that it is unaware of any abuse complaints submitted by customers of 
storage companies granted market-based rate authority in the past that 
would necessitate the imposition of a five-year market-power review 
requirement.
---------------------------------------------------------------------------

    \41\ Comments of INGAA, Dominion, KM, DTE, Duke, SGR, Honeoye, 
Bridgeline, Unicol, Falcon, SGR and Jefferson Storage.
---------------------------------------------------------------------------

    84. A number of these commentors assert that an automatic review is 
unnecessarily burdensome in this context for the same reasons proffered 
by the Commission in support of reliance on regular monitoring of 
posted information and the NGA section 5 complaint processes for 
market-based storage rates under new NGA section 4(f). For example, 
Duke submits that if regular monitoring and the section 5 complaint 
provisions are sufficient to protect consumers in instances where the 
Commission presumes that a storage provider has market power under new 
NGA section 4(f), these same provisions in addition to the Commission's 
existing policy of conditioning its certificate authorization with a 
notice of changed circumstance requirement are more than sufficient to 
protect consumers in circumstances where the Commission has found the 
applicant not to possess market power.
    85. If the Commission adopts an automatic review requirement, 
several commentors urge the Commission to make clear that the new 
requirement does not apply to projects that have previously received 
market-based rate approval,\42\ arguing that any required periodic 
review must be prospective only and not affect existing contractual 
terms and conditions agreed upon in light of the Commission's initial 
grant of market-based rate authority to a service provider.\43\ Duke 
argues that placing a new periodic-review condition on existing market-
based rate authorizations would constitute an impermissible retroactive 
revision of the certificate authorizations for the underlying 
facilities, frustrate the investment expectations of the owners of 
those facilities, and undermine investor confidence in the storage 
market.
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    \42\ Comments of Bay Gas, INGAA, EnCana, Bridgeline, and Unocal.
    \43\ Comments of INGAA, KM, and Haddington Ventures. SGR argues 
that such a modification must be made in accordance with the Mobile-
Sierra doctrine, with the Commission determining, on the basis of 
substantial record evidence, that the public interest requires such 
modification.
---------------------------------------------------------------------------

    86. INGAA submits that the threat of revocation of market-based 
rate authority in the middle of a contract term may present an 
unacceptable level of risk to potential storage developers. In order to 
minimize the uncertainty that would be created by a new periodic review 
requirement, SGR argues the Commission must make it clear that any 
review of a storage provider's market-based rate authorization will be 
conducted under NGA section 5, with the Commission bearing the burden 
of showing that the market-based rate authorization and the rates it 
permits a storage provider to charge have become unjust and 
unreasonable, and the further burden of establishing prospectively the 
ratemaking methodology that would yield just and reasonable rates.
    87. If the periodic review is adopted, Honeoye and SGR propose that 
the first such update should not be due until the later of 5 years 
after the effective date of proposed Sec.  284.504 or the date the 
relevant storage facilities are placed in commercial operation. Honeoye 
also seeks confirmation that an existing holder of market-base rate 
authority can comply with this requirement by demonstrating that the 
facts that permitted the Commission to authorize market-base rates in 
the first instance are still true.
    88. On the other hand, NGSA, EEI and PGC support the Commission's 
proposal to require storage applicants granted market-based rates to 
file an updated market-power analysis every five years. PGC asserts 
that without such periodic reviews, the Commission is unable to perform 
the regulatory oversight necessary to prevent unjust and unreasonable 
rates against captive gas customers. EEI notes that there is a similar 
requirement for electric utilities that sell at market-based rates, and 
suggests this requirement is necessary to protect customers from 
changes in the marketplace that may no longer justify market-based rate 
authority.
    89. SCE also supports the Commission's five-year periodic report 
requirement in Sec.  284.504 and submits that this review should also 
consider any cost-of-service facilities and interconnected facilities 
that could serve as substitutes for one another and should assess the 
competitive functioning of the market and impose remedial measures such 
as adjustments to mitigation measures or the complete withdrawal of 
market-based rate authority as necessary to ensure just and reasonable 
rates.
Commission Determination
    90. We will not impose a generic five-year reporting requirement on 
storage providers granted market-base rates although we reserve the 
option of imposing a reporting requirement in any individual case. We 
have carefully considered the comments and have concluded that any 
benefits that would be achieved by a generic requirement

[[Page 36623]]

are outweighed by the additional costs that such a generic requirement 
would create. The Commission believes that existing reporting 
requirements and its ongoing market monitoring programs generally give 
us sufficient information to know whether storage markets where 
applicants have been authorized to charge market-based rates remain 
competitive, and the Commission has the ability to take appropriate 
action if market-power issues arise.
    91. A central factor in the Commission's decision is the fact that 
in the majority of cases where we have authorized market-based rates 
for storage services, the applicant has not had a large presence in the 
market. For example, the Commission has approved all requests for 
market-based rates where the applicant was located in the production 
area based on findings that HHIs in that geographic region are well 
below 1,800 and the market shares of the applicants were small.\44\ In 
consuming regions, such as the Northeast portion of the United States, 
where there are fewer providers, some with large market shares whose 
services are regulated, the Commission has approved requests to 
implement market-based rates by considering factors other than market 
concentration including the small size of the applicant's market 
share.\45\ In these situations, we find that market-power concerns are 
low. Additionally, in individual cases the Commission has imposed on 
applicants permitted to charge market-based rates for storage services 
the requirement to notify the Commission when there have been changes 
of circumstances that affect the applicant's ability to exercise market 
power,\46\ and we will codify this requirement in Sec.  284.504(b). For 
storage providers with market shares of ten percent or less, we believe 
that the notice of change of circumstance requirement, together with 
the transparency provided by the existing reporting requirements in 
Sec.  284.13, are adequate to permit the effective monitoring of 
market-power concerns related to storage providers charging market-
based rates and enable the Commission to initiate section 5 proceedings 
where appropriate.\47\ For storage providers with a market share 
greater than ten percent, we intend to consider in individual cases 
whether the specific facts and circumstances presented require 
additional reporting. We believe that this approach achieves an 
appropriate balance between the need to monitor for market power and 
the goal of creating a regulatory environment that will promote 
infrastructure.
---------------------------------------------------------------------------

    \44\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ] 
61,095 (2005) (market share of working gas capacity and 
deliverability each approximately two percent); Copiah County 
Storage Co. 99 FERC ] 61,316 (2002) (market share of working gas 
capacity and deliverability each less than two percent).
    \45\ See, e.g., Avoca Natural Gas Storage, 68 FERC ] 61,045 
(19940. Steuben Gas Storage Co., 72 FERC ] 61,102 (1995) (market 
share of working gas capacity and deliverability each less than four 
percent); New York State Electric and Gas Corp., 81 FERC ] 61,020 
(1997) (working gas capacity and deliverability each less than one 
percent); N.E. Hub Partners, L.P., 83 FERC ] 61,043 (1998) (working 
gas capacity and deliverability each less than five percent); Seneca 
Lake Storage, Inc., 98 FERC ] 61,163 (2002) (working gas capacity 
and deliverability each less than two percent); and Honeoye Storage 
Corp., 91 FERC ] 62,165 (2000) (working gas capacity and 
deliverability each less than two percent).
    \46\ See, e.g., Caledonia Energy Partners, L.L.C., 111 FERC ] 
61,095 (2005) (requiring that Caledonia notify the Commission of 
future circumstances affecting its present market power status 
within ten days of acquiring knowledge of any such changes).
    \47\ This approach is similar to the Commission's proposal to 
exempt sellers of wholesale electric power who own or control 500 MW 
or less of generating capacity in aggregate from filing triennial 
reviews. Market-Based Rates for Wholesale Sales of Electric Energy, 
Capacity and Ancillary Services by Public Utilities, Notice of 
Proposed Rulemaking, FERC Stats. & Regs. ] 32,602 at P 152 (2006).
---------------------------------------------------------------------------

    92. However, the Commission wishes to emphasize that the failure to 
timely file a change in circumstance report or failure to comply with 
reporting requirements as required by the regulations would constitute 
a violation of the Commission's regulations. A storage provider would 
be subject to disgorgement of profits and/or civil penalties from the 
date on which the violation occurred. Such storage provider may also be 
subject to suspension or revocation of its authority to sell at market-
based rates (or other appropriate non-monetary remedies). Additionally, 
if subsequent experience with the changes enacted here demonstrates a 
need for a generic five-year market-power analysis requirement, we 
reserve the right to initiate such a change.
h. Cross Subsidies and Customer Protection Comments
    93. Xcel states that it is concerned that the proposed rule does 
not sufficiently protect storage customers served by a storage provider 
under cost-based rates from bearing costs associated with storage 
services provided by the same provider at market-based rates. Xcel 
explains that the temptation to increase revenues by misallocating 
costs will be difficult to resist and difficult for customers and the 
Commission to detect in a rate proceeding. Therefore, Xcel requests 
that the Commission protect customers by modifying the regulations to 
require storage service providers to account for costs incurred in 
providing market-based rate storage services separately from cost-based 
storage services. Xcel maintains this requirement is similar to the 
Commission's policy of requiring pipelines to account separately for 
the revenues received under negotiated rate agreements.
    94. Falcon asserts that pipeline and utility affiliated storage 
providers (collectively, ``Affiliated Storage Providers'') have a 
natural advantage over independents because of their ability to provide 
a rate subsidy, bundling, or other preference, enabling them to charge 
lower rates for their storage services and placing independent storage 
providers at a distinct competitive disadvantage. Accordingly, Falcon 
requests that the Commission take steps to minimize any subsidization 
or preference afforded Affiliated Storage Providers by requiring 
Affiliated Storage Providers to: (1) Unbundle storage and 
transportation services, and (2) allocate the appropriate level of 
fixed and variable costs to storage and transportation services. Absent 
such actions, Falcon alleges that independent storage providers will 
never be able to effectively compete on a ``level playing field'' with 
Affiliated Storage Providers, to the detriment of the ultimate 
consumer.
    95. Similarly, SGR submits that the broader availability of market-
based rate authority proposed in the NOPR could increase the 
possibility that pipeline-owned storage could take advantage of a 
liberalized market-power test to gain an unfair competitive advantage 
over independent storage developers/operators. It argues that pipeline-
owned storage enjoys considerable advantages in the marketplace; given 
the ability pipeline-owned storage has to share a customer base with 
the pipeline, to benefit from operational integration with the pipeline 
and to enjoy revenue support offered by pipeline transportation 
services. If left unchecked, SGR submits that these advantages could 
present insurmountable barriers to entry for independent storage 
developers.
    96. UET asserts that moving from cost-based rates to market-based 
rates for existing storage facilities and expansions of existing 
storage facilities would be unfair to existing storage customers. For 
example, UET submits that in many cases cost-based rates have paid for 
facilities with the potential for cheap expansibility. If, as the 
result of the proposed change in market-power analysis, the expansion 
capacity is offered only at market-based rates, UET alleges that the 
storage provider will

[[Page 36624]]

reap the benefits of the cheap expansibility for which the customers 
have paid.
    97. Finally, APS requests that the Commission take all available 
steps to encourage the development of independent storage facilities in 
the southwest including eliminating barriers to entry such as the 
``bundled'' pipeline storage and transmission services being offered by 
El Paso.
Commission Determination
    98. In granting market-based rates for pipelines that provide cost-
based services, the Commission intends to ensure that no subsidization 
by existing cost-based shippers takes place. To date, when granting 
market-based rates in these circumstances, the Commission has required 
that the applicant separately account for all costs and revenues 
associated with facilities used to provide the market-based 
services.\48\ We intend to continue this practice and will codify in 
new Sec.  284.504 of the regulations the requirement that pipelines 
that provide cost-based services must separately account for all costs 
and revenues associated with facilities used to provide the market-
based services. This will ensure that market-based services are not 
subsidized by cost-based services, as well as ensure that pipeline-
owned storage is not afforded an unfair rate advantage over independent 
storage providers.
---------------------------------------------------------------------------

    \48\ See, e.g., Gulf South Pipeline Co., 101 FERC ] 61,204 
(2002); Koch Gateway Pipeline Co., 66 FERC ] 61,385 (1994).
---------------------------------------------------------------------------

    99. Regarding Falcon's request to require unbundling, we note that 
our regulations already require that pipelines offer their customers 
firm and interruptible storage on an open-access contract basis.\49\ 
Issues regarding whether a pipeline has sufficiently unbundled its 
services in compliance with our policies should be raised in individual 
pipeline proceedings.\50\
---------------------------------------------------------------------------

    \49\ See 18 CFR 284.1(a) of the Commission's regulations that 
defines transportation as including storage. Thus, storage is 
included within the nondiscriminatory access and other requirements 
of Part 284 for interstate pipelines.
    \50\ APS' request that the Commission take steps to encourage 
the development of independent storage facilities in the southwest 
including eliminating the bundled pipeline storage and transmission 
services being offered by El Paso is outside the scope of this 
proceeding. This issue has been raised in El Paso's rate proceeding 
in Docket No. RP05-422-000 and will be addressed there.
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i. Additional Incentives
Comments
    100. As an alternate to market-based rates, Dominion urges the 
Commission to consider offering incentives to promote the development 
of new storage facilities reflecting the increased investment risk of 
these projects, including: (1) Authorizing higher rates of return on 
equity for new cost-of-service storage projects as compared to new 
pipeline projects to reflect the increasingly riskier nature of 
identifying new geologic structures and the shorter-term contracts that 
customers are entering into; (2) allowing the authorized rate of return 
for a new cost-of-service project to remain unchanged over the duration 
of the initial shipper contract as revenue certainty is necessary to 
provide good incentives for new investment; (3) offering regulatory 
incentives to compensate for the enormous cost of purchasing base gas 
for a new facility, particularly reservoir and aquifer types of storage 
facilities, such as permitting the roll in of the costs of base gas 
associated with a new incrementally-priced storage facility into its 
system-wide rates in its next rate case with a five percent cap placed 
on the increase to system rates from this roll-in; and (4) permitting 
interstate pipelines to recover the prudently incurred development cost 
of storage facilities that are cancelled or abandoned prior to being 
placed into service, similar to the initiative being considered in the 
rulemaking to promote the construction of new transmission facilities 
in the electric utility industry.
Commission Determination
    101. The Commission agrees with Dominion that there may be 
alternatives to market-based rates that would appropriately address the 
risk faced by storage applicants. We note that the Commission's 
policies already incorporate considerable flexibility in deriving cost-
based pricing options that are responsive to the market pressures faced 
by jurisdictional companies. For example, in Order No. 637 the 
Commission revised its regulatory policies to enable pipelines to file 
for peak/off peak and term differentiated rates.\51\ In addition, rates 
for storage services can be negotiated between the storage provider and 
a shipper under the Commission's negotiated rate policies.\52\ The 
Commission is willing to entertain requests to implement other cost-
based pricing proposals that may serve to add flexibility and 
efficiency to storage services on a case-by-case basis.\53\
---------------------------------------------------------------------------

    \51\ See Regulation of Short-Term Natural Gas Transportation 
Services, and Regulation of Interstate Natural Gas Transportation 
Services, Order No. 637, FERC Stats. & Regs., Regulation Preambles 
July 1996-Dec. 2000 ] 31,091 (Feb. 9, 2000).
    \52\ Alternatives to Traditional Cost-of-Service Ratemaking for 
Natural Gas Pipelines and Regulation of Negotiated Transportation 
Services of Natural Gas Pipelines, 74 FERC ] 61,076 (1996), reh'g 
and clarification denied, 75 FERC ] 61,024 (1996), reh'g denied, 75 
FERC ] 61,066 (1996); petition for review denied, Burlington 
Resources Oil & Gas Co. v. FERC, 172 F.3d (D.C. Cir. 1998); 
Modification of Negotiated Rate Policy, 104 FERC ] 61,134 (2003), 
order on reh'g and clarification, 114 FERC ] 61,042 (1996).
    \53\ See, e.g., Saltville Gas Storage Company L.L.C., 109 FERC ] 
61,200 (2004) (approving a modified Equitable method for designing 
firm storage rates).
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B. Energy Policy Act of 2005

    102. Section 312 of EPAct 2005 adds new NGA section 4(f), which 
permits the Commission to authorize new natural gas storage projects 
(i.e., projects placed in service after the passage of the Act) to 
provide service at market-based rates notwithstanding the fact that the 
applicant is unable to demonstrate that it lacks market power. New NGA 
section 4(f) requires that, to authorize 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.\54\ We discuss below the relevant aspects of 
new NGA section 4(f).
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    \54\ 15 U.S.C. 3301-3432 (2000). We note that the Commission has 
authorized Hinshaw pipelines to be treated the same as LDCs and we 
intend the same here. See Certain Transportation, Sales and 
Assignments by Pipeline Companies not Subject to Commission 
Jurisdiction Under Section 1(c) of the Natural Gas Act, Order No. 
63, FERC Stats. & Regs,. Regulations Preambles (1997-1981) ] 30,118 
(Jan. 9, 1980).
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1. Storage Capacity Eligible for Market-Based Rates
    103. New NGA section 4(f) states that the Commission may authorize 
``market-based rates for new storage capacity related to a specific 
facility placed in service after the date of enactment of the Energy 
Policy Act of 2005.'' In the NOPR, the Commission posited that the 
phrase ``placed in service after the date of enactment'' modifies the 
term ``facility,'' not the term ``capacity,'' such that it is the 
facility which must be placed into service after August 8, 2005,

[[Page 36625]]

rather than the storage capacity. Noting that the statute does not 
define the term ``specific facility,'' the Commission proposed to 
interpret that term to consider a new cavern, reservoir or aquifer that 
is developed after August 8, 2005, as a facility potentially qualifying 
for market-based rates under the Act. However, the Commission requested 
comments on alternative constructions of the Act. Moreover, the 
Commission also invited comments concerning how, if the Act is 
construed differently, the Commission may adequately protect other 
customers already receiving service under cost-based authorizations 
that pre-date the Commission's new NGA section 4(f) authority.
Comments
    104. A number of commentors argue that the statutory language 
concerning the capacity eligible for market-based rates under section 
4(f) is ambiguous and open to alternative interpretation. Thus, they 
assert the Commission has discretion in implementing the language.
    105. INGAA argues that the Commission interprets new NGA section 
4(f) too narrowly, so as to exclude new storage capacity resulting from 
the expansion of existing fields or reservoirs. INGAA submits 
interstate pipelines and pipeline affiliates, which own substantial 
amounts of existing storage capacity, should be allowed to apply for 
market-based rates to develop either new or expanded storage fields. 
Northern concurs with INGAA and argues that a broader statutory 
interpretation is necessary. DTE maintains that there is no reason to 
treat expansion facilities any differently than entirely new storage 
fields. Duke adds that the best assurance against the exercise of 
market power is the creation of a competitive marketplace and that 
granting market-based rate treatment to only entirely new storage 
facilities may place existing storage at a significant disadvantage and 
discourage the expansion of existing storage.
    106. Williston Basin argues that there is no material distinction 
between expanding existing storage facilities and developing a new, 
separate storage facility, and that the Commission's interpretation 
might unnecessarily influence companies to choose construction of a new 
facility over expansion of an existing facility. Northern asserts that 
the risks involved in developing new storage capacity, whether at a new 
or existing facility, are greater than those involved in constructing 
new pipeline capacity and justify the use of market-based rates. It 
states that a broader interpretation of the subject provision will 
recognize the risk of storage expansions and provide a proper incentive 
for developers.
    107. Northern maintains that existing storage customers served by a 
pipeline will not be harmed by including expansions of existing 
capacity because customers' existing storage service will not be 
affected by the expansion. In this vein, Williston Basin asserts that, 
in the case of an expansion of existing storage facilities, existing 
customers under cost-based authorizations can be adequately protected 
if the incremental capacity and associated costs are accounted for 
separately and addressed in each storage service provider's next rate 
proceeding.
    108. KM states that granting market-based rates to expansions of 
capacity will remove economic distortions associated with limiting this 
provision to new storage fields. KM asserts that it is faster and more 
cost-effective to expand existing storage facilities rather than to 
construct new storage facilities and that such expansions should be 
placed on equal footing with greenfield projects.
    109. Other commentors support the interpretation of the Act 
proposed in the NOPR.\55\ AGA argues that broadening the definition of 
``facility'' would largely benefit interstate pipelines, and 
potentially harm existing customers of cost-based storage service. AGA 
asserts that the Commission's policies should not encourage storage 
owners to invest in reshaping the operations of existing storage 
facilities in order to maximize the scope of market-based services. 
APGA agrees, and contends that the NOPR's interpretation is required by 
the language in the statute and is reasonable because there is no 
reason to provide financial incentives to a storage provider for an 
expansion of a facility that has already been constructed. PGC agrees 
arguing that interpreting section 4(f) to apply only to new facilities 
is most consistent with the goal of increasing storage capacity.
---------------------------------------------------------------------------

    \55\ AGA, Falcon, EnCana, Enstor, NGSA, PGC, and SCE.
---------------------------------------------------------------------------

    110. Falcon requests that the Commission ensure that new gas 
storage projects that are developed by Affiliated Storage Providers do 
not receive any direct or indirect subsidy from their affiliated 
companies. NGSA and EnCana assert that if the provision is interpreted 
to permit storage services made possible by incremental capacity at an 
existing, cost-based facility to be priced on a market basis, there 
would be no set of conditions that would adequately protect customers 
against the risk of abuse.
    111. Beyond the risk of cross-subsidy, EnCana is also concerned 
that there is nothing to prevent a storage service provider with both 
cost-based rate facilities and market-based rate facilities from 
placing its marketing emphasis on the market-based rate side in order 
to ensure that those storage services are fully subscribed at the 
highest possible rate, while, at the same time, deemphasizing the sale 
of their regulated cost-based services, which are theoretically 
underwritten by the regulated ratepayers. ESGI asserts that, in order 
to provide safeguards against such practices, the Commission would need 
to vigilantly review the provider's marketing efforts in section 4 rate 
cases.
    112. Enstor contends that allowing expansion capacity at existing 
storage facilities to qualify for market-based rate treatment under 
section 4(f) would place new storage projects (many of which are 
developed by independent operators) at a competitive disadvantage 
relative to market incumbents such as interstate pipelines. Enstor 
argues that allowing virtually all new capacity to fall within the 
scope of section 4(f) would enable interstate pipelines to use their 
cost-based transportation monopoly to subsidize new services offered 
under this authority.
    113. The NiSource Pipelines assert that the Commission's 
interpretation of the phrase ``specific facility placed in service 
after the date of enactment to mean ``a new cavern, reservoir or 
aquifer that is developed after August 8, 2005'' is not consistent with 
the gas industry's or the Commission's own definition of that term, 
which defines ``in service'' to mean when the facilities are actually 
placed into service. NiSource advocates that the Commission revise its 
interpretation to incorporate the more appropriate definition of ``in 
service.''
Commission Determination
    114. The meaning of new NGA section 4(f) is ambiguous. Early drafts 
of bills stated that the Commission could authorize a natural gas 
company ``to provide storage and storage-related services at market-
based rates for new storage capacity placed in service after the date 
of enactment of the Energy Policy Act of 2005, notwithstanding the fact 
that the company is unable to demonstrate that it lacks market power * 
* *.'' \56\ Under these early versions of the Act, it was clear that 
all new storage capacity would have been eligible for

[[Page 36626]]

market-based rates. However, in the final bill, the phrase, ``related 
to a specific facility'' was added so that the subject language read, 
``to provide storage and storage-related services at market-based rates 
for new storage capacity related to a specific facility placed in 
service after the date of enactment of the Energy Policy Act of 2005 * 
* *'' \57\ The addition of the specific facility language indicates 
that it is the facility, not the storage capacity, that must be placed 
in service after the date of the Act.\58\
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    \56\ S. 10, 109th Cong. sec. 382 (2005).See also, H.R. 6, 109th 
Cong. sec 382 (with engrossed amendment as agreed to by the Senate, 
June 28, 2005); H.R. 6, 109th Cong. sec. 382 (as passed and ordered 
to be printed by the Senate, July 14, 2005).
    \57\ H.R. Rep. No. 109-190, at 97 (2005) (Conf. Rep.).
    \58\ See Jama v. Immigration & Customs Enforcement, 543 U.S. 
335, 343 (2005) (noting the `` `grammatical `rule of the last 
antecedent,' according to which a limiting clause or phrase * * * 
should ordinarily be read as modifying only the noun or phrase that 
it immediately follows.'' ' (quoting Barnhart v. Thomas, 540 U.S. 
20, 26 (2003)).
---------------------------------------------------------------------------

    115. Congress, however, provided no definition of the term 
facility. Upon review of the comments and further consideration, the 
Commission concludes that a more traditional interpretation of 
``facility'' than that posited in the NOPR may be more consistent with 
Congressional intent and existing precedent, and better serve to 
further the Commission's goal of facilitating the development of new 
natural gas storage capacity. The Commission recognizes that 
significant and substantial enhancements to storage capacity can be 
achieved at existing fields and finds that it is unnecessary to exclude 
service from such expansions from consideration for market-based rates 
by narrowly interpreting the term ``facility'' in the context of 
section 4(f). For purposes of implementing the certification 
requirements of section 7(c) of the NGA, the Commission defined 
``facilities'' broadly, in exclusionary terms--everything except 
``auxiliary installations'' and certain facilities constituting 
replacement facilities are ``facilities'' for which a natural gas 
company must obtain a certificate.\59\ Applying that same definition 
here, in the context of section 4(f), would be consistent with our 
longstanding practice in applying that term under the NGA and therefore 
consistent with the rule that Congress is deemed to be aware of 
existing administrative interpretations when amending a particular 
statute that contains such interpretations.\60\ This definition would 
enable storage providers to seek market-based rates for service 
associated with capacity related to any ``specific facility'' requiring 
certification placed in service after the date of the Act, be it a new 
storage cavern or a facility which expands capacity at an existing 
cavern or reservoir. However, to receive such authorization, the 
storage provider will still need to satisfy the other requirements of 
section 4(f) discussed below. In addition, such rates will only be 
found to be in the public interest if the storage provider demonstrates 
that the market-based services will not be subsidized by existing 
customers and that customers receiving cost-based service from expanded 
facilities will be adequately protected.
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    \59\ See 18 CFR 2.55 (2005).
    \60\ See Bragdon v. Abbott, 524 U.S. 624, 645 (1998) (when 
administrative and judicial interpretations have settled the meaning 
of an existing statutory provision, repetition of the same language 
in a new statute indicates, as a general matter, the intent to 
incorporate its administrative and judicial interpretations as 
well).
---------------------------------------------------------------------------

    116. Regarding the NiSource Pipelines' concern over the 
Commission's definition of ``in service,'' we clarify that our intent 
is to define ``in service'' to mean when the facilities are actually 
placed into service.
2. Market-Based Rates Are in the Public Interest and Necessary to 
Encourage the Construction of Storage Capacity in the Area Needing 
Storage Services
    117. Section 4(f) of the NGA states that in order to allow a 
company to charge market-based rates under this section, the Commission 
must determine that: ``market-based rates are in the public interest 
and necessary to encourage the construction of the storage capacity in 
the area needing storage services.'' \61\ In the NOPR, the Commission 
stated that applicants for authorization under section 4(f) will bear 
the burden of showing that in its specific circumstances, market-based 
rates are necessary to encourage the construction of storage capacity 
and that storage services are needed in the area. To make this showing, 
the Commission suggested that the applicant could present evidence that 
it had offered its capacity at cost-based rates through an open season 
and was unable to obtain sufficient long-term commitments at those 
cost-based rates. However, the Commission invited comments concerning 
other ways a project applicant might make these showings.
---------------------------------------------------------------------------

    \61\ Energy Policy Act of 2005, Pub. L. 109-58, section 312, 119 
Stat. 594, 688 (2005) (to be codified at 15 U.S.C. 717c(f)(1)(A)).
---------------------------------------------------------------------------

Comments
    118. AGA supports the suggestion that an applicant under this 
section might demonstrate the need for market-based storage rates by 
showing that the market failed to subscribe under long-term contracts 
at cost-based rates offered through an open season. INGAA also supports 
the Commission's suggestion, but suggests such a showing should not be 
required. Rather, the Commission should allow the applicant substantial 
discretion as to how to make the requisite showing based on the facts 
of its project. EEI agrees that the applicant should have the burden to 
show that market-based rates are necessary to encourage construction of 
storage capacity; specifically, EEI urges the Commission to require an 
applicant to show why such capacity cannot be developed under cost-
based rates. SCE asserts that in the event an applicant relies on a 
failed open season as evidence of need, other parties must have the 
opportunity to contest the open season's reasonableness.
    119. The NYPSC expresses concern that the NOPR did not discuss 
``public interest'' as a standard separate and apart from ``need,'' as 
the language of section 4(f) treats these as separate standards. The 
APGA also states that the Commission must revise Sec.  284.505 to 
require a specific public interest demonstration.
    120. NYPSC acknowledges that the ``public interest'' standard could 
encompass a broad range of factors. It argues, however, that while the 
Commission may find it is in the ``public interest'' to authorize 
market-based rates to encourage the entrance of independent, third 
party storage providers into the market, it may not be in the public 
interest to encourage the construction of new storage facilities by a 
pipeline with a dominant market share.
    121. Haddington Ventures asserts that the Commission should 
recognize three distinct categories of new storage projects and treat 
each differently under its section 4(f) policy. The three categories 
are: (1) Independent storage projects owned by entities unaffiliated 
with existing natural gas infrastructure subject to cost-based rate 
regulation; (2) storage projects owned by entities affiliated with 
existing natural gas infrastructure subject to cost-based rate 
regulation, but which are not physically connected to such existing 
infrastructure; and (3) storage projects owned by entities affiliated 
with existing natural gas infrastructure subject to traditional cost-
based rate regulation to which such storage projects are connected or 
upon which such storage projects otherwise rely.
    122. Haddington Ventures submits that the Commission's proposal 
adequately addresses Category 2 projects, but should be adjusted to 
better account for Category 1 and Category 3 projects. With regard to 
Category 1 projects, Haddington Ventures asserts

[[Page 36627]]

that the consumer protection required will be satisfied by: (a) The 
Commission's rate regulation of existing infrastructure, which 
establishes a ceiling on the price that the facility owner can command 
for storage, and (b) the relative ease of entry by potential 
competitors.
    123. Haddington Ventures asserts that a Category 3 project should 
be granted market-based rates only after the project has met the burden 
of demonstrating that (a) no mechanisms remain that could be exploited 
to unfairly advantage such projects, and (b) any safeguards imposed are 
administrable. Category 3 projects should be required to demonstrate 
annually and whenever material changes in the market or of the project 
may undermine customer protections. In addition, Haddington Ventures 
maintains that Category 3 projects that do not achieve the desired 
level of return at market-based rates should not be allowed to fold the 
costs of the project back into a regulated rate structure, except where 
(a) a bona fide change of circumstances has occurred that eliminates 
the original grounds for granting the market-based rate authority, and 
(b) the Commission is satisfied that the regulated rate would be lower 
than the market rate.
    124. Enstor takes a different approach, asserting that those that 
oppose market-based rates should have the burden of showing that such 
rates are not ``necessary to encourage the construction of the storage 
capacity in the area needing storage services.'' Enstor proposes that 
the Commission establish a presumption that storage capacity will not 
be built in the absence of market-based rate authorization. Enstor 
asserts that, in the alternative, if the Commission does not adopt such 
a presumption, the objective financial criteria that the applicant's 
lenders are requiring for the development of the particular project 
should be the basis for the required determination of need.
Commission Determination
    125. In order to authorize market-based rates under section 4(f), 
the Commission must determine that: (1) Market-based rates are in the 
public interest; (2) market-based rates are necessary to encourage the 
construction of the storage capacity; and (3) the area in which the 
storage project is proposed needs storage services. We agree with the 
NYPSC and APGA that the public interest requirement is a separate 
standard under the Act and we have revised Sec.  284.505 accordingly. 
The Commission will expect each applicant to address each of these 
requirements in its applications explaining and supporting its 
contentions with respect to each element.
    126. In determining whether market-based rates for a particular 
project are in the public interest, the Commission will consider, among 
other things, the risk of the project, and the investment required to 
fund it. Generally, the Commission would expect that for market-based 
rates to be in the public interest for services proposed under section 
4(f), market-based rates would be necessary for the project sponsor to 
secure financing and move forward with the project. In the Commission's 
view, it is unlikely that market-based rate authorization would be 
necessary, or in the public interest, to encourage relatively risk-free 
expansions of storage.
    127. We also agree with the NYPSC and Haddington that another 
factor to consider in determining whether market-based rates are in the 
public interest is whether the applicant is a new independent storage 
provider or an existing pipeline in the relevant market. In general, we 
believe that an existing pipeline will face fewer difficulties in 
securing financing for incremental expansions of existing storage 
facilities. As a going concern with existing customers and financial 
relationships, the risk associated with acquiring financing is lower 
for incremental expansions than the risk associated with a greenfield 
project undertaken by a new entrant in the market. Therefore, we 
believe it may be more difficult for an existing pipeline to meet the 
public interest standard than it will be for a new independent storage 
provider.
    128. Ultimately, the Commission's finding that market-based rates 
are in the public interest will reflect its consideration of all 
aspects of 4(f) proposals, including, but not limited to, the risk 
faced by the project sponsors, the extent to which additional capacity 
is needed in the area of the project, and the strength of the 
applicant's showing that the facilities would not be built but for 
market-based rate treatment.
    129. In order to receive authorization to charge market-based rates 
under section 4(f), each applicant must make a showing as to why 
market-based rates are necessary to encourage the construction of the 
storage capacity. As the Commission stated in the NOPR, one way that 
the applicant could make such a showing is 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. On the basis of the record, we believe such an open season is 
the best means of demonstrating that cost-based rates will not be 
sufficient. However we are open to applicants making another type of 
showing. Applicants may also cite to other marketing factors to explain 
why market-based rates are necessary. As suggested by SCE, parties will 
have an opportunity to comment upon this evidence.
    130. The Commission will not establish a presumption that storage 
capacity will not be built in the absence of market-based rate 
authorization, as suggested by Enstor. The statute requires that the 
Commission make an affirmative finding that market-based rates are 
necessary to encourage the construction of storage. Also, in the 
Commission's experience, storage has been built in the absence of 
market-based rate authorization. Regarding Enstor's assertion that the 
objective financial criteria that the applicant's lenders are requiring 
for the development of the particular project should be the basis for 
the determination of the necessity of the project, the Commission will 
afford applicants significant discretion in demonstrating that market-
based rates are necessary to encourage the development of additional 
storage. Enstor can cite to requirements imposed by its lenders if it 
believes that such requirements justify the authorization of market-
based rates. The Commission cannot make a generic determination on such 
issues, but must look at the positions of the parties in individual 
cases.
    131. Applicants will also have to show that storage services are 
needed in the area in which they are proposing a project. An applicant 
can demonstrate need by including evidence of a general lack of storage 
in the area or that existing storage capacity is fully utilized, 
pipeline constraints leading into the area, projected increased demand 
for natural gas in the area to be served, customer interest, high 
natural gas prices and/or volatility and other information the 
applicant believes supports its determination that additional storage 
is needed. As noted above, the Commission will balance the strength of 
an applicant's showing of need with the other requirements of the Act 
in determining whether to approve a request for market-based rates 
under NGA section 4(f).
    132. The Commission notes that the subject of this rule is whether 
and in what circumstances authorization of market-based rates would be 
appropriate pursuant to NGA section 4(f). To the extent an applicant is 
also requesting authority to construct and operate new storage 
facilities pursuant to NGA section 7(c), the applicant will be subject 
to the full range of

[[Page 36628]]

requirements of the Commission's certificate process.\62\
---------------------------------------------------------------------------

    \62\ Pursuant to Sec.  157.20(b) of the Commission's 
regulations, any authorization granted for the construction of a 
proposed project will establish a time within which construction of 
the facility must be completed and made available for service. We 
have in the past granted extensions of time within which to complete 
construction of proposed projects. With regard to projects for which 
NGA section 4(f) authorization is sought, we note that we would not 
anticipate granting an extension of time to complete construction 
based on an argument that market demand for the project has not 
materialized.
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3. Customer Protection
    133. New NGA section 4(f) 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. In the NOPR, the Commission proposed to allow the applicant to 
propose a relevant method of protecting customers.
    134. The Commission stated that in general, customers will be 
better off if more storage infrastructure is constructed. Therefore, 
the Commission sought a balance in considering requests for market-
based rate authority under new NGA section 4(f), between the obvious 
benefits of additional storage capacity in areas needing storage 
services against adverse impacts which might arise from the potential 
exercise of market power by the storage provider. In doing so, the 
Commission stated that it remained mindful of the fact that to the 
extent unnecessary conditions are imposed, the additional storage 
infrastructure and the additional service options would be lost to 
potential customers. Accordingly, the Commission sought comments 
concerning how to achieve this balance.
    135. The Commission stated that the appropriate method of customer 
protection may vary according to the facts and circumstances of the 
individual project proposals and therefore, the Commission proposed to 
allow each applicant to propose a method of protecting customers best 
suited to its project. However, the Commission sought comments on 
whether it would be beneficial to identify certain acceptable 
approaches to protect customers. The Commission reasoned that the 
establishment of generic safeguards would facilitate the application 
process for NGA section 4(f) market-based rate authority, but stated 
that each applicant would retain the right to propose other methods of 
protecting customers that might better fit the circumstances of its 
project.
    136. Therefore, in addition to seeking suggestions for possible 
generic safeguards, the Commission outlined two generic safeguards for 
comment. The Commission reasoned that entities with market power can 
exercise that power in two general areas: (1) The withholding of 
capacity; and (2) the extraction of monopoly rents. Therefore, the 
Commission set forth two approaches to protecting customers against the 
exercise of market power. The first approach would involve conditions 
that limit the withholding of capacity and the second approach would 
involve rate protections.
    137. The Commission reasoned that market power can be exercised in 
circumstances where a storage operator can withhold capacity from the 
market and thereby raise prices. The Commission stated that 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.'' 
\63\ The Commission requested that comments address 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.\64\
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    \63\ Process Gas Consumers Group v. FERC, 292 F.3d 831, 837 
(D.C. Cir. 2002).
    \64\ Id. (affirming Commission determination that prices 
determined through an uncapped bidding process were the product of 
competitive forces, not the exercise of market power).
---------------------------------------------------------------------------

    138. The Commission recognized that one difficulty in applying this 
standard is defining when withholding should be found to be indicative 
of the exercise of market power. Therefore, the Commission requested 
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.\65\
---------------------------------------------------------------------------

    \65\ The Commission sought comment on several consumer 
protection questions including: (1) whether allowing the storage 
operator to set a reserve price would provide an appropriate 
balance; and (2) whether a withholding prohibition should apply all 
the time, or only during periods of peak demand for storage 
services? The Commission also request comment on how terms such as 
``reserve price'' and ``period of peak demand'' should be defined, 
if such conditions were to be adopted. The Commission also requested 
comment on whether a formal auction process under which the 
applicant is obligated to sell all capacity above a reserve price 
should be considered?
---------------------------------------------------------------------------

    139. The Commission also pointed out that market power can be 
exercised in those circumstances where a storage operator can extract 
monopoly rents and stated that rate protections could take several 
forms. The Commission stated that rate caps could be designed to 
provide adequate customer protection while also supporting the 
financing of new storage projects. The Commission sought comment on 
whether there are certain approaches to rate caps that could be adopted 
as a generic safeguard. The Commission also proposed that it 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 and requested 
comment on this approach or whether there were other cost-based rate 
designs or price cap methodologies that the Commission should consider.
Comments
    140. With respect to the ``customer protection'' findings required 
under section 4(f)(1)(B), INGAA and Williston Basin submit that the 
Commission can rely on the same reporting requirements and NGA section 
5 complaint process that it proposes with respect to compliance with 
the statutory periodic review requirement. INGAA and Williston Basin 
also support the Commission's suggestion that it may rely on a showing 
that a storage operator has sold or made available all of its capacity.
    141. INGAA asserts that the focus of customer protection should be 
those customers receiving storage service at cost-based rates. Other 
commenters, including AGA, APGA, and NGSA, place the focus on storage 
customers seeking service under market-based rates authorized pursuant 
to section 4(f). EGSI requests the Commission to also ensure protection 
for competitors.
    142. Williston maintains that the applicant should be allowed to 
propose an adequate method of protecting customers and the Commission 
should address each application individually. Duke also asserts that 
the Commission should not adopt any generic safeguards that will be the 
equivalent of price controls. Duke argues that imposing on storage 
participants an obligation to sell available capacity is unworkable 
and, if adopted, would eliminate any of the potential advantages that 
would result from market-based rates. Duke explains that for an 
obligation to sell to be meaningful, that obligation must be

[[Page 36629]]

imposed with respect to some price, which inevitably leads to the 
imposition of price controls.
    143. Northern, Sempra, INGAA and Enstor state that the 
circumstances of a project should determine the appropriateness of any 
given customer protection. Northern maintains there are some additional 
protections that should apply, including an open season bidding process 
with or without a minimum reserve price, known terms and conditions of 
service defined in the storage provider's tariff, a restriction on the 
storage provider requesting during a contract term that the market-
based rates it agreed to be increased, a commitment by the pipeline to 
existing customers that it will not allocate incremental costs 
associated with a market-based storage expansion to existing shippers 
receiving storage services under cost-based rates in a general rate 
case proceeding, and a requirement that market-based rates should be 
subject to the Commission's reporting and posting requirements. SCE 
urges the Commission to perform a contemporaneous market-wide analysis 
in determining whether to grant market-based rate authority as well as 
considering mitigation methods tailored to the specifics of each 
application.
    144. Dominion supports both the case-specific approach to reviewing 
the adequacy of customer protections, and establishing generic 
protections that will expedite the process. Dominion submits that 
customers will be protected from the exercise of market power if they 
are offered long-term, cost-based storage rates as a recourse service 
option. Dominion asserts that this will prevent a storage provider from 
extracting monopoly rents because a customer can always opt for the 
long-term recourse service. Withholding of capacity is therefore not 
possible, Dominion stresses, because the services will be offered under 
open-access, non-discriminatory FERC-approved tariffs.
    145. PGC states it is appropriate to establish a general rule 
requiring the use of certain pre-established safeguards where market-
based rate authority is granted. However, because some concerns may be 
case-specific, PGC supports requiring individual applicants to carry 
the burden of demonstrating that consumers are adequately protected, 
separate and apart from their compliance with any universally 
established safeguards. PGC supports the requirement that all capacity 
be offered for sale and made available to customers on a non-
discriminatory basis.
    146. NYPSC supports the establishment of generic safeguards. 
Specifically, the NYPSC maintains that a condition prohibiting the 
withholding of capacity would serve to protect consumers. It states 
that the Commission could address the pricing issues associated with 
this condition by allowing applicants to propose and support a 
reasonable recourse rate on a case-by-case basis. The NYPSC also 
supports allowing intervenors to propose other protective conditions on 
a case-by-case basis. NASUCA asserts that restrictions on withholding 
of capacity would limit the ability of a storage operator to exercise 
market power. NASUCA urges the Commission to require the storage 
applicant to post, both continuously and on a real-time basis, the 
amount of contracted storage service and storage capability for each 
storage service offered, the identified differences being considered an 
offer to sell.
    147. AGA urges the Commission to lift the cap on capacity releases 
in order to permit greater competition with storage operators to place 
downward pressure on prices.
    148. APGA maintains that the NOPR errs in its assumption that the 
consumer will be protected by requiring that a market-based-rate 
storage service provider sell all of its existing capacity. APGA 
contends that the Commission's reliance on Process Gas is misplaced 
because that decision relied on the fact that the rates for the 
capacity in question were regulated and thus the pipeline would have no 
incentive for refusing to build additional capacity. This is not the 
situation the Commission faces in the instant case. APGA also contends 
that the NOPR erred in fashioning customer and consumer protections 
that disregard the statutory requirement that rates and services cannot 
be unduly discriminatory or preferential.
    149. To prevent the imposition of either excessive or unduly 
discriminatory rates, APGA proposes that: (1) The Commission cap the 
price of long-term storage service (i.e. contracts with a term of one 
year or more) and require tariff terms and conditions for this service; 
(2) these long-term contracts be subject to the right-of-first-refusal; 
(3) storage operators be allowed to sell any excess capacity as short-
term storage service; (4) an auction be used to award storage capacity 
where the storage operator must make all capacity available at or above 
a reserve price (a rate no higher than the cost-based rate for short-
term capacity); (5) storage operators be required to continually 
provide timely information on storage capacity availability and to 
initiate an auction upon a prospective customer request; (6) storage 
providers be required to maintain a record for three years of the 
quantities, rates, terms and conditions and date of each market storage 
purchase; (7) the Commission review, every three years, whether the 
availability and rates offered are just and reasonable and not unduly 
discriminatory or preferential; (8) the Commission be allowed to 
proceed sua sponte or based on a complaint to determine whether the 
rates, terms and conditions were or are just and reasonable; (9) the 
Commission be granted the authority to require the disgorgement of 
unjust profits, invoke civil fines, and suspend or revoke the 
certificate or market-based rate authority where it determines that the 
availability or rates charged for market-based rates were or are not 
just and reasonable or are unduly preferential or discriminatory; and 
(10) the costs of the storage capacity for which market based rates are 
sought be prohibited from inclusion in recourse rates.
    150. EGSI urges the Commission to be sensitive to the need to 
protect competitors as well as customers, because a storage provider 
that has market power and market-based rates could use that market 
power in anti-competitive ways. EGSI agrees that one way of guarding 
against such an abuse of market power is the establishment of a minimum 
``reserve'' rate or rate floor. EGSI suggests that such rate floor be 
set at or above the facility's short-term marginal costs.
    151. Enstor does not support the adoption of the Commission's 
suggested generic consumer safeguards. Enstor asserts that the 
Commission's proposed prohibition on the withholding of capacity, and 
its suggested rate protections, would upset the balance between the 
customer and the storage provider such that new storage projects would 
never get built. INGAA also rejects the ``rate cap'' protections 
suggested by the Commission as simply incompatible with market-based 
rates. Enstor would support an approach where the rate applicant would 
state upfront whether it would be willing to submit to an annual 
reporting requirement detailing the agreements and rates that it 
negotiated during the preceding 12 months, similar to those that 
section 311 service providers submit. Enstor advocates that the 
Commission adopt a 60-day ``safe harbor'' review period during which 
the market-based rate arrangements could be evaluated. If the 
Commission took no action during this time frame, the arrangements 
would be left intact.

[[Page 36630]]

    152. NGSA suggests that the Commission take the following steps to 
ensure consumer protection: (1) Assess whether the applicant has 
provided sufficient evidence that its rates will be just and reasonable 
by examining whether the proposed rates are ``in line'' with other 
storage rates within the region that are charging market-based rates; 
(2) assess other specific safeguards as proposed by the applicant that 
indicate that the applicant is willing to mitigate market power, 
including whether the applicant has negotiated contracts that permit 
customers to ratchet down levels or permit mandatory ``out'' clauses or 
contracts that include indexed-based rates where the risk is shared by 
the applicant and the customer; (3) require the applicant to hold an 
open season, which if structured correctly, will provide transparency 
and enhance the Commission's ability to analyze and review the conduct 
of the storage operator; (4) apply generic customer safeguards which 
would include a no withholding requirement requiring that all storage 
capacity be available at all times with a ``reserve price'' based on 
the range of rates charged for storage area facilities with market-
based rates; (5) reaffirm existing policies including the filing of a 
tariff that contains all terms and conditions of service, as well as 
standard forms of service agreements, and the ability of customers to 
release capacity and application of the affiliate rules under Order No. 
2004; and (6) employ several prospective generic actions for all 
applications which would include the monitoring of an applicant's 
compliance with the implementation of the safeguards and acting swiftly 
upon receiving a customer complaint.
Commission Determination
    153. As a prerequisite for granting market-based rate authority, 
new NGA section 4(f) requires that the Commission, 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 will require an applicant for this authorization 
to show that granting its application can be done consistent with the 
requirement of section 4(f)(1)(B).\66\ This may be done in different 
ways, and as the NOPR proposed, we will leave applicants with the 
discretion to fashion proposals that will operate effectively given the 
unique situations involved. However, we will also describe methods that 
an applicant might employ to satisfy the Commission that the customer 
protection requirement has been met.
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    \66\ In its comments, NYPSC requests the Commission allow 
interveners to propose other protective conditions on a case-by-case 
basis. While the burden rests with the applicant, interveners may 
also propose protective conditions. The Commission will give full 
consideration to such proposals when it considers an individual 
case.
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    154. Customer protection starts with potential storage customers 
having a fair and open opportunity to contract for proposed new 
capacity. One way for an applicant requesting section 4(f) authority to 
demonstrate that interested customers were given non-discriminatory 
access to new storage capacity would be to show that it had conducted a 
fair and transparent open season. The industry has conducted open 
seasons for quite a few years, and the Commission has provided guidance 
in individual cases on issues that have arisen.\67\ A properly 
conducted open season will allow a project sponsor to test the market, 
attempt to negotiate mutually agreeable rates which support the project 
financially, and provide a means to give the market fair notice of and 
open access to potential new services. Allegations that the process 
offered by an applicant failed to provide such fair notice and access 
can be raised by potential customers in individual proceedings.
---------------------------------------------------------------------------

    \67\ See, e.g., Ouachita River Gas Storage Co., L.L.C., 68 FERC 
[par] 61,402 (1994); Avoca Natural Gas Storage, 68 FERC [par] 61,045 
(1994); Northwest Pipeline Corp., order denying reh'g, 61 FERC [par] 
61,047 (1992); Pacific Gas Transmission Co., 54 FERC [par] 61,291 
(1991).
---------------------------------------------------------------------------

    155. APGA argues that the NOPR erred in disregarding the statutory 
requirement that rates and services cannot be unduly discriminatory or 
preferential. The Commission disagrees. With respect to rates, nothing 
in this Final Rule transgresses the statutory requirement that they be 
``just, reasonable and not unduly discriminatory or preferential.'' 
With respect to services, every part 284 transporter, which includes 
storage service providers, must comply with the non-discriminatory 
access requirements of those regulations.\68\ This rule deals with the 
setting of rates and does not disturb nor set aside other provisions of 
the Commission's open-access requirements.
---------------------------------------------------------------------------

    \68\ 18 CFR 284.7(b), 284.7(c) and 284.9(b) (2005).
---------------------------------------------------------------------------

    156. Another necessary component of customer protection is ensuring 
that existing customers are not subject to additional costs, risks, or 
degradation of service resulting from new services provided under 
section 4(f). Potentially, existing storage service providers, 
including interstate pipelines and intrastate pipelines, may request 
authority to charge market-based rates pursuant to section 4(f). Any 
applicant which already serves customers under prior authorization must 
ensure that existing customers will not be subject to additional costs, 
risks, or degradation of service as a result of a section 4(f) 
authorization, and must explain how its application is consistent with 
this requirement.
    157. In addition, successful applicants will be required to 
separately account for the costs, services, and commitments provided 
pursuant to section 4(f) authorizations, and to retain these records 
for as long as they may be required under the Commission's existing 
practices for pipelines operating under the Uniform System of 
Accounts.\69\
---------------------------------------------------------------------------

    \69\ 18 CFR part 225 (2005).
---------------------------------------------------------------------------

    158. A third fundamental protection is an open-access tariff 
stating the terms and conditions of service offered. While the rates 
would be left to individual negotiation, within the customer 
protections offered by that provider and accepted by the Commission, 
the terms and conditions of service must be provided in a generally-
applicable tariff. As acknowledged and supported in the comments of 
Northern and NGSA, a tariff provides essential transparency and basic 
knowledge about the nature and quality of service to be provided. It is 
also a touchstone by which all customers may be assured that the 
quality of service provided is comparable for all customers.\70\ 
Although the NOPR did not refer to tariff-filing requirements, we note 
that the context of these authorizations is the provision of open-
access storage and storage-related services offered under Part 284 of 
the Commission's regulations. While parts of these regulations are 
routinely waived in market-based rate authorizations upon applicant's 
request and for good cause shown, the Commission has consistently 
required generally applicable tariffs for these services and intends to 
continue this practice for authorizations pursuant to section 4(f). 
This will also allow the Commission to ``ensure that reasonable terms 
and conditions are in place to protect consumers'' as required by new 
section 4(f).
---------------------------------------------------------------------------

    \70\ For transporters offering service pursuant to NGPA section 
311, their statement of operating conditions will provide similar 
transparency and consistency of service for all customers.
---------------------------------------------------------------------------

    159. EGSI asks the Commission to expand customer protection to 
require that competitors also be protected. While the Commission does 
not generally require that competitors be protected, and does not read 
the

[[Page 36631]]

customer protection requirement of new section 4(f) to require such 
protection, the Commission agrees that as a general matter, storage 
service providers, like other natural gas companies, should not charge 
rates less than their marginal costs.\71\ However, the Commission is 
not here requiring that a storage service provider authorized to 
collect market-based rates under section 4(f) state a minimum average 
variable cost rate below which it would not be allowed to charge. 
Rather, in the event of a complaint, the Commission will require the 
storage service provider to demonstrate that marginal costs were 
recovered under every rate charged.
---------------------------------------------------------------------------

    \71\  See Regulations of Natural Gas Pipelines After Partial 
Wellhead Decontrol, Order No. 436, FERC Stats. and Regulations, 
Regulations Preambles 1982-1985 ] 30,665, at 31,543-45 (1985) 
(permitting the discounting of transportation rates between the 
maximum and minimum approved rates with the minimum rate based on 
average variable costs).
---------------------------------------------------------------------------

i. Withholding
    160. In the NOPR, the Commission requested comment on whether 
customers can be assured that market power is not being exercised if 
all capacity is made available to the market, and how to apply a 
prohibition against withholding. NiSource Pipelines assert that the 
Commission's Part 284 regulations already contain a generic safeguard 
against withholding of capacity.\72\ INGAA states that an auction 
process with an appropriate reserve price would be an appropriate means 
of complying with a no-withholding rule. However, INGAA urges the 
Commission not to attempt to establish generic requirements for how 
such a reserve price should be established. Northern believes that an 
open season with or without a reserve price (and with other stated 
conditions) would be an appropriate method of compliance.
---------------------------------------------------------------------------

    \72\ Citing, Process Gas Consumers Group v. FERC, 292 F.3d 831, 
837 (D.C. Cir. 2002) (Process Gas) and Natural Gas Pipeline 
Negotiated Rate Policies and Practices, 114 FERC ] 61,042 at P 10 
(2006).
---------------------------------------------------------------------------

    161. PGC, NYPSC and NASUCA all support the concept of prohibiting 
withholding. PGC and NYPSC would leave the method for achieving this 
result to be worked out in individual cases. NASUCA would impose 
continuous and real-time posting requirements on capacity, contracted 
capacity and available capacity. APGA would also require more capacity 
postings, and would require the storage operator to initiate an auction 
upon customer request.
    162. Williston and Duke, on the other hand, argue that a formal 
auction requirement with a reserve price would reduce or eliminate the 
incentive for storage service providers and customers to enter into 
market-based rates contracts and they urge the Commission to allow the 
applicant to propose an adequate method of customer protection. They 
argue that any mandated reserve price would constitute de facto cost-
based rate regulation and would nullify any benefits offered by market-
based rates under these circumstances. Enstor objects to any generic 
requirements or prohibitions.
    163. The Commission believes that an applicant's proposal that 
adequately prevents withholding is one good way to meet the customer 
protection requirement. The Commission's existing part 284 open access 
regulations require interstate pipelines to provide service on a non-
discriminatory basis to the extent capacity is available and a 
qualified shipper is willing to pay the maximum tariff rate. In the 
absence of proof that the service provider lacks market power and a 
just and reasonable rate, the Commission has no reason to believe (and 
no basis for reasonably deciding) that an applicant for section 4(f) 
market-based rates does not have the potential to exercise market 
power. In this context, a proposal that acts to prevent withholding as 
a method of exercising substantial market power, tempered with a 
reasonable reserve price which would allow a section 4(f) applicant to 
recover its investment appears to be the best way to satisfy the test.
    164. Several commenters have suggested specific methods for setting 
reserve prices. For example, NGSA suggests use of the range of rates 
charged for other area storage facilities with market-based rates. APGA 
would require a cost-based rate to be used. However, the Commission 
acknowledges the objections of Williston and Enstor that a mandatory 
reserve price is tantamount to indirect cost-based ratemaking. Many 
other commenters advocate leaving it to the individual applicant to 
establish a reasonable method of compliance. The Commission believes 
that the most reasonable course is to allow the individual applicant to 
propose a method that balances adequate customer protections against 
withholding as a tool for exercising significant market power against 
the applicant's need for revenue sufficiency.
    165. In its application for section 4(f) authority to charge 
market-based rates, the applicant must demonstrate how it intends to 
comply with the no-withholding requirement, and must also specify 
whether, and if so, how it will establish a reserve price. The 
Commission will entertain reserve prices which represent a reasonable 
price in the market to be served. A few examples of how this price may 
be set include: prices offered by competing storage sellers in the same 
market, as suggested by NGSA; applicant's total costs; applicant's 
other already agreed upon rates (e.g., the highest initial rate agreed 
to at arms-length with a non-affiliate in the initial open season); or 
another type of reserve price for which the applicant can provide a 
just and reasonable basis convincing to the Commission based on the 
facts of a specific case. Applicants proposing a method of forestalling 
attempts to withhold capacity in an effort to exert market power which 
does not include a reserve price must convincingly demonstrate how the 
proposal will prevent the withholding of capacity.
ii. Other Rate and Service Protections
    166. In the NOPR, the Commission also sought comments on rate caps 
that might provide protection against the extraction of monopoly rents. 
In response, Dominion advocates that the offer of a long-term cost-
based storage service as a recourse service offering, would satisfy the 
customer protection requirement. APGA proposes a two-prong approach 
where long-term storage services are first offered at price-capped 
rates, with unbooked capacity available to be auctioned for short-term 
services; the short-term auction would be subject to a reserve price no 
higher than the cost-based rate for short-term capacity. Many of the 
pipelines and storage operators oppose any cost-based pricing 
restraints as nullifying the incentives to build new storage 
infrastructure.
    167. The Commission will not mandate cost-based price controls as a 
method for ensuring customer protection. On balance, we agree with the 
comments that a mandated price cap would undermine and perhaps nullify 
the incentive to build new storage infrastructure, which is the 
Commission's primary goal here, and is otherwise tantamount to imposing 
a cost-based rate, rather than granting authority to sell at market-
based rates. However, the Commission views the suggestion of a long-
term cost-based recourse storage service as a viable approach that an 
applicant may propose. In addition, some of the concepts discussed 
above on the reserve price issue may offer other methods of capping 
prices which an applicant may use in its proposal. For example, a price 
cap based on the range of prices offered by competing sellers in the 
same market could be adopted without an auction process.

[[Page 36632]]

4. Periodic Review
    168. In the NOPR, we suggested that regular Commission monitoring 
of market-based storage operators based on existing forms and data 
postings, supplemented as necessary with more specific information, 
would satisfy the periodic review requirement of the new NGA section 
4(f). Appropriate action under section 5 of the NGA would be available 
should the Commission determine, based on its own review or in response 
to a complaint, that rates charged by the storage operator were not 
just and reasonable.
    169. The Commission requested comments on this approach, whether 
further reporting or transparency requirements should be imposed, and 
whether the applicant's proposed customer protection requirements 
should be reviewed every five years.
Comments
    170. Several commentors generally agreed with the approach 
described in the proposed rule to rely on existing reporting 
requirements, and NGA section 5, to comply with the periodic review 
requirement.\73\ INGAA submits that the information currently reported, 
along with the public information regularly reviewed by Commission 
staff and the information provided in response to any specific 
complaint, as well as the existing compliance regulations, are 
sufficient to ensure compliance with the statute. Williston Basin and 
Enstor state that a more formal review process, such as every five 
years, would add unnecessary expense and is unlikely to present any 
additional information than is already publicly distributed on a 
regular basis. Sempra states that the reporting requirements should be 
designed to provide information that updates the information that was 
initially relied upon by the Commission in concluding that market-based 
rates were appropriate and to assure that such rates remain just and 
reasonable.
---------------------------------------------------------------------------

    \73\ Comments of INGAA, Williston Basin, Enstor, Dominion, and 
DTE.
---------------------------------------------------------------------------

    171. AGA, on the other hand, supports a periodic review of market-
based rates every five years in addition to the proposed Commission 
monitoring of public postings by storage operators. AGA suggests that 
the Commission provide an opportunity every five years for customers 
and interested parties to submit comments regarding storage rates and 
consumer protection measures. Similarly, NGSA also suggests that the 
Commission institute a periodic review at least every five years or 
earlier if potential issues are detected as a result of the 
Commission's monitoring or a filed complaint. APGA disagrees with the 
Commission's suggestion that a section 5 complaint complies with the 
section 4(f) mandate that the Commission periodically review whether 
the market-based rate is just and reasonable and not unduly 
discriminatory or preferential. According to APGA, a section 5 
complaint procedure suggests that the Commission can impose only a 
prospective remedy, which would fall short of the consumer and customer 
protections mandated by section 4(f).
Commission Determination
    172. We find that the regular Commission staff monitoring based on 
existing forms and data postings, supplemented as necessary with more 
specific information required during the course of any necessary 
inquiry, coupled with our authority under NGA section 5 will satisfy 
the periodic review requirement of the new NGA section 4(f). Ongoing 
review of storage operations, capacity subscription, and transaction 
details would provide a greater degree of customer protection than 
would a formal review on a multi-year periodic cycle. Ongoing review, 
as part of the Commission's regular market oversight and enforcement 
efforts, would identify potentially problematic situations faster and 
initiate solutions sooner than a formal periodic proceeding.
    173. Existing reporting requirements provide a wide range of 
information regarding storage service operations and rates. The Index 
of Customers filing under Sec.  284.13(c) reports contract entitlements 
quarterly. The semi-annual storage report under Sec.  284.13(e) filed 
at the end of the injection and withdrawal seasons identifies the 
capacity applicable to each storage customer, the actual volume 
injected or withdrawn, the revenues received, and any discounts 
permitted. The information in these reports, supplemented with ad-hoc 
staff inquiries will provide tools to identify potential unlawful 
withholding of storage capacity.
    174. Storage operators are also required to post a daily report of 
available storage on their electronic bulletin board or Web site under 
Sec.  284.13(d). This data will allow the detection of daily storage 
operating patterns inconsistent with appropriate market operations.
    175. Storage providers also must report the rates and terms of 
storage service transactions under Sec.  284.13(b) at the time service 
commences. These reports will provide the opportunity to detect 
potential undue discrimination or preference in storage rates or 
services. The Commission reminds storage operators that this 
requirement will be monitored closely by our oversight and audit staff 
to assure full compliance.
    176. Financial and operational data reporting in Form 2 or 2a is 
another source of information useful in monitoring section 4(f) storage 
operations, rates, and services. We will require section 4(f) storage 
companies to fully comply with the financial and accounting information 
required for Forms 2 and 2a. While we have waived these requirements 
for storage operators found to lack market power, we will not do so for 
firms seeking market-based rates under section 4(f). Full compliance is 
necessary to provide the Commission with a more complete picture of 
market-based storage operations for firms presumed to possess market 
power.
    177. The above sources of information are available for regular 
monitoring by the Commission staff and current or potential storage 
service customers. These sources, plus the ability of the Commission 
staff to seek further information as needed, will provide for more 
timely review and remediation of section 4(f) storage rates and service 
that might fall outside of a range of reasonableness or fail to meet 
the just and reasonable standard than a formal periodic review 
proceeding.
    178. While the ongoing review of section 4(f) storage operations by 
the Commission staff would not be a formal proceeding in which 
customers could file comments, as suggested by the AGA, customers would 
still have the opportunity to make their views known in several ways. 
Customers could contact the Commission's Enforcement Hotline to bring 
problem situations to the attention of the Commission. Interventions in 
proceedings involving section 4(f) operators provide another venue for 
communication. Alternate dispute resolution processes are available 
through the Dispute Resolution staff. The formal complaint process 
under section 5 is available for more serious concerns.
    179. Although we believe that these reporting requirements will be 
sufficient to allow the Commission and other interested parties to 
ensure that customer protections remain adequate over time, as required 
by the Act, in the event it is demonstrated that this is not the case 
for a particular project, we will take whatever additional steps are 
necessary to ensure that the periodic review provision of the statute 
is satisfied.
    180. We disagree with the assertion by the APGA that a section 5 
complaint procedure would fall short of the

[[Page 36633]]

consumer and customer protections mandated by section 4(f) because 
under section 5 remedies can only be prospective remedy. There is 
nothing in the new section 4(f) that implies a remedial procedure for 
rates under this section other than the prospective remedy afforded by 
section 5 of the NGA.
    181. Finally, as noted infra, failure to comply with the Sec.  
284.13 filing requirements would constitute a violation of the 
Commission's orders and regulations. A storage provider would be 
subject to disgorgement of profits and/or civil penalties from the date 
on which the violation occurred. Such a storage provider may also be 
subject to suspension or revocation of its authority to sell at market-
based rates (or other appropriate non-monetary remedies).
5. Presumption of Market Power
    182. Proposed Sec.  284.505(b) provides that any storage service 
provider seeking market-based rates for storage capacity pursuant to 
section 4(f) will be presumed to have market power.
Comments
    183. INGAA urges the Commission to eliminate proposed Sec.  
284.505(b) that establishes a presumption that an applicant has market 
power. INGAA submits that new NGA section 4(f) does not require it and 
without a clear picture of the implications of the presumption, 
potential applicants may be dissuaded from pursuing otherwise 
meritorious storage projects.
    184. Similarly, the NiSource Pipelines claim that this presumption 
is not consistent with section 312 of EPAct 2005. They submit that 
applying the presumption would create precedent for all subsequent 
proceedings that the applicant possesses market power, regardless of 
the fact that no market power analysis has ever been performed.
    185. EnCana argues that consistent with the intent of Congress, the 
Commission should revise proposed Sec.  284.505(b) by: (i) Removing the 
presumption of market power, and (ii) adding language which requires a 
traditional market power study to be filed by a storage service 
provider as part of its Sec.  284.505 application. EnCana argues that 
the presumption of market power is not present in section 4(f); rather, 
EnCana asserts that Congress contemplated that a traditional market 
power analysis would be filed in connection with a market-based rate 
authorization granted under that section. EnCana maintains that the 
Commission should use this market power study to determine what terms 
and conditions to impose upon a given authorization in order to provide 
the protection required by section 4(f) of the NGA. Encana asserts that 
the terms and conditions imposed by the Commission should be 
proportionate to the results of the market power study; the strictest 
terms and conditions should be imposed when a storage service provider 
fails both parts of the market power test, namely that the market it 
plans to enter is found to be heavily concentrated, or it will have a 
high market share in that market. Where a storage service provider 
fails the first part of the test (high market concentration due to the 
small number of participants), but shows that it will, in that 
concentrated market, have low market share, EnCana asserts that the 
Commission should be able to impose more lenient conditions based on a 
finding that, despite having market power, admitting the new entrant 
into the market would increase competition by diluting the market 
concentration of the dominant player(s) in the market area.
Commission Determination
    186. In implementing new section 4(f) of the NGA, we find that the 
establishment of a presumption of market power is warranted in order to 
meet our consumer protection obligation under the NGA to protect 
ratepayers from excessive rates.\74\ Because new section 4(f) permits 
market-based rates without a finding that the applicant lacks 
significant market power, we can not rely on competition to ensure that 
rates remain just and reasonable as we do under our traditional market 
power analysis. Rather, in order to ensure that the rates we authorize 
under section 4(f) will be just and reasonable, it is necessary to 
establish a presumption of market power in implementing the consumer 
protection provision of the Act. However, we clarify that the 
presumption of market power is intended to apply only for the purpose 
of implementing section 4(f); and is not a generic finding that would 
apply in other situations.
---------------------------------------------------------------------------

    \74\ See generally FPC v. Hope Natural Gas Co., 320 U.S. 591, 
610 (1944).
---------------------------------------------------------------------------

    187. We reject EnCana's request that we require section 4(f) 
applicants to submit a market power study. We find that implementation 
of such a requirement is inconsistent with the intent of Congress in 
implementing section 4(f) which specifically permits the Commission to 
authorize market-based rates not withstanding the fact that the 
applicant is unable to demonstrate that it lacks market power. Under 
the Final Rule, an applicant can choose whether to file a market power 
study under the traditional approach for obtaining market-based rates 
or by submitting an application under the provisions of section 4(f) 
that does not require a showing of a lack of market power but requires 
the applicant to meet other requirements including 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.
6. Applicability of Section 4(f) Treatment
Comments
    188. Enstor seeks clarification that the Commission's requirements 
related to implementation of section 4(f) are not applicable to an 
applicant that seeks a determination that it lacks market power.
    189. Dominion seeks clarification that new section 4(f) applies 
only to rate treatment and not to the storage service itself. Dominion 
states that it utilizes all of its storage assets together to achieve 
operational efficiency. Dominion seeks confirmation from the Commission 
that should it receive market-based rate authority for a new storage 
project under section 4(f), it will be able to operate that field on an 
integrated basis in conjunction with the other storage assets that are 
subject to cost-based rates.
Commission Determination
    190. We clarify that the requirements adopted in Sec.  284.505 
related to implementation of section 4(f) are not applicable to 
applicants seeking a finding that they lack market power. Rather, those 
applicants are subject to the requirements set forth in Sec. Sec.  
284.503 and 284.504 which require an applicant to submit a traditional 
market power analysis. An applicant is free to choose the procedures it 
wishes to be subject to.
    191. We do not have a sufficient basis to rule on Dominion's 
request that we find that if Dominion receives market-based rate 
authority for a new storage project under section 4(f), it will be able 
to operate that field on an integrated basis in conjunction with its 
other storage assets. Dominion may file and support such a request in 
any proceeding it files pursuant to section 4(f).

[[Page 36634]]

C. Other Issues

1. Section 284.126(d) Notification of Termination
Comments
    192. Bay Gas requests that the Commission remove Sec.  284.126(d), 
Notification of termination, from its regulations consistent with Order 
No. 581.\75\ Bay Gas asserts the Commission stated it was removing that 
provision in the preamble of Order No. 581 but failed to delete that 
section from the regulations.
---------------------------------------------------------------------------

    \75\ Revisions to Uniform System of Accounts, Forms, Statements, 
and Reporting Requirements for Natural Gas Companies, FERC Stats. & 
Regs., Regulations Preambles (January 1991-June 1996) ] 31,026 
(Sept. 28, 1995).
---------------------------------------------------------------------------

Commission Determination
    193. Bay Gas's request is beyond the scope of this proceeding. 
However, we note that on March 23, 1999, an errata was issued in Docket 
No. RM95-4-000 modifying the regulatory text to Order No. 581 to 
include the deletion of Sec.  284.126(d). We have placed Bay Gas' 
request in the rulemaking docket in which Order No. 581 was issued and 
will correct the matter there.
2. Encouragement of Certain Types of Storage
Comments
    194. Falcon Gas is concerned that statements made in the NOPR 
regarding the operations of salt caverns v. reservoir storage may be 
read to favor one storage project over another. Falcon maintains that 
the Commission should be clear with respect to its comments and 
intentions and let the market determine which form of gas storage 
capacity is best suited to any particular area of need. Falcon submits 
that reservoir storage, with the appropriate reservoir characteristics 
and equipped with the appropriate number of properly-configured wells 
and attendant surface facilities, can very closely match the operating 
characteristics of salt cavern storage, typically at a fraction of the 
unit development cost.
Commission Determination
    195. The Commission clarifies that it did not intend by its 
statements in the NOPR to prejudge whether one form of gas storage 
capacity is better suited to any particular area of need. Rather, our 
intent was to provide a general statement of the function of certain 
types of storage capacity. We affirm our intent to continue to evaluate 
the merits of a particular storage project on a case-by-case basis.
3. Storage and Related Services Eligible for Market-based Rates
    196. The NiSource Pipelines contend that the Final Rule should not 
limit the availability of market-based rates to firm storage services. 
Noting that the Commission has typically approved market-based rate 
authority for small storage projects, not storage services provided by 
major interstate pipeline companies, the NiSource Pipelines contend 
that the Commission should broaden the two methods proposed in the NOPR 
for obtaining market-based rates to include interruptible storage 
services, short-term firm and seasonal storage services. They also 
state that the Commission should consider applications for market-based 
rates for park and loan services and other services that provide 
storage-type imbalance management functions.
Commission Determination
    197. We clarify that the applicability of the provisions we are 
adopting in subpart M are not limited to firm storage services. An 
applicant may seek market-based rate treatment for any storage services 
that it proposes to provide. We will grant requests to charge market-
based rates for storage services to the extent the applicant is able to 
meet the requirements set forth in the regulations.

V. Summary of Regulations

    198. The Commission, therefore, is revising 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, Requirements for market-power 
authorizations, requires storage service providers granted the 
authority to charge market-based rates who also provide cost-based 
service(s) to separately account for all costs and revenues associated 
with facilities used to provide the market-based services. This section 
also requires storage providers to notify the Commission of significant 
changes occurring in its market power status. 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.

VI. Information Collection Statement

    199. 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.\76\ 
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.\77\
---------------------------------------------------------------------------

    \76\ 5 CFR 1302.11 (2005).
    \77\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------

    200. The Commission identifies the information provided under part 
284 subpart M as contained in FERC-545, FERC-546 and FERC-549.
    201. The Commission did not receive specific comments concerning 
its burden estimates and uses the same estimates here in the Final 
Rule, as modified to reflect the elimination of the requirement that 
applicants granted market-based rate approval after the effective date 
of a Final Rule file an updated market power analysis once every five 
years. 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

[[Page 36635]]

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.
    202. 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 Final 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 8 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.............               8                1              350            2,800
----------------------------------------------------------------------------------------------------------------

    Total Annual Hours for Collection: 2,800 hours.
    203. Information Collection Costs: The Commission sought comments 
on the cost to comply with these requirements. No comments were 
received. The Commission has projected the average annualized cost for 
all respondents to be $280,000 (3,500 hours x $80.00 per hour).
    204. Title: Gas Pipeline Rates: Rate Change (FERC-545); 
Certificated Rate Filings: Gas Pipeline Rates (FERC-546); and Gas 
Pipeline Rates: NGPA Title III Transactions (FERC-549).
    205. Action: Proposed Information Collection.
    206. OMB Control Nos.: 1902-0154, 1902-0155 and 1902-0086.
    207. 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.
    208. Respondents: Business or other for profit.
    209. Frequency of Responses: On occasion.
    210. 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 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. 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 showing why market-based rates are 
necessary to encourage storage services and including a method for 
protecting customers.
    211. 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. 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, communication and management within the natural gas 
industry.
    212. 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: [email protected]).
    213. 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).

VII. Environmental Analysis

    214. 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.\78\ The 
Commission has categorically excluded certain actions from these 
requirements as not having a significant effect on the human 
environment.\79\ 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.\80\ 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.
---------------------------------------------------------------------------

    \78\ 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).
    \79\ 18 CFR 380.4 (2005).
    \80\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27) 
(2005).
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VIII. Regulatory Flexibility Act Certification

    215. The Regulatory Flexibility Act of 1980 (RFA) \81\ generally 
requires a description and analysis of the impact the proposed rule 
will have on small

[[Page 36636]]

entities or a certification that the proposed rule will not have 
significant economic impact on a substantial number of small entities. 
The Commission concludes that the Final Rule would not have such an 
impact on small entities. The amendments to our regulations would apply 
only to natural gas companies, most of which are not small businesses. 
Accordingly, pursuant to section 605(b) of the RFA, the Commission 
certifies that the regulations proposed herein will not have a 
significant adverse impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \81\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------

IX. Document Availability

    216. 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.
    217. 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 in eLibrary, in PDF and 
Microsoft Word format for viewing, printing, and downloading. To access 
this document in eLibrary, type the docket number excluding the last 
three digits of this document in the docket number field.
    218. User assistance is available for eLibrary and the FERC's Web 
site during normal business hours from our Help line at (202) 502-8222 
or the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 502-
8659. E-Mail the Public Reference Room at 
[email protected].

X. Effective Date

    219. These regulations are effective July 27, 2006. The Commission 
has determined, with the concurrence of the Administrator of the Office 
of Information and Regulatory Affairs of OMB, that this rule is not a 
major rule defined in section 351 of the Small Business Regulatory 
Enforcement Fairness Act of 1996.\82\ The Commission will submit the 
Final Rule to both houses of Congress and the Government Accountability 
Office.\83\
---------------------------------------------------------------------------

    \82\ See U.S.C. 804(2) (2000).
    \83\ See U.S.C. 801(a)(1)(A) (2000).
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List of Subjects in 18 CFR Part 284

    Continental shelf, Natural gas, Reporting and recordkeeping 
requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends part 284, 
Chapter I, Title 18, Code of Federal Regulations, as set forth below.

PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE 
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES

0
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.


0
2. New subpart M is added to read as follows:

Subpart M--Applications for Market-Based Rates for Storage

Sec.
284.501 Applicability.
284.502 Procedures for applying for market-based rates.
284.503 Market-power determination.
284.504 Standard requirements for market-power authorizations.
284.505 Market-based rates for storage providers without a market-
power determination.


Sec.  284.501  Applicability.

    Any pipeline or storage service provider that provides or will 
provide service under subparts B, C, or 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.


Sec.  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 protests to applications for market-based rates must 
be filed within 30 days of the application unless the notice issued by 
the Commission provides otherwise. An applicant providing service under 
subpart B or subpart G of this part 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.
    (2) Applicants providing service under subpart C of this part must 
file in accordance with the requirements of that subpart.


Sec.  284.503  Market-power determination.

    An applicant may apply for market-based 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

[[Page 36637]]

alternatives may include an appropriate combination of other storage, 
local gas supply, LNG, financial instruments 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. Capacity (transportation, storage, LNG, or 
production) owned or controlled by the applicant and affiliates of the 
applicant in the relevant market shall be clearly and fully identified 
and may not be considered as alternatives competing 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 correct to the best of his or her knowledge, information, 
and belief.


Sec.  284.504  Standard requirements for market-power authorizations.

    (a) Applicants granted the authority to charge market-based rates 
under Sec.  284.503 that provide cost-based service(s) must separately 
account for all costs and revenues associated with facilities used to 
provide the market-based services. When it files to change its cost-
based rates, applicant must provide a summary of the costs and revenues 
associated with market-based rates with applicable cross references to 
Sec. Sec.  154.312 and 154.313 of this chapter. The summary statement 
must provide the formulae and explain the bases used in the allocation 
of common costs between the applicant's cost-based services and its 
market-based services.
    (b) A storage service provider granted the authority to charge 
market-based rates under Sec.  284.503 is required to notify the 
Commission within 10 days of acquiring knowledge of significant changes 
occurring in its market power status. Such notification should include 
a detailed description of the new facilities/services and their 
relationship to the storage service provider. Significant changes 
include, but are not limited to:
    (1) The storage provider expanding its storage capacity beyond the 
amount authorized in this proceeding;
    (2) The storage provider acquiring transportation facilities or 
additional storage capacity;
    (3) An affiliate providing storage or transportation services in 
the same market area; and
    (4) The storage provider or an affiliate acquiring an interest in 
or is acquired by an interstate pipeline.


Sec.  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 in the public interest and 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.


    Note: The following appendix will not be published in the Code 
of Federal Regulations.

Appendix--Commentors Filing Initial Comments

American Gas Association (AGA)
American Public Gas Association (APGA)
Arizona Public Service Company (APS)
Bay Gas Storage Company, LTD (Bay Gas)
Bridgeline Storage Company LLC (Bridgeline)
Columbia Gas Transmission Corporation, Columbia Gulf Transmission 
Company, Crossroads Pipeline Company, and Granite State Gas 
Transmission, Inc. (collectively NiSource Pipelines):
Dominion Transmission Inc. (Dominion)
DTE Gas Storage, Pipelines, and Processing Company (DTE)
Duke Energy Gas Transmission, LLC (Duke)
EnCana Gas Storage Inc. (EnCana)
The East Ohio Gas Company, d/b/a Dominion East Ohio, The Peoples 
Natural Gas Company, d/b/a Dominion Peoples, and Hope Gas, Inc. d/b/
a Dominion Hope (collectively, Dominion LDCs)
Edison Electric Institute and the Alliance of Energy Suppliers 
(together, EEI)
Enstor Operating Company, LLC (Enstor)
Falcon Gas Storage Company, Inc. (Falcon Gas)
Haddington Ventures, LLC (Haddington Ventures)
Honeoye Storage Corporation (``Honeoye'')
Independent Petroleum Association of America (IPAA)
Interstate Natural Gas Association of America (INGAA)
Kinder Morgan Interstate Pipelines (KM)
National Association of State Utility Consumer Advocates (NASUCA)
Natural Gas Supply Association (NGSA)
New York Public Service Commission (NYPSC)
Northern Natural Gas Company (Northern)
Port Barre Investments, LLC (Port Barre)
Process Gas Consumers Group (PGC)
Sempra Energy (Sempra)
SGR Holdings, L.L.C. (SGR)
Southern California Edison Co. (SCE)
Williston Basin Interstate Pipeline Company (Williston Basin)

[[Page 36638]]

United Energy Trading LLC (UET)
Unocal Keystone Gas Storage, LLC (Unocal)
Xcel Energy Services, Inc. (Xcel)
Commentors Filing Reply Comments
Duke Energy Gas Transmission LLC (Duke)
El Paso Natural Gas Company (El Paso)
Enstor Operating Company, LLC (Enstor)
Interstate Natural Gas Association of America (INGAA)
Jefferson Island Storage & Hub, L.L.C. (Jefferson Storage)
Natural Gas Supply Association (NGSA)
Southern California Gas Company (SoCal)
[FR Doc. 06-5642 Filed 6-26-06; 8:45 am]
BILLING CODE 6717-01-P