Gas storage investment stymied

 

The U.S. needs to add 600 to 800 billion cubic feet (Bcf) of natural gas storage capacity ASAP. Independent storage providers (ISPs) are the entities best equipped to build this needed infrastructure, but they continue to be restrained by anachronistic regulatory policies.

The Federal Energy Regulatory Commission’s (FERC’s) December 2005 rule-making to modify its market power analysis for gas storage facilities is a step in the right direction. The new rules will increase the number of FERC-regulated gas storage facilities authorized to charge market-based rates, compensating facility owners for their financial risk. However, because 200 U.S. gas storage facilities also are regulated by state public service commissions (PSCs), action at the state level will be required as well.

Special delivery

Historically, gas producers and owners of interstate gas pipelines constructed storage facilities in or near producing basins, whereas local distribution companies (LDCs) sited them near load centers. Most of these facilities offer "seasonal" storage service: They are filled during the summer and drawn down to meet peak demand during winter months. But few allow for summer withdrawals or winter deposits. In contrast, new "high-deliverability" storage facilities that ISPs are developing can inject or withdraw gas year-round and can reverse the direction of flow in as little as 30 minutes.

Such facilities would add significant value to the U.S. natural gas system, particularly if ISPs locate them near load centers. They would enable physical hedging against upstream curtailments by giving load centers access to incremental supply sources that are helpful for meeting peak demands. The facilities’ injection/withdrawal flexibility in turn would increase the system’s operational flexibility, enabling market participants to manage monthly, weekly, daily, and even hourly swings in gas loads. These same features would allow customers to mitigate natural gas price volatility by adjusting their purchase/storage decisions to daily or even hourly changes in prices.

High-deliverability storage would be particularly valuable to gas-fired electric generators, which could peg their gas usage to fluctuating electricity demands while remaining compliant with delivery pipelines’ balancing requirements and minimizing their gas procurement costs.

Removing barriers

Here are some of the regulatory burdens that needlessly retard investment in new natural gas storage facilities.

Demonstrating need. ISPs still must demonstrate the "need" for a new storage project. This requirement only serves to delay new projects and offers no benefit to ratepayers, because the ISP—not captive ratepayers—carries 100% of a project’s financial risk.

Market-based rates. States should follow FERC’s example and authorize ISPs to charge market rates, for three reasons:

  • New gas storage facilities typically cannot exercise power over existing markets.
  • Market rates are appropriate where the ISP is a new market entrant, is not affiliated with a local utility, and lacks a monopoly.
  • Market rates are usually necessary to compensate ISPs for the risk of developing a project without ratepayer guarantees.

Curbing LDC monopoly power. An LDC that offers storage as well as transmission and/or distribution services may be tempted to use its monopoly T&D power to charge below-market rates for storage. States should require LDCs to offer unbundled storage service and insist that they compete fairly in storage, without resorting to subsidies.

"Ransom" payments for sale approvals. Some ISPs use their expertise to build a storage project and then sell it to an LDC or another ISP to operate. This legitimate business model is discouraged in states that seek to extract "ratepayer benefits" as a condition for approving or expediting a sale. Requiring ISPs to turn over part of the sale proceeds to ratepayers cannot be justified, because, unlike with LDC-owned storage, ratepayers do not bail ISPs out of bad investment decisions.

Regulatory approval of financing decisions. Most states require regulated utilities to obtain approval when they incur debt, issue securities, or change their capital structure. Such requirements protect captive ratepayers from the impact of imprudent utility business decisions. But they should not be applied to ISPs, which have no captive ratepayers to protect, because such requirements only delay and increase the cost of any financial action.

Disproportionate regulatory burdens. In gas storage, most states regulate ISPs more tightly than LDCs. For example, in most states, ISPs are prohibited from connecting directly with end users, while LDC-owned storage is allowed to; ISPs—but not LDCs—are required to have their facilities’ modifications preapproved; and ISPs are denied the right to compete to serve new balancing or core storage demand. Because ISPs have no captive customers, regulatory restrictions on them should be less, not more, onerous than those imposed on LDC storage.

Will states see the light?

In a statement accompanying the December rule-making, FERC Chairman Joseph T. Kelliher linked the increased volatility of natural gas prices with the need for more gas storage capacity. "Since 1988," he wrote, "gas storage capacity has expanded only 1.4%, while demand has risen 24%." State PSCs should see the light—as FERC has—and reform policies that restrain ISP investments in needed new natural gas storage facilities.