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.
—Christopher A. Hilen is Of Counsel to the Energy Practice Group of the national law firm Davis Wright Tremaine LLP. He can be reached at 415-276-6573 or chrishilen@dwt.com. Steven F. Greenwald leads Davis Wright Tremaine's Energy Practice Group. He can be reached at 415-276-6528 or stevegreenwald@dwt.com.
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