Academic journal article Energy Law Journal

Price Tests for Market Power Analysis of Natural Gas Storage Providers

Academic journal article Energy Law Journal

Price Tests for Market Power Analysis of Natural Gas Storage Providers

Article excerpt


The U.S. Congress passed the Energy Policy Act of 2005 to, among many other things, stimulate investment in natural gas storage facilities with marketbased rates.1 Specifically, it added section 4(f) to the Natural Gas Act, which allows the Federal Energy Regulatory Commission (FERC) to grant market-based rates for new investment (placed in service subsequent to passage of the act) even if the storage provider cannot demonstrate a lack of market power.2 Three conditions are required, however: the FERC must determine that (1) the investment is in the public interest, (2) market-based rates are necessary for the investment where it is needed, and (3) customers are protected from market power.3

The FERC incorporated this directive, along with its independent efforts to stimulate investment in storage with market-based rates, into Order No. 678.4 In section IV A of that order, the FERC modified its traditional market power analysis by expanding the product market as set out in its 1996 Policy Statement, adding pipeline capacity, local production, and LNG supplies.5 In section IV B, the FERC modified its regulations based on section 4(f) to allow firms that cannot or do not show that they lack market power to nevertheless receive market-based rates for new investment, if they meet the three conditions.6 The FERC interpreted "new investment" as applying to new or existing storage facilities.7

The FERC's market power framework, embodied in its 1996 Policy Statement and Order No. 678, involves defining the product and geographic markets, conducting a concentration analysis, and evaluating potential competition and other factors. An applicant must show the alternatives included in the analysis are "good" alternatives, that is, they have comparable availability, price, and quality.8 While price tests are integral to the FERC's market power analysis, it has granted market-based rates to applicants without such a showing, especially when applications are not contested.9 More to the point, the FERC has deemed alternatives good without a price test, setting aside whether the alternatives collectively are sufficient to show a lack of market power. But parties may contest the identification of good alternatives on any of the three (or other) grounds: availability, price, and quality.10 The lack of a price test thus weakens applications for market-based rates. This recently happened in ANR Storage Company, where the FERC rejected market-based rates, as ANR Storage failed to show that it lacked market power.11

Having a viable price test to identify good alternatives has several benefits. First, since the FERC requires that good alternatives be comparable in terms of availability, price, and quality, a price test thus fills in a gap in the market power analysis. And without a price test to identify good alternatives, an application for market-based rates is vulnerable to the simple challenge that it lacks a price test. But by better demonstrating that an alternative is comparable, an application is strengthened. This is most critical in close cases that are likely to be contested.

Second, a viable price test improves the accuracy of the FERC's market power framework by more accurately identifying good alternatives. One of its motivations for expanding the product market is to have a more accurate measure of market power. This helps "ensure that market-based rates are not denied because of an overly narrow definition of the relevant market."12 Price tests also help the FERC improve the tradeoff between protecting customers by monitoring versus by expanding investment. A market-power analysis with a price test better enables the FERC to determine when an applicant is subject to competition, which also helps it to know when it can rely on that competition-rather than on costly conditions and litigation-to ensure just and reasonable rates. As the FERC noted, unnecessary conditions to address market power could decrease investment, ultimately harming consumers. …

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