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Fracking and Alternative Energy

Troutman Sanders LLP: FERC Issues Order Addressing Policies and Procedures for Market-Based Rate Applications for Natural Gas Storage

On October 15, 2015, FERC issued Opinion No. 538 denying ANR Storage Company’s (“ANRS”) application for market-based rates (“MBR”) for natural gas storage service. FERC noted that the matter was the first fully-litigated proceeding where a gas storage provider has sought MBR, thus giving FERC the opportunity to announce its policies and procedures for MBR applications from gas storage providers. In the order, FERC held that the analysis of whether a gas storage provider can exercise market power includes the three steps from FERC’s 1996 Policy Statement for natural gas pipelines: (1) define the relevant markets, (2) measure a firm’s market share and market concentration, and (3) evaluate other relevant factors.

ANRS provides open-access firm and interruptible cost-based rate natural gas storage services to customers in northern Michigan, while ANRS’s affiliates ANR Pipeline Company and Blue Lake Gas Storage Company also provide cost-based storage services in Michigan. On March 6, 2012, ANRS filed a petition for a declaratory order requesting that FERC grant ANRS authorization to charge MBR for natural gas storage services. In November 2012, upon finding that there were disputed issues of material fact, FERC set for hearing the question of whether ANRS lacked significant market power and thus merited MBR authority. In January 2014, the Presiding Judge issued an Initial Decision, holding that ANRS had not met its burden of proving that it lacks market power.

In its order, FERC first clarified that the ultimate burden of persuasion remains with the proponent applying for MBR, even if the proponent establishes a prima facie case. FERC held that, if an intervenor produces evidence to cast sufficient doubt on a proponent’s argument, the burden remains with the proponent to show it lacks market power. FERC also clarified that the applicant is not necessarily limited to pre-filed testimony to meet this burden.

With respect to determining whether a gas storage provider has market power, FERC stated that the analysis was similar to the analysis of whether a pipeline can exercise market power under its 1996 Policy Statement. The 1996 Policy Statement includes three major steps: (1) define the relevant markets, (2) measure a firm’s market share and market concentration, and (3) evaluate other relevant factors. First, FERC held that a product market is established by reasonable interchangeability, which includes the applicant’s product, products that will increase in demand given a price increase by the applicant, and the extent to which gas suppliers will switch to or away from the applicant’s service. In this case, FERC determined that the proper product market consisted of firm gas storage service and local gas production as well as intra-state storage. Although FERC noted that interruptible service could potentially be part of a gas storage product’s product market, FERC affirmed the Initial Decision’s holding that interruptible service was not part of the relevant product market on other grounds. With respect to the geographic market, FERC clarified that defining the geographic market is a separate step that consists of defining the area in which the applicant provides services. For ANRS, FERC found that “[t]he storage facilities located in ANRS’ Central Great Lakes Market reside in Michigan, Illinois, Indiana, Ohio, and western Ontario,” and that “[t]he Initial Decision erred by excluding Ohio, southern Indiana and southern Illinois.”

Within the applicable product and geographic markets, FERC then determined the list of competitive alternatives, were ANRS to attempt to exercise market power, by analyzing potential competitive alternatives in terms of price, availability, and quality. FERC held that it does not require a specific price test, and that “availability” includes existing alternatives that are under-subscribed and alternatives that may reasonably be expected to become available. Furthermore, FERC held that, regarding quality, a good alternative must provide service in which the quality is at least as high as that of the service provided by the applicant.

Upon determining competitive alternatives, FERC determined ANRS’s market concentration and market share. Although these calculations were within the range found for similar entities to which FERC had granted MBR authority, FERC found here that the likelihood that a significant number of alternatives would make themselves available in response to an anti-competitive price increase by ANRS was too speculative. Finally, FERC found that other facts, such as entry into the market and changes in the industry, did not outweigh the results of its market analysis. Ultimately, FERC determined that ANRS had not met its evidentiary burden of proving lack of market power.

A copy of the order is available here.

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