News & Insights

Energy Law Exchange

November 8, 2019

After Seven-Year Battle, FERC Authorizes ANR Storage Company to Charge Market-Based Rates for Natural Gas Storage Services


On September 26, 2019, the Federal Energy Regulatory Commission (FERC) issued an order authorizing ANR Storage Company (ANRS) to charge market-based rates for natural gas storage services.  ANR Storage Co., 168 FERC ¶ 61,195 (2019).  The order was issued in response to a remand by the U.S. Court of Appeals for the District of Columbia on judicial review.  ANR Storage Co. v. FERC, 904 F.3d 1020 (D.C. Cir. 2018). 

In the underlying proceeding, an administrative law judge (ALJ) and FERC issued lengthy decisions attempting to distinguish ANRS from other storage providers in the marketplace so as to deny ANRS’s request for authorization to charge market-based rates.  The court rejected this analysis, holding that FERC failed to justify treating ANRS differently than other storage companies granted market-based rate authority and remanding the matter to FERC for further proceedings.  On remand, FERC accepted the court’s reasoning and admitted error, reversing itself to grant ANRS market-based rate authorization.

FERC’s decision on remand of ANR Storage may have significant implications for interstate natural gas pipeline operators of storage facilities that wish to move away from cost-based rate regulation.  ANR Storage establishes that pipelines, which have provided storage services at cost-based rates since restructuring under Order No. 636, will be subject to the same market-power criteria as independent storage providers if they wish to convert to market-based rates. 

Background

Over the past two decades, FERC has authorized many natural gas storage providers to charge market-based rates.  Most of these authorizations have been granted to developers of new underground natural gas storage projects.  As start-up companies, these storage providers enter the market without established customer bases and generally with small market shares.  FERC’s regulations indicated that it should apply the same market power criteria in considering requests for authorization to charge market-based rates by incumbent storage providers, such as ANRS (the longtime operator of four natural gas storage facilities located in Michigan), as it applies in considering market-based rate applications of start-up companies; however, FERC’s analysis in the ANRS orders demonstrates a heightened scrutiny not found in its orders addressing new storage companies.

FERC requires an applicant for market-based rate authorization to demonstrate that it lacks significant market power.  The agency defines market power as the ability profitably to maintain prices above competitive levels for a significant period of time.  It assesses market power in three steps: first, it defines the relevant product and geographic markets; second, it calculates market share and concentration within those markets; and third, it considers other relevant factors.  Market share measures a company’s ability to exercise market power unilaterally, whereas market concentration, as measured by the Herfindahl-Hirschman Index (HHI), measures the ability of sellers to exercise market power jointly.

ANRS submitted a petition for declaratory order seeking market-based rate authority in March 2012 (FERC Docket No. RP12-479).  Numerous interested persons filed protests opposing ANRS’s petition.  FERC set the matter for hearing before an ALJ.  In his Initial Decision, the ALJ found that ANRS had failed to show that it lacked market power.  ANR Storage Co., 146 FERC ¶ 63,007 (2014).  On review, FERC rejected various aspects of the ALJ’s reasoning, but ultimately affirmed his decision.  ANR Storage Co., Opinion No. 538, 153 FERC ¶ 61,052 (2015). 

FERC recalculated ANRS’s market shares to be 16.12% for working gas capacity and 15.16% for daily deliverability.  It calculated the HHIs for these respective markets to be 951 and 1,010.  FERC acknowledged that it had granted market-based rate authority to other natural-gas companies with similar market shares, and it characterized the relevant HHIs as “low.”  But it denied ANRS’s petition because it was concerned that ANRS was the largest competitor in the market for working gas storage, and that a significant part of that market consisted of intrastate or subscribed storage capacity.  After FERC issued a rehearing order that left its analysis unchanged, ANR Storage Co., 155 FERC ¶ 61,279 (2016), ANRS sought judicial review.

ANRS raised a variety of challenges.  The court rejected most of them, either accepting FERC’s reasoning or noting that FERC should correct minor, non-determinative errors during the remand proceeding.  It accepted two of ANRS’s arguments, concluding that FERC’s decision was inconsistent with its own precedent and is internally inconsistent.

FERC’s Decision is Inconsistent with Its Own Precedent

ANRS argued that under FERC precedent market shares of around 16% are too low to establish the existence of market power.  The court ultimately agreed with ANRS that FERC did not adequately distinguish its past decisions involving ANRS’s principal competitor in the relevant market, DTE Energy Company, which had market shares comparable to those FERC calculated for ANRS.

In 2008 and 2009, FERC authorized two DTE subsidiaries, Washington 10 Storage Corporation (Washington 10) and Michigan Consolidated Gas Company (MichCon), to charge market-based rates for their storage services.  DTE’s market share (combined for its affiliates) was over 18% for working gas and 17% for daily deliverability, slightly higher than the ANRS market shares FERC calculated in the challenged orders.  The court observed that, despite the obvious similarities between the two leading suppliers in the relevant market, the orders at issue barely even mentioned FERC’s disparate treatment of the two companies.

FERC argued that, when the DTE affiliates sought to charge market-based rates, their market power was checked because DTE’s largest competitor, ANRS, charged cost-based rates, but when ANRS sought to charge market-based rates, its market power posed a greater concern because ANRS’s largest competitor, DTE, already was charging market-based rates.  The court responded “[w]e frankly doubt that FERC may pick winners and losers in this way, based on which of two otherwise indistinguishable competitors happens to win a race to the FERC equivalent of a courthouse.” 

FERC attempted to justify its earlier decisions by noting that the Washington 10 application was unopposed and the MichCon application, while opposed, was the subject of a settlement.  The court rejected this justification, concluding that the lack of opposition or the presence of a settlement does not justify treating ANRS and DTE differently. 

The court concluded that ANRS and DTE appear indistinguishable as leading competitors in the provision of natural gas storage services, with virtually identical shares in the same relevant market.  Because FERC did not provide any reasonable justification for allowing DTE affiliates but not ANRS to charge market-based rates, the court concluded that FERC’s decision is arbitrary and capricious.

FERC’s Decision is Internally Inconsistent

ANRS further challenged FERC’s treatment of intrastate storage services and previously subscribed interstate storage services, which ANRS argued are competitive alternatives to its storage services.  Concerned that a large number of intrastate and fully subscribed facilities would need to enter the interstate market in order to constrain ANRS’s exercise of market power, FERC concluded that ANRS had not proven that it lacked market power.

The court took FERC to task for first including these services in the relevant product market, then deeming them good alternatives, only ultimately to find that they were not sufficiently good alternatives to constrain ANRS’s exercise of market power.  It concluded that “[t]here may be good reasons why intrastate or fully subscribed facilities would not check ANRS’s exercise of market power, but FERC’s conclusion to that effect is inconsistent with most of it analysis on this point.  Because FERC’s decision is internally inconsistent, it is arbitrary and capricious.”

FERC’s Order on Remand

On remand, FERC reversed its earlier decisions and generally accepted the court’s reasoning. 

With regard to the more demanding scrutiny it applied to ANRS, FERC found that it erred by considering ANRS as an unusually dominant applicant, noting “[w]ith DTE included in the comparison, ANR Storage’s position is not the ‘unquestioned’ market leader.”  FERC did, however, reiterate its belief that an unusually dominant applicant should warrant higher scrutiny despite a low HHI.

FERC acknowledged the court’s holding that it cannot justify application of a more stringent standard to ANRS than it applied in the DTE proceedings simply because the DTE proceedings were unopposed or the result of a settlement.  Specifically, FERC noted that it cannot lawfully grant an application for market-based rate authorization unless it concludes that the company lacks market power in the relevant market.  FERC reviewed its analysis of ANRS relative to the analysis it performed in the DTE proceedings, noting the similarities among the companies, and concluded that ANRS had met its burden of proof.  FERC therefore granted ANRS’ request for market-based rate authority.

Lastly, FERC addressed the court’s discussion of inconsistencies in its alternatives analysis.  FERC concluded that intrastate storage facilities and possible capacity release of firm services provided by interstate facilities may serve as good alternatives for interstate storage services. 

Conclusion

In the underlying proceedings, both the ALJ and FERC authored lengthy decisions in which they subjected ANRS’s market power analysis to detailed and skeptical scrutiny.  This was a marked departure from FERC’s treatment of independent storage companies’ market-based rate applications.  FERC sought to justify this disparate treatment by noting that independent storage company applications are typically unopposed.  The heightened scrutiny FERC applied to the ANRS application appeared to reflect its reluctance to authorize an incumbent pipeline storage provider, that had a significant presence in the market, to provide natural gas storage services at market-based rates.  The D.C. Circuit gave little credit to FERC’s approach, and had little difficulty concluding that FERC’s disparate treatment of comparable competitors was arbitrary and capricious.

By accepting the court’s rationale, FERC has now confirmed that all natural gas storage providers operating in a relevant market, whether independent or pipeline-owned, are subject to the same market power criteria when seeking market-based rate authorizations.  Accordingly, FERC’s decision removes a source of significant uncertainty and should facilitate future applications by incumbent pipeline storage providers that wish to move to market-based rates.

Related
Energy