backTo the surprise of many natural gas storage developers, the Federal Energy Regulatory Commission (FERC), in its Pine Prairie Energy Center, LLC order, decided to apply open season requirements applicable to pipeline expansion projects to market-based rate natural gas storage expansion projects, including the obligation to solicit offers from existing shippers to permanently turn back or release unneeded capacity to avoid overbuilding expansion capacity. Despite previously accepting numerous tariffs granting storage providers discretion over whether to offer expansion capacity via an open season, FERC stated in Pine Prairie Energy Center, LLC that going forward, we will apply our open season policies to all new construction projects, including market-based rate storage projects, that create capacity.[1]
FERCs Pine Prairie Policy In the Fall of 2010, Pine Prairie Energy Center, LLC (Pine Prairie) filed an application with FERC for a certificate of public convenience and necessity for the expansion of its gas storage facility.[2] Consistent with its tariff, Pine Prairie did not offer new expansion capacity to prospective customers through an open season, nor did it solicit turn-back capacity from its existing customers. BP Energy Company (BP), desiring to release existing capacity it previously contracted for with Pine Prairie, filed a protest with FERC claiming that Pine Prairie was obligated to solicit turn-back capacity from existing storage customers due to FERC policy requiring pipelines to solicit turn-back capacity prior to expanding a jurisdictional pipeline.
Pine Prairie argued that FERCs open-season/capacity turn-back policy was developed to deal with the circumstances of cost-of-service pipelines, not storage providers like Pine Prairie that have been granted market-based rates.[3] Pine Prairie contended that the goal of FERCs requirement to solicit turn-back capacity was to avoid the rate shock that costly new facilities could have on cost-based rates.[4] Pine Prairie also argued that allowing BP to simply turn back firm storage capacity would give BP an undeserved windfall that would undermine and render meaningless the right to negotiate and enter into contracts based on market-based rates.[5]
FERC sided with BP. FERC acknowledged that it in recent years had accepted language in market-based rate storage providers tariffs granting the storage providers discretion with respect to offering expansion capacity through an open season.[6] However, FERC stated that going forward, we will apply our open season policies to all new construction projects, including market-based rate storage projects, that create capacity.[7] FERC stated this policy, which requires storage providers to solicit turn-back capacity, helps ensure facilities are appropriately sized, avoids unnecessary disruption of the environment, and avoids the unnecessary exercise of eminent domain.[8] These concerns, according to FERC, apply to all expansion projects regardless of whether they are authorized to charge market-based or cost-based rates.[9]
FERCs decision came as a surprise to jurisdictional gas storage providers, and Enstor Operating Company, LLC, Cardinal Gas Storage Partners LLC, and Leaf River Energy Center LLC attempted to intervene after FERC handed down the original order. FERC concluded these companies did not show good cause to intervene at this late stage of the proceeding.[10] FERC denied Pine Prairies motion for rehearing, and refused its request that FERC acknowledge that its open-season/capacity turn-back policy would not apply to those elements of a storage expansion project that do not require construction of significant additional facilities and therefore will not have any meaningfuladverse environmental or landowner impacts.[11] FERC stated that it would be difficult, if not impossible to identify which projects would meet this standard.[12]
Application of the Pine Prairie Policy In late 2011, FERC ordered Perryville Gas Storage LLC (Perryville) to hold an open season for expansion capacity and solicit turn-back capacity from existing storage customers in connection with FERCs approval of Perryvilles proposed expansion of its gas storage project.[13] FERC found any potential adverse impact of Perryvilles expansion to the surrounding community and landowners to be minimal (as it did with Pine Prairies proposal), but this did not keep FERC from enforcing its open-season/capacity turn-back policy.[14]
Not satisfied with FERCs Pine Prairie policy, Caledonia Energy Partners, L.L.C. (Caledonia) recently filed a certificate application with FERC requesting that FERC both (i) vacate a certificate previously granted for facility expansion, and (ii) approve a project that will increase the injection and withdrawal capacity at its existing facility.[15] Caledonia did not construct, and no longer intends to pursue, the previously approved expansion project.[16] If the previous order is vacated and Caledonias proposed certificate is authorized, the net expansion capacity will be less than the capacity previously authorized by FERC.[17] Caledonia is arguing, therefore, that its project is not creating capacity, making FERCs Pine Prairie policy inapplicable.
Conclusion
FERCs Pine Prairie order surprised many in the gas storage industry who had relied on FERCs apparent policy regarding the application of authorized market-based rates to expansion capacity. While Caledonia tries to navigate FERCs Pine Prairiepolicy, arguing that the decrease in previously authorized, unbuilt storage capacity keeps its proposed certificate from creating capacity, it is pretty clear that existing capacity holders seeking to avoid underutilized storage contracts will jump at the chance to turn back capacity should a storage provider seek expansion authorization from FERC. Meanwhile, FERCs upcoming decision on Caledonias application should define what FERC means by create capacity when it states that its open-season/capacity turn-back policies are to apply to all new construction projects, including market-based rate storage projects, that create capacity.[18][1] Pine Prairie Energy Center, LLC, 135 FERC 61,168, at 13 (2011) (Order Amending Certificate). [2] Id. at 1. [3] Id. at 6. [4] Pine Prairie Energy Center, LLC, 137 FERC 61,060, at 8 (2011) (Order on Rehearing and Compliance Filing). [5] See Pine Prairie Energy Center, LLC, supra note 1, at 6. [6] Id. at 13. [7] Id. [8] Id. at 10. [9] Pine Prairie Energy Center, LLC, supra note 4, at 10. [10] Id. at 3. [11] Id. at 13. [12] Id. [13] Perryville Gas Storage LLC, 137 FERC 61,160, at 8 (2011). [14] Id. at 4. [15] Caledonia Energy Partners, L.L.C., Abbreviated Application of Caledonia Energy Partners, L.L.C. for Certificate of Public Convenience and Necessity and Continuation of Market-Based Rates, and Motion to Vacate, in Part, Certificate Authorization, at 2 (Dec. 16, 2011). [16] Id. at 5. [17] Id. at 17. [18] Pine Prairie Energy Center, LLC, supra note 1, at 13.