The Federal Energy Regulatory Commission issued an order on October 15, 2015 in which it addressed the first fully-litigated proceeding where a natural gas storage provider sought authorization to charge market-based rates.[1] The Commission ultimately concluded that ANR Storage Company’s application should be denied because ANR Storage failed to carry its evidentiary burden to demonstrate that it lacked significant market power over the provision of natural gas storage services in interstate commerce.
Following the issuance of its 1996 Policy Statement on Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, FERC has granted a number of independent storage companies (i.e., storage providers that are not part of or affiliated with an interconnected interstate natural gas pipeline) authorization to charge market-based rates. Because most independent storage companies have been new entrants to the market, without captive customers, their market-based rate applications were unopposed. FERC used the ANR Storage case as an opportunity to set forth in detail its policies and procedures for reviewing gas storage providers’ market-based rate applications, and to make clear how a gas storage provider may show that it lacks significant market power.
Background
ANR Storage filed its application seeking authorization to charge market-based rates, in the form of a request for declaratory order, on March 6, 2012. At that time, ANR Storage was the subject of a FERC Section 5 proceeding (Docket No. RP12-123-000), which the Commission initiated to determine whether ANR Storage’s rates were just and reasonable or should be reduced. That proceeding resulted in a settlement in June 2012 under which ANR Storage agreed to significant reductions in its cost-based rates. The settlement provided for separate FERC handling of ANR Storage’s market-based rate application. Several of ANR Storage’s customers opposed the market-based rate application, which led FERC to set the proceeding for hearing before an Administrative Law Judge, who issued an Initial Decision on January 29, 2014 addressing in considerable detail a wide variety of arguments raised by ANR Storage and the intervenors.[2]
Burden of Proof
FERC’s review of the Initial Decision starts with a lengthy analysis of the applicant’s burden of proof. The ALJ found that ANR Storage had the burden of proof and was required to demonstrate that it lacked market power solely through its pre-filed direct testimony. The ALJ accepted ANR Storage’s rebuttal testimony into the record but gave no weight to it.
FERC distinguished the burden of going forward from the ultimate burden of persuasion. FERC reversed the ALJ on his handling of the burden of proof issue. FERC held that ANR Storage had presented in its application information regarding market power sufficient to constitute a prima facie case, thus satisfying the burden of going forward, and noted that in accepting the application it had found that ANR Storage had met its burden of going forward.
The Commission went on to state that, since ANR Storage had met its burden of going forward by establishing a prima facie case through its application, the burden of going forward shifted to the opposition. FERC held that the intervenors had met this burden by casting doubt on ANR Storage’s prima facie case in their protests. It also held that ANR Storage had the burden of persuasion as to its lack of market power throughout the case; this burden never shifts to the opposition (i.e., the intervenors never had the burden to prove that ANR Storage had market power).
After rejecting the ALJ’s holdings on burden of proof, the Commission proceeded to consider the Initial Decision’s rulings on specific market power arguments.
Market Power Analysis
Applicants in market-based rate proceedings must define the relevant product and geographic markets, compile a list of competitive alternatives, calculate market share and market concentration values, and identify any additional factors that could impact market power. These requirements are set forth in FERC’s regulations (18 C.F.R. Part 284, Subpart M) and discussed in the 1996 Policy Statement, Order No. 678, and various cases addressing unopposed market-based rate applications. ANR Storage attempted to derive from FERC’s decisions in these cases a series of tests which, it contended, it had satisfied. The ALJ generally found that ANR Storage had failed to meet these tests. The Commission reversed the ALJ on most of the issues.
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Inclusion of Interruptible Storage Service in Product Market. The ALJ rejected ANR Storage’s proposal to include interruptible storage services in the product market, finding that firm and interruptible service constitute two separate and distinct services because interruptible storage cannot be of equal value to firm storage. FERC disagreed with the ALJ’s reasoning, holding that a service need not be of equal value to be included in the relevant product market, so long as the price reflects the valuation of each service and there is reasonable interchangeability between the two services. The Commission affirmed the ALJ’s exclusion of interruptible services on other grounds, however, holding that ANR Storage failed to meet its burden of proof regarding the interchangeability of interruptible services.
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Inclusion of Intrastate Storage Services in Product Market. The Initial Decision found that only storage facilities that are authorized to provide services in the interstate market may be a good alternative to ANR Storage’s storage. The Commission reversed, holding that the appropriate question is whether intrastate storage providers, in response to an anti-competitive price increase by ANR Storage, would seek Commission authorization to enter the interstate market.
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Inclusion of Local Production in the Product Market. The ALJ accepted ANR Storage’s proposal to include local production in the product market, noting that all participants had agreed that local production is a good alternative to ANR Storage’s services. The Commission affirmed, noting that Order No. 678 contemplates the inclusion of local production in the product market.
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Exclusion of Ohio, Southern Illinois and Southern Indiana from the Geographic Market. FERC rejected the ALJ’s limiting of the geographic market because it found that the ALJ’s analysis failed to consider the geographic scope of the market in which ANR Storage competes. FERC noted that, by improperly conflating market definition with the identification of good alternatives, the Initial Decision developed a geographic market that was too narrow.
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Competitive Alternatives. The Commission uses a three-part rubric for evaluating good alternatives: a good alternative must have a price low enough, be available soon enough, and have a quality high enough to permit customers to substitute the alternative for the applicant’s service.
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Price. The Commission held that a formalistic price test is not required. Instead, it found that storage providers that are in close proximity with the applicant are comparable in price. This presumption can be rebutted with evidence to the contrary.
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Availability. FERC will not generally define a specific time period within which a product must become available in order to be a good alternative. The Commission reversed the ALJ’s exclusion of subscribed capacity, noting that unutilized capacity can become available through capacity release. The Commission also reversed the ALJ’s exclusion of facilities based solely on the absence of Part 284 certification because such facilities can seek Part 284 certification soon enough to potentially discipline any attempt by ANR Storage to raise prices above competitive levels.
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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. The Commission noted that it excluded interruptible service on other grounds, and therefore no finding need be made in regard to the quality of interruptible versus firm storage service.
Market Metrics
FERC uses certain market metrics – market share and Herfindahl-Hirschman Index (HHI) values – to assess the nature of the relevant market and the applicant’s ability to exercise market power. FERC rejected the market metrics calculated by the parties and the ALJ. Instead, FERC presented a detailed discussion of the alternative storage facilities that it would include in the market power analysis. The overall results of FERC’s market power analysis, shown in the table below, are coincidentally very similar to ANR Storage’s original market power study:
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The low HHIs calculated by FERC support the conclusion that customers have numerous good alternatives to ANR Storage’s services available from many independent sellers. The Commission generally considers HHIs below 1800 to indicate that the measured markets are not concentrated . But it found that ANR Storage has not met its evidentiary burden to show it lacks significant market power in the relevant markets because, at 16.12%, its storage capacity market share was unacceptably high. The Commission calculated higher market shares for ANR Storage, in part, because of its application of FERC’s regulation requiring that the storage resources of the applicant and its affiliates (in this case, ANR Storage, TransCanada, Blue Lake and Eaton Rapids) be aggregated in evaluating market power.
FERC expressed particular concern that ANR Storage, as the single largest storage provider in a market area, could exercise market power. FERC noted that it had previously accepted market shares higher than 16.12% in granting market-based rate authorizations, but observed that the applicants in those proceedings were new market entrants without captive customers or were located in a major production area. FERC went on to consider other factors relevant to ANR Storage’s application, such as ease of entry, but concluded that these factors would not overcome ANR Storage’s large market share.
Conclusion
In its ANR Storage decision, FERC has provided the natural gas industry a useful roadmap for future market-based applications, particularly in circumstances where the application might face opposition. It is noteworthy that the Commission did not adopt any new formal requirements for applicants’ evidence regarding the product market, alternatives or the geographic market. Thus, applicants are generally free to present their market power analyses in a manner that best meets their individual circumstances.
The Order on Initial Decision will not be FERC’s final pronouncement on the subject. On November 13, 2015, ANR Storage filed a Request for Rehearing of the order. A FERC order on this rehearing request could be issued sometime in 2016.
[1] ANR Storage Co., Opinion No. 538, 153 FERC ¶ 61,052 (2015) (“ANR Storage”).
[2] ANR Storage Co., 146 FERC ¶ 63,007 (2014) (“Initial Decision”).
