UNITED STATES OF AMERICA 

FEDERAL ENERGY REGULATORY COMMISSION 

Before Commissioners: Joseph T. Kelliher, Chairman; 

 Suedeen G. Kelly, Marc Spitzer, 

 Philip D. Moeller, and Jon Wellinghoff. 

Rate Regulation of Certain Natural Gas Docket Nos. RM05-23-001 

Storage Facilities and AD04-11-001 

ORDER NO. 678-A 

ORDER ON CLARIFICATION AND REHEARING 

(Issued November 16, 2006) 

1. On June 19, 2006, the Commission issued Order No. 6781

 amending its 

regulations to establish criteria for obtaining market-based rates for storage services 

offered under Part 284 of the Commission’s regulations. Timely requests for rehearing 

and/or clarification of Order No. 678 were filed by the American Gas Association 

(AGA), Enstor Operating Company, LLC (Enstor), and jointly by the Natural Gas Supply 

Association, American Public Gas Association, Process Gas Consumers Group, and 

American Forest & Paper Association (Joint Associations). 2 The requests for rehearing 

are denied, and clarification is granted, in part, as discussed below. 

I. Background

2. In Order No. 678, the Commission adopted a two prong approach for reforming its 

current storage pricing policies. First, the Commission modified its market-power 

 1 Rate Regulation of Certain Natural Gas Storage Facilities, 115 FERC ¶ 61,343 

(2006). 

2

 On September 9, 2006, the Interstate Natural Gas Association of America 

(INGAA) filed leave to answer and an answer to the requests for rehearing and 

clarification. Rule 213(a)(2) of the Commission's Rules of Practice and Procedure, 

18 C.F.R. § 385.213(a)(2) (2006), prohibits answers to rehearing requests unless 

otherwise ordered by the decisional authority. We do not find good cause to accept 

INGAA’s answer and therefore will reject it. 
Docket Nos. RM05-23-001 and AD04-11-001 - 2 -

analysis to permit the consideration of close substitutes to gas storage in defining the 

relevant product market. We explained that this will ensure that market-based rates are 

not denied because of an overly narrow definition of the relevant market. Second, the 

Commission adopted regulations implementing section 312 of the Energy Policy Act of 

2005 (EPAct 2005 or the Act),3

 which permits the Commission, in appropriate 

circumstances, to authorize storage providers to charge market-based rates for service 

utilizing new capacity even when the storage providers cannot (or do not) demonstrate 

that they lack market power. The purpose of the rule is to reduce natural gas price 

volatility and improve adequacy of gas supply during periods of peak demand by 

encouraging expansions of storage capacity while protecting customers from the exercise 

of market power. 

II. Discussion

A. Market Power Test

1. Expansion of the Product Market Definition

3. The first part of Order No. 678 addresses reforms of the Commission’s marketpower test to more accurately reflect the competitive conditions in the market for gas 

storage services. Order No. 678 provides that in individual applications, the Commission 

will consider potential substitutes for gas storage, such as available pipeline capacity, 

local gas production, liquefied natural gas (LNG), and released transportation capacity. 

The Commission explained that in today’s markets, these products may well serve as 

adequate substitutes for gas storage in appropriate cases. 

4. AGA and the Joint Associations request that the Commission reverse its decision 

to broaden the product market definition in analyzing applications to charge marketbased rates for existing storage facilities. They assert that this change in the market 

power analysis fails to advance or support the stated goal of the rule, which is to facilitate 

the development of new storage capacity. 

5. If rehearing is not granted as requested, the Joint Associations and AGA seek 

additional protections for existing customers. The Joint Associations request the 

Commission to clarify that existing customers of storage facilities authorized to change 

from cost-based to market-based rates would have the option of having their cost-based 

contracts grandfathered or be given an early termination right. AGA requests that the 

Commission clarify that following a finding that a storage provider lacks significant 

 3

 Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 594 (2005). 
Docket Nos. RM05-23-001 and AD04-11-001 - 3 -

market power, customers with long-term contracts subject to Memphis clauses will not be 

subject to market-based rates and, such customers’ right of first refusal will not be subject 

to market-based rate caps. 

Commission Conclusion

6. We reject petitioners’ arguments on rehearing that we should not apply the 

expanded product market definition to existing storage facilities. While it is true that our 

overall regulatory goal in Order No. 678 was to promote additional infrastructure, it is not 

our only policy consideration. Where markets are shown to be competitive, market-based 

rates are appropriate because they will provide the most efficient allocation of resources. 

The Commission’s authority to approve market-based rates has been approved by the 

courts when the Commission has found sufficient protection against the exercise of 

market power.4

 The Commission fully explained how its proposed regulatory change 

meets this requirement in Order No. 678.5

 

7. As to the petitioners’ alternative requests, we note that a Memphis clause in a 

contract authorizes the pipeline to make unilateral NGA section 4 filings to change the 

rates, terms, and conditions under which the pipeline will provide the service included in 

the customer's contract.6

 Therefore, a Memphis clause in a contract would permit a 

pipeline to file to change a customer’s existing cost-based rate to a market-based rate. 

However, in order to support a finding by the Commission that a pipeline’s proposal to 

charge market-based rates is just and reasonable, the pipeline has the burden of 

demonstrating that it lacks significant market power or has adequately mitigated such 

market power over the shippers who would be subject to market-based rates. The 

Commission finds that it is more appropriate to address the specific issues raised by 

petitioners in individual proceedings based on the facts and circumstances in each 

proceeding. Based on the record developed, the Commission will ensure that a pipeline’s 

 4 Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870-71 (D.C. 1993); Louisiana 

Energy and Power Authority v FERC, 141 F.3d 364, 369-70 (D.C. Cir. 1998); Interstate 

Natural Gas Association of America V. FERC, 285 F.3d 18, 31-34 ((D.C. Cir.) 2002); 

California ex rel. Lockyer v. FERC, 383 F.3d 1006, 1013-14 (9th Cir. 2004). 

5 See Order No. 678, 115 FERC ¶ 61, 343 at P 29-31. 

6 See United Gas Pipe Line Co. v. Memphis Light, Gas and Water Division, 

358 U.S. 103 (1958). 
Docket Nos. RM05-23-001 and AD04-11-001 - 4 -

proposal to charge market-based rates is just and reasonable. Accordingly, petitioners’ 

alternative requests for rehearing and/or clarification are denied without prejudice to our 

further consideration of these issues in individual cases. 

2. Determination and Quantification of a Good Alternative

8. In order to show that a non-storage gas product or service such as transportation is 

a good alternative, the Commission stated that the storage applicant would need to meet 

the criteria set forth in the Commission’s Policy Statement.7

 A good alternative is one 

that is available soon enough, has a price that is low enough, and has a quality high 

enough to permit customers to substitute the alternative for the applicant’s services. 

9. AGA requests that the Commission clarify that capacity held by local distribution 

companies under long-term firm contracts will not be considered as a competitive 

alternative in a market power determination. 

10. The Joint Associations request that the Commission afford greater protections to 

storage service customers by finding that non-storage products, such as local gas 

production, LNG suppliers and pipeline capacity under the expanded market power 

analysis, are not good alternatives for customers that use storage service to physically 

store gas; or in the alternative, clarify that a market-based rate applicant using a market 

power analysis that includes non-storage products must show that such products are good 

alternatives for all customers, including customers that use storage services to physically 

store gas. In addition, they seek clarification that in order for a non-storage product to be 

considered a good alternative, it must be available for customers that use storage service 

to physically store gas during the periods in which such customers seek to inject gas, not 

just during peak demand periods. 

Commission Conclusion

11. As the Commission stated in Order No. 678, we intend to continue to evaluate 

requests for market-based rates for storage on a case-by-case basis. An applicant is 

required to identify the specific products or services and the suppliers of those products 

and services that provide good alternatives to the applicant's ability to exercise market 

 7 Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas 

Pipelines and Regulation of Negotiated Transportation Services of Natural Gas 

Pipelines, 74 FERC 61,076 (1996) (Policy Statement), reh’g and clarification denied, 

75 FERC 61,024 (1996), petitions denied and dismissed, Burlington Resources Oil & 

Gas Co. v. FERC, 172 F.3d 918 (D.C. Cir. 1998). 
Docket Nos. RM05-23-001 and AD04-11-001 - 5 -

power.8

 The burden is on the applicant to "show how each of the substitute services in 

the product market are adequate substitutes to the applicant's service in terms of quality, 

price, and availability."9

 The rehearing requests do not convince us that we should 

foreclose, or alternatively mandate, any particular method for determining the 

substitutability of a product here; rather, we will base our determination on the record 

developed in individual proceedings. Any party to the proceeding can challenge the 

inclusion of a particular product on the grounds that it does not meet the qualifications for 

a good alternative. Based on the record in the proceeding, the Commission will 

determine if the proposed product is in fact a good alternative that will limit the exercise 

of significant market power by the applicant. 

3. Periodic Review

12. Order No. 678 did not adopt the proposal in the notice of proposed rulemaking 

(NOPR)10 to require those authorized to charge market-based rates on the basis of a 

market power analysis to file once every five years to demonstrate their continued lack of 

market power. For storage providers with market shares of ten percent or less, the rule 

finds that the existing posting and reporting requirements, change-in-status reports 

required in this rule and ongoing market monitoring programs will allow the Commission 

to take appropriate action when needed. For storage providers with market shares greater 

than ten percent, the Commission stated it will consider in individual cases whether 

periodic reports are necessary. 

13. The Joint Associations request that the Commission require all storage providers 

with market-based rates that have a ten percent or greater market share to file updated 

market power analyses every five years. They disagree with the Commission’s 

conclusion that existing reporting requirements and ongoing market monitoring generally 

provide sufficient information to know whether storage markets remain competitive. In 

support, they claim that the Commission does not have accurate information regarding 

the entire storage market because the Commission only has jurisdiction over 

approximately one-half of the underground storage facilities in the United States. They 

also maintain that the change of status filing requirement does not provide a 

comprehensive look at the conditions in the market because the reporting requirements 

 8 Policy Statement at 61,230-231. 

9 Id. 

10 Rate Regulation of Certain Underground Storage Facilities, Notice of Proposed 

Rulemaking, FERC Stats. & Regs., Regulations Preambles ¶ 32,595 (2005). 
Docket Nos. RM05-23-001 and AD04-11-001 - 6 -

only focus on changes within the control of the storage provider. Finally, they challenge 

the Commission’s statement in the rule that its decision not to impose a generic periodic 

review requirement was similar to the Commission’s proposal to exempt sellers of 

wholesale electric power who own or control 500 MW or less of generating capacity in 

aggregate from filing triennial reviews.11 To be consistent, they maintain that the 

Commission should limit the class of storage providers not subject to a periodic filing 

requirement to those not affiliated with an entity with captive customers and impose the 

periodic filing requirement on all storage providers that do not meet the requirements for 

the exemption. 

14. On the other hand, Enstor requests that in light of the Commission’s decision not 

to adopt a generic five year rate review requirement, it should lift similar conditions, as 

appropriate, that have already been imposed on existing market-based rate authorizations. 

Specifically, Enstor requests that the Commission eliminate the requirement to file an 

updated market power analysis that was imposed on its Grama Ridge Facility.12

Commission Conclusion

15. We deny the Joint Associations’ request to adopt a generic periodic filing 

requirement for all storage providers with market-based rates that have a ten percent or 

greater market share. We continue to believe that a determination on whether to impose a 

periodic filing requirement for this class of storage providers should be decided on a 

case-by-case basis. As the Commission stated in Order No. 678, this approach will 

permit it to balance the need for a periodic review in order to monitor for market power 

with other considerations, including the goal of creating a regulatory environment that 

will promote infrastructure, based on the particular facts presented in individual cases. If 

the record developed in an individual proceeding indicates that the existing reporting 

requirements and change of status filing requirement will not provide sufficient 

 11 Citing Market-Based Rates for Wholesale Sales of Electric Energy, Capacity 

and Ancillary Services by Public Utilities, Notice of Proposed Rulemaking, FERC Stats. 

& Regs. ¶ 32,602 at P 152 (2006). 

12 See Grama Ridge Storage and Transportation, LLC, 113 FERC ¶ 61,301 

(2005). 
Docket Nos. RM05-23-001 and AD04-11-001 - 7 -

information concerning the relevant storage market to enable the Commission and 

interested parties to effectively monitor the storage provider, we will adopt additional 

reporting requirements as deemed appropriate. 13

16. In addition, we find the argument that we must adopt a generic filing requirement 

for gas storage providers granted market-based rates because we proposed to retain a 

generic filing requirement for certain classes of power producers is unavailing. In 

comparison to requests for market-based rates from sellers of wholesale electric power, 

we receive few requests for market-based rates for gas storage services. Moreover, in the 

majority of these cases where we have granted market-based rates, the applicant has not 

had a large presence in the market nor is the applicant typically affiliated with entities 

owning transmission facilities in the geographic market. For these reasons, we concluded 

that there was no need to impose a generic filing requirement on any class of marketbased rate storage applicants. Rather, we found that for the class of storage providers 

with a market share greater than ten percent, we could best balance our regulatory goals 

by considering in individual cases whether the specific facts and circumstances presented 

require additional reporting. Additionally, if subsequent experience demonstrates a need 

for a generic five-year market-power analysis requirement, we reserve the right to initiate 

such a change.

17. We also deny Enstor’s request to lift the periodic reporting requirements imposed 

by the Commission on its Grama Ridge Facility in this generic proceeding. This finding 

is without prejudice to Enstor filing such a request in the proceeding in which the 

periodic filing requirement was adopted.14

 13 Generally, we find that the fact that we do not regulate the entire storage market 

does not unreasonably inhibit our monitoring efforts. First, certain non-jurisdictional 

storage data is publicly available. Second, in monitoring for significant market power, a 

lack of non-jurisdictional storage data would result in a storage provider appearing to 

have a larger market share than it really has which would result in closer scrutiny of that 

storage provider by the Commission. We note that, to the extent that our initial finding of 

lack of market power for a particular applicant was based in part on applicant-submitted 

data on competing non-jurisdictional storage to which we would not normally have 

access, we would consider on a case-specific basis whether additional reporting 

requirements are needed. 

14 Consistent with the Commission’s finding in Order No. 678, Enstor claims that 

a periodic reporting requirement is unnecessary for the Grama Ridge Facility because the 

market share of the facility is less than ten percent. 
Docket Nos. RM05-23-001 and AD04-11-001 - 8 -

4. Change of Status Requirement

18. AGA requests that the Commission clarify that customers will have an opportunity 

to provide comments or otherwise participate with respect to filings made by storage 

providers following a significant change in competitive circumstances. The Commission 

clarifies that it is our intent to provide notice and comment on any change of status filing 

we receive. 

B. Energy Policy Act of 2005

19. The second part of Order No. 678 implements section 312 of EPAct 2005. That 

provision amends the NGA to include a new section 4(f) that permits the Commission to 

authorize market-based rates for storage and storage-related services related to a specific 

facility placed in service after August 8, 2005, if the Commission determines that: 

(1) market-based rates are in the public interest and necessary to encourage the 

construction of the storage capacity in the area needing storage services; and 

(2) customers are adequately protected. 

1. Definition of Facilities

20. In implementing the new NGA section 4(f), Order No. 678 takes a different 

approach to defining the term “facility” than was proposed in the NOPR.15 After review 

of the comments, Order No. 678 defines the term “facility” consistent with the 

Commission’s long-standing practice to define “facilities” under the NGA broadly, in 

exclusionary terms – everything except “auxiliary installations” and certain facilities 

constituting replacement facilities are “facilities” for which a natural gas company must 

obtain a certificate.16 

21. All three petitioners request that the Commission interpret new NGA section 4(f) 

to apply only to new storage caverns, reservoirs or aquifers and not to expansions of 

existing facilities. The Joint Associations and Enstor argue that the Commission’s 

 15 Noting that the statute does not define the term “specific facility,” in the NOPR 

the Commission proposed to interpret that term to consider a new cavern, reservoir or 

aquifer that is developed after August 8, 2005, as a facility potentially qualifying for 

market-based rates under the Act. However, the Commission requested comments on 

alternative constructions of the Act. FERC Stats. & Regs., Regulations Preambles 

¶ 32,595 at P 37 (2005). 

16 See 18 C.F.R. § 2.55 (2006). 
Docket Nos. RM05-23-001 and AD04-11-001 - 9 -

interpretation of the word “facility” is inconsistent with the plain meaning and legislative 

history of section 4(f). Specifically, they assert that by adopting the expanded definition, 

the Commission has read the phrase “related to a specific facility” completely out of the 

statute which is inconsistent with its obligation to construe a statute to give every word 

some operative effect.17 AGA asserts that the Commission failed to adequately address 

the potential harms of the broader definition to both new and existing customers. 

22. If the Commission does not grant rehearing, Joint Associations request that the 

Commission explicitly require applicants under new NGA section 4(f) to adopt certain 

minimum measures to ensure that market-based rate authority will not adversely impact 

existing customers, including requiring applicants to: (1) ensure that existing customers 

will not be subject to additional costs, risks or degradation of service; (2) separately 

account for the costs, services, and commitments provided under section 4(f) 

authorizations; and (3) provide non-discriminatory terms and conditions of service under 

an open-access tariff. 

Commission Conclusion

23. The rehearing requests raise no arguments not already considered by the 

Commission in Order No. 678. We affirm our decision to define the term “facility” 

broadly to include expansions of existing facilities. Contrary to the claims of petitioners, 

the statute is ambiguous because Congress did not define the term “facility” in the Act. 

In addition, while the legislative history shows that in the final bill, the phrase, “related to 

a specific facility” was added so that the subject language read, “to provide storage and 

storage-related services at market-based rates for new storage capacity related to a 

specific facility placed in service after the date of enactment of the Energy Policy Act of 

2005 . . .,”18 this added phrase does not add clarity to the meaning of “facility.” In these 

circumstances, the Commission found in Order No. 678, and reiterates here, that 

interpreting the word broadly, to include expansions of existing facilities for purposes of 

NGA section 4(f), is reasonable. Such an interpretation is consistent with our 

longstanding practice in applying that term under the NGA. As courts have noted when 

interpreting new or amended statutes that repeat existing statutory language, Congress is 

deemed to be aware of existing administrative interpretations of the existing language it 

 17 Citing Cooper Industries, Inc. v. Aviall Services, Inc., 543 U.S. 157, 167 (2004). 

18 H.R. Rep. No. 109-190, at 97 (2005) (Conf. Rep.). 
Docket Nos. RM05-23-001 and AD04-11-001 - 10 -

incorporates into the new or amended statute.19 Further, it is reasonable to read the 

phrase “related to a specific facility” to mean not only completely new storage facilities 

but also specific new portions of existing facilities, especially when considering the 

expressed intent of Congress in new section 4(f) to “encourage the construction of . . . 

storage capacity in . . . area[s] needing storage services.” Recognizing that significant 

and substantial enhancements to storage capacity can be achieved at existing fields, we 

find that continuing to use our long-standing definition of the word “facility” is more 

consistent with Congressional intent, and better serves to further the goal of both 

Congress and the Commission to facilitate the development of new natural gas storage 

capacity. This interpretation also allows for the possibility of optimizing the efficient use 

of existing infrastructure. 

24. We do not share AGA’s view that we have not adequately addressed the potential 

harms of the broader definition to both new and existing customers. We reiterate that a 

storage provider seeking market-based rates under new NGA section 4(f) needs to satisfy 

the other requirements of section 4(f) including the requirement that customers are 

adequately protected. In this regard, as requested by the Joint Associations, we clarify 

that in order to demonstrate that market-based rate authority will not adversely impact 

existing customers, an applicant would be required to: (1) ensure that existing customers 

will not be subject to additional costs, risks or degradation of service; (2) separately 

account for the costs, services, and commitments provided under section 4(f) 

authorizations; and (3) provide non-discriminatory terms and conditions of service under 

an open-access tariff. The Commission will review the appropriateness of additional 

requirements on a case-by-case basis. 

2. Periodic Review

25. In Order No. 678, the Commission found that regular Commission monitoring of 

market-based storage operators based on existing forms and data posting, supplemented 

as necessary with more specific information, coupled with our authority under NGA 

section 5, meets the periodic review requirement of NGA section 4(f). 

26. The Joint Associations request that the Commission require applicants under new 

NGA section 4(f) to report at least every five years on the adequacy of the customer 

 19 See, e.g., Bragdon v. Abbott, 524 U.S. 624, 645 (1998) (holding that when 

administrative and judicial interpretations have settled the meaning of an existing 

statutory provision, repetition of the same language in a new statute indicates, as a 

general matter, the intent to incorporate its administrative and judicial interpretations as 

well). 
Docket Nos. RM05-23-001 and AD04-11-001 - 11 -

protections put into place as a condition of market-based rate authority. They assert that 

staff monitoring of reports does not satisfy the statutory requirement because the 

Commission does not have information regarding the entire storage market, again noting 

that the Commission only has jurisdiction over approximately one-half of the 

underground storage fields in the United States. In addition, they assert that the rule 

inappropriately shifts the periodic review requirement of the Act from the Commission to 

storage customers by relying on monitoring by storage customers, customer contacts to 

the Commission’s Enforcement Hotline, and customer complaints under section 5 of the 

NGA. 

Commission Conclusion

27. We do not find that it is necessary to adopt a generic five-year filing requirement, 

as requested. The statute requires the Commission to “review periodically whether the 

market-based rate is just, reasonable, and not unduly discriminatory or preferential,” but 

does not include any rigid rules prescribing how the Commission must discharge this 

responsibility. We continue to believe that the ongoing review of storage operations 

adopted in Order No. 678 will provide a greater degree of customer protection than 

would periodic filings and meets the statutory obligation imposed in NGA section 4(f). 

28. We disagree with the Joint Associations’ assertion that the existing forms and 

reporting requirements are inadequate to effectively monitor the storage market. As we 

explained in Order No. 678, the storage providers are required to provide a wide range of 

information regarding storage operations, rates, terms and conditions of service, and 

financial and accounting data. This information is sufficient to allow the Commission 

and current or potential storage customers to monitor a storage provider with marketbased rates to identify potential unlawful withholding of storage capacity and to detect 

potential undue discrimination or preference in storage service or rates. This monitoring 

effort will focus on the specific rates and practices of the section 4(f) storage provider. 

Since a section 4(f) storage company is already presumed to have market power, further 

analysis of market shares or concentration is not relevant to the periodic review. 

29. We also disagree with the Joint Associations’ assertion that we are shifting our 

responsibility under the Act to conduct a periodic review to storage customers. As we 

clearly explained in Order No. 678, the Commission will regularly monitor storage 

providers with market-based rates and based on our findings will take further action as 

necessary to ensure that customer protections are adequate over time. In addition to our 

monitoring activity, we also explained in Order No. 678 that customers can also raise 

concerns through several procedural avenues. We believe this ongoing review will 

identify potential problems faster and resolve issues sooner, than the periodic five-year 

report advocated by the Joint Associations. 
Docket Nos. RM05-23-001 and AD04-11-001 - 12 -

30. Finally, the Commission will consider whether any additional reporting is 

appropriate on a case-by-case basis to ensure that customer protections remain adequate 

over time, as required by the Act. 

The Commission orders:

The requests for rehearing are denied and clarification is granted in part, as 

discussed in the body of this order.

By the Commission. 

( S E A L ) 

Magalie R. Salas, 

Secretary.