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Southern Natural Defends Bid Aggregation Approach

Southern Natural Gas disputes claims by an affiliate of a Houston-based natural gas marketer that the pipeline acted improperly by deviating from the usual approach for aggregating bids in awarding capacity during an open season that closed in August. Southern, an El Paso Corp. pipeline, was accused of violating its tariff and FERC policy.

An industrial consumer group said Southern's approach, if upheld by the Federal Energy Regulatory Commission (FERC), would stand the aggregation process for bidding on pipeline capacity "on its head," and could have broad ramifications for shippers on other pipelines.

In a Section 5 complaint filed at the Commission on Oct. 2, Texican N. La. Transport LLC, an affiliate of Texican Natural Gas Co., claimed that after the close of the open season in August, Southern Natural decided to use a procedure for aggregating bids that it had never used in any previous open season and did not inform potential bidders about it. Texican argued that the new method was a violation of FERC precedent and Southern Natural's tariff, which requires that the open season notice describe all of the criteria to be used by Southern Natural to determine and evaluate the net present value (NPV) of the bids it receives.

In its reply to the complaint, Southern Natural said it "acted properly in awarding capacity under the terms of an open season posted according to its FERC gas tariff on June 8," and "properly advised bidders of the possibility that it could aggregate bids under the open season, that this was not a new or undisclosed approach to awarding capacity, and that such aggregation is consistent with Commission precedent and not a violation of the Natural Gas Act or its tariff."

In the "open season request form," both Texican and Shell Energy North American (US) LP checked the box that indicated they would accept a partial award of the capacity bid and Southern verified this with both parties prior to awarding the bids, the pipeline said. Their bids were ultimately aggregated and the available capacity shared between the two.

"Texican's argument that Southern came up with the aggregation process as a 'new' method to award bids is contradicted by [FERC precedent]," specifically a 2007 ruling in a case involving National Energy and Trade LP (NET) and Texas Gas Transmission LLC, Southern Natural contends. "In NET the Commission found not only that it was permissible to aggregate bids, but that aggregation was permissible even if such aggregation procedure is not in the pipeline's tariff."

But aggregation itself is not at issue in the complaint, Texican and others contend; rather it is the way that Southern Natural aggregated the bids. They said Southern Natural aggregated the bids with one motive in mind -- profit. Texican supplies gas to Southeast markets over Southern Natural and Transcontinental Gas Pipe Line.

Texican further claims that Southern Natural's methodology excludes small shippers and gives preference to bids by larger shippers, "but its conclusion in the example [it provided] doesn't make sense. Under Southern's posted methodology of aggregation, it could not ignore the smaller bids if the NPV produced by combining the smaller bids was higher. Such a bias would be discriminatory," Southern Natural noted.

"Texican also implies throughout its complaint that Southern should have put shippers on notice of the precise manner in which it would aggregate the bids. Southern had no way of predicting every possible combination of bids that it would receive and could not have known how the bids could be aggregated until they were received," the pipeline said.

Texican's bid for 66,000 Mcf/d for 35 years and seven months at the maximum applicable tariff rate had the highest NPV of any of the bids submitted in the Southern Natural open season, namely $50.7 million. Shell submitted a bid for 65,000 Mcf/d for 30 years with an NPV of $48.8 million. Nevertheless, Southern Natural chose to award Texican 10,000 Mcf/d while awarding 63,000 Mcf/d" to Shell, the second place bidder, Texican said.

While the high bid was $50.7 million, Southern Natural noted that the combination or aggregation of the two winning bids (Texican and Shell) had a higher NPV -- $55 million. The additional revenue produced by aggregating the bids of $4.3 million "will ultimately benefit Southern's customers after its next rate case," it said.

Southern Natural defended its action by saying it optimized both the NPV and the maximum capacity to be awarded by awarding 63,000 Mcf/d to Shell and 10,000 Mcf/d to Texican. Southern said it was able to sell more incremental capacity to Shell because a new receipt point where Shell was delivering its gas to the pipeline was farther downstream than most of the receipt points bid by Texican and was much closer to a new Tennessee Gas Pipeline interconnection.

Because Shell bid only 65,000 Mcf/d out of a possible 75,000 Mcf/d that was available from the Shell receipt point, Southern Natural said it had the ability to award the 10,000 Mcf/d to Texican. It said it reduced Shell's original bid by 2,000 Mcf/d to 63,000 Mcf/d so that it could award capacity to Texican.

"The most important fact omitted from Texican's complaint is that had Southern awarded the entire Texican bid to Texican, then no other capacity could be awarded," Southern Natural said.

"The analysis resulting in the award of capacity by Southern was both mathematically and scientifically based and was not unduly discriminatory," the pipeline noted. And Texican's argument that the "approach taken by Southern 'undermines the Commission's policy that capacity should be awarded to the shipper that values it most highly' is misplaced in this situation."

Southern Natural's approach gives the pipeline "virtually unlimited discretion in deciding to whom capacity is awarded," countered Texican.

Texican said a conservative estimate of the impact to the company of not having been awarded all of the capacity is $170 million in lost profits. Texican bases its lost profit calculation on the basis differential (20 cents/Mcf) between gas moving on Southern Natural's pipeline system and gas transported on other pipeline systems in the areas over the next 35 years.

"Texican's estimated damages are pure fiction. It is impossible to predict the basis differential in any area of the country for 35 years. More importantly, it is absurd to presume that an existing basis differential will continue for 35 years," Southern said.

Texican has not asked FERC to invalidate the results of the open season, but only to direct Southern Natural to award capacity in accordance with its tariff and Commission precedent.

The Industrial Energy Consumers of America (IECA) filed a motion in support of Texican's complaint, saying Southern's procedure for awarding capacity "will undermine the open season process in a fundamental way and could set a national precedent of discrimination by natural gas pipelines to the detriment of all natural gas consumers."

If Southern's approach is allowed to stand, the capacity bidding process "would be turned into an obscure guessing game with bidders unable to develop effective strategies for obtaining capacity," the IECA said.

"Of particular concern to IECA is that under Southern's new approach to aggregation, the ability of end-users, such as IECA members, to use the open season process to obtain limited amounts of capacity they need to support their operations would be severely compromised.

"Southern would stand the aggregation process on its head. Rather than using aggregation to enhance the ability of a group of shippers to obtain capacity by collectively achieving the highest NPV among all bidders, Southern apparently believes that it can, in the name of aggregation, award capacity on a piecemeal basis that simply ignores the NPV of the shippers' bids. Southern would instead focus solely on the economic advantage Southern can achieve by breaking the bids it received into small pieces, i.e., disaggregating them, in order to determine whether it can achieve a higher value by gluing bits and pieces of any number of those bids back together into a conglomeration that bears no resemblance to any of the individual bids," the industrial customer group said.

The IECA called on FERC to reject Southern Natural's theory of aggregation as inconsistent with the goal of transparent open seasons that are governed by rules that are known to all bidders.

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