Acknowledging it is entering “uncharted waters,” the Natural GasPipeline Company of America (NGPL) as part of a comprehensivesettlement has proposed to implement an interactive auction processfor posting and awarding transportation/storage capacity on itssystem. It could be up and running within less than two years. Allof the “active” parties in the settlement proceeding have indicatedtheir support for the proposed package, although five issues havebeen reserved for comment and resolution by FERC.

“What we hope to ultimately end up with is a real-time,bidding-type process of an auction, where once Natural posts theavailability of capacity and what segments of pipe it’s on,shippers would then have the ability to bid on that capacity. Thebids they put in will automatically be posted, and the [net]present value of the bids will be calculated in a real-time fashionso that they’ll be able to see almost instantaneously if they’rethe high bidder on the particular package they’re bidding on,” saidBruce Newsome, director of rates for Natural [RP97-431]. Thepipeline’s objective is to move towards an interactive auctionprocess “as soon as we can.”

Natural’s auction proposal is in response to shipper cries andCommission orders calling for the pipeline to provide moretransparency in the way it allocates transportation capacity. Theproposal comes less than a year after FERC imposed amulti-million-dollar fine on the pipeline for favoring itsmarketing affiliate over non-affiliates when awarding capacity.

Some industry experts believe Natural’s proposed auctionprocedures would make a good test case for the auction conceptraised by FERC last month in its notice of proposed rulemaking(NOPR) dealing with short-term transportation services [RM98-10].In return for removing the price caps on short-term capacity, theCommission proposed that interstate pipelines sell the capacitythrough auctions. The FERC plan, however, was short on thespecifics for carrying out the auctions. The Natural auction planmight be able to fill in some of the blanks in this area, and could”serve as a template for the Commission,” said Philip Budzik of theNatural Supply Association of America. “It may be something that we[producers] can support.”

But Newsome believes that having Natural’s proposed settlementtied to the rulemaking would be a mistake for the pipeline and itscustomers. “Certainly what we’ve agreed to [in the settlement] -once the Commission approves it – should be implemented muchsooner…than anything coming out of the rulemaking,” he said.”There’s no time frame as to when the Commission has to do anythingat all with regards to that rulemaking. That could clearly beseveral years down the road.” Nevertheless, he agrees that theexperience gained from Natural’s proposed auction procedures couldbenefit the rest of the pipeline industry.

He acknowledged there are some “similarities” between FERC’srulemaking and Natural’s proposed auction process, but there areseveral differences as well. For instance, the Commission proposesthat auctioning apply to only short-term capacity, while Naturalseeks to use it for awarding virtually all of its capacity.Natural’s plan also adds the “details and specifics as to how anauction would work. From that standpoint, what we propose goesbeyond what the Commission has offered…”

Specific Procedures

Under Natural’s settlement, the pipeline would post all firmtransportation and storage capacity at least 15 months before thedate the capacity would become available. “Natural will not discussthe availability of firm capacity with any shipper until theposting has been made,” it noted in the proposed settlement.

Auctions initially would follow a single round of bidding untilNatural can implement the computer and information systems neededfor interactive bidding, the pipeline said. “Best-case scenario,you’re probably looking at the early part of next year for thesingle-round auction to be in place,” Newsome said. Competing bidswould be valued based on a net present value (NPV) formula, whichwould take into account discount rates or gas supply realignmentcosts.

The pipeline then would begin work to implement the interactionprocess by Dec. 31, 1999 at the earliest or June 30, 2000 at thelatest. The key to the interactive auction process will be thedevelopment of a computer and information system to carry that out.The pipeline expects to develop the system internally, but this is”one of the things that we are going to have to explore,” saidNewsome.

Under the interactive procedures proposed for auctions, therewould be an open-bid period and all bids would be posted uponreceipt. Capacity packages would be established based on thequalifying bids or combination of bids that meet the reserve price(the discount rate at which Natural is willing to award capacity)and result in the highest value under the NPV formula.”Subsequently, there will be iterative bidding in intervals ofthirty (30) minutes,” Natural said. If no one posts a bid on aspecific capacity package that beats the qualifying bid in theprevious round, the auction then would close on that capacitypackage and the capacity would be awarded.

The pipeline said it would issue a report to FERC staff andothers on Sept. 30, 1999 detailing its progress in implementing theinteractive system. Additionally, it plans to conduct a review ofthe interactive auction procedures one year after they have been inplace, assuming the settlement is approved by the Commission.Initial comments on Natural’s settlement are due today (Aug. 24th)at FERC, and reply comments are due Sept. 3rd.

Adds Transparency

Newsome believes its auction proposal will be a boon to bothshippers and Natural. “We’re trying to put in place a mechanismwhere first shippers will know when pipeline capacity will becoming on the system. And we’re doing that through a much earlierposting of the availability of capacity. Beyond that shippers aregoing to know up front exactly what criteria we’re going to use toevaluate bids on that capacity. And we’ll also make available toshippers a downloadable spreadsheet in which they could in effectplug into a bid to see exactly what present value will becalculated so they know exactly how their bid’s going to beevaluated.

“Third, just after an auction’s completed, we’re going to postwhat the winning bid is as well as all other qualified bids,[enabling shippers] to check very easily that the bid was awardedto the right package.” In short, “from a shipper’s standpoint,everything will be much more transparent than it was before.”

As for Natural, the proposed procedures will provide “us withthe flexibility that we think we need to do business in the futurein that we will still be able to do pre-arranged deals withshippers ahead of time. But once that deal is completed, we wouldhave to post that package of capacity for people to have the rightto beat that pre-arranged deal,” he noted.

In the event a shipper would bid above a pre-arranged deal,Natural has outlined a “limited procedure” that would give thepre-arranged shipper as well the “right to trump the best bid inthe auction.” Under the settlement, the pipeline has agreed not toenter into any such pre-arranged deals with its marketingaffiliates until Jan. 17, 2000 or 60 days after the interactiveauction procedures are operational, whichever comes first. But itnoted that nothing in the settlement will limit the right of amarketing affiliate to initiate or participate in any auction or toexercise unilateral rollover rights or the right of first refusalunder Natural’s tariff.

Newsome noted that Natural chose Jan. 17, 2000 as the date tobegin pre-arranged deals with its marketing affiliates because itwill mark the end of a two-year period during which FERC said ifthe pipeline remained free of further capacity-allocationviolations, it would waive half of the more than $8 million penaltythat it imposed on Natural earlier this year. The Commission finedthe pipeline after it confirmed Amoco Production’s allegations thatNatural favored its marketing affiliate, MidCon Gas Services, overnon-affiliate shippers when awarding firm transportation capacityon its system.

Susan Parker

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