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Natural's Auction Procedures Elicit Support, Concerns

Natural's Auction Procedures Elicit Support, Concerns

A cross-section of customers last week showed varying degrees of support for a comprehensive, complex settlement package that calls for Natural Gas Pipeline Company of America (NGPL) to implement a more transparent auction process on its system. Still, a number of them registered concerns with elements of the proposed package, namely the five contested issues that have been reserved for FERC comment and resolution.

Moreover, nearly all of the pipeline's shippers made clear that their backing for the auction procedures proposed in the Natural settlement should not deprive them of the opportunity to consider different capacity-allocation procedures that may arise later in the Commission's notice of proposed rulemaking (NOPR) dealing with short-term transportation services, which was issued in late July [RM98-10].

Amoco Production was among one of the gas producers that backed the settlement, but it did so conditionally in comments filed Aug. 24th.

The response of Indicated Shippers, which represented six producers, was characterized as "closer to opposition" by Jon L. Brunenkant, a Washington D.C. attorney. "There's a lot about the settlement that Indicated Shippers do not like. Clearly they found a lot more wrong with the settlement than other parties did."

The producer group disagreed that the proposed Natural auction procedures should be used as a test case for the auction concept raised by FERC in its proposed rulemaking, as some have suggested. The settlement was never envisioned as "some cookie-cutter formula" to be applied to all pipelines, it said in its comments [RP97-431-005].

The Natural Customer Group, which includes a number of LDCs on NGPL's system that support the settlement, also said the settlement did not represent "the model for capacity allocation [that it] would craft if given a blank slate..." But the group added that it could serve as a "laboratory" for many of the ideas being considered in the NOPR and in the notice of inquiry (NOI) on interstate gas transportation services.

In the NOPR, the Commission proposed that interstate pipelines sell their short-term capacity through auctions in return for removing the price caps on the capacity. The FERC plan, however, provided no details on how to carry out the auctions. Some industry experts have suggested that the Commission use Natural's proposed auction procedures as a model.

Amoco said it was concerned that the proposal still might arm the pipeline with too much power to manipulate the capacity-allocation process. The Commission ordered Natural to make its auction procedures more transparent after Amoco accused the Midwest pipeline of favoring its marketing affiliate, MidCon Gas Services, over non-affiliated shippers when awarding firm capacity on its system. FERC earlier this year fined Natural more than $8 million after it confirmed Amoco's allegations.

Specifically, Amoco and Indicated Shippers said they objected to Natural's decision to refuse to identify the winning bidder in an auction, except in cases where the winning bidder is an affiliate or the bidder requests that its identity be disclosed. If a change is made on this issue alone, Amoco said it would back the settlement fully.

The producer/shippers and the Natural Customer Group also cited concerns with Natural's proposed reserve price matrix under which the pipeline could set reserve prices (the minimum discount rate at which it is willing to award capacity) based on a combination of up to 15 receipt and delivery points, and 12 different time periods in each auction.

"This means that Natural's reserve price matrix could consist, for example, of seven receipt markets and eight delivery markets (or vice versa) or ten receipt markets and five delivery markets. Since Natural is also proposing...12 specific time periods for each auction, the number of variables to be evaluated by shippers in making their bids [would be] quite high," Amoco noted. This, it believes, would allow Natural to "manipulate the auction and exercise too much discretion." Amoco, as well as the Natural Customer Group, urged FERC to keep Natural's existing 8X6 zone matrix because it would require the pipeline to maintain the same reserve price throughout each zone and would limit the pipeline's discretion in shaping an auction.

The Natural Customer Group said the pipeline would be able to fine-tune reserve prices in the market-area delivery zone to favor certain shippers and punish others. It also could favor receipts from its affiliated pipelines.

But Natural countered that the use of the 8X6 matrix would be "inappropriate" because of the size of the zones. "Treating the entire Market Delivery Zone as one market for purposes of the reserve price grid, for example, would imply that market conditions and the ability to deliver any given volume of gas are exactly the same in Chicago, St. Louis and all of Iowa."

Looks to Interactive Bidding

Moreover, the pipeline fended off criticism of its proposal to adjust bids to account for shippers that have already paid their portion of gas supply realignment (GSR) costs. Under Natural's proposal "the GSR factor [would be] added to the bid of an existing shipper which has paid its full share of GSR costs, for purposes of comparison with a bid by another shipper which has not paid its full share of such costs. This factor is essential for equitable comparison of competing bids."

Natural's ultimate goal is to achieve interactive bidding to ensure even greater transparency of capacity allocation on its system within less than two years (See NGI, 8/24/98). With interactive bidding, Indicated Shippers said they would be concerned that bidding on a capacity package could potentially close after just one round if a shipper bids the maximum rate for a term of five years. "...[E]nding the auction process after the first round will have denied interested shippers an opportunity to gauge the market and to submit matching bids to at least attempt to get some pro rata share of the capacity at maximum rates." The group urged FERC to require at least a second round of bids. Illinois Power, which supported the settlement, took the opposite view. It insisted that "shippers that value capacity sufficiently to offer the maximum rate/maximum term early in the auction should not be pro-rated on the basis of a bid made in a subsequent round."

Dynegy Marketing and Trade registered its full support for the proposed auction procedures, noting the "most important element" was the preservation of the ability to enter into prearranged deals with the pipeline. "The ability to purchase transportation capacity through one-on-one negotiations with a pipeline in the form of pre-arranged deals provides Dynegy with the needed flexibility to purchase such capacity at the same time it completes its purchase and sale arrangements," it noted. "Leaving any link in the purchase/sale/transportation chain to chance could result in an uneconomic transaction for Dynegy."

The marketer especially favored the aspect of the settlement that would bar Natural from entering into pre-arranged deals with its marketing affiliate prior to either Jan. 27, 2000 or the start of interactive bidding on the pipeline's system, whichever comes first. This would protect the pipeline's customers from affiliate abuse on Natural's part.

Susan Parker

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