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