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

Moreover, nearly all of the pipeline’s shippers made clear thattheir backing for the auction procedures proposed in the Naturalsettlement should not deprive them of the opportunity to considerdifferent capacity-allocation procedures that may arise later inthe Commission’s notice of proposed rulemaking (NOPR) dealing withshort-term transportation services, which was issued in late July[RM98-10].

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

The response of Indicated Shippers, which represented sixproducers, was characterized as “closer to opposition” by Jon L.Brunenkant, a Washington D.C. attorney. “There’s a lot about thesettlement that Indicated Shippers do not like. Clearly they founda lot more wrong with the settlement than other parties did.”

The producer group disagreed that the proposed Natural auctionprocedures should be used as a test case for the auction conceptraised 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 onNGPL’s system that support the settlement, also said the settlementdid not represent “the model for capacity allocation [that it]would craft if given a blank slate…” But the group added that itcould serve as a “laboratory” for many of the ideas beingconsidered in the NOPR and in the notice of inquiry (NOI) oninterstate gas transportation services.

In the NOPR, the Commission proposed that interstate pipelinessell their short-term capacity through auctions in return forremoving the price caps on the capacity. The FERC plan, however,provided no details on how to carry out the auctions. Some industryexperts have suggested that the Commission use Natural’s proposedauction procedures as a model.

Amoco said it was concerned that the proposal still might armthe pipeline with too much power to manipulate thecapacity-allocation process. The Commission ordered Natural to makeits auction procedures more transparent after Amoco accused theMidwest pipeline of favoring its marketing affiliate, MidCon GasServices, over non-affiliated shippers when awarding firm capacityon its system. FERC earlier this year fined Natural more than $8million after it confirmed Amoco’s allegations.

Specifically, Amoco and Indicated Shippers said they objected toNatural’s decision to refuse to identify the winning bidder in anauction, except in cases where the winning bidder is an affiliateor the bidder requests that its identity be disclosed. If a changeis made on this issue alone, Amoco said it would back thesettlement fully.

The producer/shippers and the Natural Customer Group also citedconcerns with Natural’s proposed reserve price matrix under whichthe pipeline could set reserve prices (the minimum discount rate atwhich it is willing to award capacity) based on a combination of upto 15 receipt and delivery points, and 12 different time periods ineach 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 eachauction, the number of variables to be evaluated by shippers inmaking their bids [would be] quite high,” Amoco noted. This, itbelieves, would allow Natural to “manipulate the auction andexercise too much discretion.” Amoco, as well as the NaturalCustomer Group, urged FERC to keep Natural’s existing 8X6 zonematrix because it would require the pipeline to maintain the samereserve price throughout each zone and would limit the pipeline’sdiscretion in shaping an auction.

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

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

Looks to Interactive Bidding

Moreover, the pipeline fended off criticism of its proposal toadjust bids to account for shippers that have already paid theirportion of gas supply realignment (GSR) costs. Under Natural’sproposal “the GSR factor [would be] added to the bid of an existingshipper which has paid its full share of GSR costs, for purposes ofcomparison with a bid by another shipper which has not paid itsfull share of such costs. This factor is essential for equitablecomparison of competing bids.”

Natural’s ultimate goal is to achieve interactive bidding toensure even greater transparency of capacity allocation on itssystem within less than two years (See NGI, 8/24/98). Withinteractive bidding, Indicated Shippers said they would beconcerned that bidding on a capacity package could potentiallyclose after just one round if a shipper bids the maximum rate for aterm of five years. “…[E]nding the auction process after thefirst round will have denied interested shippers an opportunity togauge the market and to submit matching bids to at least attempt toget some pro rata share of the capacity at maximum rates.” Thegroup urged FERC to require at least a second round of bids.Illinois Power, which supported the settlement, took the oppositeview. It insisted that”shippers that value capacity sufficientlyto offer the maximum rate/maximum term early in the auction shouldnot be pro-rated on the basis of a bid made in a subsequent round.”

Dynegy Marketing and Trade registered its full support for theproposed auction procedures, noting the “most important element”was the preservation of the ability to enter into prearranged dealswith the pipeline. “The ability to purchase transportation capacitythrough one-on-one negotiations with a pipeline in the form ofpre-arranged deals provides Dynegy with the needed flexibility topurchase such capacity at the same time it completes its purchaseand sale arrangements,” it noted. “Leaving any link in thepurchase/sale/transportation chain to chance could result in anuneconomic transaction for Dynegy.”

The marketer especially favored the aspect of the settlementthat would bar Natural from entering into pre-arranged deals withits marketing affiliate prior to either Jan. 27, 2000 or the startof interactive bidding on the pipeline’s system, whichever comesfirst. This would protect the pipeline’s customers from affiliateabuse on Natural’s part.

Susan Parker

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