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Auction Would Create Logistical Snag, Shippers Say

Auction Would Create Logistical Snag, Shippers Say

Major gas producers and marketers last week said they had serious concerns about the auction concept raised by FERC in its notice of proposed rulemaking on short-term transportation capacity, with some saying it would pose a logistical nightmare, threatening the reliability of the system and the seamless flow of natural gas.

The proposed auction, which would create a day-ahead market for gas, is "just not practical," noted a key marketing source, who requested anonymity. "How can you try to buy capacity a day ahead and try to buy supply and find a market all at the same time? You're going to always end up either [with] long transportation or short transportation and long supply and short market. It'll be very difficult to line all three pieces up," she said.

"Or even if you're an LDC and you're just trying to line supply and transportation up, or you're a producer trying to line transportation and the market up, it'll be a real crap shoot as to whether you're going to get the capacity out of the auction." The marketer believes an auction for short-term capacity, as FERC has proposed, "would really play havoc on reliability," and could wind up "killing the grid."

As an alternative, she said her company plans to recommend that FERC implement an auction for long-term capacity - with a term of a year or more. This is something, she believes the gas industry can get behind. She noted a company official met last week with some Midwest utilities, which "seemed to like what we're proposing." The Commission last month offered to remove the price cap on short-term capacity in return for the industry embracing its proposal calling for pipelines to conduct daily auctions of short-term (less than one year) firm, interruptible and capacity-release capacity [RM98-10].

Producers also are concerned that the auction will drive them into a daily market, said Philip Budzik, director of federal regulatory affairs for the Natural Gas Supply Association (NGSA). "One of our senior executives said 'the last thing I want in my life is to wake up every day knowing that I've got to sell my gas all over again." Producers don't want to have to "push that rock up the hill" on a daily basis.

Another "conclusion that we seem to be coming to, and I'm not saying that it's universally held, is that the pipeline can't be the auctioneer," Budzik said. "Somebody else - an independent third body, a computer in a room - has to conduct the auction." Since "there's a lot more information that's submitted during an auction" beyond that pertaining to the winning bidder, particularly about parties' willingness to pay, producers are concerned that pipelines could use the information to their advantage in setting reserve prices.

There are some who think an auction, by its very transparent nature, could lead to greater activity in the gray market. They believe this will occur even though the Commission proposes to lift the price cap on short-term capacity. "FERC has this notion that by somehow having an auction the gray market is going to disappear. I don't think it will. The complexion of it's going to change. People are still going to operate in the gray market for different reasons," not necessarily to avoid the price cap but to maintain a low profile when buying and selling capacity, an industry source remarked.

Given the transparency that would be brought about by auction procedures, he believes buyers and sellers are going to run to the gray market for cover. "Let's say I'm a buyer and I really need a big block of capacity. If I start asking for a lot of capacity [on the open market], it's going to bid the price way up." This is going to make pre-arranged deals in the gray market much more attractive to some market participants, he said.

He seriously doubted that FERC would be able to "police" these transactions. "Is someone going to sift through all the nomination/confirmation transactions to determine where the gas is going every day, and from whom and on behalf of whom?" the industry source asked. "...[W]ho in their right mind is going to go through all of that?"

Susan Parker

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