Major gas producers and marketers last week said they hadserious concerns about the auction concept raised by FERC in itsnotice of proposed rulemaking on short-term transportationcapacity, with some saying it would pose a logistical nightmare,threatening the reliability of the system and the seamless flow ofnatural gas.

The proposed auction, which would create a day-ahead market forgas, is “just not practical,” noted a key marketing source, whorequested anonymity. “How can you try to buy capacity a day aheadand try to buy supply and find a market all at the same time?You’re going to always end up either [with] long transportation orshort transportation and long supply and short market. It’ll bevery difficult to line all three pieces up,” she said.

“Or even if you’re an LDC and you’re just trying to line supplyand transportation up, or you’re a producer trying to linetransportation and the market up, it’ll be a real crap shoot as towhether you’re going to get the capacity out of the auction.” Themarketer believes an auction for short-term capacity, as FERC hasproposed, “would really play havoc on reliability,” and could windup “killing the grid.”

As an alternative, she said her company plans to recommend thatFERC implement an auction for long-term capacity – with a term of ayear or more. This is something, she believes the gas industry canget behind. She noted a company official met last week with someMidwest utilities, which “seemed to like what we’re proposing.” TheCommission last month offered to remove the price cap on short-termcapacity in return for the industry embracing its proposal callingfor pipelines to conduct daily auctions of short-term (less thanone year) firm, interruptible and capacity-release capacity[RM98-10].

Producers also are concerned that the auction will drive theminto a daily market, said Philip Budzik, director of federalregulatory affairs for the Natural Gas Supply Association (NGSA).”One of our senior executives said ‘the last thing I want in mylife is to wake up every day knowing that I’ve got to sell my gasall over again.” Producers don’t want to have to “push that rock upthe hill” on a daily basis.

Another “conclusion that we seem to be coming to, and I’m notsaying that it’s universally held, is that the pipeline can’t bethe auctioneer,” Budzik said. “Somebody else – an independent thirdbody, 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 aboutparties’ willingness to pay, producers are concerned that pipelinescould use the information to their advantage in setting reserveprices.

There are some who think an auction, by its very transparentnature, could lead to greater activity in the gray market. Theybelieve this will occur even though the Commission proposes to liftthe price cap on short-term capacity. “FERC has this notion that bysomehow having an auction the gray market is going to disappear. Idon’t think it will. The complexion of it’s going to change. Peopleare still going to operate in the gray market for differentreasons,” not necessarily to avoid the price cap but to maintain alow profile when buying and selling capacity, an industry sourceremarked.

Given the transparency that would be brought about by auctionprocedures, he believes buyers and sellers are going to run to thegray market for cover. “Let’s say I’m a buyer and I really need abig block of capacity. If I start asking for a lot of capacity [onthe open market], it’s going to bid the price way up.” This isgoing to make pre-arranged deals in the gray market much moreattractive to some market participants, he said.

He seriously doubted that FERC would be able to “police” thesetransactions. “Is someone going to sift through all thenomination/confirmation transactions to determine where the gas isgoing every day, and from whom and on behalf of whom?” the industrysource asked. “…[W]ho in their right mind is going to go throughall of that?”

Susan Parker

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