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
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
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
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
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?"