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Industry, Regulators Argue Transportation Auctions

Industry, Regulators Argue Transportation Auctions

FERC's proposal to organize and monitor the short-term market through daily auctions is either a belated and unnecessary administrative nightmare - or the road to vigorous competition in the transportation market, i.e. the "commoditization" of transportation.

Those were the views expressed during sessions and in the hallways last week at the DOE-NARUC Natural Gas Conference in Pittsburgh, with industry mostly lining up behind the "nightmare" scenario and regulatory types espousing the competitive theme.

One expert on regulatory issues has suggested that seeing the entire gas industry "apparently marching against the proposed option" in lockstep is a good sign that FERC is on the right track in its effort to create "vigorous price competition."

The daily auction concept, which was proposed in a July notice of proposed rulemaking (NOPR), is making "interesting bedfellows" of pipelines, distributors and marketers, said Pam Prairie, director of the Institute of Public Utilities at Michigan State University. "...[C]ompanies like Dynegy Corp. are taking a position in opposition to the auction; pipelines don't like the auction idea for obvious reasons; and LDCs, I think, are still trying to sort their way through as to whether or not the auctions are good or bad."

More to the point, "all the sellers [of short-term capacity] are really concerned that something's going to happen to their prices," she said. But Prairie doesn't think all parties have cause for concern. "If you're a buyer, I think [the auction's] good news, and if you're a consumer of gas, I would suggest that that's also good news for you because if there's vigorous price competition in the secondary market prices should go down."

In the NOPR, the Commission proposes to require the auctioning of short-term (less than one year) firm, interruptible and capacity-release capacity as a condition to removing the price caps in that market. A daily auction would be the "linchpin" to removing price caps on short-term transportation, said FERC Commissioner Linda Breathitt. "Without the kind of market power mitigation that the daily auction is meant to provide, I will be unwilling to support release of the price cap for short-term transportation services," she vowed. Breathitt's unyielding statement was in response to industry rumblings that it would be an administrative nightmare to coordinate buying gas and successfully participate in separate auctions for pipeline paths to markets for multiple transactions - all for delivery the next day.

Although the aim of the auction is to mitigate the existing market power particularly held by pipelines in the short-term market, Prairie believes it is "equally important" that regulators focus on LDCs and marketers, which she said also could hold enough capacity in the secondary market to wield considerable market power.

This is a real threat since more and more marketing companies are signing contracts with LDCs to manage distributors' portfolios, she noted. In such cases, "it's not difficult to imagine a scenario in which [a] marketer can keep a competitor's gas supplies by withholding large chunks of capacity at the LDC's citygate [from being released]. Or by withholding capacity from the release market. they [marketers] could also create a scarcity circumstance which, in turn, would drive up [the] price for released capacity into that market."

Likewise, "it is not difficult to imagine a scenario [where] several pipelines would get together and create a new marketing affiliate...that could buy firm capacity from [one of the pipelines at] below tariff rates with the intent of re-selling the capacity at market-based prices in the secondary market," Prairie noted.

What FERC is asking from the gas industry in the megaNOPR - to create a whole new way of selling short-term capacity - is a "formidable task," but it's "also a very doable task," she told NGI. Prairie said from her experience with implementation of Orders 436 and 636 when she was an executive with ANR Pipeline it takes 18-24 months and massive resources for system users to install and become familiar with a new process and figure out how to optimize services.

"If we really want to get to a competitive market, we can't use the excuse that there's an administrative burden...as a barrier to not getting there," she said. Prairie was partly referring to a recent request by six trade associations for the Commission to extend until Jan. 22 the deadline for the gas industry to respond to the NOPR and the notice of inquiry (NOI). The comments on both initiatives, which were issued in late July, are due Nov. 9th. The groups sought the extension because of the number of the issues (200 in all) that FERC asked them to address in written comments (See NGI Oct. 5).

Part of the problem, one industry representative pointed out is that FERC only came up with a concept and left it to the industry to figure out how to make it work. Some sources said last week they have not even begun trying to figure out how it might be accomplished. One said his group still was in the process of hiring an economic consultant.

Another who had looked at the problem said the main issue would be sequencing. The difficulty would lay, he said, in buying gas and then successfully participating in multiple pipeline auctions in your path to market for gas to be delivered the next day. Failure in any part of the process would cause the whole transaction to collapse. Multiplying this by the number of transactions various companies are involved in everyday is where the nightmare comes in.

Another industry source pointed out that LDCs have been trying to get FERC to fix the capacity release program since the first year it was implemented. After its most recent attempt to install pilot programs in late 1996 failed, most in the industry has figured out how to get around the rules, including price caps, through pre-arranged deals and gray market transactions.

If, as Prairie pointed out it takes industry 18 to 24 months to adapt to new programs, then the five years since capacity release was installed in Order 636 has been more than enough time for adaptations to occur. Several LDCs commented that removing the price cap certainly wasn't worth the cost and effort of installing and learning a whole new auction process. The protests that originally greeted the price cap have died down. As one LDC representative put it, "FERC is addressing a problem that doesn't exist anymore. They came late to the party."

The regulators are still trying, however. Given that "we threw a lot of stuff out there" in the NOPR and other initiatives, FERC Commissioner Vicky Bailey said she thought the extension request of the trade groups was a "very legitimate" one. However, "it [was] our hope to address these issues by the end of the year...to at least have the comments in by the end of the year," she told the nearly 400 industry executives and state regulators at the DOE-NARUC conference. "If that's not possible," Bailey indicated that pushing back the comment deadline might be a "legitimate response" due to the scope of the issues. Commissioner Breathitt also said she would seriously consider granting the industry's request.

Bailey's message to the gas industry: "You've got to look at these issues and [you've] got to decide what you want, what you're willing to live with, what you can't stand. And tell the Commission that in no uncertain terms. Its kind of 'come to Jesus time.'"

Hoecker Would Involve GISB

Chairman James Hoecker didn't comment on the extension request, but he did say that he was aware that "all segments of the industry, as well as their attorneys and consultants, are on overload right now" as a result of the July NOPR, specifically the auction proposal, and the NOI and other initiatives. He said the Commission offered the proposed changes in a simultaneous fashion rather than "piecemeal or half-heartedly" because the "costs from the delay and the confusion of such an approach would be far too great." Given the "unique momentum" coming from competition and convergence, "we are less able today to attack problems a bite at a time..."

In Pittsburgh, Hoecker urged the gas industry members to undertake a "broad" review of the entire package of reforms that the Commission has proposed before "solidifying their judgment." Moreover, Hoecker suggested that industry set aside the workshop scheduled for Oct. 20th to discuss only the details of how a daily auction would work, and save any remarks opposing the proposed auction for the written comments that are due at FERC on Nov. 9th.

Hoecker again indicated that the Gas Industry Standards Board (GISB) could play a "key" role in developing a real-time interactive auction process - a task that has been criticized by some GISB members as being "outside the scope" of their organization. Producers last week also joined in to protest GISB having a role in the creation of an auction process. "The producers don't want GISB involved in the auction. They are adamant about this," said Phil Budzik, director of regulatory affairs for the Natural Gas Supply Association. Producers aren't too happy with the progress that GISB has made with the issues on its plate so far, so why give the standards-setting organization more, he asked.

Industry reactions to the proposed auction touched on a number of issues. For Pat Purdy, the CEO of Strategic Energy Ltd., the burning question wasn't whether an auction process could be created, but whether it would work and whether it was needed. "I really don't know" if it would work. "We thought that the bid process on released capacity was going to work," and it had "dismal results," he said. He also had doubts about the industry's need for an auction process since more than 80% of the capacity-release transactions today are pre-arranged deals. "Probably on some pipelines [there] will be" need, but in other parts of the country the market may be working "just fine the way it is."

Terrence L. McGill, president of Columbia Gulf Transmission, said his company believes the NOPR could create an "artificial bias" in favor of short-term services that "could prove detrimental to the long-term health and expansion of the industry." He called for the "appropriateness and viability of the auction [to] be brought into much sharper focus" at the FERC workshop. On a more positive note, McGill said the auction idea was "further evidence" of the industry's "move towards the commoditization of transportation." Specifically, it is reflective of the move away from "the old public good concept to almost [a] pure bottom-line orientation."

Some gas producers at the DOE-NARUC conference speculated that the proposed auction and other FERC initiatives could threaten the industry-wide goal of obtaining a 30-32 Tcf gas market within the next decade.

"One of my concerns about funneling all the short-term capacity through an auction is that it may prevent the development of genuine third-party, independent aggregators and brokers...to compete with current capacity sellers and holders of capacity," noted one industry executive. Strategic Energy's Purdy suggested that it might be up to state regulators to offer the "right incentives" to prevent this from happening.

Michigan State University's Prairie had some further advice for FERC. First, she strongly suggested that any "regulatory model" that it develops aimed at mitigating market power include "the convergence and consolidation realities" of the industry. "Even if there isn't market concentration today, a few mergers among pipeline companies...would instantly change the level of competition in both the primary and secondary markets."

Also, FERC and the state agencies need to take a good look at themselves. "...[A]s the industry has been transformed, I'm not sure that the staff[s] of the regulatory agencies have been transformed to go along...to match the restructure."

Susan Parker, Ellen Beswick

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