Industry Opposition to Auctions Nearly Unanimous
It's nearly impossible to get the various gas industry sectors
to agree on anything, but some already are putting out signals
they might band together to send FERC the clear and unmistakable
message they don't like its capacity-auction proposal.
"There's some possibility that the major industry segments will
get together to decide they don't like it, and then will come out
and say 'thank you, but no thank you.' We're already talking to
each other about that, but it's a delicate dance," said a leading
industry representative, who asked that both his name and
gas-sector affiliation not be disclosed. "If a lot of parts of the
industry come in opposing auctions, it may be harder for them to go
ahead with it," agreed another source, adding, however, that FERC
commissioners appear "pretty upbeat" about the concept.
The industry representative doubts there would be any winners if
the Commission were to move forward with auctions on an
industry-wide basis. "I think the primary loser would be the
pipelines because if everything goes to a daily auction, some
pipelines are just going to get pummeled financially." The "next
biggest loser would be the producers primarily because of [large]
transaction costs," he noted. Third on the loser list would be LDCs
"because if people are waiting to buy into the daily market, why
would they buy released capacity that's presumably more expensive?
It would kill the capacity-release market."
The source noted that he was definitely opposed to a voluntary
auction because only pipelines that are "mostly full" would enter
the program. "It would be the land of milk and honey for them," and
transportation customers would suffer. But customers also would
feel the pain in a mandatory auction in which pipelines could set a
reserve price - the minimum acceptable price for a bid, he said.
The reason: market power could not be constrained with a reserve
Under that scenario, "the reserve price would be high in
periods of slack [capacity] demand, "so you're literally forcing
people to pay more than they would've otherwise," and in periods of
tight demand, the reserve price presumably already would be above
the maximum lawful price. "So the result is a behavior that is a
net increase to rates."
At the very least, an auction without a reserve price might be
acceptable, he noted. "An auction without a reserve price is a
mitigator of market power because...in periods of slack demand they
[the pipelines] would have to take whatever price they get" for
In its proposal, the Commission has required a reserve price
"because they're afraid that if they make it mandatory without a
reserve price then some of the pipelines possibly would go
bankrupt. Now that's in contravention to the law [Natural Gas
Act]," the industry representative said. However, keeping the
pipelines intact would exact a toll on customers since pipes would
be able to collect revenues "above and beyond what they should be
able to collect." FERC "[has] created a proposal that's a monster,"
"I suspect that we would have a very good legal case that the
Commission's current proposal allows for the exercise of monopoly
power, and therefore results in unjust and unreasonable rates," the
source told NGI.
"I was disappointed" by the Commission staff's workshop on
capacity auctions two weeks ago, he said. "I think there were a
number of parties from both the producer community and LDC
community that had legitimate questions that were dismissed. I
thought people were coming there to get guidance. And I'm not sure
what another conference would do for us, I mean if they're not
going to answer questions."
Lorraine Cross, senior vice president of regulatory affairs for
the Interstate Natural Gas Association of America, also faulted
FERC staff for failing to respond to a series of technical
questions about auctions that were submitted by several industry
groups prior to the workshop. Staff said it declined to answer
questions that required them to comment on policy issues.
"I thought that...truthfully the vast majority of the questions
were not policy questions. They were technical questions about the
mechanics of auctioning, and I don't think nearly all of them were
answered," Cross said. Moreover, "I don't think the questions about
how you would run a daily auction were very well answered. We heard
a lot about how you 'might' conduct an auction, but nothing about a
specific proposal, [or about] one that is likely to be selected" by
For one industry insider, however, the workshop was a "useful
exercise in the sense that it really framed a lot of issues." He
believes "the really interesting thing will be what they do in the
follow-up [workshop or conference]. That may give us more of a feel
for where they are going" with their auction proposal.
"Frankly, after that next conference I would hope they have no
more conferences. Let us then get down to the business of preparing
comments" on the Commission's July notice of proposed rulemaking,
which raised the auction concept, that are due to be filed in late