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NGPL Auction Initiative Not Industry Prototype, FERC Says

NGPL Auction Initiative Not Industry Prototype, FERC Says

FERC last week approved, subject to modifications, a major settlement that spells out how Natural Gas Pipeline Co. of America (NGPL) will auction off long- and short-term transportation capacity on its system. The decision was seen as a big win for the Midwest pipeline, with the Commission siding with it on key contested auction-related issues.

The Commission stressed that the Natural open auction shouldn't be considered as a blueprint for the proposed auction procedures that are now being considered for industry-wide use, but the decision itself does provide industry with a glimpse into FERC's thinking on some of the more controversial auction issues - such as when the winning bidder or bidders should be disclosed, contingent bidding and reserve pricing.

The Commission's decision in Natural "may have little or no effect on our ultimate position on the use of auctions for short-term capacity," cautioned Chairman James Hoecker, because the reason for instituting an auction in each case has been entirely different. The Natural auction was ordered as a remedial measure to prevent the pipeline from showing preference to its affiliates when awarding capacity, while the purpose of the auction as envisioned in the July notice of proposed rulemaking (NOPR) would be to provide a check on pipeline market power in the event price caps on short-term capacity are lifted.

A high-ranking FERC staff member also cautioned industry against reading too much into the Natural decision. "The broader policy issues of auctions, sort of how they ought to be constructed [and whether we should have them], were really left for the bigger rulemaking proceedings." Still, he has no doubt that gas industry members who are interested in the auction process will closely watch the Natural auction when it gets underway next year to determine 1) whether the auction really works; and 2) whether it might work for their own system.

Under the settlement, as proposed, Natural would be required to post all firm transportation and storage capacity for auction no later than 15 months before the capacity becomes available. The pipeline initially would institute single-bid procedures, but for capacity not awarded under that method, it could use an extended auction or short-term auction. Shippers also would have the option to initiate auctions on Natural's system. In addition, the settlement would allow for pre-arranged deals between the pipeline and shippers. Natural would use these auction procedures until it could institute an interactive process in a year or two. The Commission ordered the pipeline to submit revised tariff procedures to be effective Jan. 1. [RP97-431-005]

Natural would use a net present value (NPV) formula to evaluate bids, and it would set reserve prices - the minimum price at which it would award capacity - based on a matrix that would take into consideration a number of factors, including time period, service type, service option and geographic market. The Midwest pipeline proposed that the geographic market cover up to 15 markets, and that there be 12 time periods for each auction.

The geographic component of the reserve matrix was one of five hotly contested issues that Natural's shippers asked the Commission to settle. The other contentious issues were: 1) whether a shipper's full payment of its gas supply realignment (GSR) costs should be factored into bids; 2) whether a winning bidder (at maximum rate and term) should be subjected to a subsequent round of bidding under the iterative process, and, if so, how would available capacity be prorated if the bid is matched in the second round; 3) whether Natural should be required to accept a bid that is contingent upon the bidder's evaluation of deals with competing pipelines and, if so, how long must Natural allow for resolution of the contingency; and 4) whether Commission policy and precedent required firm gathering capacity to be auctioned off.

On the issue of the geographic component of the reserve matrix, the Commission accepted Natural's 15-market matrix over the pipeline's existing 8x6 rate zone matrix that was preferred by a number of its customers. The customers argued that the 15-market matrix would give Natural too much leeway to discriminate in favor of its affiliated marketer when awarding capacity. FERC okayed Natural's proposal but said it remained "concerned that Natural's reserve price matrix could act as a market barrier at one point and at the same time allocate capacity to a lower-valued bidder at another point."

To address this concern, the Commission ordered Natural to compile a record of the "reasons and basis" for each reserve price used in each auction at the time of the auction. The information would only have to be disclosed if there is a complaint.

The pipeline lost its fight to be able to adjust bids upwards for shippers that have fully paid their allotted level of GSR costs. Without such an adjustment, Natural argued that bidders who already have paid their GSR costs would, in effect, be required to pay additional GSR costs to obtain capacity on its system. Indicated Shippers objected to the proposal, saying it would give Natural shippers that have paid their GSR costs a permanent preference for the pipeline's capacity over those shippers that still have outstanding GSR costs. The Commission agreed with Indicated Shippers.

"Natural cannot manipulate the bids of customers by imputing additional values, such as a GSR factor, because this action will undermine both the transparency of the auction and confidence in the process," it said. The Commission modified Natural's proposal, such that auction bids would reflect a party's offer to pay the pipeline's base rates. It would be on this basis that the NPV would be calculated, it noted.

The shippers, however, lost out on a proposal that would have enabled them to make the acceptance of the Natural capacity they bid on contingent on two factors: 1) the reduction or termination of an existing contract if it overlaps with capacity in the auction; and 2) the purchase of requisite upstream or downstream on other pipeline systems.

Such contingencies "would place Natural at a significant competitive disadvantage," the order said. "Natural would be required to wait for at least a two-day period during which winning bidders could shop for more advantageous capacity arrangements. If a winning bidder did opt for another arrangement, Natural would be unable to respond with a better offer."

The Commission sided with the pipeline's shippers when it held that firm gathering capacity should be subject to auctioning. "Here, it is important to ensure, given the findings of past abuses in the allocation of transmission capacity on Natural's system, that access to gathering service be offered on a non-discriminatory basis."

When Natural switches to an interactive procedures in a year or two, a key issue will be whether the bidder of the maximum price and terms in the first round of an interative auction should be declared the winner then, or should he face additional bidding and/or possible proration of capacity in a subsequent round. The Commission believes it should be the former. The auction "should be designed to reward early maximum rate bids for capacity."

FERC also said "disclosure of the identity of winning bidders on a quarterly basis is sufficient to prevent undue discrimination." Some shippers had asked that disclosure occur immediately following an auction.

Susan Parker

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