Whose Idea Was An Auction Anyway?
While technical conference participants hotly debated FERC's
natural gas transportation initiatives last week, there appeared to
be some areas of agreement - starting with the need for more time
The current style of pre-arranged capacity release deals also
appears to have broad support, as does opposition to requiring
expensive new information systems to implement a capacity auction
The request for extended time came from the four major trade
associations that make up the Natural Gas Council (NGC) and two
other energy trade groups. They asked FERC for a second extension
of the deadline for industry comments on the major notice of
proposed rulemaking (NOPR) and notice of inquiry (NOI), moving the
current Jan. 22 deadline to April 22. [RM98-10, RM98-12]. The idea
is to come up with alternatives to the Commission's proposed
short-term capacity auction and at least narrow the differences
among the industry segments. As of late Friday, FERC had not acted
on the request.
Meanwhile pipelines offered FERC a choice regarding its
transportation proposal: either provide an option of seasonal rates
or if driven to an auction they will fight to maintain an auction
reserve price equal to their maximum rate, thereby defeating the
Commission's concept of an auction to establish competitive rates.
Pipelines dropped these alternatives into the mix at the FERC
staff's second conference last Tuesday on the auction proposal
that's included in the Commission's mega-NOPR.
The Commission has proposed auctioning of short-term capacity on
a daily basis as quid pro quo for removing price caps in the
secondary market. The conference, rather than resolving any of the
issues, only underscored the gas industry's universal opposition to
the auction initiative. "It's fraught with a lot of problems, and
FERC realizes this," said a producer source.
The latest proposal to set a floor for the reserve price at the
cost-of-service rate is intended "to protect the buyer and the
market from extraordinary and damaging price swings" in the
short-term market, notably during peak periods, according to
Lorraine Cross, senior vice president of regulatory affairs for the
Interstate Natural Gas Association of America (INGAA). In effect it
would allow the auction to set a market price above the maximum
lawful price (MLP), but not below it. It also would not allow the
pipeline to set a reserve price above the MLP.
As currently proposed, the NOPR denies pipelines the right to
set reserve prices in short-term auctions. In effect, it requires
them to auction all available capacity to shippers, even if the
bids received are below their MLP. From the pipelines' perspective,
what FERC is demanding of them is nothing short of "illegal," said
Richard Baish, president of El Paso Natural Gas.
The NOPR "presupposes that the Commission has the power under
the [Natural] Gas Act to order a pipeline to charge something less
than the rate that is on file [in] its tariff. Absent a finding
under Section 5 that the rate is no longer J&R [just and
reasonable], I don't believe the Commission has that power," he
told FERC staff. If pipeline revenues are reduced as a result of
new Commission policies, Baish is particularly concerned this could
unravel El Paso's 1996 rate settlement with its customers. Under
that agreement, El Paso agreed to assume 65% of the costs
associated with unsubscribed capacity on its system, while
customers would shoulder the remaining 35% of the costs.
The Commission is faced with a real dilemma on the reserve-price
issue: if it institutes an auction without a reserve price, the
pipelines will lose revenues and subsequently will take FERC to
court, but if it implements an auction with a reserve price, the
producers will take it to court, said the producer source. However,
"FERC is less in jeopardy of being overturned by the courts if it
goes along with a cost-based seasonal rate proposal" as opposed to
the auction, he believes.
The LDCs also cited their disdain for an auction proposal with
no reserve price, saying that it would place greater risk on
holders of long-term capacity. This is counter to the goal the
Commission is trying to achieve as LDCs and state regulators
grapple with how to handle expiring pipeline contracts, said
William P. Boswell, vice president and general counsel for Peoples
Gas and representative for the American Gas Association (AGA). It
also could negatively affect the next stage of retail competition
at the state level.
Pipes Fear Losses
The proposal for seasonal rates, which would be optional for
pipes, is expected to address a major concern of pipelines: that
the NOPR's bias towards the short-term market over the long-term
market would result in the underrecovery of costs for them. "Under
the seasonal pricing model, the pipeline's projected annual
revenues would not change [be reduced]" in the event of capacity
auctioning, said John W. Somerhalder, president of Tennessee Gas
Pipeline. Tariff rates would be set such that pipelines would be
able to recover more fixed costs in the per-unit charge during peak
winter periods than in off-peak periods, he explained.
Shippers reacted cautiously to the pipelines' two proposals. "I
saw no attempt made by the pipelines other than to push all of the
risk on to the shippers," said Jeffrey A. Holligan of Amoco
Production at the day-long conference.
Given that the pipes' reserve-price proposal, which would allow
short-term auction prices to go above but not below the maximum
rate, could mean excess revenue for pipelines, it begs the question
of what would happen to that excess revenue, said Washington
attorney Kathy Edwards. Would pipelines keep the excess as profit
or flow it back to shippers? the producer attorney asked.
Also since seasonal rates wouldn't be mandatory, "one of the
things that I'd want to look to is whether the price signals of the
generation market and other aspects of the energy market would be
distorted as a result of having seasonality in one pipeline," but
not in another, said Tom Brill of Sempra Energy.
"Everybody appears to be saying this [seasonal ratemaking] is
going to be the solution to the problem. I think what we should be
really looking at is other rate designs other than SFV, perhaps
moving to a volumetric rate [to encourage] the pipelines to
maximize the throughput in their systems," said Kathryn Patton,
director and regulatory counsel for Dynegy Inc.
Another key issue tackled by industry representatives was
pre-arranged deals. Kevin Madden, director of FERC's Office of
Pipeline Regulation (OPR), questioned whether excluding capacity
associated with pre-arranged and bilateral transactions from
auctions would, in fact, render auctions meaningless. Most agreed
Auction for IT
"The capacity that I'd think you'd find remaining in the
auction bloc would be the pipelines' IT, which there's still a
significant amount of...that [that] trades. And I think you'll find
there'll be some secondary [capacity] in there on a voluntary
basis," said Denise C. Goulet of the Pennsylvania Office of
Consumer Advocate. "We're not precluding the prospect of secondary
capacity trading in an auction process, [we're] only saying that it
shouldn't be mandatory," she noted.
Goulet's group believes FERC should require pipeline
interruptible and short-term capacity to be traded in auctions, but
not released capacity. "...[W]e think release capacity markets
are...robustly competitive currently. The vast majority of the
release transactions occur at well below the maximum tariff rate
for the capacity that's traded. We are aware of no complaints of
market-power abuses in this process. In addition, there is no
incentive for the primary participants in the secondary capacity
market [the LDCs] to withhold capacity from the marketplace. So the
primary premise for mandating an auction just isn't there with
respect to the secondary market," she said.
"Forcing secondary capacity into a mandatory auction without the
ability to do pre-arranged deals, without the ability to have
recall rights will not only result in fewer capacity options being
traded because the LDCs just cannot afford to forego the right to
be able to recall capacity, but you may also find that there are
fewer revenue offsets" for residential customers, Goulet said.
Some conference participants were particularly concerned FERC
changes might unravel the state unbundling programs that have been
based on current rules. Others believe FERC has it all backwards -
it should work on long-term capacity issues first and then possibly
tackle an auction.
Dynegy's Patton thinks it might be best to "relegate" the issues
raised in the NOPR, especially the auction proposal, back to NOI
status. "Quite frankly, the NOPR has more questions than