Implementation of a mandatory capacity auction, as proposed byFERC in its mega-notice of proposed rulemaking (NOPR), couldjeopardize the opportunity for natural gas to gain a greater shareof the prized electricity market in the future.

The observation was made by Charles Linderman, director offossil fuels and renewables for Edison Electric Institute (EEI),during a panel discussion on the mega-NOPR and notice of inquiry(NOI) at the National Association of Regulatory UtilityCommissioners’ (NARUC) winter meeting in Washington D.C. lastMonday.

Glen Kettering, senior vice president of Columbia GasTransmission, agreed the FERC-proposed auction could undermine gas’chances in the power market – a market that’s absolutely criticalif the gas industry is to meet its demand goal of 30 Tcf over thenext decade. “We think…the problem of adding a couple layers ofcomplexity to the mechanisms for allocating and pricing capacityare not positioning the gas industry to serve the electric marketwell,” he told state regulators and industry executives.

“From my discussions with EEI members, they tend to agree thatauctions will make it more difficult to move natural gas,” remarkedTim D. Kelley, president and CEO of CMP Natural Gas, an affiliateof New York State Electric and Gas.

While a one-size-fits-all approach to pipeline services would bea prerequisite to having a liquid, robust auction market, he noted,”we think that the industry is moving in another direction, whichis [towards] more specific types of services for individualcustomers, and I think that affects the ability for an auction towork.”

The pipelines aren’t saying “no, no never an auction,” Ketteringsaid. “Our point is that the auction as structured in the NOPR -that is, one with no reserve price, no ability to establish a priceon behalf of those folks selling capacity – is not a good publicpolicy approach…,” he noted, adding that pipeline capacity wouldbe seriously devalued without a minimum reserve price. Likewise,Kelley said he was hard-pressed to find any support from LDCs forthe Federal Energy Regulatory Commission’s` auction proposal. But,he added, “I think there might be some support for a voluntaryauction…” LDCs believe the Commission is taking a “belt andsuspenders approach” by proposing both an auction and increasedreporting requirements. “We don’t really see why we need both…”

Auction opponents invariably argue that “what the auction isgoing to do is it’s going to drive down the price of pipelinecapacity. I don’t know what’s evil about that,” countered RichardO’Neill, director of FERC’s Office of Economic Policy. He believesthe real reason pipelines are opposed to the proposed auction isthat it would control “too much of [their] market power.”

Some producers like the idea of a capacity auction. “I guessuntil somebody comes along with a better suggestion it seems to usthat the concept of the auction as a way to allocate capacity isvery, very enticing,” said William Benham, vice president ofregulatory affairs for BP Amoco. He believes an auction wouldremove both the ability of pipes to withhold capacity to drive upprices and the inconsistencies in existing capacity-awardingpractices.

He conceded the transaction costs associated with an auctionwere a “legitimate” concern of opponents. “But in our mind, thecosts associated with not having a fair system for allocatingcapacity are going to far outstrip the costs and time and resourcesthat are necessary in order to participate in an auction, as wellas design [one].”

Industrial customers want a user-friendly auction, but theydon’t think the Commission’s proposed auction mechanism fits thatbill, said Mintern Smith of Procter &amp Gamble. “Unfortunately,the systems that I’ve seen proposed – I guess that’s one of theproblems; we don’t have a lot of details on what this auction lookslike – [are] very complex,” making it difficult for both end-usersand LDCs to participate in the process. To “play” in an auction,pipeline customers would have to be “constantly” on line with themarket. “We just don’t have [the] kind of staff” to handle that,Smith told the NARUC gathering.

The auction and other initiatives in the Commission’s mega-NOPRand NOI have been the subject of discussion at a series ofclosed-door industry meetings over the past couple of months. Thenext meeting, which will be held this week, “will be sort of amake-it-or-break-it meeting. We’ll either decide there’s enough tobuild a consensus that we’ll continue meeting, or we’ll decidethere’s no consensus and we’ll disband the discussions,” a sourcetold NGI. Industry comments on the NOPR and NOI initiatives are dueat the Commission by April 22nd, but there’s a chance it could seekanother extension of the deadline.

Beyond the auction issue, participants on the NARUC panel and atthe FERC conference generally supported removal of the price cap onreleased capacity, but were mixed about lifting the cap on pipelineinterruptible and short-term firm. CMP’s Kelley said LDCs were”willing to discuss” the possibility. BP Amoco’s Benham indicatedhis company was open to considering lifting the price cap in theshort-term market as well. But NARUC was expressed concern on thisissue.

Susan Parker

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