Producers and marketers say Natural Gas Pipeline Co. of America(NGPL) conducted a capacity auction earlier this month in anillegal manner, and now are looking to FERC to overturn the resultsof the auction and to prevent the re-occurrence of the allegedviolations in the future.

In a Section 5 complaint, Amoco Production Co., Amoco EnergyTrading Corp. and Burlington Resources Oil & Gas (IndicatedShippers) called on the Commission to terminate any contracts thatwere executed during the auction, which ended on Oct. 8th, and toorder NGPL to revise its auction procedures to conform to itstariff and existing Commission precedent. They requested that “fasttrack” procedures be used to address the complaint.

If remedial action is warranted, which NGPL doesn’t think willbe so, the pipeline said it should be imposed prospectively “toprotect good-faith bidders and the integrity of the auctionprocess.” Nothing would be “more destructive to the auction processor to the evolving market for pipeline capacity than reversing anauction.”

Specifically, the Indicated Shippers accused NGPL of: 1)creating an undue preference for negotiated-rate bids byprohibiting shippers from bidding a discounted rate in therecourse-rate form; 2) requiring shippers to bid on non-contiguouscapacity as part of the same capacity auction; 3) undulydiscriminating against recourse-rate bidders by exempting onlynegotiated-rate bidders from separately paying for GSR and AccountNo. 858 surcharges; and 4) improperly restricting a shipper’scapacity-release rights in a previous auction, which the pipelinelater canceled. Some producers and marketers contend they were”effectively prevented” from participating in NGPL’s capacityauction because of the alleged illegal procedures.

NGPL called the complaint a “collateral attack” on its tariff,the FERC orders approving its tariff and Commission orders andpolicies. Moreover, it doesn’t believe the complaint is a “realdispute,” given that the bid submitted by Amoco during the auction”not only was…..invalid, but it was also not competitive underany possible analysis…”

Although the financial impact of the claimed violations cannotbe “readily calculated,” Indicated Shippers estimated that each onecent/Dth overbid in NGPL’s auctions would result in an overpaymentof about $400,000 a year. The figure, however, didn’t account for”the impact of inaccurate market signals on gas sold andtransported or other capacity,” the group said. NGPL responded bycalling it an “arbitrary” calculation. “No basis in fact has beenshown for this or any other monetary claim of harm.”

In the most recent NGPL auction, Indicated Shippers contend thepipeline showed a clear “preference” for negotiated-rate bids byeffectively denying shippers the right to submit recourse-rate bidson a discounted basis. Instead, NGPL structured it such thatrecourse-rate bidders could only submit bids equal to thepipeline’s maximum rate, the group said.

The pipeline established a different reserve price – the minimumprice that it’s willing to receive for capacity – fornegotiated-rate and recourse-rate bids during the auction in anattempt to “basically eliminate” bidding by recourse shippers, saidSteve Tarpey, gas regulatory representative for BP-Amoco. Thereserve price for recourse-rate bids was equal to $11.38 million,he noted, while the reserve price for negotiated-rate bids was”somewhere in the area of $2 million.” This disparity “absolutely”discouraged bidding by recourse shippers “because you’re notcompeting on an even playing field.”

Indicated Shippers also complained bidders were required to bidon “non-contiguous capacity” in NGPL’s South Texas, Mid-continentand Permian Zones, and as a result often wound up with capacitythey neither wanted nor needed. For instance, “a bidder onlywanting South Texas [was] forced to bid on Mid-continent andPermian Zone capacity, and a bidder only wanting Mid-continent Zonecapacity [was] forced to bid on South Texas and Permian Zonecapacity.”

Bidders on NGPL “must have the flexibility to bid on only thecapacity they desire and should not be required to bid on unwantedcapacity,” Indicated Shippers said. The Commission recognized thisright in a November 1998 order, the group noted. “…..[B]yimproperly bundling non-contiguous segments of capacity, NGPL isinterfering with market signals regarding the value of capacity andsuch interference could distort the market price for natural gas onNGPL’s system.”

Moreover, Indicated Shippers insist NGPL has further created an”undue preference” in favor of negotiated-rate bidders by exemptingthem from GSR, Account 858 and other discountable surcharges, butdenying this to recourse rate bidders. In the November 1998 order,the group noted the Commission expressed concern in this area, anddirected NGPL to remove all surcharges from its net present valuecalculations to ensure the transparency of the bidding process.

The producer-marketer group also asked FERC to address thelegality of NGPL being allowed to place limitations on a winningbidder’s ability to segment capacity awarded in an auction and onthe rights of a replacement shipper.

Susan Parker

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