FERC's Madden Considers Auctions, Affiliates, E-Trade
Interest in pipeline capacity auctions is far from dead at the
Federal Energy Regulatory Commission. Just ask FERC's Kevin Madden,
who hasn't given up on them and thinks they have a major role to
play in the natural gas industry.
"Personally I believe that we should move forward on auctions. I
think there's a great deal of need for the auctions.....," said the
deputy director of FERC's Office of Markets, Tariffs and Rates at
GasMart/Power 2000 in Denver last week.
"I think that if you have an auction that's real time," that
provides protection for captive customers, clear transparency and
is easy to use, then "I think you could release the price cap on
some of the pipeline short-term services," he told a crowd of
energy executives at the industry's 14th annual conference and
trade fair. "Now you have to look at, though, what would be the
market clearing price [for capacity in auctions]. It doesn't work
when you set it at variable rates. What should be the price for the
floor? That has to be worked out."
Madden noted that a "number" of pipelines have come to his
office to talk with him or other FERC staff members about auctions
and have submitted pre-filing proposals. More pipelines are
expected to meet with him in the future to discuss auctions.
The major gas rule, Order 637, nixed the idea of mandatory
capacity auctions, settling instead for voluntary auctions on the
part of individual pipelines. The only industry support for
mandatory auctions came from gas producers. In fact, Madden
believes Amoco Production offered a "pretty good proposal" for
Because the mandatory auction concept met with so much industry
opposition, the Commission in Order 637 decided to remove the price
cap only on short-term, capacity-release transactions for a
two-year experimental basis. The caps on short-term pipeline
services --- short-term firm and interruptible --- remain in place.
The auction issue will be further addressed on rehearing of
Order 637, which was scheduled for last week's Commission meeting,
but pulled from the agenda. "It's my hope in order to provide a
little bit more certainty [to the market] that we will see some
action from the Commission [on rehearing] in the very near future,"
Auctions are one of many issues the Commission hopes to thrash
out with the gas industry in the near term, he said. In the wake of
Order 637, "we have a lot of issues to discuss with the industry
and we're in the planning stages right now of how to get that up
Madden believes FERC must tackle the issue of e-commerce soon.
"E-commerce can be used with respect to auctions.....in order to
provide the real-time, on-line transparency that the market needs."
He noted the electronic trading of natural gas is the furthest
along of all energy markets, reporting on-line trades of more than
$10 billion in 1999. He expects the figure to triple this year. In
the next five years, e-commerce for natural gas and other energy
sources is expected to soar to as much as $500 billion. "In five
years, you're going to see some major money on e-commerce," Madden
"I think this [e-commerce] is going to be the linchpin of a
successful market in the future. This issue is essentially moving
so quickly, things are changing so fast that we [FERC] are going to
have to focus on it real soon," he told GasMart/Power attendees.
"...[W]e want to make sure that our policies do not affect the
successful commercialization of e-commerce." The energy industry is
awaiting a response to its request for FERC to conduct an inquiry
into the effects of regulation on e-commerce in the gas and
In conjunction with auctions, FERC and industry will have to
further examine the relationship between pipelines and their
marketing affiliates. The issue begs a lot of questions. "Should
we, for example, say that a pipeline affiliate cannot do business
on its sister pipeline?" he asked. The downside of this, Madden
reminded gas executives, is that affiliates would no longer be
available to buy the capacity that non-affiliate customers turn
back to the pipeline.
Or, he asked, "should there be a limitation on the amount" of
capacity that affiliates can hold on their sister pipelines? On a
number of major pipelines, FERC is finding that the portfolios held
by affiliates are enormous, Madden said.
For affiliates that participate in bidding on their sister
lines, should the Commission "have a tighter hold on them than any
other players in the market?" Also, he asked, should there be a
limit on the amount and price of the capacity resold by affiliates
into the secondary market?
On the issue of pipeline rate design, Madden said that in the
past three to four years he's "seen a lot of movement on negotiated
rates and less on your cost-based rates." He expects this trend to
continue big-time into the future.
"It seems to me that we need to think about bifurcating a
different type of regulatory scheme to focus on those areas where
the shipper has more means, there's more flexibility, there's more
access" compared to "those [areas].....where you have the
traditional captive customers."
Madden further told gas executives last Tuesday, the day prior
to the Commission's regular meeting, to look for FERC to address
the issue of interconnections on the interstate gas pipeline grid.
The following day the Commission unveiled a new gas interconnection
policy in a case involving Panhandle Eastern Pipe (See related
story, this issue). "The key thing.....for an interconnection
policy to work [is] an efficient reliable hook-up, and that's both
on the gas side and the electric side. There has to be the gas
there to meet the particular needs of generators" and other
customers, he said.
Madden believes standardization is another issue that warrants
review. "We have a great deal more liquidity on the gas side than
you have on the electric side. [The Gas Industry Standards Board]
has done a lot, but I think we have to look at whether we should do
more in terms of standardization [for gas] and should we do more
with electric.....if so, should we also focus on the retail level."
As for reporting requirements, Madden thinks FERC may have gone
overboard on these. "In my belief, there's clearly a lot of
reporting requirements right now and a lot of information that we
get that we don't need.....So I think that's going to [warrant] a
Susan Parker, Denver