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Natural Proposes Interactive Auction for All Capacity

Natural Proposes Interactive Auction for All Capacity

Acknowledging it is entering "uncharted waters," the Natural Gas Pipeline Company of America (NGPL) as part of a comprehensive settlement has proposed to implement an interactive auction process for posting and awarding transportation/storage capacity on its system. It could be up and running within less than two years. All of the "active" parties in the settlement proceeding have indicated their support for the proposed package, although five issues have been reserved for comment and resolution by FERC.

"What we hope to ultimately end up with is a real-time, bidding-type process of an auction, where once Natural posts the availability of capacity and what segments of pipe it's on, shippers would then have the ability to bid on that capacity. The bids they put in will automatically be posted, and the [net] present value of the bids will be calculated in a real-time fashion so that they'll be able to see almost instantaneously if they're the high bidder on the particular package they're bidding on," said Bruce Newsome, director of rates for Natural [RP97-431]. The pipeline's objective is to move towards an interactive auction process "as soon as we can."

Natural's auction proposal is in response to shipper cries and Commission orders calling for the pipeline to provide more transparency in the way it allocates transportation capacity. The proposal comes less than a year after FERC imposed a multi-million-dollar fine on the pipeline for favoring its marketing affiliate over non-affiliates when awarding capacity.

Some industry experts believe Natural's proposed auction procedures would make a good test case for the auction concept raised by FERC last month in its notice of proposed rulemaking (NOPR) dealing with short-term transportation services [RM98-10]. In return for removing the price caps on short-term capacity, the Commission proposed that interstate pipelines sell the capacity through auctions. The FERC plan, however, was short on the specifics for carrying out the auctions. The Natural auction plan might be able to fill in some of the blanks in this area, and could "serve as a template for the Commission," said Philip Budzik of the Natural Supply Association of America. "It may be something that we [producers] can support."

But Newsome believes that having Natural's proposed settlement tied to the rulemaking would be a mistake for the pipeline and its customers. "Certainly what we've agreed to [in the settlement] - once the Commission approves it - should be implemented much sooner...than anything coming out of the rulemaking," he said. "There's no time frame as to when the Commission has to do anything at all with regards to that rulemaking. That could clearly be several years down the road." Nevertheless, he agrees that the experience gained from Natural's proposed auction procedures could benefit the rest of the pipeline industry.

He acknowledged there are some "similarities" between FERC's rulemaking and Natural's proposed auction process, but there are several differences as well. For instance, the Commission proposes that auctioning apply to only short-term capacity, while Natural seeks to use it for awarding virtually all of its capacity. Natural's plan also adds the "details and specifics as to how an auction would work. From that standpoint, what we propose goes beyond what the Commission has offered..."

Specific Procedures

Under Natural's settlement, the pipeline would post all firm transportation and storage capacity at least 15 months before the date the capacity would become available. "Natural will not discuss the availability of firm capacity with any shipper until the posting has been made," it noted in the proposed settlement.

Auctions initially would follow a single round of bidding until Natural can implement the computer and information systems needed for interactive bidding, the pipeline said. "Best-case scenario, you're probably looking at the early part of next year for the single-round auction to be in place," Newsome said. Competing bids would be valued based on a net present value (NPV) formula, which would take into account discount rates or gas supply realignment costs.

The pipeline then would begin work to implement the interaction process by Dec. 31, 1999 at the earliest or June 30, 2000 at the latest. The key to the interactive auction process will be the development of a computer and information system to carry that out. The pipeline expects to develop the system internally, but this is "one of the things that we are going to have to explore," said Newsome.

Under the interactive procedures proposed for auctions, there would be an open-bid period and all bids would be posted upon receipt. Capacity packages would be established based on the qualifying bids or combination of bids that meet the reserve price (the discount rate at which Natural is willing to award capacity) and result in the highest value under the NPV formula. "Subsequently, there will be iterative bidding in intervals of thirty (30) minutes," Natural said. If no one posts a bid on a specific capacity package that beats the qualifying bid in the previous round, the auction then would close on that capacity package and the capacity would be awarded.

The pipeline said it would issue a report to FERC staff and others on Sept. 30, 1999 detailing its progress in implementing the interactive system. Additionally, it plans to conduct a review of the interactive auction procedures one year after they have been in place, assuming the settlement is approved by the Commission. Initial comments on Natural's settlement are due today (Aug. 24th) at FERC, and reply comments are due Sept. 3rd.

Adds Transparency

Newsome believes its auction proposal will be a boon to both shippers and Natural. "We're trying to put in place a mechanism where first shippers will know when pipeline capacity will be coming on the system. And we're doing that through a much earlier posting of the availability of capacity. Beyond that shippers are going to know up front exactly what criteria we're going to use to evaluate bids on that capacity. And we'll also make available to shippers a downloadable spreadsheet in which they could in effect plug into a bid to see exactly what present value will be calculated so they know exactly how their bid's going to be evaluated.

"Third, just after an auction's completed, we're going to post what the winning bid is as well as all other qualified bids, [enabling shippers] to check very easily that the bid was awarded to the right package." In short, "from a shipper's standpoint, everything will be much more transparent than it was before."

As for Natural, the proposed procedures will provide "us with the flexibility that we think we need to do business in the future in that we will still be able to do pre-arranged deals with shippers ahead of time. But once that deal is completed, we would have to post that package of capacity for people to have the right to beat that pre-arranged deal," he noted.

In the event a shipper would bid above a pre-arranged deal, Natural has outlined a "limited procedure" that would give the pre-arranged shipper as well the "right to trump the best bid in the auction." Under the settlement, the pipeline has agreed not to enter into any such pre-arranged deals with its marketing affiliates until Jan. 17, 2000 or 60 days after the interactive auction procedures are operational, whichever comes first. But it noted that nothing in the settlement will limit the right of a marketing affiliate to initiate or participate in any auction or to exercise unilateral rollover rights or the right of first refusal under Natural's tariff.

Newsome noted that Natural chose Jan. 17, 2000 as the date to begin pre-arranged deals with its marketing affiliates because it will mark the end of a two-year period during which FERC said if the pipeline remained free of further capacity-allocation violations, it would waive half of the more than $8 million penalty that it imposed on Natural earlier this year. The Commission fined the pipeline after it confirmed Amoco Production's allegations that Natural favored its marketing affiliate, MidCon Gas Services, over non-affiliate shippers when awarding firm transportation capacity on its system.

Susan Parker

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