Industry, Regulators Argue Transportation Auctions
FERC's proposal to organize and monitor the short-term market
through daily auctions is either a belated and unnecessary
administrative nightmare - or the road to vigorous competition in
the transportation market, i.e. the "commoditization" of
Those were the views expressed during sessions and in the
hallways last week at the DOE-NARUC Natural Gas Conference in
Pittsburgh, with industry mostly lining up behind the "nightmare"
scenario and regulatory types espousing the competitive theme.
One expert on regulatory issues has suggested that seeing the
entire gas industry "apparently marching against the proposed
option" in lockstep is a good sign that FERC is on the right track
in its effort to create "vigorous price competition."
The daily auction concept, which was proposed in a July notice
of proposed rulemaking (NOPR), is making "interesting bedfellows"
of pipelines, distributors and marketers, said Pam Prairie,
director of the Institute of Public Utilities at Michigan State
University. "...[C]ompanies like Dynegy Corp. are taking a position
in opposition to the auction; pipelines don't like the auction idea
for obvious reasons; and LDCs, I think, are still trying to sort
their way through as to whether or not the auctions are good or
More to the point, "all the sellers [of short-term capacity] are
really concerned that something's going to happen to their prices,"
she said. But Prairie doesn't think all parties have cause for
concern. "If you're a buyer, I think [the auction's] good news, and
if you're a consumer of gas, I would suggest that that's also good
news for you because if there's vigorous price competition in the
secondary market prices should go down."
In the NOPR, the Commission proposes to require the auctioning
of short-term (less than one year) firm, interruptible and
capacity-release capacity as a condition to removing the price caps
in that market. A daily auction would be the "linchpin" to removing
price caps on short-term transportation, said FERC Commissioner
Linda Breathitt. "Without the kind of market power mitigation that
the daily auction is meant to provide, I will be unwilling to
support release of the price cap for short-term transportation
services," she vowed. Breathitt's unyielding statement was in
response to industry rumblings that it would be an administrative
nightmare to coordinate buying gas and successfully participate in
separate auctions for pipeline paths to markets for multiple
transactions - all for delivery the next day.
Although the aim of the auction is to mitigate the existing
market power particularly held by pipelines in the short-term
market, Prairie believes it is "equally important" that regulators
focus on LDCs and marketers, which she said also could hold enough
capacity in the secondary market to wield considerable market
This is a real threat since more and more marketing companies
are signing contracts with LDCs to manage distributors' portfolios,
she noted. In such cases, "it's not difficult to imagine a scenario
in which [a] marketer can keep a competitor's gas supplies by
withholding large chunks of capacity at the LDC's citygate [from
being released]. Or by withholding capacity from the release
market. they [marketers] could also create a scarcity circumstance
which, in turn, would drive up [the] price for released capacity
into that market."
Likewise, "it is not difficult to imagine a scenario [where]
several pipelines would get together and create a new marketing
affiliate...that could buy firm capacity from [one of the pipelines
at] below tariff rates with the intent of re-selling the capacity
at market-based prices in the secondary market," Prairie noted.
What FERC is asking from the gas industry in the megaNOPR - to
create a whole new way of selling short-term capacity - is a
"formidable task," but it's "also a very doable task," she told
NGI. Prairie said from her experience with implementation of Orders
436 and 636 when she was an executive with ANR Pipeline it takes
18-24 months and massive resources for system users to install and
become familiar with a new process and figure out how to optimize
"If we really want to get to a competitive market, we can't use
the excuse that there's an administrative burden...as a barrier to
not getting there," she said. Prairie was partly referring to a
recent request by six trade associations for the Commission to
extend until Jan. 22 the deadline for the gas industry to respond
to the NOPR and the notice of inquiry (NOI). The comments on both
initiatives, which were issued in late July, are due Nov. 9th. The
groups sought the extension because of the number of the issues
(200 in all) that FERC asked them to address in written comments
(See NGI Oct. 5).
Part of the problem, one industry representative pointed out is
that FERC only came up with a concept and left it to the industry
to figure out how to make it work. Some sources said last week they
have not even begun trying to figure out how it might be
accomplished. One said his group still was in the process of hiring
an economic consultant.
Another who had looked at the problem said the main issue would
be sequencing. The difficulty would lay, he said, in buying gas and
then successfully participating in multiple pipeline auctions in
your path to market for gas to be delivered the next day. Failure
in any part of the process would cause the whole transaction to
collapse. Multiplying this by the number of transactions various
companies are involved in everyday is where the nightmare comes in.
Another industry source pointed out that LDCs have been trying
to get FERC to fix the capacity release program since the first
year it was implemented. After its most recent attempt to install
pilot programs in late 1996 failed, most in the industry has
figured out how to get around the rules, including price caps,
through pre-arranged deals and gray market transactions.
If, as Prairie pointed out it takes industry 18 to 24 months to
adapt to new programs, then the five years since capacity release
was installed in Order 636 has been more than enough time for
adaptations to occur. Several LDCs commented that removing the
price cap certainly wasn't worth the cost and effort of installing
and learning a whole new auction process. The protests that
originally greeted the price cap have died down. As one LDC
representative put it, "FERC is addressing a problem that doesn't
exist anymore. They came late to the party."
The regulators are still trying, however. Given that "we threw a
lot of stuff out there" in the NOPR and other initiatives, FERC
Commissioner Vicky Bailey said she thought the extension request of
the trade groups was a "very legitimate" one. However, "it [was]
our hope to address these issues by the end of the year...to at
least have the comments in by the end of the year," she told the
nearly 400 industry executives and state regulators at the
DOE-NARUC conference. "If that's not possible," Bailey indicated
that pushing back the comment deadline might be a "legitimate
response" due to the scope of the issues. Commissioner Breathitt
also said she would seriously consider granting the industry's
Bailey's message to the gas industry: "You've got to look at
these issues and [you've] got to decide what you want, what you're
willing to live with, what you can't stand. And tell the Commission
that in no uncertain terms. Its kind of 'come to Jesus time.'"
Hoecker Would Involve GISB
Chairman James Hoecker didn't comment on the extension request,
but he did say that he was aware that "all segments of the
industry, as well as their attorneys and consultants, are on
overload right now" as a result of the July NOPR, specifically the
auction proposal, and the NOI and other initiatives. He said the
Commission offered the proposed changes in a simultaneous fashion
rather than "piecemeal or half-heartedly" because the "costs from
the delay and the confusion of such an approach would be far too
great." Given the "unique momentum" coming from competition and
convergence, "we are less able today to attack problems a bite at a
In Pittsburgh, Hoecker urged the gas industry members to
undertake a "broad" review of the entire package of reforms that
the Commission has proposed before "solidifying their judgment."
Moreover, Hoecker suggested that industry set aside the workshop
scheduled for Oct. 20th to discuss only the details of how a daily
auction would work, and save any remarks opposing the proposed
auction for the written comments that are due at FERC on Nov. 9th.
Hoecker again indicated that the Gas Industry Standards Board
(GISB) could play a "key" role in developing a real-time
interactive auction process - a task that has been criticized by
some GISB members as being "outside the scope" of their
organization. Producers last week also joined in to protest GISB
having a role in the creation of an auction process. "The producers
don't want GISB involved in the auction. They are adamant about
this," said Phil Budzik, director of regulatory affairs for the
Natural Gas Supply Association. Producers aren't too happy with the
progress that GISB has made with the issues on its plate so far, so
why give the standards-setting organization more, he asked.
Industry reactions to the proposed auction touched on a number
of issues. For Pat Purdy, the CEO of Strategic Energy Ltd., the
burning question wasn't whether an auction process could be
created, but whether it would work and whether it was needed. "I
really don't know" if it would work. "We thought that the bid
process on released capacity was going to work," and it had "dismal
results," he said. He also had doubts about the industry's need for
an auction process since more than 80% of the capacity-release
transactions today are pre-arranged deals. "Probably on some
pipelines [there] will be" need, but in other parts of the country
the market may be working "just fine the way it is."
Terrence L. McGill, president of Columbia Gulf Transmission,
said his company believes the NOPR could create an "artificial
bias" in favor of short-term services that "could prove detrimental
to the long-term health and expansion of the industry." He called
for the "appropriateness and viability of the auction [to] be
brought into much sharper focus" at the FERC workshop. On a more
positive note, McGill said the auction idea was "further evidence"
of the industry's "move towards the commoditization of
transportation." Specifically, it is reflective of the move away
from "the old public good concept to almost [a] pure bottom-line
Some gas producers at the DOE-NARUC conference speculated that
the proposed auction and other FERC initiatives could threaten the
industry-wide goal of obtaining a 30-32 Tcf gas market within the
"One of my concerns about funneling all the short-term capacity
through an auction is that it may prevent the development of
genuine third-party, independent aggregators and brokers...to
compete with current capacity sellers and holders of capacity,"
noted one industry executive. Strategic Energy's Purdy suggested
that it might be up to state regulators to offer the "right
incentives" to prevent this from happening.
Michigan State University's Prairie had some further advice for
FERC. First, she strongly suggested that any "regulatory model"
that it develops aimed at mitigating market power include "the
convergence and consolidation realities" of the industry. "Even if
there isn't market concentration today, a few mergers among
pipeline companies...would instantly change the level of
competition in both the primary and secondary markets."
Also, FERC and the state agencies need to take a good look at
themselves. "...[A]s the industry has been transformed, I'm not
sure that the staff[s] of the regulatory agencies have been
transformed to go along...to match the restructure."
Susan Parker, Ellen Beswick