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Industry Opposition to Auctions Nearly Unanimous

Industry Opposition to Auctions Nearly Unanimous

It's nearly impossible to get the various gas industry sectors to agree on anything, but some already are putting out signals they might band together to send FERC the clear and unmistakable message they don't like its capacity-auction proposal.

"There's some possibility that the major industry segments will get together to decide they don't like it, and then will come out and say 'thank you, but no thank you.' We're already talking to each other about that, but it's a delicate dance," said a leading industry representative, who asked that both his name and gas-sector affiliation not be disclosed. "If a lot of parts of the industry come in opposing auctions, it may be harder for them to go ahead with it," agreed another source, adding, however, that FERC commissioners appear "pretty upbeat" about the concept.

The industry representative doubts there would be any winners if the Commission were to move forward with auctions on an industry-wide basis. "I think the primary loser would be the pipelines because if everything goes to a daily auction, some pipelines are just going to get pummeled financially." The "next biggest loser would be the producers primarily because of [large] transaction costs," he noted. Third on the loser list would be LDCs "because if people are waiting to buy into the daily market, why would they buy released capacity that's presumably more expensive? It would kill the capacity-release market."

The source noted that he was definitely opposed to a voluntary auction because only pipelines that are "mostly full" would enter the program. "It would be the land of milk and honey for them," and transportation customers would suffer. But customers also would feel the pain in a mandatory auction in which pipelines could set a reserve price - the minimum acceptable price for a bid, he said. The reason: market power could not be constrained with a reserve price.

Under that scenario, "the reserve price would be high in periods of slack [capacity] demand, "so you're literally forcing people to pay more than they would've otherwise," and in periods of tight demand, the reserve price presumably already would be above the maximum lawful price. "So the result is a behavior that is a net increase to rates."

At the very least, an auction without a reserve price might be acceptable, he noted. "An auction without a reserve price is a mitigator of market power periods of slack demand they [the pipelines] would have to take whatever price they get" for their capacity.

In its proposal, the Commission has required a reserve price "because they're afraid that if they make it mandatory without a reserve price then some of the pipelines possibly would go bankrupt. Now that's in contravention to the law [Natural Gas Act]," the industry representative said. However, keeping the pipelines intact would exact a toll on customers since pipes would be able to collect revenues "above and beyond what they should be able to collect." FERC "[has] created a proposal that's a monster," he noted.

"I suspect that we would have a very good legal case that the Commission's current proposal allows for the exercise of monopoly power, and therefore results in unjust and unreasonable rates," the source told NGI.

"I was disappointed" by the Commission staff's workshop on capacity auctions two weeks ago, he said. "I think there were a number of parties from both the producer community and LDC community that had legitimate questions that were dismissed. I thought people were coming there to get guidance. And I'm not sure what another conference would do for us, I mean if they're not going to answer questions."

Lorraine Cross, senior vice president of regulatory affairs for the Interstate Natural Gas Association of America, also faulted FERC staff for failing to respond to a series of technical questions about auctions that were submitted by several industry groups prior to the workshop. Staff said it declined to answer questions that required them to comment on policy issues.

"I thought that...truthfully the vast majority of the questions were not policy questions. They were technical questions about the mechanics of auctioning, and I don't think nearly all of them were answered," Cross said. Moreover, "I don't think the questions about how you would run a daily auction were very well answered. We heard a lot about how you 'might' conduct an auction, but nothing about a specific proposal, [or about] one that is likely to be selected" by the Commission.

For one industry insider, however, the workshop was a "useful exercise in the sense that it really framed a lot of issues." He believes "the really interesting thing will be what they do in the follow-up [workshop or conference]. That may give us more of a feel for where they are going" with their auction proposal.

"Frankly, after that next conference I would hope they have no more conferences. Let us then get down to the business of preparing comments" on the Commission's July notice of proposed rulemaking, which raised the auction concept, that are due to be filed in late January.

Susan Parker

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