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

“There’s some possibility that the major industry segments willget together to decide they don’t like it, and then will come outand say ‘thank you, but no thank you.’ We’re already talking toeach other about that, but it’s a delicate dance,” said a leadingindustry representative, who asked that both his name andgas-sector affiliation not be disclosed. “If a lot of parts of theindustry come in opposing auctions, it may be harder for them to goahead with it,” agreed another source, adding, however, that FERCcommissioners appear “pretty upbeat” about the concept.

The industry representative doubts there would be any winners ifthe Commission were to move forward with auctions on anindustry-wide basis. “I think the primary loser would be thepipelines because if everything goes to a daily auction, somepipelines are just going to get pummeled financially.” The “nextbiggest 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, whywould 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 voluntaryauction because only pipelines that are “mostly full” would enterthe program. “It would be the land of milk and honey for them,” andtransportation customers would suffer. But customers also wouldfeel the pain in a mandatory auction in which pipelines could set areserve price – the minimum acceptable price for a bid, he said.The reason: market power could not be constrained with a reserveprice.

Under that scenario, “the reserve price would be high inperiods of slack [capacity] demand, “so you’re literally forcingpeople to pay more than they would’ve otherwise,” and in periods oftight demand, the reserve price presumably already would be abovethe maximum lawful price. “So the result is a behavior that is anet increase to rates.”

At the very least, an auction without a reserve price might beacceptable, he noted. “An auction without a reserve price is amitigator of market power because…in periods of slack demand they[the pipelines] would have to take whatever price they get” fortheir capacity.

In its proposal, the Commission has required a reserve price”because they’re afraid that if they make it mandatory without areserve price then some of the pipelines possibly would gobankrupt. Now that’s in contravention to the law [Natural GasAct],” the industry representative said. However, keeping thepipelines intact would exact a toll on customers since pipes wouldbe able to collect revenues “above and beyond what they should beable 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 theCommission’s current proposal allows for the exercise of monopolypower, and therefore results in unjust and unreasonable rates,” thesource told NGI.

“I was disappointed” by the Commission staff’s workshop oncapacity auctions two weeks ago, he said. “I think there were anumber of parties from both the producer community and LDCcommunity that had legitimate questions that were dismissed. Ithought people were coming there to get guidance. And I’m not surewhat another conference would do for us, I mean if they’re notgoing to answer questions.”

Lorraine Cross, senior vice president of regulatory affairs forthe Interstate Natural Gas Association of America, also faultedFERC staff for failing to respond to a series of technicalquestions about auctions that were submitted by several industrygroups prior to the workshop. Staff said it declined to answerquestions that required them to comment on policy issues.

“I thought that…truthfully the vast majority of the questionswere not policy questions. They were technical questions about themechanics of auctioning, and I don’t think nearly all of them wereanswered,” Cross said. Moreover, “I don’t think the questions abouthow you would run a daily auction were very well answered. We hearda lot about how you ‘might’ conduct an auction, but nothing about aspecific proposal, [or about] one that is likely to be selected” bythe Commission.

For one industry insider, however, the workshop was a “usefulexercise in the sense that it really framed a lot of issues.” Hebelieves “the really interesting thing will be what they do in thefollow-up [workshop or conference]. That may give us more of a feelfor where they are going” with their auction proposal.

“Frankly, after that next conference I would hope they have nomore conferences. Let us then get down to the business of preparingcomments” on the Commission’s July notice of proposed rulemaking,which raised the auction concept, that are due to be filed in lateJanuary.

Susan Parker

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