FERC last week approved, subject to modifications, a majorsettlement that spells out how Natural Gas Pipeline Co. of America(NGPL) will auction off long- and short-term transportationcapacity on its system. The decision was seen as a big win for theMidwest pipeline, with the Commission siding with it on keycontested auction-related issues.

The Commission stressed that the Natural open auction shouldn’tbe considered as a blueprint for the proposed auction proceduresthat are now being considered for industry-wide use, but thedecision itself does provide industry with a glimpse into FERC’sthinking on some of the more controversial auction issues – such aswhen the winning bidder or bidders should be disclosed, contingentbidding and reserve pricing.

The Commission’s decision in Natural “may have little or noeffect on our ultimate position on the use of auctions forshort-term capacity,” cautioned Chairman James Hoecker, because thereason for instituting an auction in each case has been entirelydifferent. The Natural auction was ordered as a remedial measure toprevent the pipeline from showing preference to its affiliates whenawarding capacity, while the purpose of the auction as envisionedin the July notice of proposed rulemaking (NOPR) would be toprovide a check on pipeline market power in the event price caps onshort-term capacity are lifted.

A high-ranking FERC staff member also cautioned industry againstreading too much into the Natural decision. “The broader policyissues of auctions, sort of how they ought to be constructed [andwhether we should have them], were really left for the biggerrulemaking proceedings.” Still, he has no doubt that gas industrymembers who are interested in the auction process will closelywatch the Natural auction when it gets underway next year todetermine 1) whether the auction really works; and 2) whether itmight work for their own system.

Under the settlement, as proposed, Natural would be required topost all firm transportation and storage capacity for auction nolater than 15 months before the capacity becomes available. Thepipeline initially would institute single-bid procedures, but forcapacity not awarded under that method, it could use an extendedauction or short-term auction. Shippers also would have the optionto initiate auctions on Natural’s system. In addition, thesettlement would allow for pre-arranged deals between the pipelineand shippers. Natural would use these auction procedures until itcould institute an interactive process in a year or two. TheCommission ordered the pipeline to submit revised tariff proceduresto be effective Jan. 1. [RP97-431-005]

Natural would use a net present value (NPV) formula to evaluatebids, and it would set reserve prices – the minimum price at whichit would award capacity – based on a matrix that would take intoconsideration a number of factors, including time period, servicetype, service option and geographic market. The Midwest pipelineproposed that the geographic market cover up to 15 markets, andthat there be 12 time periods for each auction.

The geographic component of the reserve matrix was one of fivehotly contested issues that Natural’s shippers asked the Commissionto settle. The other contentious issues were: 1) whether ashipper’s full payment of its gas supply realignment (GSR) costsshould be factored into bids; 2) whether a winning bidder (atmaximum rate and term) should be subjected to a subsequent round ofbidding under the iterative process, and, if so, how wouldavailable capacity be prorated if the bid is matched in the secondround; 3) whether Natural should be required to accept a bid thatis contingent upon the bidder’s evaluation of deals with competingpipelines and, if so, how long must Natural allow for resolution ofthe contingency; and 4) whether Commission policy and precedentrequired firm gathering capacity to be auctioned off.

On the issue of the geographic component of the reserve matrix,the Commission accepted Natural’s 15-market matrix over thepipeline’s existing 8×6 rate zone matrix that was preferred by anumber of its customers. The customers argued that the 15-marketmatrix would give Natural too much leeway to discriminate in favorof its affiliated marketer when awarding capacity. FERC okayedNatural’s proposal but said it remained “concerned that Natural’sreserve price matrix could act as a market barrier at one point andat the same time allocate capacity to a lower-valued bidder atanother point.”

To address this concern, the Commission ordered Natural tocompile a record of the “reasons and basis” for each reserve priceused in each auction at the time of the auction. The informationwould only have to be disclosed if there is a complaint.

The pipeline lost its fight to be able to adjust bids upwardsfor shippers that have fully paid their allotted level of GSRcosts. Without such an adjustment, Natural argued that bidders whoalready have paid their GSR costs would, in effect, be required topay additional GSR costs to obtain capacity on its system.Indicated Shippers objected to the proposal, saying it would giveNatural shippers that have paid their GSR costs a permanentpreference for the pipeline’s capacity over those shippers thatstill have outstanding GSR costs. The Commission agreed withIndicated Shippers.

“Natural cannot manipulate the bids of customers by imputingadditional values, such as a GSR factor, because this action willundermine both the transparency of the auction and confidence inthe process,” it said. The Commission modified Natural’s proposal,such that auction bids would reflect a party’s offer to pay thepipeline’s base rates. It would be on this basis that the NPV wouldbe calculated, it noted.

The shippers, however, lost out on a proposal that would haveenabled them to make the acceptance of the Natural capacity theybid on contingent on two factors: 1) the reduction or terminationof an existing contract if it overlaps with capacity in theauction; and 2) the purchase of requisite upstream or downstream onother pipeline systems.

Such contingencies “would place Natural at a significantcompetitive disadvantage,” the order said. “Natural would berequired to wait for at least a two-day period during which winningbidders could shop for more advantageous capacity arrangements. Ifa winning bidder did opt for another arrangement, Natural would beunable to respond with a better offer.”

The Commission sided with the pipeline’s shippers when it heldthat firm gathering capacity should be subject to auctioning.”Here, it is important to ensure, given the findings of past abusesin the allocation of transmission capacity on Natural’s system,that access to gathering service be offered on a non-discriminatorybasis.”

When Natural switches to an interactive procedures in a year ortwo, a key issue will be whether the bidder of the maximum priceand terms in the first round of an interative auction should bedeclared the winner then, or should he face additional biddingand/or possible proration of capacity in a subsequent round. TheCommission believes it should be the former. The auction “should bedesigned to reward early maximum rate bids for capacity.”

FERC also said “disclosure of the identity of winning bidders ona quarterly basis is sufficient to prevent undue discrimination.”Some shippers had asked that disclosure occur immediately followingan auction.

Susan Parker

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