While gas industry officials debated the merits of capacityauctions, electronic trading experts last week indicated suchauctions were doable from a technical standpoint but would firstrequire a certain amount of standardization of products,definitions and practices. This immediately raised the eyebrows ofsome critics, who believe that too much standardization could beharmful to the gas industry.

In designing an auction system for the gas market, “the wholekey is how do you attract liquidity because liquidity is what makeseverything happen. To get liquidity, you have to make a productlook like a fungible commodity – which means common definitions anddeadlines, and few if any restrictions or exceptions,” said DavidG. Hanson of Quicktrade L.L.C., which is owned by Dynegy Inc.,Sempra Energy and Nicor Inc. “The system must also be easy to use,and it has to be integrated with EBBs in the back [office]. And itmust be a multi-pipeline system, not just one pipeline at a time.”

The common deadlines/definitions are needed for both capacityand commodity. “I still think we got a long way to go before we getto a fungible product [in] capacity. But if there’s a will, I thinkwe can get there,” Hanson said at the second FERC staff conferenceon auctions last Tuesday. “You need to be able to trade the entirepath. If you’re buying in the Gulf Coast and selling in Chicago,you have to be able to buy that entire route even if itcrisscrosses two to three pipelines, and you have to know you’regoing to get the whole thing. You need to have single entry so youdon’t have to re-load all the information. And to get all this, youalso need common definitions for firm, IT.” In fact, the “more eachpipeline has common definitions for firm, for interruptible, forhow you treat capacity going through a pool…across multiplepipelines, the better it is,” he noted.

“It shouldn’t come as a surprise that we think some thingsshould be standardized” to carry out auctions, said Greg Lander,president of TransCapacity. But Robert A. Levin, senior vicepresident at the New York Mercantile Exchange, believes the drivetoward standardization could be a “double-edged” sword for the gasindustry, possibly stifling flexibility and creativity in theprocess. “How are you going to let those thousands of flowers bloom[in the market] and whose going to cultivate them?” he asked.William Boswell, vice president and general counsel for PeoplesGas, raised concerns about the standarization of capacity. “It’sflexibility in capacity contracting that’s necessary for thecurrent market, not standardization of capacity as product.”

Rusty Braziel, chairman of Altra Energy Technologies, told FERCstaff that his company has seen both the “good side and the badside” of electronic auctions. Three of its electronic systems havebeen commercial successes, while one – Capacity Central – “witheredup and died away” for a couple of reasons, including sellersfavored the gray market when they had the opportunity and buyersopted for pre-arranged deals to avoid the transparency of auctions.

“We don’t believe Capacity Central’s failure had anything to dowith a lack of market demand for electronic capacity trading.Instead, this experience taught us two primary lessons: 1) to besuccessful, electronic trading services must closely replicate theworkings of a traditional phone/Fax-based marketplace; and 2) theelectronic auction provider must be able to adapt quickly as themarket makes its preferences known. The only way to know that is toput something out there, and give the people value and serviceenough to pay for it.”

Both Altra’s Braziel and Quicktrade’s Hanson agreed that acapacity auction in the gas industry should be handled bythird-party auctioneers as opposed to individual pipelines. “Athird party keeps things anonymous, keeps it unbiased, keeps alevel playing field, and all this together helps eliminate marketpower,” Hanson noted.

If the Commission “allows and encourages” the development ofthird-party auctioneers for gas capacity, Braziel predicts thatabout two to four competing systems would evolve. He believes thiswould be far better than having “80 different pipelinesimplementing 80 different systems.”

The two also concluded that a two-sided auction (with best bidsand offers being matched) would be more suited to a capacityauction. Two-sided auctions are “much more efficient and willattract the most players, and we’ve seen that on the gas side.Basically on one screen you could have electronic trading of [thecommodity] and of the capacity. And to the other side, the traderswill eliminate any of the inefficiencies in the prices. And with anon-line credit system tied into this, nobody would be able topurchase anything outside of their own credit limits,” Hansonnoted.

But Jeffrey Holligan of Amoco Production said he preferred thesingle-sided auction. “…[W]e do believe that clearly single-sidedauction of pipeline capacity would lead to lower transaction costsfor us on a daily basis.”

Susan Parker

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