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EEI: FERC Auction Could Hurt Gas in Power Market

EEI: FERC Auction Could Hurt Gas in Power Market

Implementation of a mandatory capacity auction, as proposed by FERC in its mega-notice of proposed rulemaking (NOPR), could jeopardize the opportunity for natural gas to gain a greater share of the prized electricity market in the future.

The observation was made by Charles Linderman, director of fossil fuels and renewables for Edison Electric Institute (EEI), during a panel discussion on the mega-NOPR and notice of inquiry (NOI) at the National Association of Regulatory Utility Commissioners' (NARUC) winter meeting in Washington D.C. last Monday.

Glen Kettering, senior vice president of Columbia Gas Transmission, agreed the FERC-proposed auction could undermine gas' chances in the power market - a market that's absolutely critical if the gas industry is to meet its demand goal of 30 Tcf over the next decade. "We think...the problem of adding a couple layers of complexity to the mechanisms for allocating and pricing capacity are not positioning the gas industry to serve the electric market well," he told state regulators and industry executives.

"From my discussions with EEI members, they tend to agree that auctions will make it more difficult to move natural gas," remarked Tim D. Kelley, president and CEO of CMP Natural Gas, an affiliate of New York State Electric and Gas.

While a one-size-fits-all approach to pipeline services would be a prerequisite to having a liquid, robust auction market, he noted, "we think that the industry is moving in another direction, which is [towards] more specific types of services for individual customers, and I think that affects the ability for an auction to work."

The pipelines aren't saying "no, no never an auction," Kettering said. "Our point is that the auction as structured in the NOPR - that is, one with no reserve price, no ability to establish a price on behalf of those folks selling capacity - is not a good public policy approach...," he noted, adding that pipeline capacity would be seriously devalued without a minimum reserve price. Likewise, Kelley said he was hard-pressed to find any support from LDCs for the Federal Energy Regulatory Commission's` auction proposal. But, he added, "I think there might be some support for a voluntary auction..." LDCs believe the Commission is taking a "belt and suspenders approach" by proposing both an auction and increased reporting requirements. "We don't really see why we need both..."

Auction opponents invariably argue that "what the auction is going to do is it's going to drive down the price of pipeline capacity. I don't know what's evil about that," countered Richard O'Neill, director of FERC's Office of Economic Policy. He believes the real reason pipelines are opposed to the proposed auction is that it would control "too much of [their] market power."

Some producers like the idea of a capacity auction. "I guess until somebody comes along with a better suggestion it seems to us that the concept of the auction as a way to allocate capacity is very, very enticing," said William Benham, vice president of regulatory affairs for BP Amoco. He believes an auction would remove both the ability of pipes to withhold capacity to drive up prices and the inconsistencies in existing capacity-awarding practices.

He conceded the transaction costs associated with an auction were a "legitimate" concern of opponents. "But in our mind, the costs associated with not having a fair system for allocating capacity are going to far outstrip the costs and time and resources that are necessary in order to participate in an auction, as well as design [one]."

Industrial customers want a user-friendly auction, but they don't think the Commission's proposed auction mechanism fits that bill, said Mintern Smith of Procter &amp Gamble. "Unfortunately, the systems that I've seen proposed - I guess that's one of the problems; we don't have a lot of details on what this auction looks like - [are] very complex," making it difficult for both end-users and LDCs to participate in the process. To "play" in an auction, pipeline customers would have to be "constantly" on line with the market. "We just don't have [the] kind of staff" to handle that, Smith told the NARUC gathering.

The auction and other initiatives in the Commission's mega-NOPR and NOI have been the subject of discussion at a series of closed-door industry meetings over the past couple of months. The next meeting, which will be held this week, "will be sort of a make-it-or-break-it meeting. We'll either decide there's enough to build a consensus that we'll continue meeting, or we'll decide there's no consensus and we'll disband the discussions," a source told NGI. Industry comments on the NOPR and NOI initiatives are due at the Commission by April 22nd, but there's a chance it could seek another extension of the deadline.

Beyond the auction issue, participants on the NARUC panel and at the FERC conference generally supported removal of the price cap on released capacity, but were mixed about lifting the cap on pipeline interruptible and short-term firm. CMP's Kelley said LDCs were "willing to discuss" the possibility. BP Amoco's Benham indicated his company was open to considering lifting the price cap in the short-term market as well. But NARUC was expressed concern on this issue.

Susan Parker

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ISSN © 2577-9877 | ISSN © 1532-1266
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