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Amoco Backs Auction for Short- and Long-Term Markets

April 12, 1999
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Amoco Backs Auction for Short- and Long-Term Markets

Amoco likes auctions but advocates removing price caps only in the very short-term (intra-month) transportation capacity market, according to a lengthy filing made at FERC last week by Amoco Production and Amoco Energy Trading

"Capacity auctions are nothing new, despite much rhetoric suggesting the contrary...The Commission will undoubtedly be assaulted with comments opposing a capacity auction, especially a truly market-based auction with no reserve price for next-day capacity. But the Commission should not be dissuaded by these claims," the Amoco companies said in their comments on the notice of proposed rulemaking focusing on the short-term transportation market [RM98-10].

Specifically, Amoco asked that the auction: be standardized across all pipelines; exempt prearranged deals of less than one month unless they involve a pipeline and its affiliate; allow pipelines to set a reserve price for periods of greater than a day, but not in the daily market; require pipes to offer and post all available pipeline capacity; implement closed bidding, with the winning bidder paying the actual price bid rather than the "market clearing" price; and require all transactions to be immediately posted.

On a related initiative, Amoco recommended that removal of the price caps in the short-term market be limited to only transactions involving a term of less than one month (often referred to as the intra-month market) and be subject to mandatory conditions, including the capacity auction. The NOPR, in contrast, seeks to have price-cap removal apply to longer term deals--less than one year.

For the purposes of their proposal, the companies suggested the duration of the short-term market be narrowed to less than one month (the intra-month market), as opposed to less than one year. They also proposed that the long-term market be redefined as one month or more, rather than as a year or more. The new definitions would more properly reflect the "transactional realities of today's gas markets."

Amoco contends few shipper benefits would be realized by removing price caps in the FERC-endorsed intra-year market, which it claims is highly concentrated and not competitive. It believes the intra-month to intra-day operational markets are preferable. These "are generally the most liquid markets with capacity more readily tradable than in longer term markets. There are more active participants in the intra-month market and, in fact, the vast majority of capacity-release transactions are for periods of one month or less."

In addition to redefining the short-term market, the Amoco companies said other limits and conditions would have to be met for them to support lifting the price cap: FERC would have to implement capacity auctioning of short-term capacity; instill effective monitoring and reporting requirements; require cost-based and seasonally adjusted transportation rates in the longer term market; require the competitive auctioning of long-term capacity to ensure the viability of recourse service; bar discount adjustments unless capacity auctioning is in place; and maintain the existing market-power test in the alternative ratemaking policy statement.

In further addressing discount adjustments, Amoco noted existing Commission policy was lopsided because it permitted pipelines to make discount rate adjustments in subsequent rate cases but denied similar adjustments for negotiated rates. As long as such a policy remains, "pipelines will have an incentive to categorize every 'negotiated rate' contract with a lower-than-maximum rate as a 'discounted rate' in order to gain the benefit of the discount adjustment policy. This will exacerbate the current cross-subsidization problem."

Of all the initiatives in the NOPR, Amoco said it was most concerned about the proposal that would permit pipelines to negotiate terms and conditions of services with customers. "In Amoco's view, this issue is not, as pipelines claim, about providing flexible or innovative services to customers who desire them. It is instead about reversing an ongoing pro-competitive evolution...[towards] the commoditization of short-term pipeline capacity." Amoco and others especially question whether recourse rates will be sufficient to protect captive customers from any competitive advantage caused by negotiated services.

At the very most, any authority for pipelines to negotiate terms and conditions should be "limited and conditioned," Amoco told the Commission. Specifically, FERC should permit "financial risk" management services to be negotiated, but limit the negotiation of "operational" services; require that negotiable "operational" services be primary-point specific and associated with specified facilities; require the terms of an affiliate contract to be made available to all shippers; bar negotiated services for contracts with a term of less than one year; subject negotiated contracts to general system rate increases; hold pipelines "at-risk" for revenues associated with negotiated services; and prohibit the tying of negotiated services.

The Amoco companies further noted they were "generally supportive" of the Commission's proposals to require nomination equality, expand segmentation rights and the use of flexible receipt and delivery points, and to standardize penalty procedures.

Susan Parker

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