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FERC's Madden Considers Auctions, Affiliates, E-Trade

FERC's Madden Considers Auctions, Affiliates, E-Trade

Interest in pipeline capacity auctions is far from dead at the Federal Energy Regulatory Commission. Just ask FERC's Kevin Madden, who hasn't given up on them and thinks they have a major role to play in the natural gas industry.

"Personally I believe that we should move forward on auctions. I think there's a great deal of need for the auctions.....," said the deputy director of FERC's Office of Markets, Tariffs and Rates at GasMart/Power 2000 in Denver last week.

"I think that if you have an auction that's real time," that provides protection for captive customers, clear transparency and is easy to use, then "I think you could release the price cap on some of the pipeline short-term services," he told a crowd of energy executives at the industry's 14th annual conference and trade fair. "Now you have to look at, though, what would be the market clearing price [for capacity in auctions]. It doesn't work when you set it at variable rates. What should be the price for the floor? That has to be worked out."

Madden noted that a "number" of pipelines have come to his office to talk with him or other FERC staff members about auctions and have submitted pre-filing proposals. More pipelines are expected to meet with him in the future to discuss auctions.

The major gas rule, Order 637, nixed the idea of mandatory capacity auctions, settling instead for voluntary auctions on the part of individual pipelines. The only industry support for mandatory auctions came from gas producers. In fact, Madden believes Amoco Production offered a "pretty good proposal" for mandatory auctions.

Because the mandatory auction concept met with so much industry opposition, the Commission in Order 637 decided to remove the price cap only on short-term, capacity-release transactions for a two-year experimental basis. The caps on short-term pipeline services --- short-term firm and interruptible --- remain in place.

The auction issue will be further addressed on rehearing of Order 637, which was scheduled for last week's Commission meeting, but pulled from the agenda. "It's my hope in order to provide a little bit more certainty [to the market] that we will see some action from the Commission [on rehearing] in the very near future," Madden said.

Auctions are one of many issues the Commission hopes to thrash out with the gas industry in the near term, he said. In the wake of Order 637, "we have a lot of issues to discuss with the industry and we're in the planning stages right now of how to get that up and running."

Madden believes FERC must tackle the issue of e-commerce soon. "E-commerce can be used with respect to order to provide the real-time, on-line transparency that the market needs."

He noted the electronic trading of natural gas is the furthest along of all energy markets, reporting on-line trades of more than $10 billion in 1999. He expects the figure to triple this year. In the next five years, e-commerce for natural gas and other energy sources is expected to soar to as much as $500 billion. "In five years, you're going to see some major money on e-commerce," Madden said.

"I think this [e-commerce] is going to be the linchpin of a successful market in the future. This issue is essentially moving so quickly, things are changing so fast that we [FERC] are going to have to focus on it real soon," he told GasMart/Power attendees. "...[W]e want to make sure that our policies do not affect the successful commercialization of e-commerce." The energy industry is awaiting a response to its request for FERC to conduct an inquiry into the effects of regulation on e-commerce in the gas and electric industries.

In conjunction with auctions, FERC and industry will have to further examine the relationship between pipelines and their marketing affiliates. The issue begs a lot of questions. "Should we, for example, say that a pipeline affiliate cannot do business on its sister pipeline?" he asked. The downside of this, Madden reminded gas executives, is that affiliates would no longer be available to buy the capacity that non-affiliate customers turn back to the pipeline.

Or, he asked, "should there be a limitation on the amount" of capacity that affiliates can hold on their sister pipelines? On a number of major pipelines, FERC is finding that the portfolios held by affiliates are enormous, Madden said.

For affiliates that participate in bidding on their sister lines, should the Commission "have a tighter hold on them than any other players in the market?" Also, he asked, should there be a limit on the amount and price of the capacity resold by affiliates into the secondary market?

On the issue of pipeline rate design, Madden said that in the past three to four years he's "seen a lot of movement on negotiated rates and less on your cost-based rates." He expects this trend to continue big-time into the future.

"It seems to me that we need to think about bifurcating a different type of regulatory scheme to focus on those areas where the shipper has more means, there's more flexibility, there's more access" compared to "those [areas].....where you have the traditional captive customers."

Madden further told gas executives last Tuesday, the day prior to the Commission's regular meeting, to look for FERC to address the issue of interconnections on the interstate gas pipeline grid. The following day the Commission unveiled a new gas interconnection policy in a case involving Panhandle Eastern Pipe (See related story, this issue). "The key thing.....for an interconnection policy to work [is] an efficient reliable hook-up, and that's both on the gas side and the electric side. There has to be the gas there to meet the particular needs of generators" and other customers, he said.

Madden believes standardization is another issue that warrants review. "We have a great deal more liquidity on the gas side than you have on the electric side. [The Gas Industry Standards Board] has done a lot, but I think we have to look at whether we should do more in terms of standardization [for gas] and should we do more with electric.....if so, should we also focus on the retail level."

As for reporting requirements, Madden thinks FERC may have gone overboard on these. "In my belief, there's clearly a lot of reporting requirements right now and a lot of information that we get that we don't need.....So I think that's going to [warrant] a major review."

Susan Parker, Denver

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