While gas industry officials debated the merits of auctions,electronic trading experts earlier this week indicated they weredoable from a technical standpoint but first would require acertain amount of standardization of products, definitions andpractices.

In designing an auction system for the gas industry, “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 thecapacity and commodity. “I still think we [have] a long way to gobefore we get to a fungible product [in] capacity. But if there’s awill, I think we can get there,” Hanson said at the second FERCstaff conference on auctions on Tuesday. “You need to be able totrade the entire path. If you’re buying in the Gulf Coast andselling in Chicago, you have to be able to buy that entire routeeven if it crisscrosses two to three pipelines, and you have toknow you’re going to get the whole thing. You need to have singleentry so you don’t have to re-load all the information. And to getall this, you also need common definitions for firm, IT,” 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 drivetowards 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 bloomand who’s going to cultivate them? he asked.

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.”

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