Implementation of a mandated capacity auction, as proposed byFERC in its mega-notice of proposed rulemaking (NOPR), couldsignificantly thwart the opportunity for natural gas to gain agreater share of the prized electricity market in the future.

The observation was made by Charles Linderman, director offossil 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 UtilityCommissioners’ (NARUC) winter meeting in Washington D.C. Monday.

Glen Kettering, senior vice president of Columbia GasTransmission, agreed the FERC-proposed auction could undermine gas’chances in the power market-a market that it is counting on toboost gas demand to 30 Tcf over the next decade. “We think…theproblem of adding a couple layers of complexity to the mechanismsfor allocating and pricing capacity are not positioning the gasindustry to serve the electric market well,” he told stateregulators and industry executives.

“From my discussions with EEI members, they tend to agree thatauctions will make it more difficult to move natural gas,” remarkedTim D. Kelley, president and CEO of CMP Natural Gas, an affiliateof New York State Electric and Gas.

A one-size-fits-all approach to pipeline services is aprerequisite to having a liquid, robust auction market, he noted,but “we think that the industry is moving in another direction,which is [towards] more specific types of services for individualcustomers, and I think that affects the ability for an auction towork.”

The pipelines aren’t saying “no, no never an auction,” Ketteringsaid. “Our point is that the auction as structured in the NOPR-thatis, one with no reserve price, no ability to establish a price onbehalf of those folks selling capacity-is not a good public policyapproach…,” he noted, adding that pipeline capacity would beseriously devalued without a minimum reserve price. Likewise,Kelley said he was hard-pressed to find any support from LDCs forFERC’s auction proposal. But, he added, “I think there might besome support for a voluntary auction…”

Auction opponents invariably argue that “what the auction isgoing to do is it’s going to drive down the price of pipelinecapacity. I don’t know what’s evil about that,” said RichardO’Neill, director of FERC’s Office of Economic Policy.

In contrast, producers like the idea of a capacity auction. “Iguess until somebody comes along with a better suggestion it seemsto us that the concept of the auction as a way to allocate capacityis very, very enticing,” said William Benham, vice president ofregulatory affairs for BP Amoco. He conceded the transaction costsassociated with an auction were a “legitimate” concern ofopponents. “But in our mind, the costs associated with not having afair system for allocating capacity are going to far outstrip thecosts and time and resources that are necessary in order toparticipate in an auction, as well as design [one].”

Industrial customers want a user-friendly auction, but theydon’t think the Commission’s proposed auction mechanism fits thatbill, said Mintern Smith of Procter & Gamble. “Unfortunately,the systems that I’ve seen proposed-I guess that’s one of theproblems: we don’t have a lot of details on what this auction lookslike – [are] very complex,” making it difficult for both end-usersand LDCs to participate in the process.

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