A key FERC official backed away Tuesday from the notion thatauctioning is the only way to market short-term pipeline capacityin the future.

“…[A]uctions may not be the right answer. There may be someother alternatives to auctions. So I don’t want you toleave…thinking that all of us [at FERC] are emphatic that this isthe way to go and the only way to go to make a more efficientmarket. It isn’t,” said Kevin Madden, director of the Commission’sOffice of Pipeline Regulation, at a staff workshop on auctionsMonday. Still, the “focus” now is on auctions.

“I wouldn’t be shy if I were you [industry] to tell us why we’rewrong” on this issue, he told natural gas regulatory officials andattorneys. “…[B]etween us and you, we don’t always have the rightanswers. And in many cases, we search for the answers from you.”

Even if the Commission were to agree to auctions, participationin the process by all capacity buyers would not be mandatory.”There seems to be some reason to believe that everybody had toparticipate in the auction,” but that’s not true, said Richard P.O’Neill, director of FERC’s Office of Economic Policy. “Auctionbidding [would be] optional.”

Moreover, the Commission hasn’t eliminated the possibility thatauctioning, if it comes to pass, could apply to long-term capacityas well as to short-term capacity, he said, adding that it had nointention of favoring one market over another. Staff’s goal is tocreate an “equilibrium” between the two capacity markets, O’Neilladded.

Madden emphasized that the staff workshop was “just thebeginning of a dialogue” between the Commission and the gasindustry on ways to mitigate market power in the event the pricecap on short-term (less than one year) firm, interruptible andcapacity-release capacity is removed. FERC raised the prospect ofauctions and lifting the price cap in the notice of proposedrulemaking (NOPR) that was issued in July.

Kathryn Patton, director and regulatory counsel for Dynegy Inc.,applauded the FERC staff workshop for “putting some of the keyissues on the table,” particularly how to match up supply withpipeline capacity in a daily auction. It’s a question of “whatcomes first – the chicken or the egg.” Greg Lander, president ofTransCapacity, suggested the creation of a secondary-type market tohelp “mitigate” the effects on those who are caught long oncapacity in the auction process.

The question of being able to “dovetail” supply with pipelinecapacity in an auction process seems to be a top concern of many inthe gas industry, Madden conceded. He suggested that the specificsof the issue be fleshed out later “in a less formal setting.”

Staff presented a number of papers addressing how auctionsshould be structured. These will be available at www.ferc.fed.us.onthe Commission’s website soon, Madden noted. The papers deal with anumber of issues: should auctions be daily or monthly, and shouldthey be associated with the nomination and scheduling process;should auctions be sequential or simultaneous; should capacity besold segment-by-segment or should receipt and delivery points beauctioned off; should there be separate auctions for interruptibleand firm capacity, or should capacity be auctioned off together -in “one pot;’ should auction rules apply across all interstates;should there be integrated regional auctions; should there besingle-round auctioning or continuous bidding; should there be timelimitations on daily auctions; what information should a capacityholder be required to disclose after bidding is completed; andshould bidding be open or closed. Staff also discussed differenttypes of auctions, such as the first-price auction, thesecond-price auction and the market-clearing price auction.

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