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

“Personally I believe that we should move forward on auctions. Ithink there’s a great deal of need for the auctions…..,” said thedeputy director of FERC’s Office of Markets, Tariffs and Rates atGasMart/Power 2000 in Denver last week.

“I think that if you have an auction that’s real time,” thatprovides protection for captive customers, clear transparency andis easy to use, then “I think you could release the price cap onsome of the pipeline short-term services,” he told a crowd ofenergy executives at the industry’s 14th annual conference andtrade fair. “Now you have to look at, though, what would be themarket clearing price [for capacity in auctions]. It doesn’t workwhen you set it at variable rates. What should be the price for thefloor? That has to be worked out.”

Madden noted that a “number” of pipelines have come to hisoffice to talk with him or other FERC staff members about auctionsand have submitted pre-filing proposals. More pipelines areexpected to meet with him in the future to discuss auctions.

The major gas rule, Order 637, nixed the idea of mandatorycapacity auctions, settling instead for voluntary auctions on thepart of individual pipelines. The only industry support formandatory auctions came from gas producers. In fact, Maddenbelieves Amoco Production offered a “pretty good proposal” formandatory auctions.

Because the mandatory auction concept met with so much industryopposition, the Commission in Order 637 decided to remove the pricecap only on short-term, capacity-release transactions for atwo-year experimental basis. The caps on short-term pipelineservices — short-term firm and interruptible — remain in place.

The auction issue will be further addressed on rehearing ofOrder 637, which was scheduled for last week’s Commission meeting,but pulled from the agenda. “It’s my hope in order to provide alittle bit more certainty [to the market] that we will see someaction from the Commission [on rehearing] in the very near future,”Madden said.

Auctions are one of many issues the Commission hopes to thrashout with the gas industry in the near term, he said. In the wake ofOrder 637, “we have a lot of issues to discuss with the industryand we’re in the planning stages right now of how to get that upand running.”

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

He noted the electronic trading of natural gas is the furthestalong of all energy markets, reporting on-line trades of more than$10 billion in 1999. He expects the figure to triple this year. Inthe next five years, e-commerce for natural gas and other energysources is expected to soar to as much as $500 billion. “In fiveyears, you’re going to see some major money on e-commerce,” Maddensaid.

“I think this [e-commerce] is going to be the linchpin of asuccessful market in the future. This issue is essentially movingso quickly, things are changing so fast that we [FERC] are going tohave to focus on it real soon,” he told GasMart/Power attendees.”…[W]e want to make sure that our policies do not affect thesuccessful commercialization of e-commerce.” The energy industry isawaiting a response to its request for FERC to conduct an inquiryinto the effects of regulation on e-commerce in the gas andelectric industries.

In conjunction with auctions, FERC and industry will have tofurther examine the relationship between pipelines and theirmarketing affiliates. The issue begs a lot of questions. “Shouldwe, for example, say that a pipeline affiliate cannot do businesson its sister pipeline?” he asked. The downside of this, Maddenreminded gas executives, is that affiliates would no longer beavailable to buy the capacity that non-affiliate customers turnback to the pipeline.

Or, he asked, “should there be a limitation on the amount” ofcapacity that affiliates can hold on their sister pipelines? On anumber of major pipelines, FERC is finding that the portfolios heldby affiliates are enormous, Madden said.

For affiliates that participate in bidding on their sisterlines, should the Commission “have a tighter hold on them than anyother players in the market?” Also, he asked, should there be alimit on the amount and price of the capacity resold by affiliatesinto the secondary market?

On the issue of pipeline rate design, Madden said that in thepast three to four years he’s “seen a lot of movement on negotiatedrates and less on your cost-based rates.” He expects this trend tocontinue big-time into the future.

“It seems to me that we need to think about bifurcating adifferent type of regulatory scheme to focus on those areas wherethe shipper has more means, there’s more flexibility, there’s moreaccess” compared to “those [areas]…..where you have thetraditional captive customers.”

Madden further told gas executives last Tuesday, the day priorto the Commission’s regular meeting, to look for FERC to addressthe issue of interconnections on the interstate gas pipeline grid.The following day the Commission unveiled a new gas interconnectionpolicy in a case involving Panhandle Eastern Pipe (See relatedstory, this issue). “The key thing…..for an interconnectionpolicy to work [is] an efficient reliable hook-up, and that’s bothon the gas side and the electric side. There has to be the gasthere to meet the particular needs of generators” and othercustomers, he said.

Madden believes standardization is another issue that warrantsreview. “We have a great deal more liquidity on the gas side thanyou 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 domore in terms of standardization [for gas] and should we do morewith electric…..if so, should we also focus on the retail level.”

As for reporting requirements, Madden thinks FERC may have goneoverboard on these. “In my belief, there’s clearly a lot ofreporting requirements right now and a lot of information that weget that we don’t need…..So I think that’s going to [warrant] amajor review.”

Susan Parker, Denver

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