Koch Gateway Pipeline’s proposal to create an interactiveauction for shippers to bid on capacity in expiring firm storagecontracts has come up against some protest at the Federal EnergyRegulatory Commission.

By auctioning off capacity from expiring firm storage service(FSS) contracts, Koch Gateway seeks to reduce some of the pricerisks associated with its current right-of-first-refusal (ROFR)process for such capacity. Its proposal calls for expandednotification to existing customers of the expiration of their firmstorage contracts, an automatic grant of ROFR to existing FSScustomers with a contract term of one year or more, an interactiveauction for storage capacity on Koch Gateway’s web page, and ashortened bid period and abbreviated timeframe for customers toexercise their ROFR.

Dynegy Marketing and Trade said it “generally supports” thedirection of Koch’s proposed tariff changes, but it also had someconcerns-particularly with the pipeline’s apparent intent toconduct separate auctions for each ROFR customer’s storagecapacity. “It is not clear from this [proposal] whether potentialbidding shippers will know what capacity is becoming available insubsequent auctions when they make their bids in prior auctions,”the Houston marketer said. “If that is the case, then Dynegyobjects to this proposal in that it would prevent bidding shippersfrom seeing the whole amount of available capacity before makingtheir decisions.”

Dynegy believes Koch Gateway, as well as potential bidders,would benefit if the pipeline showed its entire hand before anauction. Koch Gateway’s proposal for separate auctions “may force ashipper to forego bidding on a single, less desirable package ofstorage capacity mistakenly thinking that one package is all thatKoch has available. If the shipper, however, had seen the wholeamount of available capacity before making its decision, it mayhave determined that the single, less desirable package of storagecapacity when coupled with other packages would suit its needs.Often, the parts may not be worth as much as the whole to apotential bidding shipper.”

Also, Dynegy said the bids more likely would reflect the “truemarket value” if potential bidders were made aware of all thestorage capacity that would be available on Koch Gateway, “and notthe value placed on the capacity when bids [are] made in a vacuum.”

The marketer also objected to Koch Gateway’s proposal to givecustomers only a two-day notice of the auctions. “The proposedposting and bidding time period would inevitably preclude someshippers from competing for capacity made available because manyshippers require more than two days to identify opportunities tobid on long-term capacity, to obtain management clearance to submita bid and to prepare and submit the bid.” It urged FERC to extendthe notice to a minimum of five days.

Dynegy further took issue with the criteria by which KochGateway proposed to select the winning bid-the highest rate perMMBtu. It called on the Commission to reject this in favor of thehighest net present value method, which takes into account volumeand contract term when determining the best bid.

Separately, Dynegy urged the Commission to reject anotherproposed tariff change that would require shippers on Koch Gatewayto obtain the pipeline’s prior approval before nominating imbalancemake-up quantities. Koch Gateway, it said, already enjoys the rightto either accept or reject such nominations. “To Dynegy, suchadditional approval appears to be an unnecessary administrativeburden that will reduce a shipper’s ability to resolve an imbalancebefore the end of the month.”

Koch Gateway’s proposed change “brings to light a significantproblem on the Koch system,” the marketer said. “Specifically, itis difficult for shippers on the Koch system to determine theirtrue imbalance positions at both receipt and delivery meters forsometimes as much as a year or more. This is because Koch’s metersare old and often do not provide accurate readings…..”

As a result, FERC “should reject any attempt by Koch to placeany additional burden on its shippers until Koch is able to provideaccurate information regarding imbalances on a timely basis,” itsaid. Moreover, Dynegy noted that if the Commission approved thetariff changes, it might provide Koch with a tool to favor itsaffiliates and other preferred customers. “What is to prevent Kochfrom granting approval to one shipper over another to flowquantities to cure an imbalance?”

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