As part of a comprehensive settlement filed at FERC Natural GasPipeline Company of America (NGPL) has proposed implementing aninteractive auction process for posting and awardingtransportation/storage capacity on its system within less than twoyears. Although the settlement reserves five contested issues, allof the “active” parties have indicated their support for theproposal.

“What we hope to ultimately end up with is a real-time,bidding-type process of an auction, where once Natural posts theavailability of capacity and what segments of pipe it’s on,shippers would then have the ability to bid on that capacity. Thebids they put in will automatically be posted, and the [net]present value of the bids will be calculated in a real-time fashionso that they’ll be able to see almost instantaneously if they’rethe high bidder on the particular package they’re bidding on,” saidBruce Newsome, director of rates for Natural [RP97-431].

Some industry experts believe the Natural auction proposal wouldmake a good test case for the auction concept raised by FERC lastmonth in its notice of proposed rulemaking (NOPR) on regulation ofshort-term transportation services [RM98-10]. In return forremoving the price caps on short-term capacity, the Commissionproposed selling the capacity through auctions. The Natural auctionplan “might serve as a template for the Commission,” said PhilipBudzik of the Natural Supply Association of America. “It may besomething that we [producers] can support.”

But Newsome thinks that being associated with the rulemakingwould delay FERC action on Natural’s proposed settlement.”Certainly what we’ve agreed to – once the Commission approves it -should be implemented much sooner…than anything coming out of therulemaking,” Newsome noted. “There’s no time frame as to when theCommission has to do anything at all with regards to thatrulemaking. That could clearly be several years down the road.”

He acknowledged there are some “similarities” between FERC’srulemaking and Natural’s proposed auction process, but there areseveral differences as well. For instance, the Commission proposesthat auctioning apply to only short-term capacity, while Naturalseeks to use it for awarding all of its capacity. Natural’s planalso adds the “details and specifics as to how an auction wouldwork. From that standpoint, what we propose goes beyond what theCommission has offered…”

Under Natural’s settlement, the pipeline would post all firmtransportation and storage capacity at least 15 months before thedate the capacity would become available. “Natural will not discussthe availability of firm capacity with any shipper until theposting has been made,” it noted.

Auctions would follow a single round of bidding until Naturalcan implement the computer systems needed for interactive bidding,the pipeline said. Competing bids would be valued based on a netpresent value (NPV) formula, which would include adjustments forany discount or gas supply realignment costs.

Under the proposed procedures, there would be an open-bid periodand all bids would be posted upon receipt. Capacity packages wouldbe established based on the qualifying bids or combination of bidsthat meet the reserve price and result in the highest value underthe NPV formula. “Subsequently, there will be iterative bidding inintervals of thirty (30) minutes,” Natural said. If no one posts abid above the qualifying bid in the previous round, the auctionthen would close and the capacity would be awarded to the winningshipper.

Natural said its objective is to implement this procedure byDec. 31, 1999 at the earliest or June 30, 2000 at the latest.Initial comments on Natural’s settlement are due Aug. 24th at FERC,and reply comments are due Sept. 3rd.

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