FERC yesterday approved, subject to modifications, a majorcontested settlement that outlines how Natural Gas Pipeline Co. ofAmerica (NGPL) will auction off long- and short-term transportationcapacity on its system. Although the Commission stressed theNatural auction shouldn’t be considered a blueprint for theproposed auction procedures that are now being considered forindustry-wide use, the decision does provide a sneak preview intoFERC’s thinking on the issue.

Since the reason for requiring the auctioning of capacity onNatural – to eliminatediscrimination between the pipeline and itsaffiliates – and the reason for proposing the auction in the noticeof proposed rulemaking – to provide a check on market power ifprice caps on short-term capacity are lifted – are quite different,”the Commission’s decision in this matter may have little or noeffect on our ultimate position on the use of auctions forshort-term capacity,” said Chairman James Hoecker.

“I wouldn’t read [too much]” into the Natural auction decision,agreed a FERC staff member. “The broader policy issues of auctions,sort of how they ought to be constructed [and whether we shouldhave them], were really left for the bigger rulemakingproceedings.” But he conceded that gas industry members who areinterested in auctions will closely watch the Natural auction whenit’s in operation next year to determine whether that auctionreally works and whether it might work for their own system.

Under the proposed settlement, Natural would use a net presentvalue (NPV) formula to evaluate bids, and it would set reserveprices – the minimum price at which it would award capacity – basedon a matrix that would take into consideration a number of factors,including time period, service type, service option and geographicmarket. The Midwest pipeline proposed that the geographic marketcover up to 15 markets, and that there be 12 time periods for eachauction.

On the issue of the geographic component of the reserve matrix,the Commission accepted Natural’s 15-market matrix over thepipeline’s existing 8×6 rate zone matrix that was preferred by manyof its customers. However, it noted that it “is concerned thatNatural’s reserve price matrix could act as a market barrier at onepoint and at the same time allocate capacity to a lower-valuedbidder at another point,” which would “undermine the integrity ofthe auction process.”

To address this concern, it ordered Natural to compile a recordof the “reasons and basis” for each reserve price used in eachauction at the time of the auction. The information would notnecessarily have to be publicly disclosed at the time of theauction. “However, if a shipper or bidder complains regarding anyaction taken by Natural at a particular point during an auction,Natural must be prepared to disclose its reasons and basis for itsreserve price for the point or transaction in question,” the ordersaid [RP97-431-005].

The pipeline lost its fight to be able to adjust bids upwardsfor shippers that have fully paid their allotted level of GSRcosts. Indicated Shippers objected to the proposal, saying it wouldgive Natural shippers that have paid their GSR costs a permanentpreference for the pipeline’s capacity over those shippers thatstill have outstanding GSR costs. The Commission agreed.

“Natural cannot manipulate the bids of customers by imputingadditional values, such as a GSR factor, because this action willundermine both the transparency of the auction and confidence inthe process,” it said. The Commission modified Natural’s proposal,such that auction bids would reflect a party’s offer to pay thepipeline’s base rates. It would be on this basis that the NPV wouldbe calculated, it noted.

The shippers, however, lost out on a proposal that would havemade the acceptance of the capacity they bid on contingent on twofactors: 1) the reduction or termination of an existing contract ifit overlaps with capacity in the auction; and 2) the purchase ofrequisite upstream and downstream on other pipeline systems.

But such contingencies “would place Natural at a significantcompetitive disadvantage,” the order said. “Natural would berequired to wait for at least a two-day period during which winningbidders could shop for more advantageous capacity arrangements. Ifa winning bidder did opt for another arrangement, Natural would beunable to respond with a better offer.”

On a separate issue, the Commission gave the pipeline’s shipperssomething to cheer about – it held that firm gathering capacityshould be subject to auctioning. “Here, it is important to ensure,given the findings of past abuses in the allocation of transmissioncapacity on Natural’s system, that access to gathering service beoffered on a non-discriminatory basis.” Gathering capacity would bedelineated from other firm capacity for the purpose of auctioning,with shippers allowed to bid on its separately.

FERC also tackled the key issue of when should the identity ofthe winning bidder or bidders be disclosed. Amoco Production andIndicated Shippers called for this to be done immediately after theclose of an auction, but the Commission disagreed. “Disclosure ofthe identity of winning bidders on a quarterly basis is sufficientto prevent undue discrimination.” It ordered Natural to disclosethe information in that time period.

The Commission allayed shippers’ concerns that Natural mightbundle non-contiguous segments of capacity for auctioning. “Nothingin Natural’s tariff or the settlement appears to permit thebundling of non-contiguous capacity for auction,” the order said,but it added that there is nothing to prevent the pipeline fromauctioning it on a stand-alone basis.

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