Natural Gas Pipeline Co. of America (NGPL) fears that corrective action ordered by FERC with respect to its auction practices, if construed improperly, could boomerang and potentially “nullify” the pipeline’s negotiated-rate authority and “aggravate” its decontracting problems.

Both results are distinctly possible if FERC in its Nov. 4 order meant that, in order to avoid problems with future auctions, Natural should set a reserve price for a recourse-rate bid that is identical to the floor price for a prearranged negotiated-rate bid, according to the pipeline. Natural last week asked FERC to clarify that this wasn’t its intention. In the event clarification isn’t granted, the pipeline said it seeks rehearing of the order because it would rob it and its customers of the benefits associated with negotiated-rate transactions [RP00-18] (See NGI, Nov. 8).

If neither clarification or rehearing is awarded, Natural asked the Commission to put its Nov. 4 order on hold until the annual review of the pipeline’s auction procedures, which would occur no later than January 2000, or convene an expedited technical conference to explore the “very serious economic and business implications of its ruling.”

“Natural urges the Commission to act on its clarification request by no later than Dec. 1. This is the date on which any firm capacity awards in the auctions to be held shortly will become effective,” the Midwest pipeline said.

Natural believes how FERC decides the case on rehearing could have industry-wide implications. “The index-based negotiated transactions which the market has come increasingly to demand may no longer be feasible, depending how the Commission addresses Natural’s clarification request. If so, the efficiency of the market will be jeopardized and the effectiveness of the negotiated-rate program largely destroyed…..”

In the meantime, “Natural has little choice but to move forward with [its] auctions based on its interpretation of the Commission’s complaint order,” which it believes permits “different” reserve prices — the lowest price a pipeline is willing to accept for the capacity being auctioned — for negotiated-rate and recourse-rate bids. “Any other approach would be contrary to market fundamentals.”

Natural argued it should be given fast-track treatment since the producers/marketers — Amoco Production, Amoco Energy Trading and Burlington Resources Oil & Gas — that filed the complaint received speedy action. As ordered by FERC in the Nov. 4 order, the pipeline has filed revised tariffs to allow for discounted recourse-rate bids.

In the complaint, Amoco and Burlington accused Natural of trying to discourage recourse-rate bidders in an October auction by setting the net present value (NPV) for recourse-rate bids at $11.38 million, while the NPV for negotiated-rate bids was listed at zero. The winning negotiated-rate bidder paid a little more than $2 million for the auctioned capacity. Under Natural’s auction rules, this meant that a recourse-rate bidder would’ve had to have outbid the winning negotiated-rate bidder by more than five-fold to win that capacity. The Commission said it was “unjust and unreasonable [for Natural] to shut out all recourse-rate bidders” in this manner, and ordered the pipeline to revise its tariff.

“…..Natural does not object to posting a reserve price matrix for recourse-rate form bids. Nor does Natural object to providing for discounts applicable to recourse-rate form bids where the prearranged negotiated-rate package is expected to result in discounted rates. Natural does object, however, if the complaint order is read to include a requirement that the reserve price for recourse-rate bids must be identical to the floor price for negotiated-rate bids.” This is because the “two types of bids have different reward profiles which must be balanced. Negotiated-rate arrangements have upside potential, while recourse-rate bids never do,” it told FERC.

Because of the upside potential, “a pipeline is willing to accept a lower guaranteed revenue level (i.e. a lower reserve price and lower net present value) for a negotiated index-based transaction than for a recourse-rate bid,” Natural said.

If Natural is required to establish identical reserve prices for negotiated-rate and recourse-rate bids, the pipeline said its negotiated-rate program “would for all practical purposes be rendered a dead letter.” And “putting a damper on negotiated-rate transactions will thwart Natural’s efforts to deal with turned-back capacity.”

Susan Parker

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