A daily auction process to allocate pipeline transportationcapacity in the secondary market is the “linchpin” to removingprice caps for short-term transportation, FERC Commissioner LindaBreathitt said yesterday at the seventh annual DOE-NARUC NaturalGas Conference in Pittsburgh, PA. “Without market power mitigation,I am unwilling to release the price cap.”

Breathitt’s unyielding statement was in response to industryrumblings that it would be an administrative nightmare tocoordinate buying gas and successfully participating in separateauctions for pipeline paths to markets for multiple transactions -all for delivery the next day. Breathitt said, however, she wouldseriously consider granting the industry’s request for an extensionof the deadline for comments on FERC’s notice of proposedrulemaking on the issue. The request for a 74-day deadlineextension to Jan. 22 was made by six industry trade associationslast week. Breathitt noted the request came from a broad-basedindustry group and FERC had scheduled a technical session in themiddle of the rulemaking. Also, she acknowledge that devising aworkable system is an extremely tough problem.

But according to Commissioner Vicky Bailey, it’s “come to Jesustime” for the industry, meaning the industry will have to deal withthese issues sooner or later.

It is something that can be achieved, said Pam Prairie, wholikened the process to what the industry went through withderegulation of the gas commodity starting with FERC Order 636.That required “massive changes, redoing internal businesspractices. Everyone said it couldn’t be done.” Through that period,Prairie was an executive with ANR Pipeline, variously involved instrategy, rates and marketing. She currently is director of theInstitute of Public Utilities at Michigan State University.

She agreed that working out details of how to carry out theproposed auction will be “a formidable task,” but she added “it isalso a very doable task.” It would take a large amount of resourcesand use of the latest electronic technology. Prairie said from herexperience with implementation of Orders 436 and 636 she estimatedit takes 18-24 months for system users to become familiar with anew process and figure out how to optimize services.

“It won’t happen overnight, but I don’t think you can take theprice cap off without developing a mechanism that will preventanyone from withholding capacity,” she said. “It is important fromthe consumer perspective. It’s the way to deal with market power.”

As a matter of public policy, she said she strongly supportedFERC’s proposal. “It signals exactly the kind of steps that can beemployed to rationally evolve restructuring of the industry towarda more competitive market model.” Although the proposed auctionwill be aimed at mitigating the market power of incumbentinterstate pipelines, she also feels it has equal value forreducing the market power of marketers and LDCs, both of whichcould have significant blocks of capacity in the secondary market.Market power could arise in cases where marketing companies haveworked out contracts with LDCs to manage the LDCs energy portfolio.”It’s not difficult to imaging a scenario in which a marketer cankeep out a competitor’s gas supplies by withholding large chunks ofcapacity at the LDC’s citygate from release; or by withholdingcapacity from the release market, they could also create a scarcitycircumstance, which in turn could drive up the price of releasedcapacity in that market,” she said. “Likewise it is not difficultto imagine a scenario [where] several pipelines could get togetherand create a new marketing affiliate. That affiliate could buycapacity from [one of the] pipelines below tariff rates with theintent of reselling the capacity at market-based prices in thesecondary market.” These would be “tempting” options without andauction.

A rule of thumb, Prairie said, is “if you’re a buyer [ofshort-term capacity], you should love the auction. If you’re aseller, you’re not going to like [it] because it’s going to makeprices much more transparent,” which in turn will result incapacity having less value.

Prairie also speculated that if an auction system is developedto deal with the secondary marketing in the near term, in the longterm it may be used for all transportation across the board andwould substitute for holding long-term capacity.

Some LDCs NGI talked with agreed it would take time to adjust toa new system. They recently completed their adjustment to the pricecap on released capacity by creating the “gray market” ofnonregulated bundled transportation and supply transactions.Several LDCs commented that it isn’t all that necessary to have theprice cap removed certainly isn’t worth that hassle of learning awhole new auction process. The protests that originally greeted theprice cap have died down. As one LDC rep out it, “FERC isaddressing a problem that doesn’t exist anymore. They came late tothe party.”

Meanwhile, Peter G. Esposito, vice president and regulatorycounsel for Dynegy, who is opposed to short-term capacity auctions,thinks nevertheless they may be the answer for the long-termcapacity market where there is more time to coordinate the process.

©Copyright 1998 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press,Inc.