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Frontlines

Fortnightly Magazine - November 15 1998

would put released capacity on an even keel with pipeline firm by making intra-day noms possible and preserving primary receipt and delivery rights for releasing shippers. It would end cost-based tariff regulation for pipeline transportation rights for terms of one year or shorter, instead forcing all such short-term capacity to trade through auctions. (See, FERC Docket No. RM98-10-000, July 29, 1998.)

A raft of issues emerged at the conference. Many fell under the heading of "chicken or the egg." Must a bidder commit in a market-wide pipeline auction without first knowing if he can line up all the other elements required for a deal? Kathy Patton and Ed Ross of Dynegy described their current practice, implying that traders still appear more comfortable with one-on-one, phone-and-fax trading. "Normally," said Ross, "if we're long on the molecules, we rely on interruptible transportation. So if we are scheduled on IT and then we don't flow, we don't generally have to pay. The market will take up the capacity."

Other questions involved the ins and outs of the gas day and other sorts of technical, operational concerns:

• Price. Do winners pay what they bid or match a single, market-clearing price?

• Fungibility. How to throw capacity rights into one pot when they differ in kind (recall conditions, firm vs. IT, different receipt/delivery points, etc.)?

• Sequence. Auction all rights at once, even though a bidder might win midstream rights but lose on bids for upstream and downstream zones?

• Storage. Auction that too?

• Privacy. What information to reveal in bids?

• Gaming. How to force pipelines to put all "available" capacity up for bid?

• Timing. Integrate auction schedule with NYMEX futures positions?

One obvious stumbling block is how to coordinate capacity auctions with retail unbundling programs imposed by state regulators, which may reassign short-term pipeline capacity from the utilities leaving the merchant business to the marketers picking up their retail customers. Richard O'Neill, Director of the FERC's Office of Economic Policy, noted the problem:

"You have to recognize that some state unbundling plans will be inconsistent with each other. Some state plans stipulate the price at which LDC-owned capacity is transferred to marketers. That may be inconsistent with auction rules."

WHAT I FOUND MOST INTERESTING was how the gas pipeline auction proposal dovetails so neatly with the FERC's electric industry experience with independent system operators and power exchanges. Nothing happens in a vacuum. The knowledge the commission has gained from the PJM, Midwest ISO, and other cases (em about spot markets, coordinated dispatch, congestion contracts, pancaking, and locational marginal pricing (em it now seeks to impart to a gas industry more accustomed to distance-based pricing.

The FERC's electric experience became particularly obvious when staffers presented a "four-node" example with multiple pipeline paths, showing how in this particular case, an gas pipeline auction would produce a market-clearing price for transportation between a pair of receipt and delivery points that was much lower than that offered by one of the bidders. The example recalled the technical conference I attended a while back on transmission pricing in PJM (em and the notion that