Want auctions for gas capacity? Don't think pipeline. Think online.
In July 1998, the Federal Energy Regulatory Commission signaled its intent to try one more time to make greater use of electronic auctions in the pricing and allocation of regulated gas pipeline transmission capacity. The proposed rule, issued in Docket No. RM98-10, marks the third major effort by the commission in this area. Several workshops have already been held. Formal comments are due Jan. 22.
Since the commission began in 1992 to encourage electronic markets for pipeline capacity, several private ventures have sought to create trading products. None has succeeded, however. The publicly reported losses of those who tried are measured in the tens of millions of dollars.
Nevertheless, while private auctions for regulated transmission capacity have failed, auctions in closely related, but freely tradable unregulated commodities have succeeded quite nicely. Today, AltraTM Streamline and QuickTrade's Power Trading System, which provide electronic auctions for natural gas at a variety of delivery points, are known and accepted industry institutions.
Moreover, since the commission last examined the use of auctions, electronic merchants and auctioneers on the World Wide Web have begun to redefine the roles of buyers and sellers. They are radically changing conceptions of how business is conducted, including such fundamental questions as what "inventory" is and who provides it. The question of "where" a business even exists becomes problematic. Over time, these new virtual merchants will change the very physical landscape in which we live and work.
Accordingly, as the commission considers possible regulatory changes involving electronic auction markets, it may find it valuable to understand why its prior efforts to encourage electronic auction markets in capacity have failed, and why other electronic markets and auctions have succeeded. In particular, the commission should be attentive to the experience of online merchants and auctioneers in unrelated commodities. It should stay open to lessons that may apply as well to the regulated gas industry. This article is intended to help open the public discussion of these complex, important matters.
Redefining the Bounds of the Possible
Politics, it's been observed often, is the art of the possible. What happens, though, when the range of possibilities is suddenly and radically redefined in totally unanticipated ways? This question will come before the FERC this year in its pending auction inquiry.
What is already uncontestable is that the technological and institutional revolution known as the Internet is radically remaking the bounds of the possible in commercial transactions. In 1992, when Order No. 636 was issued, the World Wide Web barely existed. It has been estimated that there were only about 50 "http" servers in existence in January 1993.fn1 During the ensuing five years, while the gas industry has focused on creating and refining its institutional structures and business processes to make open access to the gas grid a success, the World Wide Web has been working radical changes in the way buyers and sellers interact in the rest of the commercial world.
The extent of this change is reflected in the valuations applied to the securities of those