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Fortnightly Magazine - January 15 1999

years to create businesses that are valued much more highly than regulated businesses born in the days of Thomas Jefferson.

Under this perspective, the key question the commission should be asking in the rulemaking proceeding is why the existing auction houses and cyber-merchants do not already offer auction services for pipeline capacity. It would soon learn that the reasons are rooted in the commission's prior rulings that define the transfer of such a right as a jurisdictional act for which the commission, as a matter of policy, will not grant a Natural Gas Act certificate. By prohibiting what it termed "capacity brokering," the commission sought to force posting all such transactions in the form of "releases" conducted on pipeline electronic bulletin boards.

Unfortunately, this policy posed a dilemma for potential buyers and sellers of capacity in a cross-pipeline market. They faced the prospect of having to re-post and re-consummate transactions as "releases" on disparate pipeline EBBs - deals that the parties had already conducted on the open auction board. Faced with inefficient pipeline-specific EBBs in any event, market support for the cross-pipeline auction boards evaporated. That drained the liquidity from the auction services and ensured their demise.

The second great obstacle to successful electronic auctions in capacity flowed directly from the first. By viewing auction transactions as jurisdictional and seeking to force traders through the grinder of pipeline-specific EBBs, the FERC discouraged the development of electronic tools for evaluating transmission paths across various pipeline systems. One of the key commercial problems an electronic auction mechanism seeks to solve is how to provide buyers with the ability to link segments that cannot readily be "seen" as linked (for example, because they involve non-contiguous segments of the same pipeline, non-contiguous pipelines or even different fuels).

Just as Amazon's electronic links allow a self-publisher to establish relational links between books in the attic and a school librarian, so a well-designed auction service should allow buyers, as an economic matter, to link paths on pipelines a thousand miles apart. While that is done today through privately negotiated swaps and basis differentials across pools, it is a relatively inefficient process. It lacks the transparency that would come from efficient cross-pipeline auction markets.

Moreover, as the electronic and energy markets mature and converge, sellers may seek ways to link things that the commission never dreamed would be joined in a single transaction. Examples might include the sale of light with books,fn2, gas with groceries,fn3, heat with mortgage servicing,fn4, or electricity with religious charities.fn5 In a nation of hundreds of millions, no one should expect everyone to want their molecules or electrons painted the same color. It bears remembering that insisting on producing a single-color automobile cost Henry Ford the dominant position in the U.S. automobile industry for decades.

The FERC need not renounce jurisdiction over capacity assignment for this innovation to proceed. All that is required is the withdrawal of that portion of the proposed rule that seeks to define by law the terms of the auction market. Instead, to the extent the commission believes its jurisdiction is