[BETA] Fortnightly

Make gas pipeline rights more fungible, but draw the line at contingent bidding.

Last July the Federal Energy Regulatory Commission proposed mandatory auctions to allocate all capacity rights shorter than one year's duration on interstate natural gas pipelines. (See RM98-10-000, Regulation of Short-term Natural Gas Transportation Services, FERC, July 29, 1998.) At a technical conference held Oct. 20, staff members of the commission's Office of Pipeline Regulation and its Office of Economic Policy suggested at least two auctions-a daily auction to clear one-day rights and a second process for rights longer than one day but shorter than 12 months.

In theory, a capacity auction process can create a fully functioning market in pipeline capacity. Other processes may work as well.

In any case, before auctions can make capacity trading more efficient, at least a handful of problems stand in the way:

1. Should there be pre-arranged deals, and if so, what's

the cutoff?

2. Should shippers bid separately on point and

segment rights?

3. How do shippers compare firm transportation prices when products are so different, and some rights might be contingent?

4. For daily rights, how much flexibility do pipelines and shippers enjoy to change offers and bids on auction day or the day before?

5. Must traders learn different rules for each auction?

Problem 1: Should there be Prearranged Deals?

Answer: Pre-arranged deals should remain available, even with auctions of firm transportation rights.

Until 3 p.m. two days before flow (the day before timely nominations are due), any party (including pipelines) should be able to make a pre-arranged deal to sell all or a portion of its capacity rights to any other party for any duration up to one year. The price should be open to negotiation, without any mandatory cap or floor. However, the price for any pre-arranged transactions of greater than a year (or a series of transactions with the resulting effective capacity rights being equal to or greater than a year) would be capped at the then-effective maximum annualized rate.

In addition, after 5 p.m. two days before day of flow and until 3 p.m. the day of flow, anyone, including the pipeline, should be permitted to make a pre-arranged deal to sell all or a portion of its capacity rights at any price to any other party for the day of flow. These transactions are intended for the duration of one day or a part of a day.

By contrast, when a pre-arranged deal for capacity is executed after the timely nominations deadline for the subject gas day, the capacity must be "un-nominated" by the releasing shipper. There are, of course, complications associated with determining what capacity has been un-nominated. Equally, the benefits of partial-day releases may not outweigh these complications. However, to the extent a pipeline can sell firm transportation (FT) capacity on the day of flow, releasers should be able to compete.

Parties may establish their own capacity exchanges to compete with the pipeline's auction process. The pipeline may subcontract the administration of the auction process. Transaction results of the independent or subcontracted exchanges