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Capacity Auctions Might Work, But Only if the Stage is Set

Fortnightly Magazine - January 1 1999

should be communicated to the pipeline and listed as pre-arranged deals.

Problem 2: Separate Bids on Which Rights?

Answer: To increase fungibility of capacity rights, accept separate bids for individual point and zone FT rights.

Primary receipt, delivery and path capacity rights by zone or operational area of pipeline should be sold separately and offered independently during the auction process. Buyers would be able to purchase what they need, place the rights into a master contract, and use them interchangeably within the boundaries of that contract. This idea also makes the auction process easier to participate in and administer. The ease would come from pipelines not having to predetermine which receipt rights should be offered with which delivery rights and which of either/both should be offered with which path rights-not to mention the quantity denominations that might be appropriate with respect to any of the above. Likewise, unless their constituent parts were offered separately and alongside the pipeline's offering of the same constituent parts, releasers offering capacity would not be able to have it considered interchangeably with that of the pipeline.

A significant feature of such a structure is that the ability to effectuate deliveries off of any FT contract could remain with the local distribution company. Concerns as to loss-of-pressure rights, flow rates and the like would be eliminated, as the LDC could retain these point rights. These rights exist only on the transportation agreements. Providing for their "separate release and sale" overcomes the problem of such rights becoming alienated, as they often are today, through the current release process.

Problem 3: Comparing Prices

Answer: Hold two FT auctions-Monthly and Two Days Out-as a check against market power.

There should be two firm capacity auctions: a monthly capacity auction and a two-day-out capacity auction.

In the monthly capacity auction, all unsubscribed capacity available in the same quantity for each day during the next month would be made available. A seller of capacity (the pipeline or releaser) could, but would not be required to, auction off more than the next month's capacity.

In the two-day-out auction, no less than two days before the date of flow, all pipeline unsubscribed receipt, delivery and path capacity must be made available for auction. Sellers (the pipeline and releasers) would be permitted to offer capacity for any individual days before the next monthly capacity auction (and the pipeline should be required to support such releaser choice). Any seller of capacity could, but would not be required to, offer to auction off more than the "at least two-day-out" capacity.

In the monthly capacity auction, bidding would occur between 1 p.m. and 2 p.m. CST on the day that the New York Mercantile Exchange closes the prompt month's gas futures (i.e., ends trading of the next calendar month's futures contracts).

Allow no contingent bidding. But allow owners to set reserve prices for each capacity right (i.e., receipt, delivery or path). Reserve prices would not be considered "bids," as that would not yield the intended results outlined below. Releasers could break up their capacity into its constituent primary receipt,