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

Fortnightly Magazine - January 1 1999

delivery and path rights (offering only components for sale while retaining the rest) to be put up for auction along with the identical components of the pipeline's unsubscribed capacity. All capacity is considered to be in separate "pots" of identical capacity. All capacity in each auction pot is auctioned and proceeds split pro rata based upon quantity placed in the pot and reserve prices set, met and exceeded. Capacity for which there is no bid exceeding the lowest reserve price is returned to the party and may be sold through pre-arranged deals.

In the monthly capacity auction, a seller of capacity (the pipeline or releaser) could, but would not be required to, auction off more than the next month's capacity. The pipeline would be required to offer the next month's quantities, and releasers may include theirs as well.

There are recognized means of handling pro rata revenue sharing, accounting for reserve prices. Thus, once the Commission has set the basic parameters of the auction, it should provide a six-month period for the industry to set uniform operating rules for the auction (probably through the Gas Industry Standards Board). Auction parameters should include: 1) what is to be auctioned, 2) when it is to be auctioned, 3) who may provide capacity to be auctioned, 4) who must provide capacity to be auctioned, and 5) policies governing reserve prices.

Problem 4: Flexibility on Eve of Auction

Answer: Allow only IT Rights for "day-before" and "day-of" auctions, to avoid double-booking and dilution of FT rights.

On nomination day, a shipper interested in unsold capacity should use its IT (interruptible) service agreement and submit a bid rate as part of its IT nomination. Submitting an IT nomination without a bid rate would be the same as submitting a nomination with a default bid. The default bid would be the 100-percent load factor rate of the long-term FT rate for the same haul.

A pipeline could set a reserve price for IT transactions where the pipeline has unsubscribed capacity for a zone of haul. An example would be where a pipeline has three zones in a path. The first zone has some unsubscribed capacity, but the second two zones have no unsubscribed capacity. The pipeline could set a reserve price for hauls using any part of the zone with unsubscribed capacity, but may not set a reserve price in fully subscribed zones. In addition, the pipeline should be permitted to maximize revenue (i.e., accept lower rate, shorter hauls that in aggregate generate greater revenue than higher rate, longer hauls).

This auction mechanism would suffice as the day-before/day-of auction process, and would pertain to any unconfirmed firm capacity (by definition, un-nominated capacity is unconfirmed capacity). The rate submitted by a shipper at the 11:30 cycle would be deemed that shipper's minimum bid for all pertinent cycles. Thus, parties would be able to bid a higher price in a subsequent cycle to get capacity.

A party would not have to submit another nomination just to retain space; however, if they were out-bid later they would face interruption. An IT