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

Fortnightly Magazine - January 1 1999

shipper would have the right to reduce the quantity of a nomination but would pay transportation charges based on what was scheduled. In addition, all existing rights of parties with FT would continue.

Thus, excluding the 5 p.m. cycle, any lower priority or lower priced IT could be "bumped" by higher priority (i.e., FT) or a higher priced IT bid. There should be no sale by pipeline of un-nominated FT as anything other than IT.

Problem 5: Learning the Rules

Answer: Make rules uniform for all auctions.

The rules for all auctions should be uniform with respect to posting capacity offered for sale, accepting and processing bids and awarding winning bids. In addition, they should be uniform with respect to setting bidding rules, times for market openings and closings, minimum increments of pricing, minimum bid quantities and numbers of bids per item of capacity by a bidder. That goes double for contingent bidding-don't allow it in any auctions.

In addition, all rights for auction should be offered on a stand-alone basis (i.e., no tying of receipt to delivery or of either to path rights). Likewise, all bids should be made on a stand-alone basis (i.e., each right is to be bid upon separately and separately awarded to the highest bids). Uniform auction rules make it possible for companies to play on the national stage.

Gregory M. Lander is president of TransCapacity, based in West Peabody, Mass., a developer and provider of transaction and information computer systems and software for the natural gas industry. See the TransCapacity website, at www.transcapacity.com, for more proposed rules and procedures for implementing gas pipeline capacity auctions.

Setting the Stage

Auctions can't work without standardization-in path rights, point rights, segmentation, scheduling and confirmations.

Auctions can not make capacity trading more efficient without first satisfying 10 conditions to standardize the market.

1. Points and Paths. First, eliminate restrictions on the use of receipt and delivery points and clarify use of secondary points on primary paths.

Shippers should be able to use every point on every contract as a receipt point or as a delivery point. On firm contracts, if the point right is a primary receipt right, then the delivery rights at the point would be secondary only. Likewise, if the point right is a primary delivery right, then the receipt rights at the point would be secondary.

Similarly, a path should be purchased directionally on a primary basis, but could be used to nominate a back-haul (contra-flow) transaction on a secondary basis. This design makes capacity more fungible because more rights are available to more parties to contest markets at locations that may not have unsubscribed forward-haul path capacity. In addition, secondary, within-path point rights should be continued. However, use of secondary receipt or delivery points along a primary path should not cause the path capacity to have a lower (i.e., secondary) priority.

2. Segmentation. Self-releasing should be used to segment existing capacity. Excluding those presently in place, limits should not be permitted that might reduce the capability to segment capacity rights. Segmentation should be allowed at