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

Fortnightly Magazine - January 1 1999

least by zone. Preferably, segmentation should be carried out to the level of individual links between locations covered by operational balancing agreements.

In practice, a segmentation down to the level of OBA location segmentation would permit division of rights from interconnect to interconnect and the establishment of segments between market center locations. However, it would be appropriate for network pipelines with postage-stamp rates to bar segmentation, as there is nothing to segment.

3. Back-Hauls. Back-hauls on FT contracts from primary delivery points to primary receipt points should be priced at the pipeline's minimum usage rate. That allows markets with no available primary forward-haul capacity to be contested on a back-haul basis. Back-hauls involving secondary points should be priced at the usage component of the FT rate. There should be no compressor fuel on back-hauls. Shippers should be able to release their back-haul rights without having to forfeit their forward-haul rights. Permitting in-stream transfers between contracts allows different parties with contiguous rights the benefit of their individual rights.

4. Capacity Expansion. The construction of taps for third parties helps preclude situations in which a pipeline might refuse to expand capacity in order to extract scarcity rent. Pipelines should permit third parties with FERC certificates to construct receipt and delivery taps upon request, provided they agree to reimburse the pipeline for the costs of construction and incremental operation. A receipt tap coupled with an upstream delivery tap and connected by a third party's pipeline can constitute a third-party constructed "loop," providing increased capacity.

5. Confirmation of Transactions. First, interconnected parties should confirm with each other the matches of their respective nominated transactions. Once the universe of confirmed transactions is identified, the pipelines should allocate their available point capacity to these confirmed transactions. If that process reduces or eliminates certain confirmed quantities, the pipeline with the reduction should seek to re-confirm with the other. The resulting "re-confirmed" quantities using the current "lesser-of rule" would then become the scheduled quantities. The process encourages parties to coordinate their transactions.

6. Streamline Confirmation of Capacity. Priorities in capacity allocation must accommodate interconnections between system operators. Divide these interconnect transactions into four categories, by order of priority: primary to primary, mixed firm, mixed interruptible and IT to IT.

In primary-to-primary transactions, the parties on each side of the interconnect nominate primary delivery and receipt point rights, respectively. Mixed firm transactions occur where both parties have some sort of firm point capacity but at least one of the parties has nominated secondary point capacity at the location. Mixed IT transactions are where one of the parties has nominated IT capacity at the location regardless of what kind of firm the other party has on its side of the interconnect. IT-to-IT transactions are where both parties have nominated IT capacity rights at the location.

Prioritization according to these categories would encourage parties to join firm with firm, in order to obtain the highest flow priority. It also would make firm rights more valuable, and thus provide an underpinning for the whole FT market.

In addition, once points are resolved, capacity allocations