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

Fortnightly Magazine - January 1 1999

along paths wholly within one system should follow these categories, in order of priority: primary (within path or on the mainline), then secondary (outside the path), then interruptible. The "secondary" category would not apply for network pipelines with postage-stamp rates. Once transactions are confirmed and the universe of confirmed transactions at points is established, the mainline is scheduled according to the path distinctions above (i.e., categorized as primary, secondary and IT).

7. Daily Reconciliation. Even where monthly measurement continues, the after-the-flow gas allocation process (distinct from the before-the-flow capacity allocation process) should be daily-or even hourly, if possible. Monthly allocations in a daily market make no sense and decrease transaction certainty due to ex post facto adjustments and re-allocation. Nothing should inhibit finer granularity in the allocation process.

8. Post It. Post all available capacity and all capacity transactions according to format rules set by the GISB. This posting should include the index of customers, pre-arranged deals (short-term FT), recalls, reputs and scheduled IT bids. As for timing, all transactions, including IT, should be posted by the close of business on the day of the award.

As for how much capacity is "available," post two types: First, "real-time operationally available capacity"; second, "real-time unsubscribed available capacity."

The first category represents the amount of capacity that remains available to be nominated at the location (and along the path or through the zone) following the last scheduling cycle-not a "prediction." The second denotes the capacity existing through the location or zone for purchase from the pipeline under a pre-arranged deal or through the proposed auctions. All such real-time available capacities should identify locations, paths and time intervals.

9. Master Contracts. Each shipper should be afforded the opportunity to have one or more "master" contracts for firm and interruptible service. A master contract would be able to accept new purchased capacity; capacity would be removed from it once released, for the duration of the release.

For FT, the individual component rights could be added to the contract as they are auctioned. For IT, all points and paths are considered part of these contracts. At any given time, a winning bid for a transaction would add the rate and locations/paths for the specified service to the contract for the duration of the scheduled transaction.

10. Imbalance Penalties. Have the FERC set uniform national standards for penalties and treatment of penalty revenues, and encourage state regulators to follow suit. Pipelines could charge less to all shippers uniformly, but could not charge more. Penalty tolerances should also be uniform across pipelines (i.e., 0 to 5 percent, 5 to 10 percent, 10 to 20 percent, and 20 percent) to eliminate cross-system arbitrage and dumping/drafting to avoid market behavior driven by disproportionate penalties or penalty thresholds.

Finally, the party levying the penalty should not retain penalty revenues. Penalty revenue should be rebated within two months of collection to non-offending parties in proportion to their scheduled quantities at the time and in the zone or operational area subject to the penalty.

-G.M.L.L

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