[BETA] Fortnightly

Auctioning gas imbalances offers advantages over bidding on available pipeline capacity.

In a Notice of Proposed Rulemaking issued last summer, the Federal Energy Regulatory Commission proposed a series of auctions for all unutilized short-term rights in pipeline capacity, with the most frequent auction being for transmission rights for the next day. All transporters and the pipeline would be required to release available short-term capacity rights to be auctioned. (See FERC Docket RM98-10-000, Regulation of Short-term Nat. Gas Transp. Servs., July 29, 1998.)

Confusion abounded, however, when the FERC attempted to show how auctions would work in bidding for various segments in a multi-nodal pipeline network. At the FERC's Workshop on Pipeline Capacity Auctions, held Oct. 20, the Commission staff presented several examples. For ease of presentation, the model results were first presented for a three-node linear pipeline, then a four-node, network pipeline. Much of the confusion concerning this model could be eliminated by changing the nature of the auction.

Instead of auctioning available capacity as proposed by the staff's model, the better auction is of gas imbalances (i.e., the difference between the nomination and the actual delivery of gas). Such an auction of gas imbalances would acquire a number of desirable characteristics:

Universal Application. Every transportation customer has a minor gas imbalance daily that is generally ignored because the imbalance is within tolerance. By making even those small gas imbalances subject to auction, all transportation customers would become participants in the auction.

Commodity Bids (Not Derivatives). The value of pipeline capacity is derived from the difference between the commodity value of gas at either end of the pipeline. Pipeline capacity values are thus derivative of commodity values. Capacity rights can be viewed as commodity futures contracts, such as those traded on the New York Mercantile Exchange or the Chicago Board of Options.

Fewer Auctions. An auction of gas imbalances would require only a different price for each zone on the pipeline. An auction of transportation rights requires a different price for each pair of zones. With N representing the number of zones, the market will require N imbalance auctions. But the number of discrete capacity auctions rises to N3(N-1)/2.

Simplified Bidding. The price would change automatically depending on the market balance within the relevant zone of the pipeline. No "bid" is actually submitted by a participant. Instead, the amount of a bidder's imbalance is automatically priced at the zonal price, whether long or short.

Easy Bilateral Trading. With auctions applying only to gas imbalances, a bilateral trade would not affect the market balance within a relevant zone of the pipeline.

An Intraday Market. The auction price would be determined from the market imbalance, which could be measured instantaneously for gas, simplifying the creation of an intraday market. The settlement price would be the instantaneous price averaged over a longer period of time, such as a few hours or a day.

Pricing Gas Imbalances

I propose to change the nature of pricing for gas imbalances. Currently, most pipelines and local distribution companies use a penalty structure for gas imbalances. The utility allows the