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FERC's Mandatory Gas Auctions: Are We Bidding the Right Product?

Fortnightly Magazine - January 1 1999

shipper to have a small tolerance without penalty. Cumulative net imbalances are cashed out at some slight penalty versus a nominal market price. Significant fixed penalties are charged for daily overruns during days of curtailment.

Instead we should institute a competitive market for imbalances, essentially creating a FERC-style auction. This competitive market would have daily or intraday cashouts of the entire imbalance. There would be neither a tolerance for small imbalances nor a specific penalty for large imbalances. The price for the cashout may become so severe that the customer feels a pinch similar to that of a penalty. However, the price would also be applicable to customers who have the opposite imbalance, though perhaps with a small (e.g., 5-percent) price differential to provide the pipeline with net revenue to compensate for its administrative services. The small price differential would be the only incentive for customers to trade imbalances.

The price of gas imbalances is already subject to FERC's jurisdiction. After all, the penalty structure described above is included as part of the pipeline's transportation tariff and is ruled over by FERC. My proposal changes the price from a fixed penalty structure to a varying competitive market price.

I propose that the price for imbalances be determined from a measured quantity such as gas pressure in the market area, line pack volumes, etc., as presented in the graph on the following page. The vertical axis is likely to be logarithmic, so that proportionate changes in the measurement of the market imbalance will change the price by the same factor. For instance, every 10 psi decrease in gas pressure could double the price of the gas imbalance. The second and third lines in the graph are for self-correction. As the market imbalance continues, the price curve for gas imbalances changes to increase the incentive for correcting that market imbalance. In this case, I have assumed that the market imbalance was a shortage and that the price curve shifts up on subsequent time periods.

A similar price curve appears in other papers I have written, including "WOLF Pricing," Public Utilities Fortnightly, Oct. 1, 1994, p. 69. That article was directed to the electricity market so there are different measurements for the market imbalance, and prices are for energy measured in kilowatt-hours instead of decatherms.

Since 1984 I have advocated the automated pricing of unscheduled flows of electricity. I call the concept "wide open load following," or "WOLF Pricing," as the price changes are unlimited, depending only on system conditions. The mechanics I have described for electricity are equally applicable for natural gas, the primary difference being the sophistication of the tools available for changing the price. Electric utilities have long used area control error and system frequency as indices of reliability concerns on the network. I say they are also market imbalance measures, as that term is used in the graph. Extended problems with system frequency provide another index of reliability concern: time error. The additional lines in the graph would be generated by time error, were the graph a plot of prices for