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

Fortnightly Magazine - January 1 1999

see major problems with the auctioning of capacity as proposed by FERC. Since capacity is point to point (or node to node), the program proposed by FERC staff will have a separate auction for each combination of points. For N points, there are (N)3(N1)/2 combinations. While the number of combinations may be simple to compute with the fast computers available, a large number of auctions results in thin auction markets that are subject to manipulation

Fewer Bids. The computational simplicity touted as characteristic of the FERC auction of available capacity will be destroyed as participants introduce complexities into the bidding process. For instance, some participants claim to need a multi-period commitment, arguing that the ability to move gas on Wednesday is worthless unless the participant also has the ability to move gas on Tuesday and Thursday. Other participants claim a need for all or nothing, such as the right to move 10,000 Dt per day. The combinations are similar to the dispatch models built in the 1970s for electric utilities. These models were and are incredibly complex, and do not always yield consistent solutions.

Allow Bilateral Trades

By contrast to an auction of pipeline capacity rights, an auction of gas imbalances requires no determination of volumes. The volumes are already determined by the pipeline meters and by the amount each transporter has scheduled. Transporters can change those volumes by trading imbalances with other transporters in the same zone, but such trades are not part of the pricing algorithm. The trades are arranged as the gas is flowing.

There is reputed to be a huge gray market for flowing gas. A few large users of gas have considerable flexibility in the instantaneous use of gas. An electric utility, for example, can decide to redispatch its generators, burning more coal or oil and freeing more gas for trade with other users of gas, who may have been caught short by a sudden cold front. An auction of gas imbalances will not destroy this gray market for gas, just make it more efficient.

The efficiency of an auction versus the operation of a gray market for flowing natural gas can be determined from the price disparities that exist in the gray market. Some transporters are actively marketing their flowing gas, obtaining a transportation price significantly above the tariffed transportation price. However, most transporters have not set up a group to market their flowing gas and receive the tariffed transportation rate, depending on the pipeline balancing provisions. Conversely, some transporters are running short of gas and pay the utility penalty rate. The penalty rate for a gas imbalance is equivalent to a transportation price several times the tariffed transportation price.

IT Trading and Intraday Pricing

The prices derived from the gas imbalances graph relate to simultaneous market conditions. These market conditions can be determined instantaneously by such means as a measure of the concurrent gas pressure. Thus, the prices in the graph could be applicable to gas deliveries throughout the day. High pressures during the middle of the night and low draws of gas will result