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

Fortnightly Magazine - January 1 1999

in low prices. Low pressures during the morning peak period will result in high prices.

Most customers are nominally price inelastic and use the same amount of gas at any price. However, customers that are price elastic generally are served by the utility on an interruptible rate schedule, where the price of gas is reduced, but the utility has the right to interrupt the customers' gas service. Under the price mechanism described by the graph, the interruptible transportation customer would receive lower prices automatically during periods of the day when the local distribution company is likely to allow this customer to operate. Conversely, the IT customer would be facing high prices during periods of the day that the utility would want it to be off-line.

Discourage Gaming

the System

The inadequacy of penalty rates for gas imbalances was demonstrated in Chicago during the winter of 1995-96. During a severe shortage, marketers were alleged to have sold gas to end-users at more than $40/Dt despite having neither the supplies injected into the pipeline at the well nor the right to move gas on the pipeline. The gas flowed to end-users because the accounting system was inadequate in telling operations to turn off the gas. The marketers eventually paid penalties of $10/Dt for the unauthorized use of gas-and earned a net income of $30/Dt by gaming the system. By contrast, the prices produced by the graph might have been $100/Dt, eliminating the gaming of the system by marketers out for a fast buck.

Mark Lively is an independent consulting engineer in Gaithersburg, Md., who specializes in economic issues affecting electric and gas utilities. He has worked for Kentucky Power Co. and American Electric Power Service Corp., and spent 15 years with Ernst and Young's Washington Utility Group. He can be reached at

Addressing Industry Concerns: How an Auction of Imbalances Would Stack Up

In a recent "Frontlines" commentary, Fortnightly editor Bruce Radford listed seven issue areas and posed questions involving "the ins and outs of the gas day and other sorts of technical, operational concerns." (See "Those Gas Auctions," Public Utilities Fortnightly, Nov. 15, p. 4.) In the space below, I'll address each issue, showing what would happen with an auction of gas imbalances.

Price. Do winners pay what they bid or match a single, market-clearing price?

There is a single market-clearing price paid by those with negative imbalances. A slightly lower price is paid to those with positive imbalances. The price differential is a fee to the pipeline for cashing out the imbalances. Participants can avoid this fee and set their own price through bilateral trading of the imbalances; that is, through continued reliance on the gray market.

Fungibility. How to throw capacity rights into one pot when they differ in kind (recall conditions, firm vs. IT, different receipt/delivery point, etc.)?

Many have said the only electricity that is truly firm is that which has already gone through the meter. An auction of gas that has gone through the meter (or should have gone through the meter, in the case of