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

Fortnightly Magazine - January 1 1999

a customer with a positive imbalance) is an auction of fungible gas, at least as far as firmness is concerned. Significantly different receipt/delivery points may require different auctions or geographic adjustments to the auction price.

Sequence. Auction all rights at once, even though a bidder might win midstream rights but lose on bids for upstream and downstream zones?

Sequence is not an issue in an auction of gas imbalances. An auction of gas imbalances is a solution to the sequence issue. The bidders exercised all of their rights prior to the measurement of gas imbalances. In fact, if some of the rights were not exercised or were curtailed, an auction of gas imbalances provides a cashout for the partial path used.

Storage. Auction that too?

The auction of gas imbalances will price any operation of storage that is contrary to the scheduled operation of storage. Further, the auction price is likely to be low during the periods when storage operators wish to obtain gas on their own and high when the operators have the opportunity to help the market with their gas. Also, an auction of imbalances can provide continuous prices for intraday imbalances, providing an incentive for storage systems that can inject and withdraw at different times during a gas day (e.g., the ancient gas holders owned by some LDCs).

Privacy. What information to reveal in bids?

For an auction of gas imbalances, no bids are submitted, no information is revealed. Instead, the physics of the gas system determines the price paid for imbalances. The only relevant information about an individual shipper is its gas imbalances.

Gaming. How to force pipelines to put all "available"

capacity up for bid?

The auction quantity is not capacity but gas imbalances, and all participants are "forced" to participate by the physics of gas imbalances. The pipeline can indeed affect the price by withholding compression, which would lower the pressure in the delivery area. However, if transporters respond appropriately to low pressure in the delivery area by reducing consumption and creating surpluses, the pipeline will find itself a net buyer of gas at a very high price.

Timing. Integrate auction schedule with NYMEX futures positions?

The creation of an auction price for gas imbalances should make NYMEX futures more liquid. The improved liquidity should expand the volume of futures trades. Further, an auction of capacity rights is a futures auction, since capacity rights are not a spot commodity but a hedge against some future delivery of a commodity. Accordingly, any tie between capacity rights and NYMEX futures positions creates a chain of hedges that is systemically unstable. A tie to gas imbalances is a tie to reality that will stabilize the NYMEX futures market.



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