A debate on the FERC proposal to put short-term capacity up for bid.
Last summer the Federal Energy Regulatory Commission truly outdid itself. In a move that left the gas industry speechless, the FERC proposed that it would remove all price controls or cost-based regulation for capacity rights shorter than one year's duration, and instead would resort to auctions for the purchase and sale of such "short-term" rights to transport natural gas on interstate pipelines.
The reason? The FERC said it wanted to level the field between short- and long-term contracts. The industry was showing less and less interest in longer-term deals, said the FERC. In fact, the Commission believed that shippers had found a way to have it all. Essentially, shippers could avoid the risk inherent in long-term deals and yet lock in some of the benefits by using rights of first refusal to renew their rights under short-term deals. The FERC called it an "asymmetry of risk."
Better Than Phone and Fax?
For pipeline rights of one day's duration, the FERC proposed a mandatory daily auction for all such "available" capacity. Pipelines would have little choice; they could not set a reserve price (a price below which they would not agree to sell). However, pipelines would not be required to sell capacity rights for a price below the minimum rate (variable cost) stated in their tariffs. For auction of rights of longer than one day, pipelines would be permitted to set a reserve price.
Moreover, the daily auction would apply to all available pipeline storage capacity, plus released capacity by shippers (who would be permitted to set reserve prices).