FERC recently articulated a broad view of pipelines’ ability to “aggregate” bids when using a net present value (NPV) evaluation process in awarding open-season capacity. It is reasonable, FERC explained, for pipelines to aggregate open-season bids in a manner that allows them to determine the highest value for all of their available capacity—even when that entails aggregating portions of larger bids, and even when the bidder with the highest individual NPV ultimately is not the winning bidder. According to the agency, this flexible approach will allow pipelines to maximize the incremental revenue to all customers, including captive customers, and will help new shippers access pipelines’ system.
FERC articulated this approach in dismissing the complaint of shipper Texican N. La. Transport, LLC (Texican) against pipeline Southern Natural Gas Company (Southern). Texican filed its complaint after Southern in August 2009 awarded Texican—the open-season bidder with the highest individual NPV—only a portion of the capacity it had requested and gave another shipper, Shell Energy North America (Shell), a portion of the capacity that it had requested. Both shippers bid the maximum rate, but Texican, was awarded a smaller share of capacity due in part to the two bidders’ different receipt and delivery points.
Invoking FERC’s earlier decision in Natural Gas Pipeline Co. of America, 82 FERC ¶ 61,036 (1998) (Natural), Texican claimed that aggregation is “a combination of smaller bids that, taken together, yield a higher NPV than one larger bid.” According to Texican and its supporters, Southern’s aggregation methodology impermissibly awarded a lesser amount of capacity to the bidder that valued it most and frustrated the Commission’s policy objectives of enabling smaller customers to compete for available capacity.
But FERC rejected Texican’s narrow definition of aggregation. While acknowledging that a goal of aggregation is helping small customers compete, FERC nevertheless made clear aggregation also serves to increase incremental revenue, attract new shippers, and maximize available pipeline capacity:
“The Commission did not approve aggregation of open[-]season bids to provide advantages to only smaller bidders. Another benefit of aggregation is creating a greater chance that more new shippers will be able to access and move gas on the pipeline’s system. . . . The goal of the Commission’s capacity allocation policy is not only to the allow those who value the capacity the most to win but also to ensure that the overall capacity is allocated to the bid or group of bids that produces the greatest net revenue to the pipeline. This may not necessarily be the ‘individual’ bidder with the highest NPV.”
The Commission explained further that the specific aggregation methodology approved in Texican was “based on objective financial calculations to determine the NPV and an operational analysis to determine how much capacity could be made available based on the bids received.”
Despite the Commission’s admonition that its approach to aggregation “does not amount to unfettered discretion for pipelines in making their capacity awards,” the Commission’s language paves the way for pipelines to more flexibly make NPV evaluations and to make more complex awards of capacity in open season.