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Bid Bonds 23 January 2009. 2 What is a Bid Bond? Stepping stone to full performance bond (or letters of credit). Value is based on cost of running the.

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Presentation on theme: "Bid Bonds 23 January 2009. 2 What is a Bid Bond? Stepping stone to full performance bond (or letters of credit). Value is based on cost of running the."— Presentation transcript:

1 Bid Bonds 23 January 2009

2 2 What is a Bid Bond? Stepping stone to full performance bond (or letters of credit). Value is based on cost of running the auction again, if a shipper is not able to fulfil their credit arrangements. Held in elected bank during bidding process Bid Capacity Release Bid Bond Performance Bond / Letter of Credit Bidder 1 Bidder 2 Bidder Winning bidder’s bond is kept as guarantee, all others are returned. If shipper defaults (i.e. can not sign performance contract), then bond is used to fund an auction to re-allocate the capacity

3 3 Bid Bonds and Entry Capacity Auctions Originally the bid bond was designed for a pure capacity auction e.g. European transit pipeline In pure capacity auctions, the capacity can easily be resold, and the ‘cost’ of running the auction again can be calculated. NTS Long Term auctions include investment decisions, single-user ASEPs and (most likely) Substitution Review Group discussions indicate that it is inappropriate to rerun the auction or reallocate the capacity However, there are different types of ‘bid’ bonds that can be applied - could it therefore still be used as part of an ‘initial hurdle’!?

4 4 Strawmann v Bid Bond Concept Bid Bond requires a FIXED amount from each bidder prior to an auction. Aim is to provide an initial hurdle in the form of a deposit, without requiring full credit.. This means initial requirements are non-discriminatory – everyone has to provide the same deposit. Hurdle is high enough to stop shippers from taking chances, while is not a barrier to entry as it is low enough to allow a number of shippers to take part. The Bond could partially cover potential losses, should a shipper default Credit can then be requested – using current credit arrangements. Only Y+1? Draft Strawmann suggests that Y+1 and Y+4 credit is required upfront – this will vary depending on the shipper’s holdings / project status, etc. Variations possible. Aim is to cover both current and new users. Benefit of assessing potential individual shipper risk. Current arrangements would simply be extended. Although additional analysis of shipper status is required. Impact on smaller shippers? Complexity? What is the right level of security, without providing a barrier to entry, or costing the community more than the risk of default?


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