Bid Bonds
23 January 2009
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
Capacity
Release
Bid
Bidder 1
+
Bid Bond
Bidder 2
+
Bid Bond
Bidder 3
+
Bid Bond
Performance Bond / Letter of
Credit
• 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 reallocate the capacity
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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’!?
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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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