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Bid Bonds

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.

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Bid Bonds

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  1. 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 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 re-allocate the capacity

  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. 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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