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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

Bid Bonds

23 January 2009

what is a bid bond
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
bid bonds and entry capacity auctions
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’!?
strawmann v bid bond concept
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?