Dynegy Sees Secondary Market for Recourse Services
Giving interstate pipelines the authority to negotiate terms and
conditions of service would pose "significant dangers to
competitive markets," Dynegy Inc. says. But it does favor giving
such authority to pipeline customers - the buyers of recourse
services - to allow them to sell or trade components of their
recourse services to and among themselves. In short, the
Houston-based marketer envisions creating a secondary market for
recourse service components that would compete head-to-head with
the primary market.
"If there will ever be a hope of competition amongst pipeline
services, it must...come from competitors. Dynegy suggests that
pipeline customers be allowed to create this competition.
Specifically, customers who purchase recourse services should be
allowed to trade and/or sell components of services to and among
themselves," it told FERC in its comments on the notice of proposed
rulemaking and notice of inquiry, which were filed Monday [RM98-10,
RM98-12]. "The rights to be traded could include rights to inject
or withdraw storage gas during given periods, or a portion or all
of a shipper's imbalance tolerance rights."
Dynegy contends that allowing customers, rather than pipelines,
to negotiate terms and conditions of service through trading of
components of recourse service has "many advantages," such as
minimizing the incentive for pipelines to "dumb-down" services by
stripping out components of services and reselling them to other
shippers; limiting the prospect for discrimination since there
would be numerous sellers of a particular component of service;
forcing pipeline affiliates to use real dollars - rather than what
Dynegy refers to as "funny money" - to secure components of a
negotiated service; and reducing cost shifting to customers.
In addition to the creation of a secondary market for recourse
service components, Dynegy called on FERC to make "generally
applicable tariffed services...more flexible as a matter of
course." It proposed that a number of "no brainer" changes be
incorporated into individual pipeline tariffs to achieve such
flexibility. "Once these changes have been made, primary and
secondary service offerings will be better positioned to compete
against each other, and to mitigate pipeline market power." Only if
these services become competitive should FERC then consider lifting
the price caps in the short-term market, it said.
On a related issue, the gas marketer urged the Commission to
reassess Order 497. its pipeline affiliate rule, in light of the
increasing convergence between pipelines and electric utilities.
First, it must require pipeline affiliates to use real corporate
dollars - as opposed to "funny money" or what amounts to
intra-corporate transfers - when bidding for recourse services or
paying for negotiated services, it said. Also, FERC should amend
Order 497 such that "proscriptions against undue discrimination,
information sharing" would also apply to any Btu-related affiliate,
which includes power generation affiliates.
Dynegy contends all segments of the natural gas industry, with
the exception of pipelines and some LDCs, are opposed to giving
pipelines the authority to negotiate terms and conditions. It
provided an exhaustive laundry list of reasons - from increasing
the dangers of rate/service discrimination to boosting pipeline
market power to jeopardizing the viability of the recourse service
- for not wanting pipelines to be awarded such authority.
Even if FERC permitted the negotiation of only certain terms and
conditions, Dynegy said it wouldn't change its position. "Dynegy
foresees that no matter how tall a fence the Commission tries to
put around negotiated terms and conditions, there will always be
someone trying to climb over, go around, dig under or cut a way
through the fence. In the end...neither the industry nor the
Commission will be able to police implementation."
With respect to auctioning of short-term capacity, Dynegy said
that the goal of the Commission's proposal was "laudable," but
added that "the game plan [was] not one that can be successfully
executed." Instead, it believes the Commission "should require
pipelines to auction off all capacity on a long-term basis, with no
In embracing a daily auction for the short-term market "the
Commission appears to view the gas market as headed full speed to a
daily and perhaps hourly market. While there clearly is much more
day trading than there was a decade or even just a couple of years
ago, this is not the power market," Dynegy reminded FERC. "There is
no generator-like precision in wellhead production, and storage,
line-pack and tolerable pressure swings can take up the slack when
consumption inevitably does not match forecasts. Term transactions
- those of 30 days or more - still account for the vast majority of
purchases and sales, and will into the future...In the end, there
are too many variables to tell exactly where the market is going,
or should go. The market is evolving naturally: there is no need to
push it via regulation in any particular direction."
As an alternative to a daily auction, Dynegy proposed that
willing pipelines be given the go-ahead to release shippers from
their current contractual obligations and bid out all capacity on a
long-term basis for whatever price the market will bear. "While we
have heard private expressions of interest, no pipeline has
publicly embraced our proposal. We can only surmise that the
protection afforded by regulation is more valuable to the pipelines
than the perceived 'upside' of market rates," Dynegy said.
It noted that it espoused auctioning of long-term capacity
because it lacked many of the problems that were associated with
auctioning on a short-term basis. "Specifically, problems
associated with moving gas across the grid disappear because there
are not tight time restrictions on when upstream or downstream
capacity must be purchased...Pricing volatility is greatly reduced
because long-term pricing can be agreed upon upfront...Concerns
regarding an increase in transaction costs also go away...Finally,
reliability concerns are eliminated."