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Dynegy Sees Secondary Market for Recourse Services

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 reserve price."

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."

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