Giving interstate pipelines the authority to negotiate terms andconditions of service would pose “significant dangers tocompetitive markets,” Dynegy Inc. says. But it does favor givingsuch authority to pipeline customers – the buyers of recourseservices – to allow them to sell or trade components of theirrecourse services to and among themselves. In short, theHouston-based marketer envisions creating a secondary market forrecourse service components that would compete head-to-head withthe primary market.

“If there will ever be a hope of competition amongst pipelineservices, it must…come from competitors. Dynegy suggests thatpipeline customers be allowed to create this competition.Specifically, customers who purchase recourse services should beallowed to trade and/or sell components of services to and amongthemselves,” it told FERC in its comments on the notice of proposedrulemaking and notice of inquiry, which were filed Monday [RM98-10,RM98-12]. “The rights to be traded could include rights to injector withdraw storage gas during given periods, or a portion or allof a shipper’s imbalance tolerance rights.”

Dynegy contends that allowing customers, rather than pipelines,to negotiate terms and conditions of service through trading ofcomponents of recourse service has “many advantages,” such asminimizing the incentive for pipelines to “dumb-down” services bystripping out components of services and reselling them to othershippers; limiting the prospect for discrimination since therewould be numerous sellers of a particular component of service;forcing pipeline affiliates to use real dollars – rather than whatDynegy refers to as “funny money” – to secure components of anegotiated service; and reducing cost shifting to customers.

In addition to the creation of a secondary market for recourseservice components, Dynegy called on FERC to make “generallyapplicable tariffed services…more flexible as a matter ofcourse.” It proposed that a number of “no brainer” changes beincorporated into individual pipeline tariffs to achieve suchflexibility. “Once these changes have been made, primary andsecondary service offerings will be better positioned to competeagainst each other, and to mitigate pipeline market power.” Only ifthese services become competitive should FERC then consider liftingthe price caps in the short-term market, it said.

On a related issue, the gas marketer urged the Commission toreassess Order 497. its pipeline affiliate rule, in light of theincreasing convergence between pipelines and electric utilities.First, it must require pipeline affiliates to use real corporatedollars – as opposed to “funny money” or what amounts tointra-corporate transfers – when bidding for recourse services orpaying for negotiated services, it said. Also, FERC should amendOrder 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, withthe exception of pipelines and some LDCs, are opposed to givingpipelines the authority to negotiate terms and conditions. Itprovided an exhaustive laundry list of reasons – from increasingthe dangers of rate/service discrimination to boosting pipelinemarket 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 andconditions, Dynegy said it wouldn’t change its position. “Dynegyforesees that no matter how tall a fence the Commission tries toput around negotiated terms and conditions, there will always besomeone trying to climb over, go around, dig under or cut a waythrough the fence. In the end…neither the industry nor theCommission will be able to police implementation.”

With respect to auctioning of short-term capacity, Dynegy saidthat the goal of the Commission’s proposal was “laudable,” butadded that “the game plan [was] not one that can be successfullyexecuted.” Instead, it believes the Commission “should requirepipelines to auction off all capacity on a long-term basis, with noreserve price.”

In embracing a daily auction for the short-term market “theCommission appears to view the gas market as headed full speed to adaily and perhaps hourly market. While there clearly is much moreday trading than there was a decade or even just a couple of yearsago, this is not the power market,” Dynegy reminded FERC. “There isno generator-like precision in wellhead production, and storage,line-pack and tolerable pressure swings can take up the slack whenconsumption inevitably does not match forecasts. Term transactions- those of 30 days or more – still account for the vast majority ofpurchases and sales, and will into the future…In the end, thereare too many variables to tell exactly where the market is going,or should go. The market is evolving naturally: there is no need topush it via regulation in any particular direction.”

As an alternative to a daily auction, Dynegy proposed thatwilling pipelines be given the go-ahead to release shippers fromtheir current contractual obligations and bid out all capacity on along-term basis for whatever price the market will bear. “While wehave heard private expressions of interest, no pipeline haspublicly embraced our proposal. We can only surmise that theprotection afforded by regulation is more valuable to the pipelinesthan the perceived ‘upside’ of market rates,” Dynegy said.

It noted that it espoused auctioning of long-term capacitybecause it lacked many of the problems that were associated withauctioning on a short-term basis. “Specifically, problemsassociated with moving gas across the grid disappear because thereare not tight time restrictions on when upstream or downstreamcapacity must be purchased…Pricing volatility is greatly reducedbecause long-term pricing can be agreed upon upfront…Concernsregarding an increase in transaction costs also go away…Finally,reliability concerns are eliminated.”

©Copyright 1999 Intelligence Press Inc. All rights reserved. Thepreceding news report may not be republished or redistributed, inwhole or in part, in any form, without prior written consent ofIntelligence Press, Inc.