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Dynegy: Pipes Should Drop SFV; Install Competitive, Volumetric Rates

Dynegy: Pipes Should Drop SFV; Install Competitive, Volumetric Rates

If pipelines want the freedom to negotiate competitive deals, they must first get rid of the "most notorious symbol of market power" - the straight-fixed variable rate design (SFV) - and offer volumetric rates, Dynegy Marketing and Trade told FERC last week.

"Who in a competitive market can force their customers to pay all the fixed costs of their business and guarantee a profit to boot?" Dynegy, formerly the Natural Gas Clearinghouse said in offering an alternative to the Columbia pipelines' proposal to provide customers with negotiated terms and conditions of service. Dynegy said its alternative could apply to any pipeline that wants to be able to offer unfettered competitive services.

The marketing company also proposed setting up regional Independent System Administrators (ISAs) to determine the amount of pipeline capacity that's available for sale. The ISAs would not have operational authority as do the Independent System Operators (ISOs) on the electric side.

The switch from SFV would take place on a set, uniform day, according to Dynegy. "It would sort of be a jump-ball for all the pipelines," said Peter G. Esposito, vice president and regulatory counsel for the Houston-based marketer. At that time, all pipelines interested in negotiated services would agree to accept bids based on a volumetric rate for all of their capacity and services.

Bids - perhaps blind - would be accepted on a net present value (NPV) basis for the recourse, or standard, service. A pipeline would be required to accept all bids in excess of variable costs up to the capacity of the pipeline. Existing service holders would have a right to match the highest bid for their existing service, or assign that right to another party. Pre-granted abandonment would apply after the initial round. And, rights of first refusal would be negotiated thereafter.

Only then - after all the capacity has been awarded - would pipelines be able to fully negotiate terms and conditions of service, Dynegy proposes. "In this way, the pipeline cannot exercise market power going in, and all capacity would be awarded to the highest bidder on a level playing field basis."

Under Dynegy's proposal, any "diminution of service" for remaining recourse customers would be grounds for damage claims; any change in terms, conditions and rates of service henceforth would be negotiated, eliminating the need for unilateral Section 4 rate filings; purchasers of all firm capacity would have the right to resell that capacity; and purchasers could repackage the capacity (negotiate the terms and conditions of the release to the same extent the pipeline could), and the pipeline would be required to recognize the repackaged capacity.

Esposito said the ISA's job would be to "figure out how much capacity is available to put up for sale." The ISA would be a "less-active, less hands-on" organization than the ISO.

The ISA would perform the initial auction of pipeline capacity to ensure "maximum impartiality," as well as nominations and scheduling. Following the initial auction, the pipelines themselves would continue to sell the space and services on their respective systems.

Susan Parker

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