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Dynegy Offers Risk-Reward Replacement for Auctions

October 26, 1998
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Dynegy Offers Risk-Reward Replacement for Auctions

Dynegy Inc. is the only gas-related company so far to publicly propose an alternative to FERC's notice of proposed rulemaking (NOPR) that seeks to institute industry-wide auctioning of short-term capacity in return for lifting the price cap on that capacity. "There's nothing else that's been made public," said Peter G. Esposito, vice president and regulatory counsel.

The Houston-based gas marketer proposal calls for the Commission to get rid of straight-fixed variable rate design (SFV) on those pipelines that favor such action, and reward them with removal of the rate cap. Dynegy stressed that this would not be mandatory for all pipelines, but rather would be limited to willing pipelines. "Basically, there are some pipelines out there that don't have the market to support the risk that goes along with it [eschewing SFV]. And there's others that have the market and will take the risk in order to take the upside," Esposito noted.

Instead of an auction, Dynegy proposes that pipelines be required to put all their capacity out for bid in an open season on a net-present-value (NPV) basis at volumetric rates. "In a perfect world, the pipeline would have [one large] open season, sort of what I call the 'Big Bang' theory, and then you would have it [smaller open seasons] periodically when the contracts expire." The pipeline would have to take whatever was bid until all firm capacity was sold, the marketer noted.

Shippers would bid on the recourse service, which is "today's existing services plus what I call 'the no-brainer changes,'" such as more flexible receipt and delivery points, and better segment rights, Esposito noted. In addition, bidders could bid a minimum volume guarantee over a specified term. "It's like what we did with El Paso. [We] agreed to what amounts to a take-or-pay for 50% [of capacity] one year and 70% the next."

The Dynegy proposed plan also would give pipeline customers the benefit of negotiated terms and conditions through secondary-market sales of service components. After a pipeline's capacity has been sold, shippers then could resell or trade components of the service they have purchased to or with others. For example, shipper A, who might have his own market-area storage or peak-shaving, could sell off some of its imbalance flexibility to shipper B, who might have more significant load swings, the proposal said.

"We think that our alternative has a lot of the positive points of the FERC [proposal], that is where there is competition you can have market-based rates. But we don't have all the administrative burden" associated with an auction, Esposito said. "The key difference between our proposal and FERC's is that essentially we view the market power being exercised in the short-term [market] not in the long term."

Dynegy has been "floating" the proposal around the gas industry for reactions. So far, "I'm getting 'intrigue' basically" from LDCs, small producers and state commissions, he said, adding that he wouldn't go as far as to say it was "positive feedback."

Susan Parker

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