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."
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