If pipelines want the freedom to negotiate competitive deals,they must first get rid of the “most notorious symbol of marketpower” – the straight-fixed variable rate design (SFV) – and offervolumetric rates, Dynegy Marketing and Trade told FERC last week.

“Who in a competitive market can force their customers to payall the fixed costs of their business and guarantee a profit toboot?” Dynegy, formerly the Natural Gas Clearinghouse said inoffering an alternative to the Columbia pipelines’ proposal toprovide customers with negotiated terms and conditions of service.Dynegy said its alternative could apply to any pipeline that wantsto be able to offer unfettered competitive services.

The marketing company also proposed setting up regionalIndependent System Administrators (ISAs), to determine whatcapacity is available. The ISAs would not have operationalauthority as do the Independent System Operators (ISOs) on theelectric 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 thepipelines,” said Peter G. Esposito, vice president and regulatorycounsel for the Houston-based marketer. At that time, all pipelinesinterested in negotiated services would agree to accept bids basedon 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 pipelinewould be required to accept all bids in excess of variable costs upto the capacity of the pipeline. Existing service holders wouldhave a right to match the highest bid for their existing service,or assign that right to another party. Pre-granted abandonmentwould apply after the initial round. And, rights of first refusalwould be negotiated thereafter.

Only then – after all the capacity has been awarded – wouldpipelines be able to fully negotiate terms and conditions ofservice, Dynegy proposes. “In this way, the pipeline cannotexercise market power going in, and all capacity would be awardedto the highest bidder on a level playing field basis.”

Under Dynegy’s proposal, any “diminution of service” forremaining recourse customers would be grounds for damage claims;any change in terms, conditions and rates of service henceforthwould be negotiated, eliminating the need for unilateral Section 4rate filings; purchasers of all firm capacity would have the rightto resell that capacity; and purchasers could repackage thecapacity (negotiate the terms and conditions of the release to thesame extent the pipeline could), and the pipeline would be requiredto recognize the repackaged capacity.

The ISA would perform the initial auction of pipeline capacityto ensure “maximum impartiality,” as well as nominations andscheduling. Following the initial auction, the pipelines themselveswould continue to sell the space and services on their respectivesystems. The ISA’s role would be to determine if the capacity isavailable.

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