Dynegy says 1,060-MW power plant endangered by higher gas pipeline costs

The Sithe/Independence Power Partners LP subsidiary of Dynegy (NYSE: DYN) filed a Dec. 31 complaint with the New York State Public Service Commission over its gas pipeline service.

Independence is the owner and operator of a 1,060-MW facility located in Scriba, New York. It is seeking from the PSC a declaratory ruling, waiver, and complaint against Niagara Mohawk Power Corp. d/b/a National Grid.

The Independence facility has been taking gas transportation service from National Grid over a 27-mile pipeline directly connecting the facility to the interstate Empire State Pipeline under a 20-year contract that was due to expire on Dec. 31, 2014. National Grid constructed the pipeline solely to serve the Independence facility, the pipeline does not serve any other customers, and no other National Grid gas facilities are used to serve Independence.

“Once the Contract expires, National Grid insists that Independence take service under the volumetric rates in its PSC 219 Gas, Service Classification No. 14 Gas Transportation Service for Dual Fuel Electric Generators (‘SC-14’) or pursuant to a new negotiated contract reflecting the estimated costs Independence would incur to construct a new pipeline to bypass National Grid’s gas distribution system,” said the complaint. “As discussed below, the SC-14 volumetric rates are inapplicable, inappropriate, and unjust and unreasonable in light of the unique factual circumstances regarding Independence’s service over the Pipeline.

“First, SC-14 applies only to generating facilities that are duel-fueled, which Independence is not. Second, imposition of the SC-14 rate would more than double Independence’s payments for the exact same service Independence has received under the Contract. On the unique facts of this case, there can be no reason to increase the rate currently paid by Independence to National Grid under the Contract.

“The Contract was executed in full compliance with Commission’s 1991 Gas Bypass Policy Statement, which authorized local distribution companies (‘LDCs’) to negotiate gas transportation rates with large volume gas users that would otherwise bypass the LDCs’ gas system. These payments over the past 20 years, totaling $135 million, have provided National Grid with full recovery (as required by the 1991 Gas Bypass Policy Statement) of the operating expenses and the estimated $35 million capital costs of the Pipeline and provided National Grid’s ratepayers with a substantial contribution. Because the contract provided for full recovery of all capital costs over the term of the Contract, Independence believed that the payments on the Pipeline would go down after 20 years. In fact, the annual payments under the Contract in years 6 through 20 were already lower than the payments in years 1 through 5. It would be unjust and unreasonable, harm the economics of the Facility, and likely lead to increased electricity prices in the State if National Grid were now permitted to more than double the rate for the same service over the fully depreciated Pipeline.

Independence, a limited partnership organized under the laws of the State of Delaware, is an indirect wholly-owned subsidiary of Dynegy, which acquired its ownership interests in Independence in 2005. The facility commenced operating in 1995. It is electrically interconnected with the transmission system of National Grid and sells energy, capacity, and ancillary services into the wholesale electricity markets in New York and steam at retail to a nearby, large commercial customer.

Said the complaint: “Independence proved it would bypass National Grid’s gas system if it could not obtain service from National Grid at a competitive rate more than 20 years ago, prior to its execution of the Contract. The Contract rate reflects the costs of such bypass and ensured that National Grid fully recovered its costs of the Pipeline and received a substantial contribution to overall system costs. National Grid, however, has insisted that a new negotiated rate must be based on a new demonstration of bypass and reflect the bypass costs of this new demonstration. Though Independence disagrees that a second bypass showing is required, Independence has recently obtained cost estimates to construct a new pipeline to bypass National Grid’s system, and it is approximately 50 percent above the cost under the current Contract rate, but approximately 50 percent lower than the amount that would be charged under the SC-14 volumetric rates.”

The filing also noted: “The higher gas transportation rates will increase the Facility’s costs of production, requiring Independence to raise its bids into the New York Independent System Operator’s competitive wholesale electric market. If Independence is selected to operate as the marginal unit, its increased gas transportation costs will raise wholesale electricity prices, which will be passed through to retail customers. If Independence is not the marginal unit, it will have to absorb such costs, severely harming the economics of the Facility.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.