El Paso Expects Brisk Bidding on Dynegy Space
Dynegy's California-bound capacity on El Paso Natural Gas went
up for grabs last week, and while the pipeline expects a possible
stampede of customers, they aren't expected until nearly the end of
the auction period. With a right-of-first refusal held by Dynegy,
bids for the capacity are expected to be higher than last time,
Dynegy currently holds 1,181,905 Mcf/d, which will be available
beginning Jan. 1, 2000. Meetings with potential shippers have been
held in Los Angeles, San Francisco, Phoenix, Dallas and Houston,
and more than 150 people attended, said Al W. Clark, El Paso
Natural Gas vice president, marketing and operations control.
Two years ago when there was no right-of-first refusal,
"everybody low-balled their bids," Clark said. "There are a lot of
things that have occurred in the marketplace since then." In short,
he said, the capacity is more valuable.
One thing driving up value is the growing convergence between
gas and power generation. Many California generating plants have
been sold by utilities to operators who need gas supply to keep
them running. Companies such as Dynegy, Reliant, Southern Energy,
and Duke Energy all have a need for gas to supply California plants
they own, Clark said. Additionally, the California gas market is
growing at about 2% per year, he said. And third, the pending
completion of the multiple pipelines from the Midwest to the
Northeast makes El Paso think the old PGT system will be unloaded
and there will be a clockwise shift in continental gas flows. Gas
will be flowing into Chicago from western Canada, and more gas from
the Permian Basin will want to make its way to California. "More
gas is going to be flowing in a westerly direction across our
"I think the marketplace's general expectations have changed.
There was an expectation that El Paso was going to have an unloaded
system and you could obtain capacity cheap across the El Paso
Recently, El Paso has garnered reservation charges ranging from
18 to 20 cents for other released capacity for terms of one year or
more in 2000 and beyond, Clark said. "The folks that have got
access to our electronic bulletin board can see that by looking at
the postings and awards that have been made.
"All the other bidders know there are people out there who have
the capability to go out and bid for a large block of capacity like
On July 13, El Paso notified customers the capacity would be
available in an open posting subject to Dynegy's
right-of-first-refusal. Meetings were held this month in Los
Angeles, San Francisco, Phoenix, Dallas and Houston.
The open posting closes at 1 p.m. MDT Sept. 29. Bids will be
evaluated Sept. 30 through Oct. 4, and the best bids will be
awarded. From Oct. 5 to Oct. 11, Dynegy may exercise its
right-of-first-refusal on any awarded bids. Contracts will be
finalized Oct. 12 through Oct. 15. Clark said the bids aren't
expected to come rolling in until the end of the auction period.
"Our experience with these kinds of postings has been that
everybody waits until about the last hour or two to put in their
El Paso and Dynegy took a lot of heat when all of the capacity
was awarded to Dynegy previously, and Dynegy was accused of
hoarding capacity to manipulate the market. California regulators
and Pacific Gas and Electric (PG&E) charged an agreement
between El Paso and Dynegy gave Dynegy the "unilateral right" to
keep a large portion of the Block II capacity on El Paso off the
California market without being subject to recall rights.
Regulators and PG&E said the agreement was contrary to a
June order in which the Federal Energy Regulatory Commission
approved the Dynegy contracts subject to modifications, and a 1996
settlement between El Paso and its customers.
The capacity Dynegy bought was going for about 8 cents in 1997.
Late last year it was valued at about 32 cents/Mcf, excluding
variable costs, while Dynegy was paying only 12 cents in demand
Bids must meet an El Paso minimum revenue requirement, a figure
which is closely guarded by the pipeline. Judging by remarks made
in May by Jerry Strange, El Paso director of transportation
marketing, at GasMart/Power in Dallas, El Paso expects a lot of
interest in the capacity.
"Those of you who went through our sale of this before, we will
sell it the way it's most effective for El Paso on an economic
basis because that's the reality of the world," Strange said. "The
paradigms all crashed in '96 on how capacity like this is sold. And
so my admonition to everybody is bid early and bid often because
it's going to be a very competitive situation."
Joe Fisher, Houston