The impact of the 1.325 Bcf/d Alliance Pipeline and the 1 Bcf/dVector Pipeline on Chicago basis prices will be a lot lesssignificant than some may be expecting, according to several marketobservers speaking at the LDC Forum in Chicago yesterday.

“The current situation provides receipts out of the [Chicago]Hub a home for 1 Bcf/d greater than deliveries into the hub inChicago,” noted Jim Goetz, director of trading and assetoptimization for PG&E’s National Energy Group. “This is priorto Alliance or Vector. Adding Alliance we’ll see deliveries intothe hub passing receipts out of the hub by roughly 400 MMcf/d.Conversely, if we had only Vector and not Alliance, thatwould…show receipts out of the hub substantially greater thandeliveries into the hub. If we have both, we’ll see a materialbalance shift very slightly in reducing our receipts out of the hubbut still having receipts exceed deliveries. The variance isactually very negligible.”

Currently there is about 15.2 Bcf/d of mainline gas delivered tothe Chicago Hub and about 16.2 Bcf/d of mainline receipts atChicago, leaving receipts 1 Bcf/d greater than deliveries. However,adding both Alliance and Vector reduces the net variance by only325 MMcf/d to 625 MMcf/d more mainline receipts than deliveries.

Alliance is due to start bringing its load of Canadian gasproduction from British Columbia and Alberta to Chicago on Oct. 30.Vector is scheduled to provide receipt capacity at Chicago andtransportation to the Dawn Hub in Ontario starting Nov. 1. Vectoris expected to open at about 725 MMcf/d until it gets its Highlandcompressor station operational. It also will be expandable to 1.5Bcf/d.

The Chicago-Henry Hub basis differential is roughly about 10cents “going out until 2003,” Goetz said. “When you add Alliance[and Vector], the basis differentials do not change materially.”Goetz estimates a basis increase of only two cents to a total of 12cents.

People Energy’s Timothy Hermann, supervisor of hub services,noted that there is enough new gas-fired power generation in andaround Chicago this year to easily absorb on an hourly basis anyincremental increase in deliveries over receipts. “On a dailybasis, I think in 2001 that gas will be spoken for, too. But onthose mild summer days I think we could still see Chicago in a longhand position.”

Chicago has the most liquidity of all the other major markethubs. “It out-does any other market hub for its deliverability inand out [of the hub],” noted Goetz. “And for price discoverypurposes we can see liquidity going out five, 10, 12 and even 15years with very close [bid-ask] spreads. That’s important for anyother pricing mechanisms we need.”

However, there will be some major hurdles to cross locally forChicago’s spot at the top to be maintained. Hermann expects aninitial negative impact on local price liquidity until the marketirons out the wrinkles in gas flow and pricing among the multipledelivery points within the Chicago area.

The current infrastructure will be taxed considerably with theintroduction of the Alliance, Vector, and the other new andproposed pipelines, including the Guardian, Horizon and WhitecapEnergy projects to northern Illinois and Wisconsin.

Although in the broad scheme of things Chicago looks veryhealthy and robust, there are some “logistical limitations that areworking against a fluid and efficient marketplace,” said Hermann.

“The Chicago market is not as well connected as it was two yearsago. Most of the new capacity is being added south of Joilet, IL,whereas most of the new demand growth is occurring north of Joliet.The Chicago infrastructure is becoming subject to limitations thatwill soon eat into the trading liquidity people enjoy here. Oneexample is supply into Nicor where Northern Border, NGPL and ANRcompete not only with each other but also with Nicor’s own storageand transmission capacity. Another example is that Alliance volumesinto Peoples will at times be limited to the connection location.And finally, there are numerous systems connected at Chicago butnot connected in a very robust manner. As more supply is introducedby new sources, the system integration efforts really have not keptpace, and soon there is going to be a limitation here and it’sgoing to have a negative effect on liquidity. We need some assets,like compression and pipe.”

With the addition of so many new pipelines in Chicago, butparticularly the larger ones, problems may begin to show up becauseof the numerous points on the LDC systems, Hermann added. On theNicor and Nipsco systems alone there are about 16 potential tradingpoints. “This has not been a barrier to market liquidity in thepast because most gas traded at one point on the system because ofa lack of supply adversity. But the introduction of large volumesof competitively priced gas at new supply points is going to erodemarket liquidity in Chicago,” he said. Last October, Peoplescreated a pool on its system that decreased the number of potentialtrading points from six to one. “The results were very successful,and the same pooling concepts, I believe, can be used elsewhere.”

Meeting the needs of new power generation, however, could end upbeing the biggest challenge. “On the one hand we are going to seeincreased volatility as the market needs more balancing assets, butI think there is going to be a new source of balancing assets withthe introduction of Vector because it attaches tohigh-deliverability storage in Michigan. But Chicago is stillpretty hungry for more transparent options for extremely volatileloads,” said Hermann.

Another major weakness in the market is the inability of theLDCs to provide no-notice services or allow other players to stepin and provide those services. If the LDCs don’t get on the ballsoon, they may not be the ones serving these new generation loadsat all, said Goetz.

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