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El Paso Expects Brisk Bidding on Dynegy Space

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, too.

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 pipeline.

"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 system."

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 this."

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 bids."

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 charges.

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

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