Dynegy’s California-bound capacity on El Paso Natural Gas wentup for grabs last week, and while the pipeline expects a possiblestampede of customers, they aren’t expected until nearly the end ofthe 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 availablebeginning Jan. 1, 2000. Meetings with potential shippers have beenheld in Los Angeles, San Francisco, Phoenix, Dallas and Houston,and more than 150 people attended, said Al W. Clark, El PasoNatural 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 ofthings 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 betweengas and power generation. Many California generating plants havebeen sold by utilities to operators who need gas supply to keepthem running. Companies such as Dynegy, Reliant, Southern Energy,and Duke Energy all have a need for gas to supply California plantsthey own, Clark said. Additionally, the California gas market isgrowing at about 2% per year, he said. And third, the pendingcompletion of the multiple pipelines from the Midwest to theNortheast makes El Paso think the old PGT system will be unloadedand there will be a clockwise shift in continental gas flows. Gaswill be flowing into Chicago from western Canada, and more gas fromthe Permian Basin will want to make its way to California. “Moregas is going to be flowing in a westerly direction across ourpipeline.

“I think the marketplace’s general expectations have changed.There was an expectation that El Paso was going to have an unloadedsystem and you could obtain capacity cheap across the El Pasosystem.”

Recently, El Paso has garnered reservation charges ranging from18 to 20 cents for other released capacity for terms of one year ormore in 2000 and beyond, Clark said. “The folks that have gotaccess to our electronic bulletin board can see that by looking atthe postings and awards that have been made.

“All the other bidders know there are people out there who havethe capability to go out and bid for a large block of capacity likethis.”

On July 13, El Paso notified customers the capacity would beavailable in an open posting subject to Dynegy’sright-of-first-refusal. Meetings were held this month in LosAngeles, San Francisco, Phoenix, Dallas and Houston.

The open posting closes at 1 p.m. MDT Sept. 29. Bids will beevaluated Sept. 30 through Oct. 4, and the best bids will beawarded. From Oct. 5 to Oct. 11, Dynegy may exercise itsright-of-first-refusal on any awarded bids. Contracts will befinalized Oct. 12 through Oct. 15. Clark said the bids aren’texpected to come rolling in until the end of the auction period.”Our experience with these kinds of postings has been thateverybody waits until about the last hour or two to put in theirbids.”

El Paso and Dynegy took a lot of heat when all of the capacitywas awarded to Dynegy previously, and Dynegy was accused ofhoarding capacity to manipulate the market. California regulatorsand Pacific Gas and Electric (PG&E) charged an agreementbetween El Paso and Dynegy gave Dynegy the “unilateral right” tokeep a large portion of the Block II capacity on El Paso off theCalifornia market without being subject to recall rights.

Regulators and PG&E said the agreement was contrary to aJune order in which the Federal Energy Regulatory Commissionapproved the Dynegy contracts subject to modifications, and a 1996settlement 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, excludingvariable costs, while Dynegy was paying only 12 cents in demandcharges.

Bids must meet an El Paso minimum revenue requirement, a figurewhich is closely guarded by the pipeline. Judging by remarks madein May by Jerry Strange, El Paso director of transportationmarketing, at GasMart/Power in Dallas, El Paso expects a lot ofinterest in the capacity.

“Those of you who went through our sale of this before, we willsell it the way it’s most effective for El Paso on an economicbasis because that’s the reality of the world,” Strange said. “Theparadigms all crashed in ’96 on how capacity like this is sold. Andso my admonition to everybody is bid early and bid often becauseit’s going to be a very competitive situation.”

Joe Fisher, Houston

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.