The controversial two-year period in which Dynegy Marketing andTrade held a huge chunk of El Paso’s firm capacity to the SouthernCalifornia border is coming to an end, but if western gas tradersare looking for a new market regime in the new millennium they maybe sorely disappointed. El Paso announced Friday that it has foundanother buyer willing to hold on to 1.2 Bcf/d of firm space to theCalifornia border.

The southwestern pipeline said it recontracted all of itsavailable firm capacity for a minimum of $37.5 million in revenuesfor 2000. The amount reflects an increase of 7% over the annualaverage revenues generated from the Dynegy deal over the past twoyears. Dynegy paid $70 million for 1.3 Bcf/d.

During the open bidding process that occurred during September,Williams Energy Marketing and Trading purchased 99,301 Mcf/deffective Jan. 1. The remaining capacity of 1,225,894 Mcf/d wascontracted Friday, for a one-year term commencing Jan. 1, to anundisclosed shipper. Speculation tended to center on Duke Energy,whose subsidiary Duke Energy North America has 3,450 MW of currentelectric generation capacity in California and another 1,400 MW indevelopment. El Paso said the shipper would be identified after afour-day bidding period. The open season is being held to providean opportunity for other shippers to better the rates in thecontract.

El Paso said the negotiated rate contract provides the companywith potentially greater revenues, depending upon basisdifferentials between receipt and delivery points on the El PasoNatural Gas system over the course of the one-year deal. Details ofthe contractual terms can be found on El Paso Natural Gas Co.’selectronic bulletin board.

“We are pleased with the results of the recontracting process,which demonstrate the growing value of the capacity,” said WilliamA. Wise, president and CEO of El Paso Energy. “We designed thecontract around a one-year term because we believe the value willcontinue to rise during the next year. This contract assures ElPaso Natural Gas a reliable revenue stream during the year 2000,with upside potential. The proceeds from this contract areconsistent with the projections used to establish the company’sfinancial earnings targets for the coming year.”

The transaction came just in the nick of time, too. Two roundsof open bidding failed to produce a deal earlier this fall and thepipeline company had to turn to a negotiated deal less than a monthprior to decontracting. In the first round of bidding this fall,slightly less than 100 MMcf/d was awarded to Williams EnergyMarketing and Trading. Other bids were rejected because they didn’tmeet El Paso’s “minimum revenue threshold” requirements.

For the same reason and also because of withdrawn bids or unmetcredit specifications, no awards were made in a second biddinground even with Dynegy’s right-of-first-refusal (ROFR) capabilityremoved. El Paso thought the ROFR might have been a deterrent topotential bidders in the first round.

Following the failure of the second open season, El Pasoessentially hoped to repeat what it had done with Dynegy two yearsearlier: assign the capacity in a negotiated arrangement.

Including the approximately 1.3 Bcf/d of capacity turned back byPacific Gas & Electric in 1997, Dynegy has a shade less than1.5 Bcf/d of FT reserved, all of which expires at the end of thisyear. One source said Dynegy was reluctant to re-up all of its hugeEl Paso commitment because it was “getting hammered” this year ontake-or-pay provisions during the summer months. Under its contractDynegy was obligated to pay reservation charges on at least 72% ofthe capacity compared to only 50% in 1998.

“We had discussions with El Paso,” said one Dynegy source. “Theyevidently didn’t like our proposal and took Duke’s.”

The only other single customer that comes near Dynegy incontrolling firm El Paso capacity to the border is distributorSouthern California Gas with about 1,176 MMcf/d. The SoCal Gascontract runs through Aug. 31, 2006. Pacific Gas & Electricturned back all of its FT holdings on El Paso in 1997.

If the past two years provides any indication of the marketimpact of one company holding such a large amount of access to theSouthern California Border, then a fairly wide San Juan-SoCal basiscan be expected in 2000. NGI found that the average basisdifferential between San Juan Basin-Blanco and the border widenedfrom 19 cents in 1997, the year before the Dynegy deal took effect,to 36 cents in 1998 and 27 cents in 1999. San Juan Non-Bondadbidweek spot prices averaged $2.33 in 1997, $1.87 in 1998 and $2.05in 1999, while SoCal Border bidweek prices averaged $2.52, $2.23and $2.32, respectively in 1997, 1998 and 1999.

Several San Juan Basin producers, including Amoco and BurlingtonResources, have staunchly opposed the Dynegy contract. They alsotook shots at El Paso in a September complaint to FERC that thepipeline consistently overbooks firm nominations at the Topock, AZ,delivery point into Southern California Gas. The producers allegedthat the Topock allocation method causes them big monetary losses(Amoco estimated $1-2 million a year in its case). They wanted tostop El Paso’s first open season for about 1.4 Bcf/d in FT, sayingits results could exacerbate the situation.

A marketer agreed with the two producers last week, complainingthat El Paso essentially has been selling interruptible capacity asfirm. “I am almost never able to get 100% of my FT flows deliveredat the border” by El Paso, he said. The marketer estimated thatnominated firm deliveries by Transwestern average 95-100%, but saidEl Paso service can range from 5% to 100%.

Roger Tanner, Rocco Canonica

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