With San Juan Basin-Southern California border (bidweek) basisaveraging double what it was last year through November, 36cents/MMBtu compared with 18 cents, and rising, Dynegy’s $70million deal for 1.3 Bcf/d of El Paso Natural Gas’ firm pipelinecapacity is looking better all the time for the company, DynegyPresident Stephen Bergstrom said in an interview with NGI.

Dynegy made $7.6 million on the capacity during the thirdquarter, but Bergstrom said most people may not know those profitsoffset a corresponding $7.6 million loss during the first andsecond quarters.

“Our volumes since we’ve had this deal have ranged from a low ofabout 400 MMcf/d to a high of about 1 Bcf/d and it’s all over themap depending on demand,” said Bergstrom. “We still like the deal.We think it makes sense. But through about September we were aboutbreak even on our costs. We’re encouraged that as we get intowinter we think we’re going to do pretty well, but remember we puta $70 million bet down over a two-year period. We’ve got to get $70million back before we start making anything. Everyone kind offorgets that we don’t have rate base on that $70 million. If thedemand is not there and the spread is not there, we eat the wholething.”

The $70 million Dynegy paid is broken up into $28 million in thefirst year and $42 million in the second year. “That’s a littleover a million each month [next year], just in demand charges.”

“The demand looks pretty good. The last three months, we’ve beenaveraging 750 to 800 MMcf/d. We think storage looks a little leanout there to us. And when Northern Border comes on in the next fewweeks, we think you’ll see gas get pulled out of [California] to goto the Midwest and the demand for U.S. transportation, i.e., ElPaso, will be stronger than what we’ve seen in the past,” saidBergstrom.

“The spreads have been able to maintain pretty healthy levelsbut the spread doesn’t mean anything unless you move volumes.Everybody else is full. Transwestern is full, Kern is full, PGT isfull and our capacity is the swing capacity into California.”

Bergstrom said the forward basis market is offering only the”high 30s,” 30 cents/Dth for transportation from the San Juan Basinto the Southern California border. “When you go back and look atthe [San Juan-SoCal border basis this year] and you scratch yourhead and say why would the forward market be high-30s when the lastthree or four months has been mid to high 40s. That just tells youthere’s not a lot of liquidity out there because it should be[high-40s]. But the forward market doesn’t really represent whatthe current market dynamics are because there’s just not that muchliquidity in the San Juan to SoCal spread.”

Bergstrom said Dynegy does plan to extend the two-year contract,which ends in January 2000. El Paso also would like to extend it,he said, because it transfers a tremendous amount of risk. “We havea lot more capability of managing it because A) we’re not anaffiliate, and B) we have such a large position in California. Westill think that we’ll get a reasonable return.”

Bergstrom doesn’t deny the El Paso deal has driven up the valueof transportation to the California market and widened the basis.The capacity Dynegy purchased was going for about 8 cents lastyear. Now it’s valued at about 32 cents, excluding variable costs.But he said the value of capacity last year was driven down toartificially low levels because California regulators forced theLDCs to dump all their unused capacity on the market. “Whencapacity gets rationalized in an unfractured market, you’re goingto get more of a true reflection of the value of the capacity.”

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