Affiliates of El Paso Merchant Energy, Enron, Duke Energy andPacific Gas & Electric picked up the largest shares of the 1.2Bcf/d of available space on El Paso Natural Gas lines to SouthernCalifornia points in the latest capacity auction.

The assignments to a total of 30 companies mostly run for fiveor six years from the June 1, 2001 start date, with a few extendingeven longer. The current capacity holder, El Paso Merchant Energydeclined to exercise its right-of-first-refusal (ROFR) for thetotal capacity, saying it “passed up a short-term profit” (and morecontroversy) to focus on “building our long-term relationship withour California customers.”

“We just decided we don’t want to spend our energies dealingwith the problems” that have plagued the company lately regardinguse of the large block of capacity by its merchant affiliate,spokesman Mel Scott said. “We’ve been made a scapegoat. We’re evengetting calls from residentials. Their utilities have told themwe’re to blame for the high prices. We’re delivering all the gasthat California can take. We’re not withholding capacity. There’sno way you can hide capacity on a pipeline. But, you can’t explainthat to a California TV station. They just don’t understand how thesystem works.”

Scott also pointed out that El Paso delivers about 3 Bcf/d outof the average 8 Bcf/d of natural gas that California uses. “Thereare other pipelines, but they seem to focus on us.”

It appears the winning bidders were taking no chances in goingfor the long term, since El Paso had said its economic evaluationof the bids would include returns up to five years. Rates paid werenot disclosed, but sources were assuming, given current demand forcapacity, they were at or near the maximum. The bids posted totaled1,243,072 MMBtu/d and the leaders were (all volumes in MMBtu/d): ElPaso Merchant Energy with 276,932, Enron Energy Services 254,056,Duke Energy affiliates 211,697, PG&E affiliates 151,300, TexacoNatural Gas 58,407, and Dynegy affiliates 56,418. A total of 14.4Bcf/d of bids were received and volumes were pro-rated.

For El Paso Merchant Energy, Enron, Duke and PG&E, the bulkof their capacity is for deliveries to PG&E at Topock. Otherprospective capacity holders include (in descending order) MGISupply Ltd., CEG Energy Options, Sempra Energy affiliates,Occidental Energy, Merrill Lynch Capital, Coral Energy, Mexicanadel Cobre, AEP Energy Services, Allegheny Energy Supply, WilliamsEnergy, Sacramento Municipal Utility District, BurlingtonResources, Paramount Petroleum, California Steel Industries, andothers.

Given the large volume of bids, El Paso also is consideringexpanding its pipeline and expects to hold an open season, althoughno date has been set, Scott said. The company also is consideringFERC’s suggestion that it expand its project to convert theexisting 30-inch diameter, 1,088-mile crude oil pipeline it isacquiring from Plains All American Pipeline L.P. into new capacityfor California. In the meantime El Paso Energy is conducting anopen season to determine interest for six prospective LNG terminals- at least one and possibly two of which would be on the WestCoast. The company said it is prepared to spend $1.5 billion overthe next five years on the projects (see NGI, Feb. 12).

Coming in the wake of the capacity squeeze going into Californiaover the last year, the latest allocation was a far cry from thetwo previous auctions for the block of capacity, representing abouta third of El Paso’s deliveries to California, relinquished byPacific Gas & Electric in December 1997. Dynegy (then NGC) paid$70 million for the space for 1998 and 1999. The payment includedabout a 12-cent/Dth reservation charge, plus about 1.6-cent usagecharge (see NGI, Jan. 19 & Feb. 2, 1998). After that a contractwith Enron for the space fell through and El Paso Merchant Energypicked up the capacity in January 2000 for 15 months for $38.5million (see NGI, Feb. 21, 2000).

Management of the space has been under attack by Californiaregulators and shippers ever since the first contract was awardedto NGC. El Paso and high-flying California border prices currentlyare among the targets of several investigations on-going inCalifornia and Washington. The company recently issued a pressrelease labeling as “demonstrably untrue” allegations that capacitywas manipulated to increase prices (see NGI, Feb. 26).

Ellen Beswick

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