Traders hoping for unsubscribed El Paso capacity to reduceprices at the Southern California Border will be sorelydisappointed because of last week’s announcement that an unnamedshipper signed for 1.2 Bcf/d. The southwestern pipeline said itrecontracted all of its available firm capacity for a minimum of$37.5 million in revenues for 2000. The amount reflects an increaseof 7% over the annual average revenues generated from the Dynegydeal over the past two years. Dynegy paid $70 million for 1.3Bcf/d.

During the open bidding process that occurred during September,Williams Energy Marketing and Trading purchased 99,301 Mcf/d effectiveJan. 1. The remaining capacity of 1,225,894 Mcf/d was contractedFriday, for a one-year term commencing Jan. 1, to the unnamedcompany. Speculation tended to center on Duke Energy, whose subsidiaryDuke Energy North America has 3,450 MW of current electric generationcapacity in California and another 1,400 MW in development. El Pasosaid the shipper would be identified after a four-day biddingperiod. The open season is being held to provide an opportunity forothers to better the rates in the contract (see Daily GPI, Dec. 10).

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, CEO of El Paso Energy Corp. “We designed the contractaround a one-year term because we believe the value will continueto rise during the next year. This contract assures El Paso NaturalGas a reliable revenue stream during the year 2000 with upsidepotential. The proceeds from this contract are consistent with theprojections used to establish the company’s financial earningstargets for the coming year.”

The transaction came just in the nick of time, too. El Pasofailed on two previous occasions to forge a deal, forcing thecompany to seek a negotiated deal. In the first round of biddingthis fall, slightly less than 100 MMcf/d was awarded to WilliamsEnergy Marketing and Trading. Sources cited El Paso’s “minimumrevenue threshold” as a main reason why other bids were rejected.The second round of bids also failed, even though Dynegy’sright-of-first-refusal (ROFR) capability was removed in an attemptto draw more interest.

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 producersalleged that the Topock allocation method causes them big monetarylosses (Amoco estimated $1-2 million a year in its case). Theywanted to stop El Paso’s first open season for about 1.4 Bcf/d inFT, saying its 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%.

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