El Paso Merchant Power has found a way to leverage itsregulatory expertise into a whole new business, buying up gas-firedcogeneration facilities across the country – and the power supplycontracts that go with them – to create “the lowest cost merchantpower plant portfolio being assembled in the industry.”

Greg Jenkins, president of El Paso Merchant Power, said hisdivision of El Paso Energy has collected facilities totaling morethan 2,000 MW of capacity in the past year and plans to continue onthe same track for the foreseeable future. The plants El Paso isfocusing on are qualifying facilities (QF) with favorable longterm contracts to supply power to utilities.

The contracts were originally based on avoided cost and tend tobe high-priced in today’s market. “These are very, very solidcontracts, typically with a very high investment grade,” Jenkinssaid. As state commissions are pushing utilities to restructure,the utilities are renegotiating contracts and writing off strandedcosts. Part of what El Paso Merchant Power gains in writing a newdiscounted deal for the remaining life of the contract is theflexibility to provide the power from any source. “We can go intothe market and buy cheaper power when it’s available to fulfill thecontract,” Jenkins said. “This has a significant upside from dayone and value going forward.”

“We have experience evaluating assets – what is possible – isthe discount reasonable? And we have experience dealing withregulatory entities, with transition legislation, and withutilities.” Jenkins said there still are “a lot of opportunities,more than we can handle at any given time” created as states openup their markets and seek solutions for their stranded costsproblems. “You’ll see us doing other transactions in the next fewyears, as long as the opportunities are available.”

El Paso Merchant Power is concentrating on California, theSouthwest, the Northeast and the Southeast, where its parent recentlyannexed Sonat and its Southern Natural Gas Pipeline, which also sharesownership of Florida Gas Transmission. The company announced earlierthis week an agreement to purchase gas-fired California plants fromDynegy totaling 370 MW capacity. Dynegy was selling the QF plantsbecause of its merger with Illinova and its regulated utility IllinoisPower. The plants, largely concentrated in the Bakersfield area, havea capacity to use about 80 MMcf/d of gas. (See Daily GPI, Dec. 8)

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