In one of the largest transactions of its kind to date, EnronCapital and Trade Resources Corp. (ECT) last week agreed to managethe natural gas supply, storage and interstate pipeline capacity ofBrooklyn Union Gas for one year with an obligation to produce over$10 million in savings and profits for the New York utility’sshareholders and its ratepayers. Anything above that, ECT is freeto keep.

“As the leading marketer of natural gas in North America, ECThas the expertise and capability to capture additional valueinherent in Brooklyn Union’s natural gas supply portfolio in thenational gas market and bring those benefits home to the utilityand its customers,” said Enron CEO Kenneth L. Lay. “ECT’sguaranteed profits and savings for Brooklyn Union will serve as amodel for other utilities throughout the country. We believe thatthis transaction will add significant momentum to the trend of gasdistribution companies outsourcing their gas supply function inpreparation for full retail competition.”

Transactions in which marketing companies acquire completecontrol of the natural gas portfolios of regulated utilities arerare but are expected to become more common with the progress ofretail competition. Through deals of this kind, assets that maybecome stranded by competition are turned into new profit-makingcenters, noted a BU spokesman.

In this transaction, Enron will take control of BU’s supplycontracts, covering about 200 Bcf/year (nearly 550 MMcf/d) of gaswith 50 suppliers, its upstream gas transportation capacity on sixmajor interstate pipelines that serve the Northeast, 36 Bcf ofworking storage capacity in 11 storage fields in five states andone LNG plant in Brooklyn with 1.5 Bcf of storage capacity. Inreturn, it will be responsible for supplying gas to BU’s regulatedand contractual customers, while producing savings and profits ofmore than $10 million (80% going to ratepayers and 20% to BUshareholders). The companies refused to release the exact terms ofthe deal.

The arrangement between BU and ECT is similar but much largerthan one announced last year between Duke Energy and Rhode IslandLDC Providence Gas. That deal involved fewer assets: 5.4 Bcf ofworking storage capacity, 1.5 Bcf of LNG storage, 155 MMcf/d offirm transportation and an average of 20 Bcf/year of gas supplycontracts. But it was expected to save the Rhode Island gas utilityabout $75 million over the three-year term, allowing it to cutcustomer rates 5% ($28 million), freeze them over three years andmake $80 million in upgrades to its distribution system.

It appears in this transaction, Enron will be making out muchbetter than Duke did with Providence. For example, last year BU’sfirm deliveries amounted to only about 140 Bcf ($500 million/yearof gas). But it sold another 80 Bcf as interruptible service andoff-system hub sales. Enron will be free to handle the off-systemcontracts in whatever manner it chooses, said a BU spokesman.

The transaction still must be approved by the New York PublicService Commission. It is scheduled to go into effect April 1.

Rocco Canonica

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