In a move it hopes will boost liquidity on its western gasfutures contract, The Kansas City Board of Trade (KCBT) filedFriday with the Commodity Futures Trading Commission (CFTC) toconvert the contract from flat-price to basis. The exchange plansto begin trading basis futures with the February 2000 contractmonth upon CFTC approval. The expected start date of basis futuresis Nov. 29.

The western contract is traded at the West Texas Permian/Wahahub, which is operated by PG&E Gas Transmission-Texas. PG&Echarges gas sellers a two-cent hub fee if a contract is taken todelivery. The fee has been viewed by some as a stumbling block toliquidity. That will change with the contract’s conversion fromflat-price to basis. PG&E will only charge a one-quarter of acent hub fee after the change.

And for that concession, the hub operator gets? “As far as I cantell right now, nothing,” said Rick Johnson, PG&E GasTransmission-Texas director of pricing and business analysis. “In anutshell, we would like to see the contract stay in existence justbecause of the activity it brings to the market. We’re not gettinganything else out of it, or possibly anything out of it. Frankly, Idon’t know if it’s going to keep the contract alive.”

Johnson said thanks to increased pipeline capacity, West-to-Eastspreads “are so incredibly flat right now there’s not a lot ofbasis risk for people to trade.” Those needing a contract are morelikely to turn to the Nymex, he said.

Shelia Summers, KCBT assistant vice president of marketing,conceded the western contract “has been pretty slow lately.” Theexchange decided to look into converting to a basis contractfollowing an August conference call with its largest contractplayers. The change was proposed by traders (see Daily GPI Sept.8).

“This change in our western natural gas contract is in responseto the demands of our western natural gas customers,” KCBTPresident Michael Braude said in a statement. “Our membersquestioned their customers to see what hedging tool they werelacking and the answer was a basis contract.”

All contract months from February 2000 have been de-listed fromtrading flat-price futures. If the entire open interest in theJanuary 2000 flat-price contract is liquidated during the 45-dayCFTC fast-track review period, the KCBT intends to de-list thecontract month from flat-price futures and begin trading basisfutures Nov. 29 effective with the January 2000 contract month.

Summers said flat-price contract users have been liquidatingtheir positions since the August conference call. On Aug. 13, shesaid the number of open positions stood at 669. In early September,the contract had fewer than 400 open positions. Additionally,western gas index futures and western gas options contracts havebeen de-listed from trading and rendered dormant. These contractsare not applicable to the new basis futures contract.

The KCBT launched western futures and options in August 1995 asa risk management tool for the western U.S. market.

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