The recent tightening of Henry Hub-New York basis can beattributed to a number of factors: the large amounts of capacitybeing turned back to the pipelines, high inventory levels,competitive residual fuel oil prices and new liquefied natural gasprojects, according to a prominent energy trader.

“We’re clearly in a market where all the forces right now aresqueezing the basis,” Paul Rossi, director of energy trading at CNEDevelopment Corp., said at GasMart/Power ’98 in New Orleans lastweek. Rossi noted one of the biggest factors has been lowercompeting oil prices this winter in contrast to previous years,particularly 1990 and 1995. But the anticipation that as much as25% of all pipeline capacity in the Northeast will be up forrenewal in 2005 also is influencing basis, he said.

Contract expirations will be concentrated on Tennessee’s system,which expects to have 78% of its contract demand expire in 2001. Inaddition, market-area storage, which has been growing, is taking atoll on basis. The “big news” here is the asset managementprograms, “whereby LDCs in exchange for the release of firmtransportation and firm storage get delivered citygateservices…with a premium.” As a result of these programs, “we’veseen a real increase in storage cycling,” he noted. Storage andassociated transportation “are being worked harder and harder, withthe impact that the reliance on year-round, 365-day firmtransportation in some instances is reduced.”

Moreover, Rossi cited short-term inventory levels and LNGstorage as contributing factors. “LNG storage is “something which Ifeel is perhaps…a little overlooked [and] can be highlyinfluential on the basis markets.” He noted Connecticut Energy andDOMAC separately are sponsoring new LNG peaking storage projects inthe Northeast.

The problem should be “quite alarming” for capacity holders.Capacity pricing is approaching marginal costs or will fall belowmarginal costs. Since 1994, summer basis on three pipelines -Tennessee Pipeline, Transcontinental Gas Pipe Line and TexasEastern Transmission – into the New York City market has rangedfrom 15-20 cents to 35 cents, Rossi noted. For the winter periods,basis has gone from a low of 20 cents up to $1.20 during the”memorable” winter of 1995-96. When “we look at prices against thecontext of [regulated] pipeline rates, the firm transportation costrecovery has been very low as measured by the basis markets,” hetold energy executives.

“For the New York citygate market from the post January 1994period, what we see is that the market has returned 60% of thedemand charge in the winter and 10% in the summer, with a 100%commodity recovery in the winter and 83% in the summer,” he said,adding it showed that in the “best of cases” capacity-holders haverecovered about 60 cents on the dollar when releasing theircapacity in the secondary market.

“From the point of view of a competitive market, I think thatthis is really a good sign. We’re seeing that prices arecompetitive. However, this has clearly a different implication forthe holders of FT capacity.”

He believes industry and FERC need to take a close look at thesecondary market. Its “limitations clearly include rate caps,limits on the amount of price discovery that’s possible through thesecondary process, and the short-term efficiency of the capacityrelease process is something I think we also need to take a hardlook at.” Secondary release “is very manual; it’s a very laboriousprocess. I think that what we’ve seen is that the market moves alot faster than capacity release.”

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