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Gas-Electric Mergers: Money Well Spent?

Fortnightly Magazine - March 1 2000

at it from a contractual basis, assets that we will manage for others, our customer base, as well as the ownership angle and putting all those pieces together from a pipeline grid to integrate from a generation basis," says Flinn.

Turning the Tables:

Catering to the Converged

Kinder Morgan has taken a different route than most companies. It "sells the bullets" to the already converged companies that are fighting it out.

Jay Hopper, vice president at Kinder Morgan Power (KMP), a year-old division, sells 15- to 20-year tolling agreements to energy marketers on 550-megawatt plants Kinder Morgan has built on its pipeline.

Under a tolling agreement, a power marketer or commercial electricity customer provides the fuel, say natural gas, to produce electricity for the marketer or customer at an agreed upon spark spread, dependent on the plant's efficiency as measured by its heat rate, and receives the rights to electricity output.

"All of our plants are contracted before they are built," Hopper explains.

His company's strategy is not to be a trader but to be a developer, operator and marketer to power traders.

"[The way] we make the strategy work is first the location of the pipe. When you look at where Kinder Morgan's pipe [is laid], it has access to [the entire] gas basis, whether it is the Gulf, Anadarko, the Rockies or Canada," he says. "If somebody builds a converter on our pipe, they are located to take advantage of diversity in the gas market.

"The second part of our strategy is that we have located plant sites from an electric transmission perspective where they will enhance the system and provide ancillary services into the network," he says.

Hopper believes his success comes from having a flexible plant design that has swing operation. In that way, it can vary its output greatly on an hourly basis. KMP also has a significant order of turbines from General Electric to back up that strategy.

In addition, KMP has designed computer software that tells the trading floor, based on the outside temperature, humidity and what is going on in the world, the amount of gas necessary to produce a specific electric demand. "So they know exactly what it is costing them when they are making a trade," Hopper says.

The cost for KMP's service involves a monthly reservation fee, a fee for every megawatt-hour converted, and the customer pays for its own fuel, in addition to purchasing the right to do that for the next 20 years, Hopper says.

KMP's big obstacle, because it does not have an energy marketing or trading business, is to build plants in markets that will remain attractive to customers for use as backup.

"We can't just unilaterally go out an build plants, but that imposes on us the discipline of having to go out and get customers who say, 'this is where we will pay to toll your plant for a long period of time,'" Hopper says.

Hopper explains that his customers rank among the top 10 power marketers. They tend to trade nationwide and need physical