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Gas-Electric Mergers: Money Well Spent?

Fortnightly Magazine - March 1 2000

contracts to back up some portion of their trade. To do that, they depend on flexible generation plants.

"What we sign is tolling contracts with power marketers and then they bring their gas to the plant and they tell us when they want us to convert it," he says.

Due to the long-term nature of its contracts, KMP receives a lower return than companies in merchant generation. "Because we are signing tolling agreements long term, marketers end up with the upside and downside, which can be significant. We end up with more of a regulated-kind of return."

Earnings to date have not been significant. Kinder Morgan has three power plants operating in Colorado and it contributes a certain amount of margin to the bottom line, he says.

"[Of course], the plants that are scheduled to come online won't be online until spring of 2002. So, there won't be any significant change in Kinder Morgan Power's earnings between now and then," he says.

Hopper says that the plants under development will be on the GPL pipeline, which has broad coverage of the Western, Central and Midwest U.S. regions. In addition, Hopper's clients have asked KMP to build these types of plants elsewhere.

"We have a plant that is designed to be extremely flexible. That is very important to our strategy in the Midwest because large nukes and coal plants dominate the Midwest power-grid. What that means to us is that gas-fired plants are not going to be on the margin at the peak," he says. "[Therefore], we need a plant that can get in and out of the market quickly. So we have a specific design to do that."

Hopper says that his plants are a nice fit for the energy marketer pursuing a convergence play.

"Our plant is really designed to take advantage of convergence, so that they can decide on an hourly basis whether they are selling Btus or they are selling electrons," he says. "By trying to focus in on putting these flexible plants along all of our pipe, we are in a position to sell physical backup for convergence to marketers in all of the regions in the Midwest."

Hopper speculates that the trader's strategy in buying tolling agreements is to find a long-term off-take contract or some portion of it, and play the hourly market with the rest.

But Kinder Morgan is not the only company courting business from the big energy marketers. Tenaska, AES and Panda Energy International share that niche, Hopper says.

And though his company's view of convergence is limited to providing midstream services, Hopper observes that the electric side of the trading houses are of greater magnitude than the gas and tend to drive the decision-making.

True convergence in the industry, however, remains an unfulfilled promise, he adds. "In the top 10, the trading floors are coordinated between power and gas. But most of the [others] are not converged."

Richard Stavros is senior editor at Public Utilities Fortnightly.

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