Dan:

To help your prepare for your meeting in Stamford, here are some thoughts.

PG&E Large Packages Index Trends

1.   PG&E Large Packages is the interconnection between El Paso/Transwestern into PG&E.  The interconnection between El Paso/Transwestern and Kern into SoCal is referred to as SoCal Border.  

2.   PG&E gas supply comes in from three main pipelines:  PGT (Canada), El Paso/Transwestern (San Juan and Permian) and Kern River (Rockies).  With the exception of a few very cold days in Canada and the Northwest, the cheapest supply comes from Canada.  The other two pipes are similarly priced, based on the incremental cost of gas out of the Southwest and what options the supply has.  There is always some marginal demand for supply out of the Southwest into PG&E, but it can be a small number of only about 500,000 MMBtu/d in a shoulder month and 1,000,000 MMBtu on a peak day.  When it is a low demand day PG&E large packages will trade like Malin (PGT interconnect to PG&E).  On a peak day PG&E large packages trades like SoCal border.

3.  Effective April 1, El Paso changed the way gas moves on their system.  It used that anyone with primary delivery point capacity to PG&E could deliver into SoCal on a primary basis.  Now, if you have PG&E primary, you can only get into SoCal on an alternate delivery point basis.  Because capacity is constrained, PG&E primary capacity will generally not flow into SoCal.  Thisis why PG&E Large Packages trades at a discount to SoCal Border.

4.  PG&E large packages is the relevant index for the PP&L deal:  PG&E trades at a significant discount to SoCal because of the reasons listed above.    Anyone with primary SoCal delivery will want to go into SoCal.  This leaves the PG&E capacity as the marginal capacity that folks could use for delivery to Griffith.  If anyone owns primary delivery into SoCal they will use it there.  Citizens is offering Griffith a discount relative to these suppliers.  The good news is that PG&E delivery is still very strong because given the gas supply balance in California the marginal supply out of the southwest is needed.  

5.  PG&E large packages is becoming more liquid:  Now that El Paso has changed the way gas moves on their pipeline there is a much more distinct difference between the types of capacity on El Paso.  Folks that own capacity want ways to hedge its value.  Enron has recognized this and plans to introduce the PG&E large packages point on Enron Online, our internet based trading system.  Trading volume at the PG&E point has increased in the last month and is expected to continue to increase.  This is good for Citizens as the liquidity makes the index more reflective of the market.  It also reduces the risk that the index doesn't print as has often occurred in the past.  (See historical data attached).  It also reduces the spread between the bid and offer at that point.

6.  PG&E Large Packages has gotten much stronger:  it used to be that the San Juan/SoCal Border spreads barely covered variable transport expense.  Now the demand is much stronger in CA and the transportation value has increased.   California is short storage due to growth in demand with the new power plants and the strong economy.  Although demand due to the economy is likely to fall, the new power plants and short storage position still create a very bullish situation.  For example, current valuations for the PG&E index are in the attached spreadsheet below: